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Q: Why is benchmarking important in logistics and supply chain management, and what steps are involved in the benchmarking process?

Benchmarking in logistics and supply chain management is crucial for identifying best practices, measuring performance, and driving improvements in efficiency and customer service. It helps companies compare their operations against industry standards to gain insights into their competitive position and identify areas for improvement . The process of benchmarking involves several steps: 1. Identifying what to benchmark and defining key performance metrics and processes. 2. Selecting companies or industry standards to compare against. 3. Collecting and analyzing data to measure current performance relative to benchmarks. 4. Identifying gaps and areas for improvement. 5. Developing and implementing strategies for process enhancements . This structured approach ensures that organizations can systematically improve their supply chain processes by aligning them with industry best practices and performance goals .

Q: Contrast the periodic review system with the reorder point system in inventory management.

The periodic review system involves reviewing stock levels at regular intervals and placing orders to replenish stock up to a target level, which is suited for computerized inventory systems that manage large numbers of items . The reorder point system, on the other hand, continuously reviews stock and places orders based on demand levels crossing a predetermined threshold, allowing more dynamic order quantities but potentially increasing transport costs due to multiple separate orders .

Q: In the context of logistics, what is the significance of strategic inventory positioning and how can it benefit a supply chain?

Strategic inventory positioning within a supply chain involves optimizing the location of inventory to enhance sales opportunities while managing stockholding costs and risks, which are considered liabilities rather than assets . This positioning often uses decoupling buffers to reduce lead times and improve materials planning, thereby enabling better customer service by providing quicker response times . Additionally, by reviewing stock levels periodically as part of demand-driven strategies, businesses can more effectively match inventory to customer demand, minimizing the risk of obsolescence and helping avoid lost sales due to stockouts . By strategically positioning inventory, companies can achieve a competitive advantage with improved service levels and operational efficiencies while controlling costs and managing risks associated with holding excess stock .

Q: How does a Software as a Service (SaaS) WMS model benefit small to medium-sized enterprises (SMEs)?

A SaaS WMS benefits SMEs by offering lower entry costs, reduced start-up expenses, instant upgrades, user-driven innovation, and flexible usage options, making it suitable for temporary warehouse operations . Despite potential drawbacks like poor internet connectivity and data security concerns, its cost-effectiveness and flexibility make it appealing for SMEs .

Q: What criteria should be considered when selecting a warehouse location?

Selecting a warehouse location involves considering factors such as the quality and reliability of available transport modes, proximity to ports and airports, lead times and responsiveness, labour costs and availability, tax incentives, government policies, and environmental impact . Other considerations include proximity to customers and suppliers, security, and political stability .

Q: What role does the Carbon Trust play in promoting energy efficiency in warehouses, and what tools do they provide?

The Carbon Trust promotes energy efficiency in warehouses by connecting them with accredited suppliers of energy-efficient equipment and providing high-quality proposals and competitive quotes . They also offer tools for measuring, managing, and reducing carbon emissions, along with affordable financing packages for projects designed to achieve proven ROI .

Q: What strategies can be employed to conduct an effective warehouse management audit, and how can the findings be utilized for improvement?

An effective warehouse management audit can be conducted by using comprehensive checklists, involving independent auditors, and ensuring open communication with staff to explain purposes and findings . Findings should be shared with staff to foster a sense of ownership and responsibility for implementing improvements, thus encouraging continuous enhancement and adherence to best practices .

Q: What are the potential drawbacks of using a SaaS WMS model for warehouse management, particularly for larger companies?

Potential drawbacks of a SaaS WMS model for larger companies include concerns about data security, reliance on the internet for access, which might be slow or unreliable, and the lack of customized functionality to meet specific large-scale operational needs . While SMEs may benefit from its cost-effectiveness, larger companies might find limitations in scalability and integration with existing systems .

Q: Why is a Warehouse Management System (WMS) considered essential in modern warehouses, and what are the main benefits it provides?

A WMS is essential in modern warehouses due to the complexity of warehousing and distribution operations, requiring systems that can improve inventory accuracy, resource management, and customer service, while providing better operational visibility . Its main benefits include reducing excess inventory, preventing lost products, and optimizing pick paths, which collectively reduce costs and enhance service levels .

Q: How can internal audits improve warehouse operations and what are some critical components of a warehouse audit?

Internal audits improve warehouse operations by providing objective insights, enhancing efficiency, evaluating risks, safeguarding assets, assessing organizational controls, and ensuring legal compliance . Critical components of a warehouse audit include detailed checklists, independent personnel for carrying out the audits, and sharing results with staff to promote ownership of necessary improvements .

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PRAISE FOR THE LOGISTICS

AND SUPPLY CHAIN TOOLKIT
THIRD EDITION

‘A book that summarizes and explains many of the key techniques that make
logistics the profession that it is. Certainly one that will not gather dust on a
bookshelf, but will gather insight and understanding in the workplace.’
Professor Neil H Ashworth, Non-executive Chairman and adviser, former
senior retailer and logistician, United Kingdom

‘A great resource that not only provides the tools but also gives you a plan.
Sufficiently succinct to give comprehensive coverage of the subject, but in
enough depth to work as a stand-alone reference. I thoroughly recommend it.’
Nigel Price, Director, CRP, United Kingdom

‘An invaluable source of practical information on all aspects of the supply chain,
which will be useful to both practitioners and those studying the subject at any
academic level. The toolkit provides an excellent resource to help in this task.
Enhanced by many illustrations and tables, with inputs from a range of
companies and practitioners and references to useful websites and literature,
this book is a must-buy for anyone interested in learning more about this
fascinating industry.’
Sharon Cullinane, Professor of Sustainable Logistics, Gothenburg Business
School, Sweden

‘The Logistics and Supply Chain Toolkit, third edition, is a well-researched,

substantial reference book. Packed full of clear examples and with a very
structured approach, this is an excellent practical guide into the understanding
of logistics tools and how to apply them in the real world. It’s a must-read for
anyone who is involved in logistics and supply chain management.’
Carole Verry, Consultant, France
ii

THIS PAGE IS INTENTIONALLY LEFT BLANK

iii

Fourth Edition

The Logistics
and Supply
Chain Toolkit
Over 100 tools for transport,
warehousing and inventory
management

Gwynne Richards and Susan Grinsted

Publisher’s note
Every possible effort has been made to ensure that the information contained in this book is
accurate at the time of going to press, and the publishers and authors cannot accept respon-
sibility for any errors or omissions, however caused. No responsibility for loss or damage
occasioned to any person acting, or refraining from action, as a result of the material in this
publication can be accepted by the editor, the publisher or the author.

First published in Great Britain and the United States in 2013 by Kogan Page Limited
Fourth edition 2024

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as
permitted under the Copyright, Designs and Patents Act 1988, this publication may only be repro-
duced, stored or transmitted, in any form or by any means, with the prior permission in writing of
the publishers, or in the case of reprographic reproduction in accordance with the terms and li-
cences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent
to the publishers at the undermentioned addresses:

2nd Floor, 45 Gee Street 8 W 38th Street, Suite 902 4737/23 Ansari Road
London New York, NY 10018 Daryaganj
EC1V 3RS USA New Delhi 110002
United Kingdom India

www.koganpage.com

Kogan Page books are printed on paper from sustainable forests.

© Gwynne Richards and Susan Grinsted 2013, 2016, 2020, 2024

The right of Gwynne Richards and Susan Grinsted to be identified as the authors of this work has
been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

All trademarks, service marks, and company names are the property of their respective owners.

ISBNs

Hardback 978 1 3986 1339 3

Paperback 978 1 3986 1337 9
Ebook 978 1 3986 1338 6

British Library Cataloguing-in-Publication Data

A CIP record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

***

Typeset by Integra Software Services, Pondicherry

Print production managed by Jellyfish
Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY
v

CONTENTS

List of tools x
Acknowledgements xvi

Introduction 1

01 Warehouse management tools and guides 4

1.1 Warehouse audit 4
1.2 5S or 5C, also known as Gemba Kanri 7
1.2i Gemba Walk 15
1.3 Pareto analysis, 80/20 rule, ABC analysis or the vital
few analysis 17
1.4 Choosing an order-picking strategy 21
1.5 Choosing pick technology 27
1.6 Cross-docking 27
1.7 Slotting or item profiling 34
1.8 Resource planning 38
1.9 Task interleaving 43
1.10 Selecting warehouse storage equipment 44
1.11 Warehouse location numbering 47
1.12 Selecting warehouse material handling equipment (MHE) 48
1.13 Calculating aisle width for a forklift truck 51
1.14 Goods-to-person solutions – omnichannel operations 53
1.15 Warehouse space calculations 57
1.16 Warehouse location 61
1.17 Justifying a warehouse management system (WMS) 64
1.18 Selecting a warehouse management system (WMS) 68
1.19 Choosing between a best-of-breed warehouse
management system (WMS) and an enterprise resource
planning (ERP) WMS module 76
1.20 How to implement a WMS 80
1.21 Warehouse maturity scan, by Jeroen van den Berg 88
1.22 Warehouse risk assessments 89
1.23 Contingency planning for the warehouse 92
vi Contents

1.24 How to ‘green’ your warehouse and save energy 97

1.25 Hazardous packaging and labelling 100
1.26 Automatic identification (autoID) 104
1.27 Setting up ‘Go / No Go’ decision criteria in Logistics
projects 108
1.28 Flow charts 115
1.29 The PDCA tool 118

02 Transport management tools 126

2.1 Transport audit checklists 126
2.2 Calculating emissions in freight transport 127
2.3 Fuel adjustment factor formula 131
2.4 How to improve fuel efficiency 133
2.5 Incoterms® 2020 136
2.6 Load and pallet configuration 141
2.7 ISO containers, weight volume ratios and pallets 143
2.8 Calculating road freight transport charges and rates 147
2.9 Transport management system (TMS) selection process 151
2.10 Vendor assurance of transport logistics service providers 155
2.11 Transportation of hazardous products 158
2.12 Calculating customs duties 159
2.13 How to become an Authorized Economic Operator
(AEO) 162
2.14 Last mile and micro delivery options 165

03 Inventory management tools 169

3.1 Inventory management audit 169
3.2 ABC Pareto analysis for inventory management 173
3.3 Ballou’s inventory-throughput curve 175
3.4 Consignment stock 179
3.5 Cycle counting or perpetual inventory counting 182
3.6 Strategic positioning of inventory 185
3.7 Measuring demand variation 188
3.8 Periodic review inventory management system 191
3.9 Reorder point inventory management system 194
3.10 Replenishment order quantities 198
3.11 Economic order quantity (EOQ), by Geoff Relph 201
3.12 Combining Pareto with EOQ to enhance group analysis,
by Geoff Relph 205
Contents vii

3.13 Material Requirements Planning (MRP) 208

3.14 Safety stock calculation 211
3.15 Stock counting 215
3.16 Stock turn 220
3.17 Vendor-managed inventory (and co-managed inventory) 222
3.18 Identification and disposal of surplus stock 226
3.19 Managing spare parts inventory 229

04 Supply chain management tools 235

4.1 Supply chain management audit 235
4.2 Collaborative planning, forecasting and replenishment
(CPFR®) 237
4.3 Demand forecasting 240
4.4 Factory gate pricing (FGP) 243
4.5 Kanban 246
4.6 Kraljic matrix 250
4.7 Maturity models 253
4.8 Postponement 256
4.9 Product Flow Path Design, by Fortna 258
4.10 SCOR® 262
4.11 Supplier relationships 266
4.12 Supply chain risk assessment 268
4.13 Supply chain risk mitigation and contingency planning 271
4.14 Sustainable sourcing 276
4.15 Theory of constraints 279
4.16 Value stream mapping 281
4.17 Demand-driven MRP (DDMRP) 285
4.18 Calculating ordering cost 291
4.19 How to calculate stockholding cost 293
4.20 Sales and operations planning (S&OP) 296
4.21 S&OP self-assessment by Supply Chain Movement and
Involvation 300
4.22 Strategic procurement 304
4.23 Supply chain strategy, by Julian Amey 307
4.24 3D printing or additive manufacturing ROI 311
4.25 Supply chain analytics 313
4.26 Logistics 4.0 316
viii Contents

4.27 Digital twinning 320

4.28 Blockchain in supply chain management by Frank
Findlow 322

05 Outsourcing tools 327

5.1 Outsourcing 327
5.2 To 4PL© or not to 4PL© 331
5.3 A risk-based approach to logistics outsourcing 335
5.4 Supply chain and logistics outsourcing 338
5.5 Non-disclosure agreement (NDA) 340
5.6 Outsourcing questionnaire 343
5.7 Logistics services provider (LSP) criteria and decision
table 350
5.8 Decision matrix analysis (DMA) 353
5.9 Mind maps 356
5.10 RACI matrix by Rod Turner 359

06 Performance measurement and quality

improvement tools 364
6.1 Performance measurement and quality improvement 364
6.2 SMART 370
6.3 Performance measures for freight transport 372
6.4 Warehouse KPIs 374
6.5 Balanced Scorecard 377
6.6 Radar chart 382
6.7 Benchmarking 384
6.8 DMAIC: a process improvement tool 389
6.9 SWOT analysis 392

07 Financial management tools and ratios 394

7.1 Activity-based costing (ABC) and time-driven activity-based
costing (TDABC) 394
7.2 Calculating return on investment and payback period 400
7.3 An engineered approach to calculate equipment ROI,
by Aaron Lininger 403
7.4 Supply chain financial ratios and metrics 408
Contents ix

08 Problem-solving tools 412

8.1 Brainstorming 412
8.2 Cause and effect analysis, or fishbone or Ishikawa 415
8.3 The 5 Whys 417
8.4 The 8-D approach 420

Appendix 1 Useful websites 424

Appendix 2 Imperial/metric conversions 429
Index 431

Additional resources to accompany this text are available at the

following URLs.
A selection of tools are available at:
www.koganpage.com/TLASCT4

For a comprehensive set of tools go to:

http://howtologistics.com
x

LIST OF TOOLS

Title Chapter Tool number

3D printing or additive manufacturing ROI 4 4.24

5 Whys 8 8.3

5S or 5C, also known as Gemba Kanri 1 1.2

8-D approach 8 8.4

ABC Pareto analysis for inventory management 3 3.2

Activity-based costing (ABC) and time-driven activity- 7 7.1

based costing (TDABC)

Automatic identification (autoID) 1 1.26

Balanced Scorecard 6 6.5

Ballou’s inventory-throughput curve 3 3.3

Benchmarking 6 6.7

Best of Breed v ERP WMS module 1 1.19

Blockchain by Frank Findlow 4 4.28

Brainstorming 8 8.1

Calculating aisle width for a forklift truck 1 1.13

Calculating customs duties 2 2.12

Calculating emissions in freight transport 2 2.2

Calculating ordering cost 4 4.18

Calculating return on investment and payback period 7 7.2

Calculating road freight transport charges and rates 2 2.8

Cause and effect analysis, or fishbone or Ishikawa 8 8.2

List of tools xi

Title Chapter Tool number

Choosing an order-picking strategy 1 1.4

Choosing pick technology 1 1.5

Collaborative, planning, forecasting and 4 4.2

replenishment (CPFR®)

Combining Pareto with EOQ to enhance group 3 3.12

analysis

Consignment stock 3 3.4

Contingency planning for the warehouse by Legacy 1 1.23

Supply Chain

Cross-docking 1 1.6

Cycle counting or perpetual inventory counting 3 3.5

Decision matrix analysis (DMA) 5 5.8

Demand-driven MRP 4 4.17

Demand forecasting 4 4.3

Digital twinning 4 4.27

DMAIC: a process improvement tool 6 6.8

Economic order quantity (EOQ) 3 3.11

Engineered approach to calculate equipment ROI 7 7.3

Factory gate pricing (FGP) 4 4.4

Flow charts 1 1.28

Fuel adjustment factor formula 2 2.3

Gemba Walk by Frank Findlow 1 1.2i

Go/No Go decision criteria by Rod Turner 1 1.27

Goods-to-person solutions 1 1.14

Hazardous packaging and labelling 1 1.25

xii List of tools

Title Chapter Tool number

How to become an Authorized Economic Operator 2 2.13

(AEO)

How to calculate stockholding cost 4 4.19

How to ‘green’ your warehouse and save energy 1 1.24

How to implement a WMS 1 1.20

How to improve fuel efficiency 2 2.4

Identification and disposal of surplus stock 3 3.18

Imperial/metric conversions App 2

Incoterms® 2020 2 2.5

Inventory management audit 3 3.1

ISO containers, weight volume ratios and pallets 2 2.7

Justifying a warehouse management system (WMS) 1 1.17

Kanban 4 4.5

Kraljic matrix 4 4.6

Last mile and micro delivery options 2 2.14

Load and pallet configuration 2 2.6

Logistics 4.0 4 4.26

Logistics services provider (LSP) criteria and decision 5 5.7

table

Managing spare parts inventory 3 3.19

Material Requirements Planning (MRP) 3 3.13

Maturity models 4 4.7

Measuring demand variation 3 3.7

Mind maps by Joe Fogg and Slimstock 5 5.9

Non-disclosure agreement 5 5.5

List of tools xiii

Title Chapter Tool number

Outsourcing 5 5.1

Outsourcing questionnaire 5 5.6

Pareto analysis, 80/20 rule, ABC analysis or the vital 1 1.3

few analysis

PDCA tool 1 1.29

Performance measurement and quality improvement 6 6.1

Performance measures for freight transport 6 6.3

Periodic review inventory management system 3 3.8

Postponement 4 4.8

Product Flow Path Design by Fortna 4 4.9

RACI by Rod Turner 5 5.10

Radar chart by Ruth Waring and Jo Godsmark 6 6.6

Reorder point inventory management system 3 3.9

Replenishment order quantities 3 3.10

Resource planning 1 1.8

Risk-based approach to logistics outsourcing 5 5.3

Safety stock calculation 3 3.14

Sales and operations planning (S&OP) 4 4.20

Sales and operations planning – self-assessment by 4 4.21

supply chain movement and involvation

SCOR® 4 4.10

Selecting a warehouse management system (WMS) 1 1.18

Selecting warehouse material handling equipment 1 1.12

(MHE)

Selecting warehouse storage equipment 1 1.10

Slotting or item profiling 1 1.7

xiv List of tools

Title Chapter Tool number

SMART 6 6.2

Stock counting 3 3.15

Stock turn 3 3.16

Strategic positioning of inventory 3 3.6

Strategic procurement 4 4.22

Supplier relationships 4 4.11

Supply chain analytics 4 4.25

Supply chain and logistics outsourcing 5 5.4

Supply chain financial ratios and metrics 7 7.4

Supply chain management audit 4 4.1

Supply chain risk assessment 4 4.12

Supply chain risk mitigation and contingency planning 4 4.13

Supply chain strategy by Julian Amey 4 4.23

Sustainable sourcing 4 4.14

SWOT analysis 6 6.9

Task interleaving 1 1.9

Theory of constraints 4 4.15

To 4PL© or not to 4PL© 5 5.2

Transport audit checklists 2 2.1

Transport management system (TMS) selection 2 2.9

process

Transportation of hazardous products 2 2.11

Useful websites App 1

Value stream mapping 4 4.16

Vendor assurance of transport logistics service 2 2.10

providers
List of tools xv

Title Chapter Tool number

Vendor-managed inventory (and co-managed 3 3.17

inventory)

Warehouse audit 1 1.1

Warehouse KPIs 6 6.4

Warehouse location 1 1.16

Warehouse location numbering 1 1.11

Warehouse maturity scan by Jeroen ven den Berg 1 1.21

Warehouse risk assessments 1 1.22

Warehouse space calculations 1 1.15

xvi

ACKNOWLEDGEMENTS

We thank our partners, Teresa Richards and the late Sidney Garber, respec-
tively, for their support while we were preparing this book. Sadly, Geoff
Relph, a significant contributor to the inventory section of the book, passed
away recently.
We are also grateful to Suzanne Turner whose book, Tools for Success: A
manager’s guide, gave Gwynne the idea for this supply chain and logistics
book.
We want to thank the following individuals and organizations for their
support and contributions: Sherry Alexander, BCI Incorporated; Julian Amey,
University of Warwick; Tom Andersson, Stiq Ltd; Kate Barr, Fortna; Beth
Barber-Atkinson, 512 Sheffield; Katie Barry, isixsigma; Natalie Beecroft, JDA;
Mark Bergkotte; Erik Bootsma, Capgemini; John Burns and Geoff Wainwright
of Impact Data Metrics; Carbon Trust; Chris Coles, Adaptive BMS; Steven
Cross, ATMS Global; Nick Deal, RHA; Richard Evans, Slimstock; Paul Fagan,
Nene; Frank Findlow, Triple EFF Consulting Services; Joe Fogg, Gary
Frankham, Atlet; Richard Gibson; Jo Godsmark, Big Change; John Hill,
formerly of University of Warwick; Tony Hughes, TH Logistics Consultants;
Charles Intrieri; Vincent Lambert; Aaron Lininger, West Monroe Partners;
Locators Ltd; Martijn Lofvers, Supply Chain Media; Markforged; Catherine
Milner; Geoff Relph, Inventory Matters and University of Warwick; Kyle
Krug, Legacy Supply Chain; Tony Sellick, Fork Lift Training; John Skelton,
Supply Chain Almanac; Alan Sommer, Six Sigma Material; Tactik Smart;
Stephen Steele, Transport for London; Chris Sturman; Bruce Taylor, Nissan;
Rod Turner; Jeroen van den Berg; Visku; Ruth Waring, Tony Wallis.
Finally, we would like to thank Nick Hoar from Kogan Page for his
patience.
The authors have endeavoured to trace and acknowledge all sources.
Should there be any errors or omissions, we will be pleased to know about
them and make corrections in future.
1

Introduction
Today’s logisticians are working in a fast-moving, ever-changing environ-
ment. The supply chain has become centre stage, providing competitive
advantage to those who can master procurement, supplier management, in-
ventory, warehouses and distribution. Getting the right product in the cor-
rect quantity to the right customer at the prescribed time in good condition
at an acceptable cost is paramount to not only retaining but increasing sales
and profitability. Supply chain and logistics managers are not only expected
to be experts in their own field but also in human resource management,
finance, customer service, supplier management and, at times, production.
This book, written by supply chain and logistics practitioners, sets out to
provide users with a handbook to enable them to keep pace with what’s
happening in this sector.
According to the Collins English Dictionary, a tool is ‘anything that can
be used as a means of performing an operation or achieving an end’. In this
book we will introduce guides, frameworks, models, quick calculations and
practical ideas, describing to the reader how to use the tools and under what
circumstances. These guides and tools have been chosen to enable the reader
to identify issues, produce solutions and thus improve operational efficiency
and effectiveness. Some of these tools and spreadsheets can be downloaded
from our website: http://howtologistics.com.
Have you ever wondered how you go about efficiently locating stock in
your warehouse utilizing an ABC analysis, what is meant by the term ‘slot-
ting’, or what your trucks’ CO2 emissions are? To answer these questions
and more, we thought it was time to bring these tools and calculations to-
gether in an easy-to-understand format with specific examples that relate to
the supply chain and logistics sector.
The aim of this book is to provide today’s managers with a toolbox of
practical guides, ideas and information to help them in their day-to-day
work. It explains a number of the major management tools and suggests
areas within supply chain and logistics where they can be applied. We don’t
expect you to use all the tools and data but hope that you will find a number
of them useful in your work.
2 The Logistics and Supply Chain Toolkit

The introduction of advanced technologies into today’s warehouses and

fulfilment centres has gone a long way to assisting managers to become more
efficient and cost effective. However, not all companies are able to afford
sophisticated warehouse management systems, automation and robotics.
As a result of recent feedback from the third edition, we now compare
some of these new technologies. However, the essence of the book remains –
the provision of workable tools to assist managers in their day-to-day op-
erations.
The tools have been put into chapters, including supply chain, warehous-
ing, transport and inventory. The supply chain is a demanding and challeng-
ing area and managers require all the assistance they can get to satisfy both
internal and external customers. Where we believe that the reader’s experi-
ence will be enhanced by further information on the tools discussed, we
have identified and provided details of websites, software packages and
companies that can further assist. These are included at the end of each tool.
Each chapter provides guides and tools that enable the reader to tackle most
of the problems faced in the above areas and thus improve efficiency and
effectiveness. The chapters provide guidelines and suggestions as to how
each tool can be used and show logistics-related examples where needed, to
explain the tools further.
The book is split into eight chapters:

1 Warehouse management tools and guides

2 Transport management tools
3 Inventory management tools
4 Supply chain management tools
5 Outsourcing tools
6 Performance management tools
7 Financial management tools and ratios
8 Problem-solving tools

The chapter on warehousing includes descriptions of the various types of

item-pick methods, a comprehensive warehouse audit, how to use ABC
analysis to lay out the warehouse and the factors that need to be taken into
account when deciding on a new location for a distribution centre. We have
also included a comparison of goods-to-person systems and a tool on how
to produce a contingency plan for the warehouse.
Introduction 3

The transport management chapter looks at areas such as carbon foot-

print measurement, fuel surcharge calculation and transport costs. We have
also included a comparison of last mile delivery systems.
Within the inventory management chapter we discuss the various tools
used in determining the optimum stock quantity, demand forecasting, how
to calculate stock turn and carry out perpetual inventory counting.
The chapter on supply chain management looks at current tools such as
SCOR®, factory gate pricing and supplier relationships. With the advance-
ment in technology we have also included tools and information on
Blockchain, Logistics 4.0 and Digital Twinning.
Chapter 5 provides a step-by-step guide to logistics outsourcing, while
the performance management section provides a number of relevant logis-
tics measures and details on how to measure performance.
The tools set out in the finance and problem-solving chapters can be used
across the different logistics sectors.
Appendix 1 provides a list of useful websites while Appendix 2 provides
useful measurements and conversions.
A glossary of terms and a list of useful acronyms can also be found, along
with many of the tools in this book, on our website: http://howtologistics.com.
A number of the examples and templates are free while others have been heav-
ily discounted for purchasers of this book. The code to enable you to receive
the discount is lsct2024.
As website addresses might change over time we have archived the infor-
mation in a separate location. If you are provided with a company website
address in the text, we also provide an alternative address should that loca-
tion no longer be available.
This book is a quick reference guide for supply chain and logistics profes-
sionals who want immediate access to relevant tools and data to assist with
their day-to-day work. We hope you enjoy it. This is the fourth edition of the
book as we are constantly updating the tools. If you have any ideas for other
logistics-related tools please let us know and we will endeavour to include
them in the next edition and on our website.
Previous editions have been translated into Chinese and Russian.
4

arehouse
W 01
management
tools and guides
This chapter has a number of tools to assist you in operating your ware-
house more efficiently. Tools include how to undertake an ABC analysis,
which types of storage and materials handling equipment will enhance your
operations, which is the best picking strategy for your type of operation and
how to choose a warehouse management system.
At the end of the chapter we have included some general management
tools and how they can be used to solve specific warehouse problems.

1.1 Warehouse audit

Introduction
An internal audit is designed to monitor and improve an organization’s
business practices.
These are five reasons why internal auditing is important and should be
carried out on a regular basis.
Audits:

●● Provide objective insight

●● Improve efficiency of operations
●● Evaluate risks and protect assets
●● Assess organizational controls
●● Ensure legal compliance

his section provides an audit checklist for a warehouse and its operations.
T
The list of questions is not exhaustive and can be added to by users to mir-
ror their own operations.
Warehouse management tools and guides 5

Audits should be undertaken by an independent person from within the

company or by an external consultant. The purpose of the audit should be
explained to staff in advance. Results need to be shared with all the staff,
and they need to take ownership of any improvements necessary.
The audits are based on what we see as best practice in a warehouse. A
full set of audit forms in Excel format with over 100 questions can be pur-
chased from http://howtologistics.com, discount code: lsct2024; an extract
of the audit is shown in Table 1.1.

Further information
Suggested reading to ensure safe and legal practices:

UK HSE – http://www.hse.gov.uk (archived at https://perma.cc/U8CT-5ZGM)

UK COMAH – http://www.hse.gov.uk/comah/index.htm (archived at https://
perma.cc/V26X-4NG7)
UK SEMA – http://www.sema.org.uk (archived at https://perma.cc/TQN3-
2UR7)/
USA OSHA – www.osha.gov (archived at https://perma.cc/PE5B-TH7Z)/
USA EPA – https://www.epa.gov/laws-regulations (archived at https://perma.
cc/8QX3-ACY3)
European Safety and Health at Work – https://osha.europa.eu/en/safety-
and-health-legislation (archived at https://perma.cc/3SQB-JT2X)

Further reading
Ackerman, K (2003) Auditing Warehouse Performance, Ackerman Publica-
tions, Columbus, OH
Richards, G (2021) Warehouse Management, 4th edn, Kogan Page, London
United Kingdom Warehousing Association – www.ukwa.org.uk (archived at
https://perma.cc/ZMR8-QXFY)
https://kirkpatrickprice.com/blog/5-reasons-why-internal-audit-is-
important (archived at https://perma.cc/D8GA-RRMZ)
6 The Logistics and Supply Chain Toolkit

Table 1.1 Warehouse audit checklists – example questions

Carried out by: Location: Date:

Item No Poor Good Excellent N/A Comments

Comprehensive
signage for
delivery drivers in
multiple
languages

Stock adequately
protected from
theft and pilferage

Escape routes
clearly marked
and obstruction
free

Is there disabled
access into the
building?

Racking condition
is checked
regularly and
reported

Are there any

overhanging
pallets in the
racks?

Weight capacity
visible on the end
of the racks

Are sufficient
security
measures in
place for high-
value items?

(continued )
Warehouse management tools and guides 7

Table 1.1 (Continued)

Carried out by: Location: Date:

Item No Poor Good Excellent N/A Comments

Are sufficient
safety measures
in place for
hazardous items?

All electrical
items tested (UK
PAT test)

Staff have correct

licence for type of
truck operated

Responsible staff
trained to operate
MHE

Record of safety
training kept up
to date

1.2 5S or 5C, also known as Gemba Kanri

Introduction
5S, also known as 5C, has its origins in Japan. 5S focuses on organizing the
workplace effectively and standardizing work procedures (see Figure 1.1).
5S simplifies processes and reduces waste and non-value-adding activities
while improving quality, efficiency and productivity. Safety is sometimes in-
cluded as a sixth S.
The tool is also effective in getting employees involved in the improve-
ment process and ‘owning’ their area of work, taking pride in how it looks
and performs.
8 The Logistics and Supply Chain Toolkit

Figure 1.1 The steps of 5S

Seiri
Sort or Clear out

Shitsuke
Seiton
Sustain or
Straighten or
Continually
Configure
improve
Safety

Seiketsu
Seiso
Standardize or
Shine or Clean
Conform

When to use
When a company is looking to improve efficiency within the warehouse and
instil a culture of continuous improvement.

How to use
5S needs to be carried out in the correct order. You need to give individuals
responsibility for each task and for their respective work areas within the
warehouse:

a The first S (Sort or Seiri or Clear out) concentrates on removing any

unnecessary items from the work area. This can include obsolete and
damaged stock, over-stocks, defective equipment, broken pallets, waste
packaging, etc. It can also refer to unnecessary movement within the
warehouse. For example, the introduction of a cross-aisle within the
picking area will reduce the amount of travel undertaken by the operators.
Items marked for disposal can be put into a holding area until a consensus
is reached as to what should be done with them.
Warehouse management tools and guides 9

Figure 1.2 Shadow boards

SOURCE Courtesy of Fabufacture

b The second S (Straighten or Seiton or Configure) focuses on efficient and

effective placement of items, for example, location labelling and putting
frequently used items in easy-to-access locations. Shadow boards can be
used to ensure equipment is returned to its correct locations (see
Figure 1.2). Directional signs in the warehouse are also part of this, as
they should reduce the amount of time taken to find items. Items such as
tools, empty pallets and packaging should be placed in easily accessible
areas close to the point of need. Finally, parking areas for handling
equipment need to be set up, with reminders to staff to put the equipment
on charge if required.

c The third S (Shine or Seiso or Clean) comes after you have cleared the
area of any unnecessary items. Thoroughly clean the area and produce a
10 The Logistics and Supply Chain Toolkit

timetable for cleaning. This can be done at the end of each shift, with
defects to equipment reported immediately. Staff take pride in a clean
work area, they work better and from experience, clean warehouses tend
to be more efficient! Suggestions include putting bins at the front of each
aisle to capture waste paper, packaging and broken pallets and making
brooms and dust pans easily accessible.

d The fourth S (Standardize or Seiketsu or Conform) is all about creating

standards for each work area. Walk through each process with the
relevant staff and then produce, document and display best practice
procedures within the warehouse. Make them simple to read and
understand. A photograph displaying the process with minimal text
works well in this situation.
e The fifth S (Sustain or Shitsuke or Continually improve) ensures
continuous improvement. Staff are encouraged not to return to previous
work practices but to accept change and take things to a new level.
Regular checks and audits need to be carried out, with the potential for
bonus payments on achieving high performance scores.

More recently, companies have introduced a sixth S, which covers safety. It

can be argued that safety is at the heart of the operation and therefore is a
valuable addition to the 5S mentality.
An example of how to use the 5S tool is shown in Table 1.2. Companies
that have instigated 5S have improved quality, increased efficiency, improved
safety, reduced waste and given employees a sense of ownership.
Table 1.3 below shows an audit tool, which can be carried out in a work
area, including offices. It can be adapted to work in most areas. An interac-
tive version of this audit tool can be found at https://www.adaptivebms.
com/tools (archived at https://perma.cc/7ABV-R6UG).
Allied to 5S are the 7 Muda (types of waste). These are as follows:

1 Inventory – waste of space, equipment, facilities, energy, administration

and IT resources. It needs to be evaluated and adjusted as necessary.
2 Motion – any motion of a person or machine that does not add value
needs to be removed.
3 Over-production – ‘just in case’ mentality. ‘More than’, ‘faster than’ or
‘sooner than needed’ have to stop.
4 Waiting – waiting is idle time, created by imbalances of machinery or
people. This needs to be reduced or eradicated.
Warehouse management tools and guides 11

5 Re-work – reject, repair, re-work causes a great waste of resources:

materials, manpower and machinery. Although capturing value in the
warehouse it shouldn’t occur in the first place.
6 Processing – non-logical flow in the wrong sequence that adds no value –
needs to be regularly evaluated – walk through the process regularly.
7 C
onveyance – essential but adds no value. Every time you move something
it adds cost. Reduce these movements.

Table 1.2 5S tool

Person/group Checked
5S Actions responsible Measurement by

Audit MHE and WM Reduced GM

remove defective maintenance costs,
equipment increased space

Identify obsolete Inventory Increased available GM

stock and dispose manager locations, lower
Sort

of it stock holding costs

Label locations. WM/external No of locations Put-away team.

Introduce shadow labelled/total no of Housekeeping
boards locations. All team
equipment in correct
location

ABC analysis WM Increased pick GM

productivity rates,
shorter travel
distances
Straighten

Slotting analysis WM Increased pick GM

productivity rates,
shorter travel
distances

Reduce pick Picking team Increased items WM

travel time picked per hour

(continued )
12 The Logistics and Supply Chain Toolkit

Table 1.2 (Continued)

Person/group Checked
5S Actions responsible Measurement by

Identify and Housekeeping Visual WM

remove broken
pallets
Shine

Provide bins at WM Visual GM

the end of each
aisle

Produce new Team leaders Visual WM

procedures for
Standardize

each section

Set up a WM/Team Visual GM

communication leaders
cell for each team

Set up regular WM/Team No of improvement WM

Sustain

review meetings leaders suggestions made

between staff per month. No of
and team leaders improvements
introduced

Key
WM = Warehouse Manager
GM = General Manager
MHE = Mechanical or Materials Handling Equipment

Companies need to carry out an audit to identify areas that can be improved
based on the 7 Muda. Discuss the process/procedures and how any changes
can benefit the organization.

The 7 Muda are also referred to at times by the mnemonic TIMWOOD:

T=Transportation
I=Inventory
M=Motion
W=Waiting
O=Over-processing
O=Overproduction
D=Defects
Warehouse management tools and guides 13

Some writers have also added an S which stands for Skills, or underutiliza-
tion of worker capabilities.

Table 1.3 6S audit tool

1S – SORT – ACTIVITY DESCRIPTIONS YES NO

1 Only the required stock and packaging are present in the work
area

2 Only the required tools and equipment are present in the

work area

3 Only the required paperwork is present in the work area

(signage)

4 Unnecessary items have been removed from the

general area

2S – STRAIGHTEN – ACTIVITY DESCRIPTIONS

5 Locations for all stock are clearly defined and labelled

6 Equipment and tools are properly labelled and have a clearly

defined storage location

7 Paperwork/scanners/voice equipment is properly labelled and

has a clearly defined location

8 Walkways, access to equipment and work area boundaries are

clearly defined and marked

3S – SHINE – ACTIVITY DESCRIPTIONS

9 Storage containers, shelving/racking and storage areas are

clean and damage free

10 Tools and equipment are clean, fully maintained and

damage free

11 Work surfaces are clean and damage free

12 Walls and partitions are clean, uncluttered and damage

free – no excessive signage

13 Cleaning equipment available and neatly stored

(continued )
14 The Logistics and Supply Chain Toolkit

Table 1.3 (Continued)

4S – STANDARDIZE – ACTIVITY DESCRIPTIONS

14 Displayed KPIs are correct, relevant for the department and up

to date

15 Tools, equipment, paperwork stored neatly and returned

immediately after use

16 Maintenance records for tools and material handling

equipment are easily accessible and up to date

17 Waste products (waste oil, rubbish) consistently cleaned up

and removed from the work areas

5S – SUSTAIN – ACTIVITY DESCRIPTIONS

18 Is the 6S audit visible to all, up to date and shared with all staff?

19 Recognition is given to teams who get involved in 6S activities

20 Time and resources are continually allocated to 6S activities

21 Has the team improved items that were not already identified
on the previous audit?

6S – SAFETY – ACTIVITY DESCRIPTIONS

22 Are employees wearing suitable PPE required for their current

work?

23 Walkways and access to safety equipment are clearly

identified and unobstructed (no hazards or obstacles in the
way of fire extinguishers, emergency access doors)

24 Is the working environment suitable for the work in hand

(lighting, air quality, temperature)?

25 Are the equipment and tools provided correctly for the current
work activity?

Further information
There is an abundance of literature on this topic and websites specifically
for Six Sigma and Lean: www.isixsigma.com (archived at https://perma.
cc/EA5P-JGTX)
Warehouse management tools and guides 15

Further reading
https://www.adaptivebms.com/tools (archived at https://perma.cc/5PGA-
SY7P)
Toyota TPS system. https://toyota-forklifts.co.uk/about-toyota/toyota-
production-system (archived at https://perma.cc/59K3-38PQ)/

1.2i Gemba Walk

Introduction
A Gemba Walk is performed by management and is a tool that allows man-
agers to witness first hand what is happening on the warehouse floor. It
underpins initiatives such as Lean and TPM. It eliminates second-hand in-
formation; you are on the warehouse floor.
It is simply the C in the Plan Do Check Act (Tool 1.29) problem-solving
model for sustainable improvement. It allows managers to go to the place of
work, look at the processes and talk with the staff. It provides the opportu-
nity to talk with the process owners and see the work done daily, understand
the challenges faced, in order to improve efficiency through effective resolu-
tion of the problems and guide corrective actions.
In effect it gives management a close-up view of the operation.
It is important to note that the walk is not there to check up on people,
more to have a presence and ask questions to understand what they need to
do their job; ask guiding questions and let them identify their own prob-
lems. Use questions such as What, Why, What if and Why Not – pretty much
in this order.
The key to a successful Gemba Walk is always to focus on process. When
you get the process right, the results take care of themselves.
Performed correctly, the Gemba Walk is a much more powerful manage-
ment approach than sitting at a desk looking at data. It requires some effort
to get these walks right, but when you do it helps improve your o
rganization.

Observations during Gemba Walk:

●● Is the facility clean?

●● Are employees engaged?
●● Is the health and safety code followed?
16 The Logistics and Supply Chain Toolkit

●● Are metrics updated?

●● Is the operations status up to date e.g. picks per hour?
●● Are documents updated?
●● Are aisles clearly marked?
●● Have MHE checklists and inspection sheets been completed?
●● Are priority issues recorded and understood?
●● Are the process flows clear?

Typical questions to ask:

Process

What is your priority for the day?

What is your biggest quality issue currently?
What is your quick Kaizen/CI (Continuous Improvement) for your area?
What are the things you feel are improving?
What would you change if you were given the opportunity?
How do you know if you are having a good or bad day?
What can I do to help you?

Safety

What’s the number one hazard in your job?

What can we do to improve safety?
How do you report safety concerns?
Do you have a ‘near miss’ recording facility?
What recent safety improvements worked well?
Are our safety procedures easy to follow?
How are employees recognized for their safety contributions?
What else can we do to improve manual handling?
Warehouse management tools and guides 17

1.3 Pareto analysis, 80/20 rule, ABC

analysis or the vital few analysis
Introduction
Vilfredo Pareto was an Italian economist who calculated that 80 per cent of
the land in Italy was owned by 20 per cent of the population and that 20 per
cent of his pea plants produced 80 per cent of the crop. This idea was taken
further by Joseph Juran, a US consultant in the 1940s, who demonstrated
that 80 per cent of product defects were caused by 20 per cent of the prob-
lems in production methods. It is now used by companies to identify and
separate best-selling products and profitable customers from slow-moving
products and less-profitable customers.
The tool is used heavily within the warehouse environment. Examples are
as follows:

20 per cent of the stock lines account for 80 per cent of sales;
20 per cent of the stock lines produce 80 per cent of the profit;
20 per cent of stock lines appear most frequently on orders;
20 per cent of the stock keeping units (SKU) account for 80 per cent of the
stock value;
20 per cent of suppliers provide 80 per cent of the stock lines;
20 per cent of customers produce 80 per cent of turnover;
20 per cent of customers cause 80 per cent of the problems;
20 per cent of customers produce 80 per cent of the profit;
20 per cent of the staff produce 80 per cent of the output;
20 per cent of staff cause 80 per cent of problems.

These are all common rules of thumb used in business today. They may not
be exact for every company, but most companies can relate to at least some
of them. It is the 20 per cent figure (or the vital few) that we need to concen-
trate our efforts on; that is, our top 20 per cent of customers, suppliers,
product lines and staff.

When to use
One of the most time-consuming operations within a warehouse is the pick-
ing of orders. It can take up to 55 per cent of overall labour activity within
18 The Logistics and Supply Chain Toolkit

the warehouse and, of that, half can be accounted for by travel to, between
and from the pick locations. Thus, to reduce travel in the warehouse we
need to place our most popular items in terms of order frequency (not sales
volume) as close to the dispatch area as possible. To do this, we need to
analyse our data.

How to use
If we take a company’s order profile, we can use Excel as a tool to list all of
the products by sales frequency and use the ‘Data Sort’ function to list them
from highest to lowest, as can be seen in Table 1.4. Once this analysis has
been undertaken, you can revise the warehouse layout by having the top 20
per cent of popular stock lines (SKU), i.e. those that appear most often on
orders, at the front of the warehouse closest to dispatch. Many companies
use the total unit sales; however, this can provide a false picture in terms of
warehouse layout as some items may sell in large quantities but only once a
year, whereas others sell less but on a continuous basis.
As shown in Table 1.4, the first four items have by far the most appear-
ances on orders during the period. These are classified as fast movers, the
next six as medium movers, and the following eight as class ‘C’ or slow mov-
ers. They are also referred to as runners, repeaters and strangers. As a rule
of thumb, 80 per cent of order frequency appearance tends to come from 20
per cent of the product lines (A items), 15 per cent from 35 per cent of the
product lines (B items) and 5 per cent from 45 per cent of the product lines.
The last two items have not sold at all during the period, and need to be as-
sessed by sales, marketing, procurement and finance to determine whether
they are likely to be sold in the future (note they could be new items), need
to be put on special offer, returned to the suppliers or written off. In this
example we have denoted them with an ‘X’ for further analysis.
This tool can also be used for perpetual inventory or cycle counting (see
tool 3.5) and with activity-based costing (see tool 7.1) to determine which
customers should be retained in terms of profitability and also how much
sales time should be allocated to each customer. It is usually the case that the
smaller customers demand more management time!
Provided that you have accurate information for each of these parame-
ters, the 80/20 analysis can be a valuable tool in any company’s armoury.
Table 1.4 ABC analysis of pick list frequency

Product Ranking (by order Frequency Cumulative Cumulative % of Cumulative % of Category

code frequency) in period frequency total frequency number of stock lines

123 1 300 300 30 5 A

235 2 225 525 52.5 10 A

127 3 150 675 67.5 15 A

134 4 125 800 80 20 A

167 5 40 840 84 25 B

222 6 30 870 87 30 B

361 7 25 895 89.5 35 B

363 8 25 920 92 40 B

221 9 17 937 93.7 45 B

344 10 15 952 95.2 50 B

345 11 10 962 96.2 55 C

(continued )

19
本书版权归Kogan Page所有
20
Table 1.4 (Continued)

Product Ranking (by order Frequency Cumulative Cumulative % of Cumulative % of Category

code frequency) in period frequency total frequency number of stock lines

166 12 8 970 97 60 C

177 13 6 976 97.6 65 C

189 14 6 982 98.2 70 C

190 15 6 988 98.8 75 C

111 16 4 992 99.2 80 C

1035 17 4 996 99.6 85 C

1037 18 4 1,000 100 90 C

126 19 0 1,000 100 95 X

135 20 0 1,000 100 100 X

Total 1,000

本书版权归Kogan Page所有
Warehouse management tools and guides 21

Further information
There is a significant amount of information on the web for ABC analyses
in logistics. The co-author’s own book on warehouse management (Richards,
2021) has a section on the subject.
An Excel template can be downloaded from http://howtologistics.com
(archived at http://perma.cc/B94P-EKEP); discount code: lsct2024.

Reference
Richards, G (2021) Warehouse Management, 4th edn, Kogan Page, London

1.4 Choosing an order-picking strategy

Introduction
Many warehouses continue to pick orders individually; however, in today’s
e-commerce environment, there is a requirement to speed up the picking
process. We also find that there is confusion between the different pick strat-
egies in terms of how they are described. Below is our interpretation.

Pick by individual order

Line items are collected from all locations by an individual for a specific
customer order. Once picked, the operator returns for the next order:

●● Instructions can be via paper-based systems, scanners, voice or vision

technology.
●● It is normally a single-stage process unless every order is checked on
dispatch.
●● Handling equipment can range from a trolley to a forklift truck.
●● It can be prone to error if using a paper-based system.
●● It can be time-consuming.
●● Training can be time-consuming for scanning and paper pick.

Cluster picking
Operators take several individual orders out into the warehouse at the same
time:

●● Operation is as per individual order pick, although multiple orders are

picked at the same time.

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22 The Logistics and Supply Chain Toolkit

●● Order sizes are lower than for individual order picks.

●● Orders are clustered in a particular area.
●● Normally a single-stage process unless every order is packed and checked
on dispatch.
●● Handling equipment can range from a trolley to a forklift truck but
requires segregated sections in order to separate the orders.
●● Reliant on operator being accurate in sorting.
●● S ystem assistance required to ensure orders are clustered efficiently and
items are placed in the correct location. A put to light system or a vision-
based system is ideal.
●● Training can be very time-consuming.

Pick by batch
Large quantities of items are collected for a large number of orders that have
the same product lines. All orders are consolidated onto one pick request:

●● Typical use in e-commerce applications.

●● One to five lines per order maximum.
●● Can pick exact amount from reserve storage and allocate to zero (pick to
zero) or pick full cartons/pallets and return remainder to stock (pick by
line) once allocation is completed.
●● Handling equipment is mainly reach or forklift trucks for pallet quantities.
●● Two/three-stage process – pick then sort and label. Possible return of
unused stock.
●● Requires additional space to sort and label.
●● The use of a put wall with a put to light system is ideal for sortation.
●● Reliant on system to consolidate orders.

Pick by zone
Products are categorized into specific groups and located in defined areas
within the warehouse:

●● Reduces walking distance as operator looks after a small area.

●● Picking can be simultaneous or sequential.
●● Simultaneous orders require consolidation.
●● Requires conveyors or automated mobile robots, sometimes referred to
as cobots, to transport orders around the warehouse.

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Warehouse management tools and guides 23

●● Essential to ensure each zone has near-equal activity.

●● Used with pick and put to light systems.
●● High accuracy if combined with scanning or vision systems.
●● Items are not individually identified unless using a more sophisticated
system.
●● Reliant on accurate put-away operation.

Pick by waves
Large numbers of orders are picked during defined time periods:

●● Any of the above pick methods can be used.

●● Pick is associated with vehicle departures, shift changes, order deadlines,
etc.

Goods to picker
Large number of orders can be picked at the same time:

●● Initial orders are batched together.

●● Picker remains in one position.
●● Products are brought to the picker by conveyor, robot or automated
system.
●● Operator uses put to light system, or a vision system, to allocate items to
individual orders.
●● Little training required.

When to use
When looking to improve both productivity and accuracy within the ware-
house.

How to use
Table 1.5 compares the methods discussed above.

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24 The Logistics and Supply Chain Toolkit

Table 1.5 Order-picking strategies comparison chart

Pick Typical Benefits Disadvantages

method applications

Pick by Most ●● Single-stage ●● Low pick rate

individual operations operation ●● Very labour intensive
order ●● Flexible ●● Can result in bottlenecks
●● Quick at the pick face
implementation ●● Training can take some
●● Ability to isolate time depending on the
urgent orders tools used
●● Picker able to
decide pick path if
using paper pick
system
●● Utilize manual or
technology systems

Cluster Most ●● Multiple orders ●● Training can take some

picking operations picked at the same time
with low cube time ●● Accuracy can be an
items ●● Reduce travel in the issue if no technology is
warehouse if orders used
clustered in a ●● Urgent orders cannot be
particular area separated easily
●● Reduce overall pick ●● Requires equipment to
time hold multiple orders
●● Requires low cube
items in the main
●● Requires system
assistance to combine
orders
●● Can result in bottlenecks
●● Needs sufficient orders
to enable clustering
●● May require second
stage to pack orders

(continued )

本书版权归Kogan Page所有
Warehouse management tools and guides 25

Table 1.5 (Continued)

Pick Typical Benefits Disadvantages

method applications

Batch e-commerce, ●● Multiple orders ●● Urgent orders cannot be

pick to retail store picked at the same separated easily
zero orders, TV time ●● Requires system
shopping ●● Very effective for assistance to combine
channels e-commerce orders orders
where 100s of ●● Pick to zero initial pick
orders for single line likely to take longer than
items are received pick to line
●● Reduced travel ●● Requires sortation area
●● Increased accuracy and additional staff
●● Can be used ●● Repacking may be
successfully in a required
cross-dock operation

Batch e-commerce, ●● Multiple orders ●● Urgent orders cannot be

pick by retail store picked at the same separated easily
line orders, TV time ●● With pick to line, excess
shopping ●● Increased accuracy products need to be
channels ●● Very effective for returned to location
e-commerce and TV ●● Requires sortation area
shopping orders and additional staff
with 100s of orders ●● Repacking may be
for single line items required
●● Reduced travel

Zone pick Situations ●● Less travel for ●● Normally requires

where there operator conveyors or mobile
are large ●● Orders can be robots
numbers of picked ●● Cost of equipment
SKUs and low simultaneously or ●● Normally combined with
number of sequentially pick/put to light
items per ●● Can accommodate systems, which can be
order line. different families of expensive
Also, where items on orders ●● Can lead to idle time if
different such as hazardous, work is not balanced
families of temperature between zones
products are controlled, ambient
located in etc
different parts
●● Less training if pick
of the
to light and put to
warehouse
light used

(continued )

本书版权归Kogan Page所有
26 The Logistics and Supply Chain Toolkit

Table 1.5 (Continued)

Pick Typical Benefits Disadvantages

method applications

Wave When orders ●● Ability to schedule ●● Urgent orders cannot be

pick are released work efficiently separated easily
on a timed ●● Orders are picked in ●● Requires a WMS to
basis or to time for a manage the allocation
meet production run or
departing vehicle departure
trucks

Goods to High-intensity ●● High pick rates ●● High equipment costs,

picker pick ●● High accuracy although can be leased
operations ●● Equipment moves, or rented
operators stay in ●● High energy costs if not
the same place self-charging
●● Reduced space ●● Potential system failure
requirement ●● High opportunity cost
●● Product security ●● Standardized unit loads
●● Ergonomic required
workstations ●● Limited to smaller items
●● Training is less in the main
intensive ●● Boredom for staff

Further information
There are a number of books and websites on the subject of picking:

Ackerman, K (2000) Warehousing Profitably, Ackerman Publications,

Columbus, OH
Frazelle, E H (2016) World Class Warehousing and Materials Handling,
McGraw-Hill, New York
Richards, G (2021) Warehouse Management, 4th edn, Kogan Page, London
Van den Berg, J P (2012) Highly Competitive Warehouse Management, Man-
agement Outlook Publishing, Utrecht, Netherlands

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Warehouse management tools and guides 27

1.5 Choosing pick technology

Introduction
The picking function in a warehouse can be up to 55 per cent of the operat-
ing cost, with travel to, between and from locations being up to 50 per cent
of that labour involvement. It is therefore crucial to choose the most appro-
priate method of picking.
Many warehouses continue to use system-created paper pick lists to pick
orders within the warehouse. There are a number of alternatives, the major-
ity requiring some form of technology. Table 1.6 shows the advantages and
disadvantages of each method. One thing to point out here is that many
warehouses will use a combination of pick methods, depending on require-
ments such as velocity of movement, lead times, product identification,
product size and accuracy requirements.

When to use
When looking to improve both productivity and accuracy within the ware-
house.

How to use
Table 1.6 compares the different picking systems. A new picking method
called ‘vision pick’ utilizing technology similar to Google glasses has been
introduced by a number of companies recently.

Further information
There is some excellent content at https://www.inventoryops.com/order_
picking.htm (archived at https://perma.cc/8X4J-ZCQ8)

1.6 Cross-docking
Introduction
Cross-docking is a technique utilized in distribution centres and warehouses
to speed up the throughput of products. It eliminates the need to store

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28 The Logistics and Supply Chain Toolkit

Table 1.6 Pick technology comparison chart

Applications Benefits Drawbacks

and pick rate

Paper ●● Most ●● Low cost ●● Low pick rate

picking operations ●● Single-stage ●● Not hands free
●● Where there picking operation ●● Low accuracy
is very little although two- ●● Duplicated tasks
systems stage update
●● Not real time
support operation (key
information into ●● Training can take some
●● Low cost
system) time
areas
Flexible ●● Requires manual update
●● <100 lines ●●
of system from written
per hour ●● Quick
instructions
implementation
●● Requires return to desk
●● Ability to isolate
for further instructions
urgent orders
●● Picker able to
decide pick path
●● Low maintenance
●● Suitable as part
of a contingency
plan

Pick by ●● Most ●● Low cost ●● Low pick rate

label operations ●● Reasonably ●● Not hands free
●● Where there accurate ●● Duplicated tasks
is very little ●● Single-stage ●● Need to print labels
systems picking operation ●● Not real time
support although two-
●● Training can take some
●● Low cost stage update
time
areas operation
●● Label information may
●● <100 lines ●● Flexible
be difficult to read
per hour ●● Quick
●● Can damage product if
implementation
errors made
●● Low maintenance
●● Requires return to desk
●● Ability to label for further instructions
product with
dispatch details

(continued )

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Warehouse management tools and guides 29

Table 1.6 (Continued)

Applications Benefits Drawbacks

and pick rate

Barcode ●● Most ●● Improved ●● Low/medium pick rate

scanning operations accuracy* ●● Not hands free
with gun ●● <100 lines ●● Paperless ●● Can take longer than
per hour ●● Flexible paper picking
●● Real-time stock operationally
update** ●● Cost of hardware
●● Ability to deal ●● Requires barcode on
with multi-SKU every product
locations ●● Issues with
international bar code
standards
●● Requires system
interface
●● Requires maintenance
●● Real-time system
requires wireless
receivers throughout
warehouse

Wearable ●● Most ●● Paperless ●● Cost of hardware

scanners operations ●● Flexible ●● Requires bar code on
●● <150 lines ●● Improved product
per hour accuracy ●● Issues with
●● Improved international bar code
productivity standards
compared to ●● Requires system
hand-held interface
devices ●● Requires maintenance
●● Hands free
●● Less strain on
operators
●● Damage
reduction
●● Real-time stock
update
●● Ability to deal
with multi-SKU
locations

(continued )

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30 The Logistics and Supply Chain Toolkit

Table 1.6 (Continued)

Applications Benefits Drawbacks

and pick rate

Voice ●● Most ●● Paperless ●● Cost of hardware

picking operations ●● Flexible ●● Difficult in very noisy
●● Ideal for ●● Fewer processes environments
temperature- ●● Improved ●● Requires system
controlled accuracy* interface
areas, also Requires maintenance
●● Improved ●●
heavy,
productivity ●● Problem with multi-SKU
awkward
Quick training location
items ●●

Hands free/eyes ●● Serial number capture is

100–250 lines ●●
●●
free an issue – takes time –
per hour
●● Improved safety unless coupled with
scanner
●● Less strain on
operators ●● Accuracy issue if
product in incorrect
●● Damage
location
reduction
●● Unsure of long-term
●● Real-time stock
health issues
update

Voice ●● Most ●● Paperless ●● Cost of hardware and

picking operations ●● High accuracy software
plus ●● Ideal for ●● Good productivity ●● Requires bar code
finger temperature- Requires system
●● Hands free ●●
scanning controlled interface
●● Less strain on
areas Issues with
operators ●●

●● 125–250 lines international bar code

●● Damage
per hour standards
reduction
●● Real-time stock ●● Unsure of long-term
update health issues
●● Ability to deal
with multi-SKU
location

(continued )

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Warehouse management tools and guides 31

Table 1.6 (Continued)

Applications Benefits Drawbacks

and pick rate

Pick to ●● High no SKUs ●● High accuracy* ●● Cost of hardware

light high ●● High productivity ●● Requires system
frequency ●● High pick rate interface
sales per System failure
●● Easy to train staff ●●
individual
Staff can choose ●● Cost of maintenance
item ●●

pick sequence ●● Low flexibility

●● Mail order/e-
commerce, ●● Real-time stock ●● Long implementation
engineering update time
stores ●● Hands free ●● Limited in terms of
●● Approx ●● Improved safety product types
250–450 lines ●● Damage ●● Problem with multi-SKU
per hour reduction locations
●● Simultaneous or ●● Difficulty with batched
sequential picking or clustered orders
●● Can be used for
goods-to-person
and person-to-
goods picking
(zone)

Put to ●● Retail store ●● High accuracy ●● Cost of hardware

light operations ●● High productivity ●● System failure
●● Goods-to- ●● Damage ●● Limited in terms of
person reduction product types
operations ●● High pick rate ●● Cost of maintenance
●● Sortation ●● Easy to train ●● Can be a two-stage
●● Real-time stock operation
update
●● Can be used for
goods-to-person
picking

(continued )

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32 The Logistics and Supply Chain Toolkit

Table 1.6 (Continued)

Applications Benefits Drawbacks

and pick rate

RFID ●● High-value ●● Very high ●● Cost of hardware

goods accuracy ●● Cost of tags
●● Items ●● High productivity ●● Requires readers
requiring ●● Real-time stock ●● Read distances very
accurate update short
traceability
●● Requires international
●● 200–300 lines standards
per hour
●● Issues with certain
types of products
– metal and liquids
●● Requires system
interface
●● Cost of maintenance

Vision ●● Various goods ●● Hands free ●● New technology

pick ●● 230–350 lines ●● Real-time ●● Some reports of neck
per hour verification ache/headache
●● High accuracy ●● Cost of hardware and
●● Capture serial software
numbers ●● Requires system
●● Reasonable interface
training time ●● Issues with
international bar code
standards

* High accuracy is dependent on accurate put-away. Can be supplemented by reading out last four
digits of barcode for voice picking.
** Scanning can be real time or information can be downloaded once the tasks are completed.

roduct by consolidating items during the inbound process and taking them
p
directly to the shipping or dispatch area.
Items are likely to remain on site for a maximum of 48 hours, with most
leaving in a much shorter time. These can be dispatched separately or can be
consolidated with product picked from stock. The costs of holding and han-
dling inventory are significantly reduced. Walmart puts some of its success
down to cross-docking as much as 85 per cent of its products through work-
ing closely with its suppliers and having sophisticated IT systems.

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Warehouse management tools and guides 33

When to use
The pressure on companies to reduce order lead times requires products to
move through the supply chain much faster. Cross-docking enables this to
happen.
A variant of this is a sequencing centre where parts destined for a produc-
tion line are consolidated and sorted so that they arrive at the production
line only when they are required.

How to use
To operate an efficient cross-dock requires a good information technology
system. Advanced shipping notifications (ASNs) are essential and goods
need to be identified easily at the inbound stage to enable staff to move them
directly to the dispatch or shipping area as opposed to the storage area. To
enable this, barcodes or radio frequency identification (RFID) tags have to
be aligned across suppliers and customers.
Suppliers can be requested to label the items with information that ena-
bles the goods-in team to identify the items quickly. Alternatively, the in-
bound team are alerted to the fact that a transfer of goods is required by an
instruction on the paperwork, a voice message or a message on the barcode
scanner. If the company is using scan technology, a message appears on
screen as soon as the goods for cross-docking have been identified.
Instructions as to where to move the product should also be given at this
time.
Ideally a vehicle is already waiting on the loading dock for the items in
question. This requires excellent coordination and planning. Alternatively,
the pallets or cartons are placed in a section of the dispatch area that is
marked out for outbound loads. If space is at a premium in the dispatch
area, drive-in racking can be used to hold the products until the outbound
vehicle arrives (see Figure 1.3).
The coordination of inbound and outbound movements is key to the
system working effectively. An example of this is the hub operation for a
parcel or pallet distribution operation where items arrive in time to meet a
departing vehicle returning to its geographic area. A vehicle cannot depart
until the last vehicle carrying goods destined for its area has arrived.
Finally, warehouse design plays its part in terms of where the inbound
and outbound doors are located. If they are situated next to each other as in
Figure 1.3, there is a need to ensure that congestion is not an issue.

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34 The Logistics and Supply Chain Toolkit

Figure 1.3 Example of cross-dock operation

D
Rack storage

Ex
-st
Drive-in rack

oc
Grid for staging

k
D
A
Inbound Outbound
C

C C D
B B B C C
A B C C A B B B B C
A A B B C C A A A A A A

Inbound Outbound

Alternatively, doors can be situated at opposite sides of the building, with

forklift trucks travelling the length of the building to load out the vehicles –
less congestion but increased travel distances.

1.7 Slotting or item profiling

Introduction
Inventory slotting or profiling is the process of identifying the most efficient
placement for each stock item in a warehouse or distribution centre, taking
into account item popularity, characteristics and safety aspects. Strategically
placing the item in the optimum location allows workers to pick items effi-
ciently, quickly and accurately, and reduces the risk of injuries.

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Warehouse management tools and guides 35

When to use
To enable you to improve the efficiency of your picking operation within the
warehouse.

How to use
Slotting can be done manually using standard spreadsheets, database pro-
grams or specifically designed slotting software. Slotting is a recent addition
to many warehouse management systems (WMS).
There are several ways to increase picking productivity with slotting.
Placing fast-moving items close to the dispatch area, conveyors and aisle
ends minimizes picker travel time. Using easier-to-pick locations for high-
activity items, such as the middle levels of shelving and carton flow racks,
also facilitates quicker and more ergonomic picking.
Items that are often sold together should be stored together to reduce
travel. This can also help distinguish between similar parts. For example,
placing the same size nut and bolt together not only reduces travel but also
separates one bolt size from another. Other potential pairings include dry
pasta and pasta sauces. This is sometimes called product affinity.
From a safety point of view, frequently picked and moderate-weight
items should be placed at a height between an average person’s waist and
shoulders to minimize the chance of injury to pickers and replenishment
staff. In warehouses where there is a mix of heavy and fragile items, the
heaviest items should be placed at the beginning of the pick path so that they
are loaded at the bottom of a pallet, carton or tote.
Where items appear frequently on orders, these should not only be put
close to dispatch but also into multiple locations in this area of the ware-
house in order to balance the workload and avoid bottlenecks.
Note that if using zone picking, the most frequently ordered items should
not be held in the same zone. They should be separated across all the zones
to ensure that activity is equal across all zones.
Items can also be grouped within the warehouse based on vendor or
product similarities. Vendor groupings can simplify merchandise put-away.
Family groups can also be established to cluster items that are often sold
together or items with specific storage or handling requirements. Retailers
may use family groups to organize the warehouse logically so that the pick
mirrors the layout in the stores.

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36 The Logistics and Supply Chain Toolkit

Careful slotting can also ensure that items are placed in properly sized
locations. The full cubic capacity of the location should be used, allowing
for clearance height requirements. The location should hold a sufficient
quantity of inventory to meet the restocking goals for the warehouse, for
example a full shift’s pick.

How to start
The first step in any inventory slotting project is gathering the necessary in-
formation about the items, locations in the warehouse and product sales.
Data may already be stored in the WMS or ERP (enterprise resource plan-
ning) system. Otherwise, items and cases need to be physically measured.
The following information is typically needed for each SKU:

●● item length, width, height and weight;

●● case quantity and dimensions (length, width, height and weight) for items
stored by the case;
●● pallet quantity (or cases per tier and tiers per pallet – TiHi) for items
stored by the pallet;
●● vendor, if items are to be stored in vendor groupings;
●● family group if items are to be stored by product groupings;
●● special storage conditions, if applicable (flammable, refrigeration, high
value, etc);
●● maximum stacking height or crushability factor, if applicable;
●● items that often appear together on an order;
●● items that are very similar resulting in mis-picks or that can cause a
chemical reaction should not be stored next to each other.

Each pick location in the warehouse needs to be defined. Information typi-

cally required for each slot is:

●● location number;
●● usable size (length, width, height);
●● weight capacity;
●● proximity to material handling equipment (MHE) and shipping;
●● position within the pick path;
●● types of items eligible to be stored here (hazard code, vendor or family
group, batch code or lot number).

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Warehouse management tools and guides 37

Item movement can be captured in terms of the number of times each item
was sold (hits), the quantity sold, sales forecast (stocking level) and the on-
hand quantity. Hits and quantity sold are most typically used because high-
hit items should be placed in the most efficient locations and the optimal size
location can be established using the quantity sold and the dimensions.
Having two adjacent pallet locations (bays) is not an issue with fast-moving
goods – this reduces the number of times the locations are replenished and
can avoid replenishing during a pick cycle.
If items change frequently and do not have any historical movement fig-
ures, sales forecasts may be used instead of history. On-hand quantity data
are important for warehouses that choose to size locations in slow pick
areas to a typical on-hand inventory level, rather than a sales level.

Slotting rules
Once the necessary data have been collected, slotting rules must be estab-
lished by setting up constraints (rules that cannot be broken) and objectives
(goals). Constraints include weight limits, hazardous material areas and
vendor/family group areas. Objectives define factors such as the desired
stock level, where faster-moving items are placed and how activity will be
balanced. Examples of some typical rules include:

●● Put the fast-moving items close to the shipping dock and on the lower
pallet rack levels. Store slower-moving items on higher levels and further
away from the dock.
●● In the case pick area, locate taller cases and heavier cases at the beginning
of the pick path. Put faster-moving cases on floor/lower levels.
●● If using carousels, balance the activity among carousels in pods. Spread
faster-moving items among the carousels and put them on the centre
shelves.
●● Place fast-moving items into carton flow racks, with the very fastest on
the centre levels. Balance the workload among the flow rack units.
●● Put slower-moving items into shelving.
●● Put the faster-moving items closer to the take-away conveyor or end of
aisle.
●● Locate heavier items on the centre levels of shelving.

Proper slotting takes time to establish, and regular maintenance is required

to keep items positioned efficiently; however, slotting software can ease the

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38 The Logistics and Supply Chain Toolkit

burden of keeping items in proper locations. Slotting items properly in-

creases picking productivity and makes order selection easier, safer and
more accurate.
Trial re-slotting runs should be made to test the rules and refine them so
that they will yield the desired results. You can opt to make the profile
changes gradually during normal operations, rather than interrupting fulfil-
ment activities to move hundreds of items. You can review item placement
on a weekly basis and move items each night to relocate the most badly
placed SKUs. Although it will take several months to achieve the optimal
profile, picking productivity will increase with each set of moves.
(Reproduced by kind permission of Sedlak Management Consultants,
http://www.jasedlak.com (archived at https://perma.cc/Y63R-5FRK).)

Further information
Details on specific slotting software can be found at http://www.slot3d.com,
(archived at https://perma.cc/6DCF-ZCHL) http://www.insight-holdings.
com/dc-expert-45 (archived at https://perma.cc/C82D-4FW5)
https://www.fortna.com/solutions/slotting/ (archived at https://perma.cc/
QSU4-9UAE)

1.8 Resource planning

Introduction
Labour is a significant cost within a warehouse operation. Warehouse man-
agers are constantly required to optimize the number of staff employed and
reduce overall headcount by increasing productivity. Planning work is there-
fore crucial to the running of a cost-effective warehouse.
Labour management enables warehouse managers to compare produc-
tivities between staff and engineered standards, and as a result identify op-
portunities for further training or possible redeployment. The system can
also be used to introduce incentive schemes and be part of an appraisal
system.
There are a number of labour management systems (LMSs) available on
the market, some of which are listed at the end of this tool. Some WMSs
also have a labour management module. However, it is possible to plan the
resources required within a warehouse manually through the use of

spreadsheets.

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Warehouse management tools and guides 39

When to use
It is our contention that all warehouses should operate with some form of
resource plan to ensure that the correct number of staff are deployed each
day and therefore it should be part of daily operations. Resource planning
enables the warehouse manager to reasonably calculate the number of staff
required each day for each section of the warehouse and, when busy, to
calculate how many additional staff may be required.

How to use
Table 1.7 details a number of warehouse tasks together with the volume of
activity, productivity standards and the expected time to undertake these
tasks. Forms such as this can be completed each day based on the activities
planned for the coming days and weeks. It requires advanced information in
terms of receipts and orders, whether forecast or actual. It also requires staff
to undertake time-and-motion studies to calculate the time required to un-
dertake each activity.
The data can be updated with actual figures once the task has been com-
pleted: this provides a more accurate picture for future similar work.
Table 1.7 details an in-handling operation over the course of one day. Each
activity is listed together with the expected volume and this, together with
the engineered standards previously estimated, enables the warehouse man-
ager to calculate the number of staff required and the equipment needed. By
completing this form, the warehouse manager is able to calculate the num-
ber of people and equipment required for that particular day’s operation.
Utilizing an electronic LMS enables you to evaluate the productivity of
individuals as well as the team as a whole. It measures the performance of
each individual for completed tasks against existing labour standards to de-
termine how the time spent performing each task compares with the ex-
pected task completion time. The system, if interfacing with voice or radio
frequency, can more accurately measure the task in hand, taking into account
idle time, delays and bottlenecks. The system is able to assign the operator an
overall score. This enables the warehouse manager to compare performance
against engineered standards and the operator’s peers. The system is a great
deal more sophisticated than a spreadsheet and will produce the data much
faster. A number of steps are required to set up the system (see Figure 1.4).
The more sophisticated LMSs can also create a list of tasks for an opera-
tor and coordinate tasks. As Obal (2011) says: ‘When you start interleaving
and measuring people, you are driving out a lot of inefficiencies. You’re
maximizing your labour that is already there in the warehouse.’

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40
Table 1.7 In-handling resource plan

Activity description Daily volume

(average)
Productivity Other equipment
Inbound operation Activity Unit of standard (units Hours MHE MHE MHE e.g. radio frequency
(units) measure per hour) required Type 1 Type 2 Type 3 scanner

Unloading

Unload palletized trailer 260 Pallets 52 5 PPT RFS

Unload loose loaded 5000 Cases 200 25 RFS

containers & palletize

Stretch-wrap pallets 100 Pallets 40 2.5

Put-away

Collect pallets, put away 210 Pallets 20 10.5 FLT RFS

in wide aisle racking

Collect pallets, put away 124 Pallets 16 7.75 FLT RFS

in drive-in racking

Collect pallets, put away 26 Pallets 5 5.2 PPT RFS

in pick locations

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Sub-total 55.95

Ancillary work (collect 8.39

paperwork, equipment
etc (15%))

Total hours required 64.34 10.20 18.25

Available productive 7.2 8 8

hours per person/truck
per day

Approx number of staff 8.94

required

Approx number of 1.28 2.28

equipment required

41
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42 The Logistics and Supply Chain Toolkit

Figure 1.4 Setting up a labour management system

Identify the activity

Decide on the labour

parameters such as working
hours and utilization rate

Perform a time-and-motion
study or alternatively
interview staff

Agree and set the labour

standards

Compare standards vs actual

Revise standards if required

Although many WMSs have LMS as an option or even inbuilt, there are a
large number of stand-alone systems that can be interfaced with both ware-
house and transport management systems. A list of suppliers of LMS can be
found at the website below.

Further information
http://www.capterra.com/workforce-management-software?gclid=CMaxj8
DF57UCFXDKtAodqxsAYA (archived at https://perma.cc/6MXG-E43M)
Shortcut – http://bit.ly/2Jn7vim (archived at https://perma.cc/228U-
AQ9Q)

Reference
Obal, P (2011) cited in 2011 Market Trends Report: Warehouse Management
Programs

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Warehouse management tools and guides 43

1.9 Task interleaving

Introduction
Minimal movement within a warehouse is key to efficiency and productiv-
ity. There are a number of ways of reducing the amount of travel undertaken
in a warehouse.
As we have seen in the ABC/Pareto tool (tool 1.3), the notion of placing
the most popular items as close to the dispatch area as possible reduces the
amount of travel in the warehouse. Another method of movement reduction
is task interleaving or dual cycling. Task interleaving is controlled by a WMS
that allocates tasks to ensure an operator travels fully loaded, both ways.
For example, an operator unloading a trailer on inbound and taking the
pallet to reserve storage will be tasked with collecting a pallet for replenish-
ment or possibly dispatch depending on the amount of travel required be-
tween locations. This can reduce equipment use by up to 30 per cent. The
system works well with full pallet movements both inbound and outbound.

When to use
When looking to increase efficiency and reduce travel within the warehouse.

How to use
The idea is to combine work for a forklift truck or powered pallet truck.
According to Tompkins (2003), task interleaving is especially good for tasks
with the following characteristics:

●● The same materials handling equipment can be used to undertake both

types of moves.
●● The end location for one type of move is relatively close to the collection
point for the other move. This means that the operator and truck are utilized
both ways rather than two separate single trips, which often happens. This
is similar to the back-loading concept used in freight transport.
●● The moves are pretty much equal both ways. Ensuring that the tasks are
well matched needs an accurate set-up in the WMS.

Although put-away and replenishment may seem a good match, it is likely

that interleaving these tasks can cause increased travel and delays for both
processes. For task interleaving to be successful, it needs the support of an
information technology system. Most modern WMSs have this capability.

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44 The Logistics and Supply Chain Toolkit

This also works better when the doors are on the same side of the building
and can be used for both inbound and shipping activities. It can also work
reasonably well with doors on adjacent sides. It needs operations to be more
flexible and not have dedicated inbound and outbound teams. The opera-
tors need to be free to undertake both put-away and dispatch activities. As
a result, staff need to be able to multitask and move between operations.
Task interleaving will not be successful if inbound activities are under-
taken in the morning, dispatch in the afternoon and replenishment over-
night, for example. Task interleaving works best at larger facilities where
more tasks can be queued up and staff will have continuous work.
The key is to manage the task allocation and not to disrupt urgent opera-
tions. The tasks have to be controlled sufficiently well and planned to coin-
cide with other tasks. Releasing tasks too early or too late can have a devas-
tating effect on productivity and on equipment and manpower usage.

Reference
Tompkins (2003) https://www.tompkinsinc.com/en-us/Insight/Articles/task-
interleaving/ (archived at https://perma.cc/5SUU-93KT)

1.10 Selecting warehouse storage equipment

Introduction
The selection of warehouse storage equipment is best carried out in conjunc-
tion with the equipment manufacturers. They are the experts and have ex-
perience of different types of warehouse operations. Ensure that you get a
number of opinions and, if necessary, use a consultant to sense-check the
options.
In this guide we look specifically at storage media. There are a number of
different options when it comes to choosing the method of storage. The
choice of how to store product will very much depend on the product size,
its speed of throughput, the number of pallets per line item and the stock
rotation policy (see Table 1.8).
There are, of course, many variables that will impact on the price. The
main one is pallet size and type; for example, with drive-in racking there are
different design options and alternative support rails available. On double-
deep racking it would normally be the use of adjustable pallet racking
(APR), but some trucks require a low-level beam to accommodate reach

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Table 1.8 Choosing a warehouse racking system

Pallets stored at
Use of Use of Access to Special ground level in
floor cubic Speed of individual MHE Rotation 4,636 sq metres Cost per
space space throughput pallets required of stock (50k sq ft) location†

Adjustable pallet racking * ** No FIFO 1,250 100

Very narrow aisle (VNA) *** *** ** **** Yes FIFO 1700 100‡

VNA with articulated *** *** *** **** Yes FIFO 1600 100
forklift

Drive-in racking *** * ** * No FILO 2,120 200

Double-deep racking * * Yes FILO 1,650 120

Push-back racking * * No FILO 1,950 500

Gravity-fed racking ** * **** * No FIFO 2,500 700

Mobile racking ** * * **** No FIFO 2,325 500

Satellite racking *** * * Yes FILO 2,500 500

†
The cost column assumes that standard adjustable pallet racking is given a base cost of 100.
‡
This cost does not include any guidance wire or guidance rail that the VNA forklift may require to operate.
SOURCE information provided by Nene Ltd

45
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46 The Logistics and Supply Chain Toolkit

Figure 1.5 Pallet rack capacity

5576

NG
(60,000)

NG
KI N

KIN

KI
AC

G RAC
AC

AC
5111

R
TR
TR
(55,000)

CK LET
LE
LE
LE

IN
RA AL
L

RA G
AL

PA
AL

IN
4646

E
EP
P

-IN P

ST CK

G
EP

E
(50,000)
AREA OF BUILDING IN SQUARE METRES (SQUARE FEET)

VE RA
SL

O
AIS

DR LE

T
E
LE

LE
V
B
W
4182

I
B

LL AL
DE

OU
RO

LI
(45,000)

PA E P
DO
WI

ET
R

IL
E
A

SL
LE

B
.) N

IT MO
3717

AI
S
NA E AI
.A

&
OW
(40,000)

E
.A WID

RR
(V

LL
TE
3252

SA
.)
(35,000)
.N
(V
2788
(30,000)

2323
(25,000)

1858
(20,000)

1394
(15,000)

929
(10,000)

464
(5,000)
0
0
0
0

0
0
0
0
00
00
00
00
00
00

19 0
00

00
00

24 0
00
10
20
30
40

60
70
80
90

0
11
12
13
14
16
17
18

21
22
23

500 1000 1500 2000 2500

NUMBER OF PALLETS AT GROUND LEVEL
SOURCE Reproduced by kind permission of Constructor Group

legs, which would increase the price, and very narrow aisle (VNA) opera-
tional costs will fluctuate depending on the guidance system used. In terms
of special MHE required, we mean anything other than a counterbalance or
reach truck.
Figure 1.5 provides an approximate figure in terms of how many pallets
can be stored within a specific area utilizing the different types of racking.

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Warehouse management tools and guides 47

1.11 Warehouse location numbering

Introduction
When you enter the majority of warehouses you are faced with row upon
row of storage racks. An interesting aspect from a consultancy viewpoint is
how each row or aisle of racking is identified. This section suggests how to
number rows of racking or shelving within a warehouse facility.

When to use
If a company is looking to introduce greater efficiency into its picking op-
eration and reduce travel time, it needs to consider carefully how it numbers
its pick locations.

How to do it
In Figure 1.6 we see that each row of racking is given a letter: A, B, C, etc.
This results in one-sided picking as denoted by the arrows. The numbers
denoted in the boxes are the pallet locations. The shaded area is an order
pick location.
In this example the first pick location will have a location identification
(ID) of A (row) 06 (bay) 01 (ground floor) – A0601, while the second loca-
tion will be B0401. The pick list produced for the operator will automati-
cally send him or her to the location in Row A. This can result in large
walking distances as the order picker first visits the location on one side of
the aisle and then returns to visit the locations on the other side. This method
of identification can be utilized in very wide aisles; however, for narrow
aisles and shelving it is more efficient to number the aisles as can be seen in
Figure 1.7. However, note that there are warehouse management systems
that can adapt to row numbers and configure the pick operation to follow
the most efficient path.
In Figure 1.7 the aisles are given letters, as opposed to each row, which
results in the picker traversing the aisle and thus picking from both sides at
one pass. This will reduce the amount of travel significantly. In Figure 1.7
the first pick location is A0801 and the second becomes A1101. As a result,
the pick travel has reduced significantly. This is referred to as snake path or
S-shape picking.
It can also be noted in Figure 1.7 that the location numbers begin at the
other end of the aisle for aisle B thus allowing the picker to travel less and

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48 The Logistics and Supply Chain Toolkit

Figure 1.6 Pallet row numbering

A B C D E F G H

10 10 10 10 10 10 10 10

09 09 09 09 09 09 09 09

08 08 08 08 08 08 08 08

07 07 07 07 07 07 07 07

06 06 06 06 06 06 06 06

05 05 05 05 05 05 05 05

04 04 04 04 04 04 04 04

03 03 03 03 03 03 03 03

02 02 02 02 02 02 02 02

01 01 01 01 01 01 01 01

06 First pick location – Row A location 06

SOURCE Adapted from and reproduced by kind permission of JP van den Berg

in sequence. Care should be taken in terms of which items are at the begin-
ning of the pick sequence: heavier items should be picked first. The section
on slotting (tool 1.7) gives further guidance on this subject.

Reference
van den Berg, J (2012) Highly Competitive Warehouse Management,
Createspace

1.12 Selecting warehouse material handling

equipment (MHE)
Introduction
The choice of MHE within a warehouse is closely linked to the choice of
storage medium. It is therefore key to ensure that they are done simultane-
ously, taking into account the trade-off between additional space capacity

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Warehouse management tools and guides 49

Figure 1.7 Aisle numbering

A B C D

19 20 02 01 19 20 02 01

17 18 04 03 17 18 04 03

15 16 06 05 15 16 06 05

13 14 08 07 13 14 08 07

11` 12 10 19 11 12 10 09

09 10 12 11 09 10 12 11

07 08 14 13 07 08 14 13

05 06 16 15 05 06 16 15

03 04 18 17 03 04 18 17

01 02 20 19 01 03 20 19

08 First pick location – Aisle A location 08

SOURCE Adapted from and reproduced by kind permission of JP van den Berg

and speed of throughput. In choosing the most appropriate equipment we

are looking to:

●● ensure staff safety;

●● lower unit handling costs;
●● reduce handling time;
●● reduce travel time;
●● maximize cubic space utilization;
●● reduce energy consumption and emissions.

Table 1.9 compares different truck types working in a racked storage envi-
ronment. We have taken a warehouse with the following storage area di-
mensions – 48 metres × 120 metres × 10 metres – to bring out the differences
between the trucks. Note the lift height capability of the trucks together
with the aisle space required. Also note that the VNA truck requires another
truck to transport the product to and from the racked area.

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50 The Logistics and Supply Chain Toolkit

Table 1.9 Comparison chart for MHE

Lift
Aisle width capacity
MHE type Lift Height (mm) (mm)* in kg from To (kgs)

Hand pallet truck, 200 mm 1525/1725 1000 2300

pallet jack

Hi-lifter 800 mm 2100 mm 1000 1000

Powered pallet 195 mm 2157/2265 mm 1300 2500

truck

Pedestrian 3600 – 5400 2234/2216 mm 1000 2000

powered pallet
stacker

Platform powered 2500 – 6000 2990/2920 mm 1400 2000

pallet stacker

Reach truck 7000 – 13000 mm 2687/2942 mm 1200 2500

Counter balance 7500 mm 3102/3440 mm 1500 2000

truck 3 wheel

Counter balance 7060 mm 3327/3568 mm 1800 8000

truck 4 wheel

Low-level order 800 mm 2813/3149 1200 1200

picker

Medium-level 1700/2500 mm N/A 1000 1000

order picker

High-level order 10200/11200 1400/1250 1000 1200

picker

Man up VNA 10500/16800 1698 750 1500

Man down VNA 6700/11000 1660 750 1500

Articulated forklift 15000 1800/1650 1500 2500

truck

* Aisle width – 1000 x 12000 crossways/800 x 1200 lengthways

NOTE These are guides only. Different manufacturers will have different capacities and lift heights.

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Warehouse management tools and guides 51

Figure 1.8 Reach truck aisle width calculation

Reach dimension R

Forks, extended position

L LLC Outer turning radius WA

Manufacturers of materials handling equipment have their own sophisti-

cated systems with which to model operations within a warehouse. They are
able to take your data and run a simulation to decide on the most appropri-
ate equipment.

1.13 Calculating aisle width for a forklift truck

Introduction
There is a correlation between the type of racking installed and the type of
forklift required to operate within the racking. In order to ensure that the
correct equipment is purchased we need to undertake a number of calcula-
tions. These are shown below.

When to use
When deciding on the aisle width required for a certain type of racking and
use of a forklift truck.

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52 The Logistics and Supply Chain Toolkit

Figure 1.9 Aisle width calculation, counterbalance truck

L LLC

How to use
In order to calculate the aisle width required for particular forklift trucks we
need to use a formula that takes into account the size of load, the truck’s
outer turning radius and the truck’s lost load centre, which is the horizontal
distance from the centreline of the front axle to the front face of the forks.
The formula should also include a margin for ‘operator clearance’.
The official formula for working out the minimum 90-degree stacking
aisleway dimension (known as Ast4 or Ast3) is shown as:

WA + LLC + L
where
WA = The forklift truck’s outer turning radius
LLC = Forklift truck’s lost load centre
L = Length of load

Tony Sellick from Forklift Training suggests adding a further 300 mm for
operator clearance.
With regard to the reach truck the following formula applies:

WA + LLC + L − R plus 200 mm (operator clearance)

where
WA = The forklift truck’s outer turning radius
LLC = Reach truck’s lost load centre
R = The reach distance
L = Length of load

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Warehouse management tools and guides 53

Further information
Note that the majority of racking and materials handling equipment compa-
nies will be happy to assist you with these calculations.
Another useful site is: https://www.fork-lift-training.co.uk/buyersguide/
forklift-aislway-turning-dimensions.html (archived at https://perma.cc/
8Y82-LGQ7)

1.14 Goods-to-person solutions –
omnichannel operations
Introduction
As mentioned in tool 1.5, the picking function in a warehouse can be up to
55 per cent of the warehouse operating cost, with travel to, between and
from locations being up to 50 per cent of that labour involvement. It is
therefore crucial to choose the most appropriate method of picking.
The shortage of labour coupled with increased labour costs, requirement
for more flexible work hours and shorter order lead times has seen an in-
crease in goods-to-person (G2P) systems.
In this section we examine the various types of G2P systems currently
available.
There are four main types of systems: those which utilize mobile robots
to convey items to static pickers at pick stations; those which are permanent
fixtures, utilizing shuttles on rails; hybrid versions of the latter; and carou-
sels/vertical lift modules.
The mobile robot systems convey shelving to a pick station where a
picker will pick the required item and the mobile robot and shelving will
return the shelves to the storage area.
These include AGVs (autonomous guided vehicles) and AMR shuttles
(autonomous mobile robots).
AGVs/AMRs tend to convey shelving up to 1.8 metres in height while
AMR shuttles can convey taller fixtures, up to 8 metres.
These robots move around a warehouse independently and take instruc-
tions from warehouse control/execution software (WCS/WES). The robots
are fitted with sensors, scanners and 3D cameras. They navigate through

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54 The Logistics and Supply Chain Toolkit

buildings using digital maps routing from point A to B. The robots can avoid
obstacles and interact safely with humans. Robots can also navigate using
2D bar code labels positioned in strategic positions on the floors and in the
racks.
Dynamic slotting takes place as orders are analysed. The WCS will mon-
itor the movement rates of SKUs and units and will slot based on these rates.
Although floor space is utilized efficiently the cubic space is not, unless
multiple floors are introduced. This is a significant downside of this system.
Major suppliers include Geek+, Mushiny, HIKRobot, GreyOrange,
Quicktron, Swisslog.
Amazon, which has its own AMRs, states that fulfilment centres (FCs)
with robots are three times more efficient and 20 per cent faster than tradi-
tional, less high-tech FCs.
Companies utilizing this system will tend to use put to and pick to light
systems for put-away and picking.
In terms of static versions we have the cube AS/RS (Automated Storage
and Retrieval Systems) provided by companies such as Autostore and
utilized by Ocado and its clients. In this system, plastic totes are stacked
one on top of the other in a grid system. An ABC analysis (see tool 1.3)
is used to ensure the most popular items are as close to the surface as
possible.
A similar system is provided by Cimcorp, but without the requirement of
the superstructure. Each tote is stacked on top of another, and they are re-
trieved utilizing a gantry crane.
Static AS/RS systems provided by companies including Knapp, TGW,
Dematic, SSI Schaefer, Opex, Honeywell etc. utilize a structure where
shuttles move on rails to access the plastic totes. These totes can be lo-
cated one or two deep in the ‘racks’. Weight capacity tends to be in the
region of <50 kg.
However, there are pallet AS/RS systems with a much greater capacity.
We can also include mini-load systems in this section. Shuttles retrieve
items and bring them to the front of the structure where the required item is
picked, and the remainder of the items returned to their location.
The hybrid version operates with a permanent fixture but utilizes mobile
robots to access the totes in the racks and convey items to a picker. Each of
these systems provides very dense storage. An example of this system is pro-
vided by Exotec and Hai Pick.
Although utilizing the cubic space of the warehouse, this system has its
disadvantages – namely the permanency of the structure and the high capital

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Warehouse management tools and guides 55

outlay. The cube AS/RS also requires the robots to ‘dig’ out the totes to ac-
cess those items which are not located on top of the grid.
Another type of permanent structure includes carousels and vertical lift
modules which have either shelves which rotate within the structure, called
carousels – these can be vertical or horizontal – or a lift system at the back
of the structure called a vertical lift module (VLM).
Another system is the pocket sorter which is very similar to a hanging
garment system whereby pouches convey items to a pick station. This will
usually require a separate storage location for storing items and a section for
decanting into the pouches.
Another system, recently introduced to the market, is the Hive system
where robots climb existing racking to retrieve items. This is still very much
in its early development stage.
Selecting a G2P solution very much depends on the type of operation.
You need to know what the inventory is in terms of size, stability of size,
stock turnover, number and size of orders and order lead time, to name a
few parameters.
As mentioned in the recent Stiq G2P report, ‘the higher the level of auto-
mation the higher the predictability must be for the future’.

When to use
If you are a potential or existing user of G2P solutions, in the process of
evaluating G2P solutions, constructing a new warehouse, having significant
labour issues, looking to increase productivity and accuracy or just starting
to think about the possibility of automating your warehouse.

How to use
Table 1.10 shows the advantages and disadvantages of each type of automa-
tion. One thing to point out here is that many warehouses will use a combi-
nation of pick methods, depending on requirements such as velocity of
movement, lead times, product identification, product size and accuracy re-
quirements. This can be a combination of automation and manual processes.
The following table compares the different types of G2P systems.
The more stars the better the system for that parameter.
As can be seen from Table 1.10, there are advantages and disadvantages to
each of the systems.

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56
Table 1.10 Different types of G2P systems

VLM/ Collaborative Manual

AMRs/AGVs Cube AS/RS Static AS/RS Carousels Robots processes

Implementation ** * ***

timescale

Capital cost * * * * ****

Pay as you use **** * * * *

ROI period *

Labour cost * * * * ** *

Space utilization *

Complexity * *

Flexibility *** * * * * **

Scalability ** *

Accuracy * * *

Productivity * *

Single point of **

failure

Fire risk * * **

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Warehouse management tools and guides 57

With regard to the AMRs and the cobots, these can be acquired via rental or
pay-as-you-use contracts, whereas the AS/RS systems will require a signifi-
cant capital investment unless acquired through leasing.

Conclusion
The type of system chosen has to be based on the following:

●● size and type of products;

●● speed of throughput required – based on the order types;
●● number of SKUs;
●● temperature storage requirements – ambient, chill or frozen?
●● storage required and available space;
●● capital available;
●● labour availability;
●● suitability of facility, e.g. floor loading and condition;
●● failure/breakdown and how to get the system operational;
●● insurance

References
2023 G2P Solutions report by Stiq Ltd, www.styleintelligence.com (archived
at https://perma.cc/2GGW-E3GJ)
TH Logistics Blog https://www.thlogisticsconsultant.com/blog/ (archived at
https://perma.cc/E7FE-RRZG)

1.15 Warehouse space calculations

Introduction
For those companies that do not have access to warehouse design software
there are a number of simple ways to calculate the space required for specific
operations. In this tool we have included a calculation for dock space and
racked pallet storage.

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58 The Logistics and Supply Chain Toolkit

How to do it
1. Calculation of dock space requirements
The formula for this is relatively simple, as follows:

Dock space = {Roundup ((Number of loads received × hours per load) /

hours per shift)} × (Size of load × pallet dimensions)
Data
Receiving 20 loads per day
Each load is 26 pallets
Each pallet is 1 m × 1.2 m
45 minutes per load to unload vehicle
30 minutes per load to stage prior to put-away
8 hours per day work shift
Calculation
Roundup ((20 × 1.25)/8) × (26 × (1.2 × 1.0))
= roundup (3.125) × 31.2
= 4 × 31.2
= 124.8 square metres
Dock space = 124.80 square metres
Add double the space for working and travel area = 249.60 square metres
Total space required = 374.40 square metres

2. Pallet storage calculation

This tool enables operators to calculate the number of pallets that can be
stored within a particular cubic area. It works on the basis of calculating
width, length and height modules within the warehouse.
A module width is calculated as follows:

Module width = Width of aisle + 2 Pallet lengths (short side) + 100 mm

For example, given the following data:
Aisle = 2,500 mm (variable with type of MHE used)
Pallet size = 1,200 mm × 1,000 mm
Two pallets short side = 2 × 1,000 mm = 2,000 mm

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Warehouse management tools and guides 59

Clearance = 100 mm between back-to-back pallets

Therefore:
Width of module = 4,600 mm (the sequence is pallet–aisle–pallet–clearance)

A module length is calculated as follows:

Module length = Width of upright + Clearance + 2 Pallets (long side)

Rack upright plus clearance = 420 mm (120 mm × 3 × 100 mm)
Two pallets (long side) = 2 × 1,200 mm = 2,400 mm
Therefore:
Length of module = 2,820 mm (the sequence is upright–clearance–pallet–
clearance–pallet–clearance) (see Figure 1.11).

Module height = Height of pallet = 150 mm

Pallet height = 1,350 mm
Clearance above pallet = 150 mm
APR beam width of 140 mm
Therefore:
Height of module = 1,640 mm (sequence is pallet and goods–clearance–
beam height) (see Figure 1.12).

Total pallets stored within cubic capacity of a warehouse section, excluding

receiving and dispatch areas, gangways and other areas:

(No of width modules × pallets in module width) × (No of length modules

× pallets in module length) × (No of height modules) = No of pallets into
cube volume of warehouse.

Figure 1.10 Width module calculation

AISLE AISLE

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60 The Logistics and Supply Chain Toolkit

Figure 1.11 Length module calculation

Figure 1.12 Height module calculation

So, for a warehouse section with a width of 48 metres, a length of 120

metres and a height of 10 metres:
Width calculation = 48 m ÷ 4.6 m = 10 modules
Length calculation = 120 m ÷ 2.82 m = 42 modules
Height calculation = 10 m ÷ 1.64 m = 6 pallets
Therefore:
Total number of pallets = (10 × 2) × (42 × 2) × (6) = 10,080 pallet locations
in this warehouse storage area.

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Warehouse management tools and guides 61

An alternative calculation to calculate space requirements is as follows:

S = (A/2 + W + 0.1 metres) × (L + 0.2 metres) × N/(h × d)

where:

S = surface area required

A = aisle width, depends on building height
W = width of pallet
L = length of pallet
N = total number of pallets
h = stacking height in number of pallets high
d = stacking depth in number of pallets deep, d = 1 for traditional storage

Note that these calculations are ‘rule of thumb’ calculations and may not fit
all operations.

Further information
There are a number of free resources that can calculate the number of pal-
lets that can be stored within a specific area or volume. These are supplied,
in the main, by the material handling and storage equipment companies, for
example http://webtools.cisco-eagle.com/rack/ (archived at https://perma.
cc/E85U-2F7U)
A simple pallet calculation sheet using Excel can be downloaded from
http://howtologistics.com (archived at https://perma.cc/YRW4-CNPM)

1.16 Warehouse location

Introduction
Locating a warehouse strategically and in the most cost-effective geographic
location is one of the most important decisions a company will make. The
decision as to whether to operate the warehouse in-house or outsource is
covered elsewhere in this book (see tool 5.1).
The selection of a warehouse location requires multiple criteria to be as-
sessed, including both quantitative and qualitative data. Many companies
will look at the location and size of customers which, although relevant, are

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62 The Logistics and Supply Chain Toolkit

not as important as they would be when locating a retail outlet. Factors to

take into account include the following:

●● cost of land, rent, rates and local taxation;

●● access to transport networks;
●● availability of trained labour;
●● transport links for staff;
●● availability of funding, grants, etc;
●● availability of existing buildings;
●● availability and cost of utilities, including telecoms;
●● availability of finance and resources;
●● goods traffic flows;
●● proximity to ports, including inland ports and airports;
●● proximity to multi-modal facilities
●● location of suppliers and manufacturing points;
●● the potential neighbours, e.g. opportunities for co-loading or, negatively,
hazardous storage facilities.

When to use
When the company is looking to locate or relocate a warehouse operation.

How to use
Figure 1.13 provides a list of criteria companies need to take into account
when deciding on a new location for their warehouse. Fortunately, this does
not have to be a totally manual decision as there are a number of software
programs available that will take the majority of these criteria into account
and produce a number of viable alternatives.
Route planning and optimization software will produce a viable location;
however, supply chain optimization tools will further enhance this decision.

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Figure 1.13 Warehouse location criteria

Selection criteria for warehouse location

Macro Labour
Cost Infrastructure Environment Markets
environment characteristics

Existence of modes
Government of transport
Geography
Land cost policies Telecommunication Proximity to
Labour availability systems Weather
Labour costs Industry regulations customers
Skilled labour Energy and water Neighbours
Transportation cost Enterprise zones Proximity to
and construction Transport links utilities Congestion supplier/producer
Tax incentives for staff
plans Quality and Away from Lead times and
Tax structures Industrial reliability of modes
Planning regulations flood plains responsiveness
Financial incentives relations record of transport
Political stability Away from Traffic flows
Handling costs Proximity to ports subsidence
Security and airports
Existing sites

63
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64 The Logistics and Supply Chain Toolkit

Further information
The websites for a number of providers of this software are:

Cirrus Logistics – http://cirruslogistics.com/products/cost2serv-network-

strategy/ (archived at https://perma.cc/643B-4PDH)
JDA – http://www.blueyonder.com/solutions/ (archived at https://perma.cc/
YV58-CAMW)
Llama Soft – https://www.coupa.com/products/supply-chain-design (archived
at https://perma.cc/DE6V-CK38)
Plan LM – www.solvoyo.com (archived at https://perma.cc/MP9X-KFBP)
SCM Globe – https://scmglobe.com/user_sessions/new (archived at https://
perma.cc/RAW2-JG4P)

Further reading
Demirel, T, Demirel, N Ç and Kahraman, C (2010) Multi-criteria
warehouse location selection using Choquet integral, Expert Systems
with Applications, 37 (5), pp 3943–52

1.17 Justifying a warehouse management

system (WMS)
Introduction
A WMS has become essential to the smooth and efficient operation of com-
plex warehousing and distribution environments around the world.
Recognizing the need for a WMS is a reasonably straightforward exercise
for many warehouse managers. Inaccurate inventories and pressure to
continually reduce costs and improve service levels make the investment
decision almost intuitive. Investments, however, are rarely made based on
intuition. Fortunately, the benefits of a WMS can be identified and, to a great
extent, quantified, to provide an accurate basis for justification.

When to use
When contemplating the acquisition of a WMS.

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Warehouse management tools and guides 65

How to use
Red Prairie (now JDA) suggests a five-step plan to justify the introduction of
a WMS.

Step 1: Define the problem areas

Four principal benefits can be expected to arise from the implementation of
a WMS. These benefits lie in the four areas that cause the majority of effi-
ciency problems in warehouses: inventory accuracy, resource management,
customer service and visibility. The first step is to identify the main problems
currently experienced. Begin by creating a matrix using these four benefits
as the primary categories. Next, list the facility’s problems under each cate-
gory.
Common problems occurring under inventory accuracy include excess
inventory, lost product, incorrectly located items and mis-picks. Under re-
source management, problems may include wasting time looking for mate-
rial, inefficient pick paths and no means of measuring performance.
Customer service problems include ship errors and delayed shipments.
Finally, information management problems may include stock-outs, false
stock-outs, transaction update delays of hours and days, and data entry
errors.

Step 2: Estimate the costs

Once any warehousing problems have been documented, the next step is to
estimate the costs associated with each. This step is critical to understanding
the severity of any problems. A variety of equations and industry standards
can be used to quickly estimate the costs. Four examples of typical costs are
listed in Table 1.11. Having completed a quick estimate of the costs, it be-
comes easy to identify the most urgent problems – those problems that rep-
resent your biggest cost factors. The first example indicates the impact of
ship errors. Two calculations are made: one assuming a ship accuracy of
98.5 per cent and one assuming 96 per cent. Ship accuracy above 95 per
cent is often thought of as excellent, yet the cost of errors in these two cases
is significant – $44,250 and $118,000 respectively. These figures are based
on a survey by Honeywell, which estimated the cost of a picking error to
be $59.

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66 The Logistics and Supply Chain Toolkit

Table 1.11 Typical cost penalty if no WMS

Error Occurrence (%) Cost/Occurrence Total cost

Ship errors 1.5 $59 $44,250

4.0 $59 $118,000
(assume 50k orders pa)

Shrinkage 1.0 .01 × $1m in invoicing $10,000

.01 × $7m in invoicing $70,000

Data entry 4.0 $10 $40,000

errors (assume 100k transactions pa)

Lost 5.0 $3.33 $41,625

product 7.0 (10 minutes searching $58,275
(assume 50k orders × 5 lines × $20/hour)
per order)

Step 3: Identify the savings

The savings associated with the reduction of inventory levels may them-
selves justify investment in a WMS. Many companies have reported reduc-
ing inventory levels by as much as 30 per cent. This level of reduction greatly
affects carrying costs, which typically equate to 25 to 35 per cent of the cost
of inventory (see Table 1.12).
Realistically, during the few months of implementation, cost savings will
not be maximized because of ‘learning curve’ issues such as training and a
re-engineered warehouse culture. However, over time, users should expect
near perfection in those areas that were once major problems. Estimated
cost savings should take into consideration the fact that year two will return
greater savings than year one. Minimizing the learning curve can be
accomplished through training (commencing long before implementation)
combined with good internal communication (change management).

Step 4: Determine the cost of a WMS

At this point in the process, it will be reasonably clear how much money and
time a good WMS product will be able to save. The next step is to determine
how much will have to be spent to integrate the system. Although vendors

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Warehouse management tools and guides 67

Table 1.12 Potential cost savings from introducing a WMS

Potential cost savings (%)

Labour utilization 10–35

Inventory reduction 5–30

Floor space utilization 10–30

Maintenance 0–10

Shrinkage 50–75

Rolling stock 10–20

Increase shipping accuracy to 99+

Increase data entry accuracy to 99+

use various pricing models, the components of their pricing proposals usu-
ally fall into five categories:

1 licence fees;
2 custom development (if applicable);
3 computer hardware;
4 radio frequency (RF) hardware; and
5 services such as design, implementation, training, testing and travel.

Your internal costs to implement the system should also be included when
defining the total cost of the implementation, as well as the cost of mainte-
nance over the time period for which you are calculating the ROI.
An alternative pricing and implementation model may also be consid-
ered. WMS systems are now available on a SaaS (Software as a Service)
basis. In this model you typically pay a modest upfront implementation fee
and then have a single monthly payment (including system and hardware
costs and maintenance fees) for a specified period such as three or five years.
Note some WMS suppliers charge on a transactional basis. Add the sum of
the payments for the life of the contract and the implementation fee to de-
termine total system costs.

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68 The Logistics and Supply Chain Toolkit

Step 5: Calculate the ROI

See tool 7.2. Once calculated and accepted by the board you can begin the
process of supplier selection (see tool 1.18).

Reference
http://jda.com/knowledge-center/collateral/five-steps-for-cost-justifying-a-
wms-white-paper/ (archived at https://perma.cc/AX23-JFLL)

1.18 Selecting a warehouse management

system (WMS)
Introduction
If I had to choose one tool to operate within a warehouse it would have to
be a WMS, closely followed by ABC analysis (see tool 1.3). This tool de-
scribes how you should go about choosing a WMS.
A WMS can process data quicker and can coordinate movements within
the warehouse. It can produce reports and handle large volumes of transac-
tions, as seen in e-commerce operations. The potential benefits of having a
WMS in place include the following:

●● efficient and effective labour management;

●● improvements in productivity and accuracy;
●● stock visibility and traceability;
●● accurate stock-takes;
●● reduction in picking errors;
●● reduction in returns;
●● accurate reporting;
●● improved responsiveness;
●● remote data visibility;
●● automatic replenishments;
●● improved customer service; and
●● minimized paperwork.

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Warehouse management tools and guides 69

To embark on a WMS project you need to be certain that you are going to
achieve significant business benefits. Such systems need capital investment,
unless purchasing a SaaS system, plus there are some running costs involved;
however, the main ‘cost’ is the drive, enthusiasm and commitment needed
from the entire warehousing team and senior management to ensure that the
system is set up correctly, used properly and regularly optimized. A WMS is
not a ‘quick fix’ option. A WMS is more than a stock control and data col-
lection tool. It is a system that helps you ‘automate’ your warehousing op-
erations as much as possible.
IT projects arguably should be justified on the same basis as any other
business investment. A WMS is very much a tactical ‘execution’ system and
is therefore a lot easier to justify than many IT projects. It forms an impor-
tant component for strategic business improvement but nevertheless is still
tactical.

When to use
When you have decided on the purchase or rental of a WMS.

How to use
Step 1: Undertake a return on investment (ROI) calculation
The justification process (see tool 1.17) is important because it helps you to
set a budget for your project and also focus on the functional ‘must haves’
rather than the ‘nice to haves’ when selecting suppliers. The key areas to
consider are:

●● the potential for a WMS to give you improved stock accuracy – by

reducing errors, providing real-time information and enabling perpetual
inventory counting;
●● the potential for increased productivity and cost savings – through
improved labour, equipment and space utilization;
●● the need for improved traceability – a WMS can give you two-way
traceability, almost as a by-product of being in place;
●● improved customer and client service – through overall improved
warehouse control, improved pick and dispatch accuracy.

The more transactions per day (e.g. pallet moves, picks) and locations in
the warehouse, the greater the potential for payback and the greater the

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70 The Logistics and Supply Chain Toolkit

justification. In addition, warehouses use expensive equipment where opti-

mization can bring significant savings – sometimes to such an extent that
less equipment needs to be purchased and fewer staff employed.
Understand the cost methods used by WMS vendors. These can be bro-
ken down into four main components:

1 Licences – the software licence needed to run the system. Typically, this is
charged by ‘user’, i.e. PC user or radio data terminal user, although
different models are now being offered, including paying by transaction
and/or paying monthly rather than outright purchase of the system.
2 Professional services – the costs for project management, training and
go-live support.
3 Development costs for requirements not catered for in the package,
including interfaces to third-party systems.
4 Support costs – typically an annual cost based on licence costs and often
development costs; the scope of service and cost varies significantly from
supplier to supplier.

Ensure that the suppliers you approach give you costs for all of the above.
Ask them to indicate which prices are fixed and which are variable. Watch
out for hidden costs such as travel costs, travel time and project manage-
ment time. Summarize all the costs in a spreadsheet, showing the initial cost
and then costs for years one to five with accumulated totals. You may be
surprised by the results!
In addition, there are the hardware and infrastructure costs. These costs
have to be considered in terms of project budget and ROI, of course, but in
many cases can be managed as a separate project with interdependencies
with the main project.

Step 2: Decide on the process

Modern WMSs are highly configurable, normally by the end user, and
should be capable of working in virtually any type of warehousing environ-
ment. In the past, the production of a large, detailed invitation to tender
(ITT) was an important part of the WMS selection process. This reflected
the limited functionality of most systems at that time. A major disadvantage
of ITTs is that they cannot hope to take account of a company’s future re-
quirements and are often over-prescriptive. The other disadvantage is that
many WMS providers will often not respond to ITTs. They consume a vast
amount of time, which the vendor might prefer to spend in other directions
under its own control.

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Warehouse management tools and guides 71

There are spreadsheet templates that are downloadable from the internet;
however, many of these are, or were originally, prepared by WMS vendors
and are slanted towards their products. Most WMS vendors therefore view
such documents with suspicion.

Step 3: Understand and analyse your existing systems

If your ERP/business system already has a WMS module, then you should
examine and analyse this in the first place. The same due diligence applies to
this selection as to any other system, but normally any small shortfalls in
functionality are outweighed by reducing any risks of systems not interfac-
ing with each other reliably and accurately.
Similarly, if your warehouse is highly automated, with cranes, conveyors
or sortation systems, you may wish to focus on the WMS provided by the
automation systems company. This will typically be known as a warehouse
control system or WCS. Again, shortfalls in functionality are often out-
weighed by the avoidance of an interface to an external WMS. There are
many papers available on this subject and some of these are mentioned
below.

Step 4: Is there an in-house development capability?

Owing to the ‘packaged’ nature of the WMS market nowadays, in-house
development is very rarely viable as a typical WMS vendor will have per-
haps 100+ clients over which it amortizes the continuous development costs;
these same 100+ clients serve as a very valuable and thorough proving
ground for the product in question. In-house development is sometimes vi-
able if the overall requirements are particularly specialized or require spe-
cialized integration with existing in-house systems.

Step 5: Request for information

Prepare a short RFI document (request for information); this should typi-
cally be no more than a few pages long. In this document you describe your
business, your future business direction, your warehouse and your plans for
the warehouse. Then talk in broad terms about what you want to achieve
from the WMS.
By this stage you will have completed an operational specification for the
warehouse to gain capital approval. The key elements from this specification
are an ideal base for the RFI, for example number of loading bays, number
and type of reserve locations, number of pick face locations, and pick-and-
pack station details. Of particular relevance is the number of users, i.e.

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72 The Logistics and Supply Chain Toolkit

administrative users, forklift truck drivers, pickers, packers and so on.

Provide a guide to the number of transactions per day (receipts, put-aways,
picks, dispatches) and indicate if there are any significant peaks across the
day, week or month.
Do not try to describe how the system should work – in fact it can be
dangerous to be too specific at this point, as there may be faster, better,
cheaper ways of doing things and part of the selection process is to see how
potential suppliers can guide you in this regard. You could use the services
of a specialist consultant to help you.
Within the RFI, ask the vendor for budget costs and implementation
timescales. You should ask for supplier information, including:

●● company history;
●● financial history and status;
●● number of sites using its current WMS product;
●● who owns the IP (intellectual property – source code) for the WMS;
●● client list, especially those companies operating in your marketplace;
●● daily rates and support charges;
●● support cover;
●● development plans;
●● track record.

We suggest that you send this RFI to 6 to 10 suppliers initially. Focus on

suppliers that have experience in your market – this is particularly the case
if you are a third-party logistics provider; WMS vendors with no experience
in this sector are unlikely to have the functionality and importantly the ex-
pertise to help you. Focus on suppliers that have a track record linking to
any business or ERP system you are operating.
At this stage you will need to decide whether to purchase the software
and hardware outright or to rent the software and operate it on a third-
party server platform. A SaaS (Software as a Service) WMS is an internet-
based application that is developed, hosted and maintained by a third-party
software provider on secure servers. The vendor rents out the system to a
number of different clients. These clients, in turn, will choose the various
modules within the software they require and pay for them as they use them.
The advantages are:

●● lower cost of entry;

●● reduced start-up costs;

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Warehouse management tools and guides 73

●● instant upgrades;
●● user-driven innovation;
●● ability to turn on and off as required, e.g. to run a temporary warehouse
operation.

S uch a system will be attractive to start-up companies and small and me-
dium-sized enterprises (SMEs), although it could benefit larger companies
that are looking for a temporary fix. Potential disadvantages include the
possibility of poor internet links between the companies and worries over
data security.

Step 6: Short list

Produce a short list of three to five suppliers. Price, of course, is not the main
criterion at this stage but can be used to rule out suppliers that will exceed
your budget. Get the suppliers to visit you for an informal meeting. This will
help you get a feel for their company – how professional they are, how care-
fully they listen and respond to your needs, how well they answer your
questions.
Before you get into the detailed demonstration stage, do a little more
checking on each of the suppliers; this will help you to reject unsuitable sup-
pliers at an early stage. A good way of doing this is to telephone-interview
at least six reference sites, preferably sites you choose from a longer list.
These calls should all be made with the knowledge of the supplier – unless
you have contacts with their clients already.
Get the short-listed suppliers to provide you with a tailored demonstra-
tion. Get them to focus on what you believe is especially important for your
operation – for instance, pick face replenishment, or kitting and assembly.
At some time during the selection process you should also get them to
give you an overview of their company, products and people and of their
strategy – in terms of both company and product.
Visit their head office to get a better understanding of their culture, man-
agement style and team working. It is very important to get a good ‘people’
fit with any organization you select. It is always worth asking the suppliers
why they think they should be selected for your project.
The reference site visit/s is often the crux of supplier selection. Make sure
you are given a choice of sites, not just ‘the one’, and make sure it is similar
in terms of size and processes to yours – or preferably slightly larger and
slightly more complex.

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74 The Logistics and Supply Chain Toolkit

If you have identified any gaps in functionality, now is the time to get
these specified and costed. The supplier should be asked to provide an ac-
curate project cost, clearly identifying any variable costs. This is where the
contacts you have developed with the suppliers’ reference sites will pay off,
as you can talk to them about how well the supplier worked to budget
and time.

Step 7: Final choice

Choose the most appropriate supplier. Utilize a decision matrix, taking into
account the criteria mentioned above (see tool 5.8).

Summary
Here are 20 tips for choosing a WMS:

1 Have a clear long-term vision of what your warehouse could look like in
the future – this will help you ensure that you choose a solution that is
sufficiently scalable, flexible and functional.
2 Ensure complete ‘buy-in’ from senior management.
3 Keep an open mind about how your WMS will operate – let the WMS
vendors listen to your needs and show you different ways of using their
solution.
4 Ensure that your processes are working efficiently before introducing a
WMS.
5 Look for a supplier that is warehouse and logistics focused; more
generalist companies will often change strategy and reduce their focus
on warehousing as their fortunes change.
6 Look for a supplier with a strong team of warehousing specialists,
otherwise you will be training the supplier in warehousing or at best will
be reliant on one or two individuals.
7 Choose a WMS vendor that you get along with – it is about partnership.
8 Make sure that help desk and support cover is available during your
working hours – 24/7 if necessary.
9 Look for a WMS that has been specified by warehouse and logistics
professionals, rather than by programmers and analysts.
10 Make sure that the product is relatively new but with a sound track
record, and uses the latest software technology.

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Warehouse management tools and guides 75

11 Make sure that the product is being developed on an ongoing basis to

meet future warehousing and supply chain needs. Historically, WMS
vendors have made their money by charging their customers significant
amounts of money for development work. This has several major
disadvantages: it invariably costs more than functionality provided as a
package, it extends the project time, and it introduces risk (bespoke
software often fails to perform due to both technical issues and
differences in interpretation of the specification). A further disadvantage
is that custom software often makes software upgrades cumbersome,
risky and expensive.
12 Choose a WMS vendor that can demonstrate a significant track record
in your type of warehousing operation; get them to take you to customer
sites to see the WMS in action, and make sure that you talk to the users
and the management team at each site.
13 Look for a WMS that is an end-user-configurable package. Nowadays it
is impossible to predict future WMS needs, particularly in a third-party
environment, so flexibility is the name of the game.
14 Where small but important changes are needed to make the system meet
your very specific needs, ensure that these changes do not compromise
the package upgrade route.
15 Look for relevant reference sites. Look for a vendor with a good, active
user group, and ensure that this group has real influence on the product
strategy and support services.
16 Ensure that the vendor is of the right size – not so small that it has
insufficient resource and not so large that you have no influence on
product development and service levels.
17 Ensure that the vendor will help and support you in commercial and
technical discussions with suppliers, customers and clients.
18 Have an in-depth demonstration of the WMS. Make sure that potential
users of the system go along. Ensure that the WMS is easy to use and
related closely to your operation.
19 Make sure that you involve your IT team in ensuring that the WMS
vendor can work with you to provide solid interfaces with your other
business systems. Do not let them dominate the project – a WMS is a
tactical, operational solution and, as such, in most cases the project
should be managed and run by logistics people.

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76 The Logistics and Supply Chain Toolkit

20 Make sure that you identify a project champion in your organization,

build a team around him or her and get the champion to own the WMS
implementation.

(This tool is adapted from a white paper written by Stephen Cross and re-
produced with his permission. The original paper can be found at http://
www.cenglobal.com/atms/wp-content/uploads/2015/04/chapter-12-
systems.pdf Shortcut – http://bit.ly/2S1DnMm)

Further information
A comprehensive list of WMSs can be found at http://www.capterra.com/
warehouse-management-software (archived at https://perma.cc/2ZE3-2EEK)
An example of a WMS Request for Proposal (RFP) template can be
found here: https://www.koerber-supplychain-software.com/en/knowledge-
center/supply-chain-resources/wms-rfp-template-for-enterprise-businesses
(archived at https://perma.cc/5DHX-QVGF)

1.19 Choosing between a best-of-breed

warehouse management system (WMS)
and an enterprise resource planning
(ERP) WMS module
Introduction
For omnichannel retailers and those with complex operations, up until very
recently, choosing a best-of-breed warehouse management system (WMS)
over an enterprise resource planning (ERP) WMS module was quite com-
mon. However, according to enVista, ‘the functionality of ERP WMS sys-
tems has continued to evolve, leaving companies with a tough choice –
which WMS is best for our company and our needs?’
Many businesses are already using an enterprise resource planning (ERP)
system of some sort such as Infor, Oracle, SAP, Sage and Microsoft – and
these solutions also offer warehouse management capabilities. Some are ru-
dimentary and very basic, whereas others are more feature rich. Depending
on the type of business and complexity of your warehouse processes, you
may find the functionality offered as standard within your ERP is perfectly

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Warehouse management tools and guides 77

adequate – this may well be the case for SMEs. ERP vendors have been
slowly replicating best-of-breed functionality.
Best-of-breed systems have interfaces to integrate with the host ERP;
however, companies can remove any integration concerns by going with an
ERP WMS. In the past companies found that the value they received in a
best-of-breed WMS and its complementary products far outweighed inte-
gration and increased licence costs.
A significant increase in order volumes, together with a competitive la-
bour market where salaries have increased significantly and labour short-
ages are commonplace, has heralded an increase in the use of automation
and robotics. As a result we are now also seeing the introduction of more
sophisticated and comprehensive warehouse execution systems and ware-
house control systems.
With the evolution of warehouse control and warehouse execution sys-
tems and their ability to interface with ERP systems, companies are finding
that they are less dependent on best-of-breed WMS and more likely to uti-
lize the WMS module in their ERP solution.

When to use
When deciding to purchase a new WMS, replace an existing WMS, or when
purchasing a new ERP system.

How to use
One of the main issues in determining which system to go with is that com-
panies are made up of departments and people that often have differing, or
even conflicting priorities.
The operations team will be looking for a comprehensive suite of func-
tionalities, while finance will be concerned with cost, and the IT team with
having to deal with multiple systems.
The WMS you select must ultimately align with your company’s short-
and long-term performance goals while providing a competitive advantage.
This is a decision for the long term, so it should be treated as such! There are
some essential questions to ask when deciding whether to implement a ded-
icated WMS solution or choose a module from your ERP vendor. These are
as follows:

●● How will improved warehouse efficiency from buying a separate WMS

contribute towards your business goals – both now and longer term?

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78 The Logistics and Supply Chain Toolkit

●● To what extent can the ERP’s WMS record and manage KPIs in the
warehouse?
●● How easily can the following key metrics be tracked?
●● time required to complete routine stock movements;
●● goods receiving and put-away processing times;
●● stock replenishment time frames;
●● ‘On Time In Full’ order-picking trends, pick accuracy levels and
operator productivity;
●● stock accuracy and stock audit discrepancies.
●● How easily can the ERP solution be adapted to reflect changing warehouse
operations? Can these be implemented without incurring extra costs?
●● Does the ERP vendor have the real-world warehouse management
expertise to help refine existing processes during the implementation
programme?
●● How well does the ERP’s functionality fit your current business processes
and are compromises required? Can custom functionality be easily
added?
●● Does the ERP module support wave picking for e-commerce, perpetual
inventory counting, value add packing, allergen management, customs
and excise reporting, compliance procedures or track and trace?
●● Can the WMS vendor support you with in-house integration capabilities,
to ensure all systems can communicate in real time?

While ERP WMS systems are fully integrated with the ERP suite, the lack of
autonomy between the two systems can cause unforeseen enhancements to
obtain comparable functionality.
Many of the best-of-breed WMS software providers have complementary
software solutions for complete fulfilment execution that span several chan-
nels including retail, wholesale, e-commerce and marketplaces such as
Amazon.

Example
An example of the benefits of a dedicated WMS is provided by Indigo
software.

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Warehouse management tools and guides 79

A best-of-breed WMS integrated with their existing ERP system delivered

their client the following benefits:

●● more efficient raw materials delivery to production and improved

replenishments in the manufacturing area;
●● real-time inventory accuracy at every location – no searching for available
put-away spaces;
●● optimized picking with pre-allocated travel paths to minimize time
between locations;
●● no time delays between inventory transactions and system updates;
●● accurate cycle counting and improved stock auditing.

‘Overall, the client’s WMS investment generated significant cost savings and
they quickly recouped their initial capital expenditure in reduced labour
hours required.’

Conclusion
The WMS you select must ultimately align with your short- and long-term
performance goals while providing a competitive advantage. This is a deci-
sion for the long term, so it should be treated as such!
Invest in the WMS that creates a competitive advantage for your supply
chain by enabling impactful service and cost benefits.

Further information
https://logisticsvoices.co.uk/2022/07/best-of-breed-wms-or-erp-bolt-on-
how-to-evaluate-what-your-warehouse-needs/ (archived at https://
perma.cc/R3TZ-QRW4)
Indigo Software – https://indigo.co.uk/ (archived at https://perma.cc/
Z8D3-37FQ)
https://envistacorp.com/blog/5-considerations-when-evaluating-best-of-breed-
wms-vs-erp-wms/#:~:text=5%20Considerations%20When%20Choosing%
20Between%20Best-of-Breed%20WMS%20vs.,Technology%20
Complimentary%20Software%20Products%20Total%20Cost%20of%20
Ownership (archived at https://perma.cc/KT3K-7YCL)
https://www.msasys.com/wp-content/uploads/2013/03/ERP_vs_Best_of_
Breed_WMS_White_Paper_MSA.pdf (archived at https://perma.cc/YQ9J-
D8NX)

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80 The Logistics and Supply Chain Toolkit

1.20 How to implement a WMS

Introduction
Once you have decided you really need a WMS, and you have selected a
WMS vendor, the hard work begins. There is no substitute for good and
robust project management, alongside the selection of a good team. The
WMS project must be owned from the top of the organization to the bot-
tom. A project sponsor is an invaluable member of the project team – some-
one who ensures that the focus is maintained on delivering business benefits
with minimal disruption.
A project champion needs to be appointed to effectively take charge of
the project and this person will often come from a warehousing rather than
an IT background. Crucial to this is having project management experience.
IT staff should also be represented on the team, but increasingly IT is seen
as a business support function as opposed to the main ‘drivers’ of a WMS
project. Too many projects have failed when the project manager has not
been experienced or has not been able to concentrate fully on the project
itself.
Use the guidance and support of your WMS vendor as much as possible;
a major part of your selection process should have been to identify a vendor
that adds value during the implementation process. This guidance needs to
be paid for, of course, so make sure that you have budgeted for it.
Methodology before technology is the key reminder for virtually all IT
projects, particularly WMS projects. Ensure that your warehouse is running
in an optimal manner with tried-and-tested processes before trying to imple-
ment a WMS: otherwise expect failure! That is not to say you cannot intro-
duce new and better processes while implementing a WMS – this is often the
case – but if your warehouse is disorganized, tackle that problem before
doing anything else. Do not automate a bad process: you just get to the
wrong result faster.
In the case of a greenfield operation, methodology before technology is
not normally possible as timescales are tight. Here it is vital to have a strong
and experienced management team with a logistics background. In addition,
you may want to use the services of a specialist consultant or an interim
manager. Interim management can be a very cost-effective way of providing
the extra resource needed in this change management process.
The scope of the project should be documented. The scope is just building
on the WMS description you wrote for your RFI, i.e. what you want the

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Warehouse management tools and guides 81

s ystem to do for your business. This need not be an arduous or tedious task,
but it is important to focus on top-level business requirements and ware-
house processes rather than being prescriptive as to how the WMS should
function in detail at this stage. This top-level approach is particularly rele-
vant where a well-established packaged solution has been purchased – in the
final analysis, such a solution should be highly flexible and configurable.
Interfaces to external systems, including ERP systems, transport manage-
ment systems, warehouse control and automation systems and parcel carri-
ers all have to be thought about and specified. This is a specialist area and
can be one of the riskiest areas of a WMS project if not managed properly.
A project plan should be drawn up – often the WMS vendor will have a
template available (see Table 1.13). The plan will detail all the tasks re-
quired, responsibilities and timescales. Regular review meetings will moni-
tor progress against the plan and make corrective actions as required. Make
sure that there is no project creep: learn to say no! Start as simply as possible
and get some quick wins.

The contract
A contract should be drawn up between you and the vendor. This should be
done before you commit any major finances, but far enough into the initial
stages of the project that you can have it scoped, planned and costed.
Your RFI and scope document form a key part of this contract, as does
all documentation received from the vendor. An outline plan should have
been produced by this stage, showing key milestones and deliverables. This
plan also forms part of the contract.
The contract should as far as possible be in plain English. It does not
necessarily need to be produced by a lawyer, but you should get appropriate
legal advice. The contract needs to be produced by someone with knowledge
of the principles of contract law.

Infrastructures
The IT infrastructure needs to be planned around the WMS. Your internal
IT department can help with this, assuming they have the skills and re-
sources. Alternatively, you can contract it out or in certain cases the WMS
vendor will take on complete responsibility.
The IT infrastructure will consist of servers to run the applications, PC
workstations, network infrastructure and printers. In some cases you will
also use radio data terminals (RDTs) or a voice- or vision-enabled technol-
ogy for the system. Both are mini-projects in their own right that need to be

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82 The Logistics and Supply Chain Toolkit

Table 1.13 Generic project plan

Generic Project Plan – Warehouse Management System Implementation

Plan for FZ Company

Resource &
Task Detail Duration responsibility

Project planning 5 days

Internal project kick-off WMSS* Projects,

WMSS Sales

Identify project teams & Customer, WMSS

responsibilities Projects

Identify scope & Customer, WMSS

boundaries Projects

Identify server & PC Customer, WMSS

requirements Projects

Identify any additional RF WMSS Projects,

requirement Customer

Identify printer/print Customer, WMSS

server requirements Projects

Understand existing WMSS Projects,

network Customer

Sourcing server WMSS Projects

Source progress WMSS Projects

Project 7 weeks
management

Project meetings WMSS Projects,

Customer

Update meetings WMSS Projects

Document and diarize WMSS Projects

Action WMSS Projects,

Customer

*warehouse management systems staff (continued )

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Warehouse management tools and guides 83

Table 1.13 (Continued)

Generic Project Plan – Warehouse Management System Implementation

Plan for FZ Company

Resource &
Task Detail Duration responsibility

Identify RF 2 days
Hardware

RF survey Hardware vendor

Design overall hardware Customer, WMSS

configuration Projects

Order equipment Customer

Configuration/ 3 days
consultancy

Identify existing/ WMSS Projects,

proposed business Customer
processes

Business process WMSS Projects,

document Customer

Present – process WMSS Projects,

overview Customer

Acceptance/gap analysis WMSS Projects,

Customer

Configuration WMSS Projects

Interface (if any) 2 days

Specify & agree interface WMSS Projects

requirements

Installation & 7 days

commission

Server available Customer

Remote access WMSS Technical/

implemented Customer

(continued )

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84 The Logistics and Supply Chain Toolkit

Table 1.13 (Continued)

Generic Project Plan – Warehouse Management System Implementation

Plan for FZ Company

Resource &
Task Detail Duration responsibility

Install progress WMSS Deployment

Deploy standard WMS WMSS Deployment

Application, data, WMSS Deployment

menus, scripts

Shutdown, truncate, WMSS Deployment

back-up etc

Create deployment WMSS Deployment

document for support

Data collection sheet Customer

Interface (if any) 3 days

Develop & test interface WMSS Devt, WMSS

Projects

Install WMSS Deployment

Training 15 days

Training on full system WMSS Trainer,

Customer

General guides – WMSS WMSS Projects,

& Warehousing Customer

STP & datahub overview WMSS Projects,

Customer

Basic data set-up WMSS Projects,

Customer

Inbound processes WMSS Projects,

Customer

Outbound processes WMSS Projects,

Customer

(continued )

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Warehouse management tools and guides 85

Table 1.13 (Continued)

Generic Project Plan – Warehouse Management System Implementation

Plan for FZ Company

Resource &
Task Detail Duration responsibility

In-house processes WMSS Projects,

Customer

Train the users Customer

Change management Customer

Go-live 2 days
preparation

Create implementation WMSS Projects,

plan Customer

Resourcing WMSS Projects,

Customer

Determine & source WMSS Projects,

necessary consumables Customer

Data entry 10 days

support

Locate and harvest static Customer

data

Preliminary dynamic data WMSS Projects,

Customer

Full data take-on WMSS Projects,

Customer

Stock take pre go live Customer

Documentation 1 day

Document revisions to WMSS Projects

user manual

System live 3 days

Go-live support WMSS Projects

(continued )

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86 The Logistics and Supply Chain Toolkit

Table 1.13 (Continued)

Generic Project Plan – Warehouse Management System Implementation

Plan for FZ Company

Resource &
Task Detail Duration responsibility

Project summary WMSS Projects,

meeting Customer

Project review 1 day WMSS Projects,

meeting Customer

Total project 54 days* WMSS Projects

days

*The project management (49 days) simultaneously runs alongside these 54 days.

planned and specified. Often the WMS vendor can provide the subsystem, or
you may prefer your IT supplier to provide the wireless network backbone
and then the WMS vendor or hardware vendor provides the necessary
equipment. Note that if you are considering a SaaS, the software will be run
on the vendor’s server to which you will have remote access.

Pilot project
Set up a pilot project, either as a conference room pilot or ideally in the
warehouse itself. Focus on one customer, one product group or one func-
tion, such as receiving. Create a test plan and continue to test to ensure that
the system is operating as required and that operatives understand the sys-
tem and are working optimally.
Start working out how you are going to do a ‘data take-on’, i.e. all the
data you need to start and run the system, including locations, location
maps, product codes, product details, pallet sizes and configurations. A lot
of these data can come from your ERP system if present. You can construct
spreadsheet templates to compile them. You also need to start planning the
‘rules’ within the warehouse, for example put-away rules, replenishment
rules, FIFO, LIFO, etc. If you are moving into a warehouse with existing
stock, consider how you are going to label and record this stock.
Remember that you are testing for failure as well as testing for success.
This is an ideal opportunity to test the interfaces to external systems; inter-
face testing invariably takes longer than planned.

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Warehouse management tools and guides 87

Ensure that you train the trainers or super users and then cascade the
training down to the users; this way, you will build your own in-house ex-
pertise.

Going live
The go-live stage needs to be planned carefully. Go live can be a ‘big bang’
or can be phased, according to the nature of your operation. You are likely
to need extra personnel during this period. Budget very carefully for the on-
site support you may need from the WMS vendor; costs can escalate in this
area, particularly for out-of-hours, evening and weekend support. It is likely
that your performance levels will be low to start with until the operation has
moved up the learning curve; for this reason it is best to go live during a
quiet period if possible, although ensure that your key personnel are not on
holiday at this time.

In summary
As with all system projects, and indeed projects in general, the more you
plan and prepare, the better your results will be. The old adage is ‘Fail to
plan, plan to fail’. Supplier selection is the crux of a successful project, along
with good project management and good project ownership. Obal (2007)
says that during implementation the following have to be avoided:

●● establishing an unrealistic implementation schedule;

●● buying a low-end system and expecting high-end results;
●● failing to track vendor progress;
●● failing to develop a contingency plan;
●● overselling the system to users;
●● lack of system integration training;
●● providing the software vendor with faulty, incomplete or out-of-date
data;
●● thinking a newly integrated WMS will eliminate all inefficiencies within
the operation;
●● blaming the WMS provider for glitches that occur during the software’s
initial launch;
●● failing to audit the results to see if the system is working as efficiently as
possible.

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88 The Logistics and Supply Chain Toolkit

(Adapted from JDA and a white paper written by Stephen Cross and repro-
duced with his permission.)

Further information
For additional information visit www.blueyonder.com (archived at https://
perma.cc/82HA-V95K)

Reference
Obal, P (2007) Selecting Warehouse Software from WMS & ERP
Providers – Expanded Edition: Find the best warehouse module or
warehouse management system, 2nd edn, Industrial Data &
Information Inc. IDII

1.21 Warehouse maturity scan, by Jeroen

van den Berg
Introduction
This tool enables companies to assess the maturity of their warehouse op-
erations (an introduction to maturity models is given in tool 4.7). The model
comes from Highly Competitive Warehouse Management by Jeroen van den
Berg (2012). In his book he makes a distinction between four phases of
warehouse maturity:

●● Phase 1 – Reactive. The warehouse is not well structured.

●● Phase 2 – Effective. Processes are streamlined with more transparency in
the operation.
●● Phase 3 – Responsive. Processes are better planned and controlled by the
use of intelligent IT.
●● Phase 4 – Collaborative. The warehouse is an equal partner in the supply
chain and generates more added value.

When to use
The scan can be used to assess the maturity of a distribution centre.

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Warehouse management tools and guides 89

How to use
The assessment requires answers to 18 specific questions about your current
warehouse operation. The four answers to each question represent an in-
creasing level of sophistication. If you believe that your operation ranks in
between two answers, you should select the lowest answer; for example, if
your distribution centre almost meets the requirements of answer c but not
completely, then choose answer b.

Example question
Are the processes in the distribution centre formally specified?

a No, we do not have standard operating procedures.

b Somewhat, we have specified our processes, but they are somewhere in a
drawer and/or outdated.
c Yes, we do have up-to-date standard operating procedures, which are
being actively followed by operators.
d Yes, we do have up-to-date standard operating procedures, which we
use for process analysis and for the instruction and operational manage-
ment of operators. A comprehensive maturity model can be completed
online at https://www.jvdbconsulting.com/en/warehouse-maturity-
scan/. A full supply chain maturity scan can be completed at https://
www.jvdbconsulting.com/en/supply-chain-maturity-scan/

Reference
van den Berg, J P (2012) Highly Competitive Warehouse Management: An
action plan for best-in-class performance, Management Outlook
Publishing, Utrecht, Netherlands

1.22 Warehouse risk assessments

Introduction
Warehouses, like any industrial facility, can be dangerous places to work in,
especially with the movement of forklift trucks, the risk of slips and trips, and
people working at height. So, to ensure a safe and secure environment,

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90 The Logistics and Supply Chain Toolkit

c ompanies need to undertake risk assessments regularly. (A full description of

risk assessment is included in tool 4.12.) Note that:

●● a hazard can be anything – whether work materials, equipment, work

methods or practices – that has the potential to cause harm;
●● a risk is the chance, high or low, that somebody may be harmed by the
hazard.

The following are potential risk areas:

●● falls from height;

●● slips, trips and falls;
●● manual handling;
●● falling objects;
●● operation of MHE;
●● operation of other machinery;
●● traffic movements;
●● portable electrical equipment;
●● lighting;
●● hazardous substances; and
●● fire.

When to use
To ensure the safety of all visitors to, and staff working in, a warehouse.

How to use
The guiding principles that should be considered throughout the risk assess-
ment process can be broken down into a series of steps:

●● Step 1: Identifying hazards and those at risk.

●● Step 2: Evaluating and prioritizing risks.
●● Step 3: Deciding on preventive action.
●● Step 4: Taking action.
●● Step 5: Monitoring and reviewing.

As can be seen in the risk assessment form in Table 1.14, it is essential that
there is a suitable person responsible for the action to be taken, and that a

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Table 1.14 Example risk assessment for the warehouse

Location Date: Assessor:

What are Who might be What are you What further action is Action by Action by Completed?
the hazards? harmed and how? already doing? necessary? whom? when?

Falls from Staff can suffer All staff are given Signage put in place to Warehouse 01/03/20– Yes 01/03/20–
height severe or even fatal instructions never to reiterate the point manager
injuries if they fall climb racking –
while climbing racking monitored by
supervisors

Staff or contractor No controls in place ●● Put up ‘fragile roof’ Facilities 01/03/20– Yes 8/02/20–
could suffer severe or signs on each side of manager
fatal injuries falling the building and at (FM)
through fragile roof access points
lights when effecting ●● Only trained contractors FM 02/04/20– No
repairs to access the roof
●● Full risk assessment to FM/ As required
be undertaken by Contractor
contractor

Slips, trips and All staff may suffer ●● Flooring kept dry ●● Suitable absorber to be FM 25/02/20– 24/02/20–
falls sprains or fractures if and quality made available for liquid
they trip over debris maintained spills
or slip on spillages ●● All staff trained to ●● Extra bins provided for FM 25/02/20– 24/02/20–
maintain good waste
housekeeping
standards

91
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92 The Logistics and Supply Chain Toolkit

target date is set for completion. We have completed part of the form as an
example. The form can be downloaded from http://howtologistics.com, dis-
count code lsct2024.

Further information
https://osha.europa.eu/en/tools-and-publications/oira (archived at https://
perma.cc/KG72-U48B)
http://www.hse.gov.uk/risk/ (archived at https://perma.cc/4K6F-KB5E)
http://www.hse.gov.uk/toolbox/index.htm (archived at https://perma.cc/
NVN6-7DEJ)
https://www.osha.gov/Publications/3220_Warehouse.pdf (archived at https://
perma.cc/E3Z7-BW3P)

1.23 Contingency planning for the

warehouse
The Covid-19 pandemic highlighted the need for a contingency plan or busi-
ness continuity plan.
Many companies will have plans in place for certain eventualities; how-
ever, you cannot cover everything. The Covid pandemic was an example of
this.
Natural disasters such as hurricanes, tornadoes, floods etc together with
labour issues, system failures and supplier problems can all have a signifi-
cant impact on your warehouse operation.
Contingency planning assists companies to minimize the impact of these
disruptions in order to maintain operational continuity and recover more
quickly.
An explosion close to an ASOS warehouse resulted in the company being
out of action for six weeks. A fire at another of their warehouses a few years
later resulted in a quicker recovery, having instigated a robust contingency
plan.
According to Kyle Krug from Legacy Supply Chain there are three steps
to creating a robust warehouse contingency plan. I have added a fourth –
Test.

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Warehouse management tools and guides 93

Figure 1.14 Contingency Plan Steps

Assess Plan Communicate Test

When to use
Contingency plans should be in place for an existing warehouse operation
and need to be reviewed regularly. New warehouses should also be risk as-
sessed and a contingency plan drawn up.

How to use

Step 1 - Assess
The first step to create an effective contingency plan is to perform a risk as-
sessment within your warehouse (see tool 1.22).
Start by mapping out business-critical processes, procedures, technolo-
gies and personnel to create a foundation for the plan. Next imagine various
worst-case scenarios and formulate a response for each.
Ensure you have an up-to-date contact list for emergency services and
other stakeholders.

Step 2 – Plan
Once the risk assessments have been completed the contingency plan can be
formed. Irrespective of the likely disruption, every warehouse contingency
plan should outline the following:

●● Specific triggers. These dictate what will set your plan in motion.
●● Response strategy. Your plan should include a brief overview of how
your warehouse staff should respond to the situation at hand.
●● Key roles and responsibilities. Clearly define who is responsible for
enacting different parts of the plan and what is expected of them. Include
a substitute to cover for absence.
●● Leadership depth and training. Continuous training and cross-training
efforts within the warehouse will prove an invaluable time investment
should disaster strike.

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94 The Logistics and Supply Chain Toolkit

Table 1.15 Emergency contacts

Position Name/Company Phone Email

Plan coordinator

Emergency services

Power company

Telecoms provider

Water company

IT systems provider

MHE supplier

Suppliers (planned inbound

deliveries)*

Customers (planned outbound

deliveries)*

Transport companies (planned

inbound/outbound deliveries)

Other

Insurance company

*NOTE You will need access to those customers and suppliers who will be affected in the immediate
future

●● Technology. One of the most critical elements of any warehouse

contingency plan is a thorough schematic of all technology systems such
as warehouse management systems, warehouse control systems, labour
management and timekeeping systems, enterprise resource planning
systems and transportation management systems – as well as the systems
they connect to.
●● Labour. Another critical element of a warehouse contingency plan is
to have labour providers and staffing agencies able to react quickly to
your call.
●● Timeline. Explain to your employees when each step of your contingency
plan should take place – for example, whether an action needs to occur
within the first hour of the plan being implemented or the first day.

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Warehouse management tools and guides 95

●● Alternative work schedules. Certain emergency scenarios, such as

Covid-19, will require you to drastically reduce the number of on-site
employees. Build alternative work schedules into your warehouse
contingency plan to ensure that all of your business-critical operations
are completed, even with a reduced workforce.
●● Remote work arrangements. If there’s anything the Covid pandemic has
taught us, it’s that every business – even warehousing – needs to have a
plan in place for remote work arrangements. Your warehouse contingency
plan should detail which workers are considered essential and which
ones can work from home; be sure to provide the necessary resources and
equipment to help remote workers get set up.
●● Attendance requirements. When creating your warehouse contingency
plan, be sure to include information about attendance requirements and
expectations, and policies to address these concerns.
●● Payment and benefits information. Similar to attendance, depending on
the nature of the emergency, your employees may have concerns about
payment and benefits. Take care to include specific information about
both in your warehouse contingency plan.
●● Corporate responsibility. For more high-risk scenarios, it’s important
that you demonstrate to your staff that your organization is taking the
necessary precautions to ensure their safety. Provide detailed explanations
of workplace safety protocol, as well as offering a point of contact who
can field employee questions or concerns.
●● Evacuation plans. In some situations – say, a flood or a fire – it may be
necessary to evacuate your staff from the warehouse. To accommodate
for this possibility, your contingency plan should include specific
instructions on how to proceed, as well as clearly outline an evacuation
route.
●● Communication models. It’s important that your contingency plan maps
out a structured flow of communication, and that you have prepared
message templates. This is imperative not only for internal communications,
but also for potential external communication should the situation attract
media attention. Having someone who has had media training is also a
good idea.

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96 The Logistics and Supply Chain Toolkit

Step 3 – Communication
You need to clearly communicate your plan to all levels of your business.
The best way to do this is to start by determining the different groups
within your warehouse. For example, your site leadership team might con-
sist of a facility manager, an HR manager, an operations manager and vari-
ous supervisors. This group should be separate from your senior leadership
team, which might consist of VPs and C-suite executives and your ware-
house staff.
The next step is to create a tiered chain of communication so that indi-
viduals in leadership positions have a clear understanding of whom they’re
responsible for delivering information to.
There needs to be documentation that your employees can easily access
and can refer to for guidance. An employee FAQ that your staff can refer to
if they have additional questions about your contingency plan is a good
idea.
Ensure that all new employees are aware of the plans.
Copies of the plan should be stored in various places including off-site.
Ideally, your warehouse contingency plan communication effort should
be multi-faceted so that messaging is consistently reinforced. This can also
include face-to-face meetings and videoconferencing.
An important note: these should be considered living documents and
regularly updated with new information to ensure accuracy, e.g. changes in
contact details etc.
Having an established business continuity committee that meets at least
annually to review and update plans and responsibilities is advised.
You should communicate your organization’s contingency plan to ware-
house staff well in advance of an actual emergency. There’s really no way to
accurately predict when disaster might strike, so it’s important that your
employees are prepared, no matter what.

Step 4 – Test
Contingency planning and business continuity are all about preparation and
diligence. Creating mock scenarios in which key staff are required to acti-
vate certain elements of your contingency plan can prove invaluable should
you ever have to actually enact it. From practising technology fails, to being
able to pick and process orders manually, to moving large groups of people
to a safe area, there are any number of ways to practise your warehouse
contingency plan ahead of time in a controlled environment.
Finally, having a qualified third party to evaluate your plan is also a dvised.

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Warehouse management tools and guides 97

Further information
Thanks to Kyle Krug, Director of Corporate Solutions for Legacy Supply
Chain for this tool.
A warehouse contingency plan template can be downloaded from https://
legacyscs.com/warehouse-contingency-plan-template/ (archived at
https://perma.cc/7QW9-K9C6)

1.24 How to ‘green’ your warehouse

and save energy
Introduction
In recent years environmental issues have come to the fore, both at home
and at work, with corporate social responsibility (CSR) initiatives concen-
trating on the environment, waste, health and safety, and the local commu-
nity. The introduction of these initiatives does not have to cost the earth. In
the majority of cases there are grants and significant opportunities for cost
saving as well as the resulting reduction of the company’s impact on the
environment.
The following list provides warehouse managers with ideas on how to
reduce their impact on the environment and thus help companies achieve
their CSR targets and save energy:

●● Lighting in a non-automated warehouse can be up to 70 per cent of the

total energy costs. Ways to reduce lighting costs are as follows:
●● introduce energy-efficient lighting;
●● switch off all non-essential lighting out of business hours;
●● install movement sensors and timers;
●● introduce and regularly clean skylights and clerestory windows to
increase the use of natural light;
●● switch off lights when daylight is sufficient;
●● turn off external lights when daylight is sufficient;
●● switch off office lights on exit or introduce motion sensors.
●● Use of alternative energy production methods:
●● solar panels;
●● wind turbines;
●● biomass boilers.

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98 The Logistics and Supply Chain Toolkit

●● Heating/air conditioning can make up 15 per cent of a warehouse’s

energy costs:
●● use zoned and time-controlled thermostats that are set accurately
(a 1 per cent reduction in temperature on the thermostat can reduce
heating bills by 8 per cent);
●● experiment with switch-on times for heating and air conditioning and
switch off well before close of business;
●● ensure hot water supply is sized in relation to site occupancy.
●● Install time controls on equipment that is not required after close of
business, such as vending machines.
●● Use of natural ventilation systems:
●● use ventilation stacks;
●● use atria and automatic window openings combined with automatic
control systems;
●● use passive cooling such as breathable walls;
●● use the effective thermal mass of buildings to reduce cooling and
ventilation energy.
●● Cooling the warehouse can also increase energy costs:
●● introduce sunlight reflectors;
●● use mobile air handling units;
●● switch off equipment when not in use;
●● ensure all doors have sufficient seals to prevent air and water entry.
●● Make better use of resources:
●● rainwater collection for reuse in vehicle washing, flushing toilets, etc;
●● low water use in sanitary appliances;
●● check insulation levels and increase where practical and cost-effective;
●● reuse or recycle where feasible and cost-effective;
●● move to utilizing plastic totes/bins in place of cardboard;
●● utilize plastic or aluminium pallets;
●● use of gas, electric or hybrid forklift trucks;
●● in-rack charging for narrow aisle trucks and shuttle systems.
●● Movement reduction within the warehouse to reduce energy consumption:
●● use of ABC analysis (see tool 1.3) to ensure that popular items are
placed close to the dispatch area.

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Warehouse management tools and guides 99

●● Kinetic-energy plates positioned on the access road to produce power

from vehicles entering and leaving the site.
●● Introduce car-sharing schemes for staff.
●● Encourage staff to walk or cycle to work or take public transport.
●● Introduce training in green initiatives such as fuel-efficient driving.
●● Source materials locally, such as packaging, paper, MHE, etc.
●● Continually assess the situation by walking around the warehouse at
various times during operating hours.
●● Plant trees and shrubs to assist with the removal of emissions.
●● Finally, ensure that your warehouse is operating effectively – no
unnecessary movements, accurate picking and dispatch and effective
utilization of space and packaging materials.

In the UK, the Carbon Trust Implementation Services provide expert sup-
port to warehouse and logistics companies that are looking to cut energy
costs by implementing new lighting or heating equipment (see Figure 1.15
for its figures on energy usage in an SME warehouse). The new service
introduces warehouses to established suppliers of energy-efficient equip-
ment that are accredited by the Carbon Trust. It helps warehouse companies

Figure 1.15 Energy usage in an SME warehouse

Domestic hot
water–gas oil 2% Space heating – gas oil 12%

Space heating (kerosene) 3%

IT 1%

Fans and pumps 1%

Vending machines 3%

Battery charging 7%

Office lighting 6%

Warehouse lighting 65%

SOURCE Carbon Trust 2013. Reproduced with permission

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100 The Logistics and Supply Chain Toolkit

obtain a set of high-quality proposals and competitive quotes for an energy

efficiency project. The Carbon Trust delivers value to warehouses through
energy efficiency:

●● It helps warehouses develop a compelling business case for an energy

efficiency project – demonstrating a proven ROI. https://www.carbontrust.
com/news/2012/08/making-the-business-case-for-energy-efficiency/
●● The Carbon Trust provides affordable financing packages for new
equipment and projects that are designed to pay for themselves. https://
www.carbontrust.com/client-services/programmes/finance/
●● The Carbon Trust also provides tools for measuring, managing and
reducing carbon emissions and energy costs. https://www.carbontrust.
com/our-work-and-impact/guides-reports-and-toolsv

Further information
Other initiatives include being part of Voluntary Sustainable Building Award
schemes such as:

●● BREEAM (Building Research Establishment Environmental Assessment) –

UK: www.breeam.com (archived at https://perma.cc/8TSH-K8XV)
●● LEED (Leadership in Energy and Environment Design) – United States:
www.usgbc.org (archived at https://perma.cc/PBP8-CYJ7)
●● Greenstar – Australia https://new.gbca.org.au/ (archived at https://perma.
cc/B9EA-UMLG)
●● CASBEE (Comprehensive Assessment System for Built Environment
Efficiency) – Japan: http://www.ibec.or.jp/CASBEE/english/index.htm
(archived at https://perma.cc/4Z5E-UQL2)

References
http://www.carbontrust.com/ (archived at https://perma.cc/79JE-9KUL)
www.ukwa.org.uk (archived at https://perma.cc/H8SR-2TVZ)

1.25 Hazardous packaging and labelling

The consignor/supplier is responsible for ensuring that packaging of hazard-
ous items conforms to the regulations for the product. The packaging can

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Warehouse management tools and guides 101

vary from a cardboard box or paper bag for low-risk powders in small
quantities to very sophisticated double-skinned stainless-steel packages for
more complex high-risk products.
To promote the safe storage and transportation of dangerous goods, an
international system of classification has been introduced (the UN
Classification System). Examples are:

●● UN1263: Paint or paint-related materials

●● UN1498: Sodium nitrate
●● UN1500: Sodium nitrite

An up-to-date list can be found at https:bit.ly/3K3KMXu

The system divides the different types of dangerous goods into classified
groups, each group identified by a code marking. There are nine classes,
some with divisions, as shown in Table 1.16.
In general, the package needs to be UN approved and compatible with
the product. For every UN number there is a list of packaging options avail-
able to the packer.
All over the world there are different laws on how to identify the hazard-
ous properties of chemicals (called ‘classification’) and how information
about these hazards is then passed to users (through labels and safety data
sheets for workers). This can be confusing because the same chemical can
have different hazard descriptions in different countries; for example, a
chemical could be labelled as ‘toxic’ in one country but not in another. This
also acts as a barrier to international trade.
Given the expanding international market in chemical substances and
mixtures, to help protect people and the environment and to facilitate trade,
the United Nations has developed a Globally Harmonized System (GHS) on
classification and labelling. The GHS is a single worldwide system for clas-
sifying and communicating the hazardous properties of industrial and con-
sumer chemicals. GHS sits alongside the UN Transport of Dangerous Goods
system. The GHS is not a law – it’s an international agreement. To make the
GHS legally apply, each country or bloc of countries must adopt the GHS
through legislation. EU Member States agreed to adopt the GHS across the
EU through a direct-acting Regulation, the European Regulation (EC) No
1272/2008 on Classification, Labelling and Packaging of substances and
mixtures. This is also known as the CLP Regulation or just CLP. This will
finally lead to a reduction in the regulatory burden on manufacturers, which
currently have to struggle with many different systems of classification de-
pending on the countries they manufacture in and export to. Figure 1.16
shows the new pictograms.

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102 The Logistics and Supply Chain Toolkit

Table 1.16 Hazardous classes

Class Type of material

1 Explosive substances and articles

1.1 Mass explosion hazard

1.2 Projection hazard only

1.3 Fire hazard and minor blast or minor projection hazard

1.4 Minimal hazard

1.5 Blasting agents

1.6 Very insensitive detonating articles

2 Gases

2.1 Flammable gas (e.g. butane)

2.2 Non-flammable and non-toxic gases that could cause asphyxiation

(e.g. nitrogen, helium, carbon dioxide) or oxidizers (e.g. oxygen)

2.3 Toxic gases (e.g. chlorine, phosgene)

3 Flammable liquids (e.g. lighter fluid, petrol)

4.1 Flammable solids, self-reactive substances and solid desensitized

explosives

4.2 Substances liable to spontaneous combustion

4.3 Substances which, in contact with water, emit flammable gases

5.1 Oxidizing substances

5.2 Organic peroxides

6.1 Toxic substances

6.2 Infectious substances

7 Radioactive material

8 Corrosive substances

9 Miscellaneous dangerous substances and articles

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Warehouse management tools and guides 103

Further information
●● UK – http://www.hse.gov.uk/chemical-classification/legal/background-
directives-ghs.htm (archived at https://perma.cc/PX3T-2XY6)
●● United States – https://www.osha.gov/dsg/hazcom/pictograms/index.
html (archived at https://perma.cc/T4SS-YR8Y)
●● EU – https://ec.europa.eu/growth/sectors/chemicals/classification-labelling_
en (archived at https://perma.cc/75ZG-ZJ5F)

Figure 1.16 GHS pictograms

GHS Pictograms and Hazard Classes

• Oxidizers • Flammables • Explosives

• Self Reactives • Self Reactives
• Pyrophorics • Organic Peroxides
• Self-Heating
• Emits Flammable Gas
• Organic Peroxides

• Acute toxicity (severe) • Corrosives • Gases Under Pressure

• Carcinogen • Environmental Toxicity • Irritant

• Respiratory Sensitizer • Dermal Sensitizer
• Reproductive Toxicity • Acute toxicity (harmful)
• Target Organ Toxicity • Narcotic Effects
• Mutagenicity • Respiratory Tract
• Aspiration Toxicity • Irritation

SOURCE reproduced from United States Department of Labor (nd)

Reproduced from https://www.osha.gov/dsg/hazcom/index.html (archived at https://perma.cc/SLV7-
28EN)

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104 The Logistics and Supply Chain Toolkit

●● Details regarding hazardous goods transportation can be found in tool

2.11.
●● https://www.uk.dsv.com/air-freight/hazardous-air-cargo/The-9-Classes-
of-Dangerous-Goods (archived at https://perma.cc/PZY9-LVXY)

Reference
United States Department of Labor (nd) A Guide to The Globally
Harmonized System of Classification and Labelling of Chemicals
(GHS), Occupational Safety and Health Administration, Washington,
DC, https://www.osha.gov/dsg/hazcom/ghsguideoct05.pdf (archived at
https://perma.cc/3S7N-YT33)

1.26 Automatic identification (autoID)

Introduction
Automatic identification methods have made a great difference to accurate
visibility of inventory in the supply chain. The most common methods in use
in supply chains are 1D (one-dimensional) and 2D (two-dimensional) bar-
codes, and radio frequency identification (RFID).
Clearly, it is much quicker to read a barcode or RFID tag than to enter a
10- to 20-digit product identity on a keyboard. However, it is the accuracy
of such an operation that makes the big difference. Studies indicate that a
trained keyboard operator will make an average of one mistake per 300
keystrokes. In contrast, the worst accuracy rate for barcode reading is
approximately one error per 300,000 readings, but may be as low as one
error per 10 million operations for certain types of barcode.
Since barcode labels are easily affixed or can be directly printed onto
virtually any material (mailing tubes, envelopes, boxes, cans, bottles, pack-
ages, books and more), they are the most cost-effective and accurate solu-
tion for capturing data.

When to use
Barcodes and RFID systems are used to allocate identities to materials and
products with a unique identity per SKU. Anybody can implement a
barcoding or RFID system in their own operation for items in the warehouse

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Warehouse management tools and guides 105

or to track production orders through the factory, for example. Note, how-
ever, that if you want these identities to be recognized outside your business,
they must be registered with a national body, thus ensuring that the identity
is unique in the world.

How to use
The first stage of an autoID project is to be clear about why you want to
implement barcodes, and what benefits you are expecting. Different barcod-
ing and RFID systems exist. In this section we will concentrate on 1D and
2D barcodes.
When barcodes are used on a widespread public basis, such as printed on
an internationally sold item, it is important to register the symbology to
protect the data, especially from product/code copiers. However, if the bar-
code is for in-house use, it does not need to be registered. Registering a
barcode is a simple process that can be performed through third-party on-
line sites or through barcode global organizations such as GS1.
All symbologies have some limitations on the number (size) and type of
characters that can be encoded (set). Barcodes can encode numeric only, al-
phabetical only or alphanumeric character sets. The values of these digits
are determined by standards managed by GS1, Global Standards One, for-
merly known as the Uniform Code Council (UCC) in the United States and
EAN International in the rest of the world. GS1 is now the single worldwide
origination point for UPC and EAN numbers. Table 1.17 lists the different
types of barcodes and their typical applications.
Two-dimensional (2D) barcode symbologies contain information in
both the X and Y axes of the symbol. In other words, there are different
data encoded in the horizontal and vertical dimensions of the code. To
properly decode the data, a scanner must read the entire symbol, in both
dimensions simultaneously. This can be done by sweeping the scan line (in
the case of a laser or linear imaging scanner) over the symbol, or by using
a 2D-array-equipped scanner, which acts as a camera. Since the data can be
stored in two dimensions, 2D barcode symbologies allow vast amounts of
data to be stored.
There are two kinds of 2D barcode symbologies: stacked codes and ma-
trix codes. Stacked codes consist of multiple layers of linear barcodes and
matrix codes encode data using cells within a matrix. Examples of stacked
codes are shown in Table 1.18 and matrix codes in Table 1.19.

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106 The Logistics and Supply Chain Toolkit

Table 1.17 Types of barcode and application

Barcode Application

EAN – 13 Character Set: Numeric only; Character Size: 13 fixed-length;

Fault Tolerance: High; Application: International retail and
grocery standard (Europe)

UPC – A Character Set: Numeric only; Character Size: 12 fixed-length;

Fault Tolerance: High; Application: Retail and grocery standard
(United States)

AN – 8 Character Set: Numeric only; Character Size: 8 fixed-length;

Fault Tolerance: High; Application: Small packages in retail
(Europe)

UPC – E Character Set: Numeric only; Character Size: 6 fixed-length;

Fault Tolerance: High; Application: Small packages in retail
(United States)

Code 128 Character Set: Alphanumeric (uppercase/lowercase),

punctuation, controls; Character Size: Any; Fault Tolerance:
High; Application: Best for full ASCII character set

Code 39 Character Set: Alphanumeric (uppercase only), punctuation;

Character Size: Limited by reader; Fault Tolerance: High;
Application: Military, government

GS1 DataBar Character Set: Numeric only; Character Size: 14 fixed-length;

Omnidirectional Fault Tolerance: High; Application: GTIN in small format

GS1 DataBar Character Set: Numeric only; Character Size: Variable-length;

Expanded Fault Tolerance: High; Application: GTIN, applications in ID
fields

GS1 – 128 Character Set: Alphanumeric; Character Size: Variable-length;

Fault Tolerance: High; Application: Many uses in supply chain:
lots, containers, batches, retail

MSI/Plessey Character Set: Numeric only; Character Size: 3–16 fixed-

length; Fault Tolerance: High; Application: Grocery

Code 32 Character Set: Numeric only; Character Size: 8 digit (plus one
check character) fixed-length; Fault Tolerance: High;
Application: Pharmaceutical industry (Italy)

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Warehouse management tools and guides 107

Table 1.18 Stack codes

Stack
codes Application

PDF 417 Character Set: Alphanumeric (uppercase/lowercase), punctuation,

controls; Character Size: Variable-length; Fault Tolerance: High;
Application: Driver licences, transportation, inventory
management, government

Codablock F Character Set: Numeric only; Character Size: Up to 5,450

characters variable-length; Fault Tolerance: High; Application:
Healthcare

Table 1.19 Matrix codes

Matrix codes Application

Data Matrix Character Set: Alphanumeric, uppercase/lowercase letters,

punctuation, controls; Character Size: Up to 2,335 characters
fixed-length; Fault Tolerance: High; Application: Marking small
items, printed on labels and letters, industrial engineering for
marketing components

QR Code Character Set: Alphanumeric, uppercase/lowercase letters,

punctuation, controls, includes Kanji characters; Character Size:
Up to 7,000 numeric characters or 4,296 alpha characters
variable-length; Fault Tolerance: High; Application: Automobile
manufacturing, mobile phone codes

Further information
AIM Global – www.aimglobal.org (archived at https://perma.cc/KB3X-
Y2W6)
GS1 The Global Language of Business – http://www.gs1.org/ (archived at
https://perma.cc/9U6Z-4PGA)
Ten Steps to Barcode Implementation – http://www.gs1.org/barcodes/
implementation (archived at https://perma.cc/GPR4-AL3M)
Global Electronic Party Information Register (GEPIR). GEPIR is a
distributed database that contains basic information on over 1,000,000
companies in over 100 countries. You can search by GTIN (includes

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108 The Logistics and Supply Chain Toolkit

UPC and EAN –13), SSCC and GLN numbers or by company name in
some countries – http://gepir.gs1.org (archived at https://perma.cc/9FK3-
KAFQ)
Barcoding for beginners and barcode FAQ – https://www.barcodefaq.com/
barcoding-for-beginners/#barcode-Accuracy (archived at https://perma.
cc/29XH-XCUK)

The following tables are reprinted by kind permission of Datalogic. (This

work is licensed under the Creative Commons Attribution-Non-commercial-
Share Alike 3.0 Unported License.)

1.27 Setting up ‘Go / No Go’ decision

criteria in logistics projects
Introduction
Confusingly, some of the most common reasons for failure in logistics
change projects are a lack of clarity among stakeholders about what consti-
tutes success, but also a failure to agree which elements of the project are
critical to a successful outcome, and an understanding of what must happen
if key milestones are not achieved.
In any major project, there may be many steps where a planned comple-
tion date is built into the overall project plan, but no key performance indi-
cator (KPI) agreed for delivery of the action to be considered a success, and
no agreement on what happens if that step is not successfully delivered in
full and on time.
This is risky for the project team. Expectations will be high for a success-
ful implementation of the project and any delay is unwelcome and difficult
to explain internally unless the potential for, and implications of delay are
discussed in advance. Most importantly, in many projects, there will be clear
steps towards ramping up operations, often connected with changes else-
where in the organization, such as transfer of suppliers to a new location,
allocation of orders to the new location, starting a new delivery schedule.
All these changes (and many other examples depending upon the com-
plexity of the project) impact on other areas of the organization and may
have wider implications for those areas. An unexpected delay to a previ-
ously agreed plan may be met with anger and hostility, perhaps even with
demands to continue with the plan irrespective of the issues that may cause

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Warehouse management tools and guides 109

for the project. The ‘Go / No Go’ decision criteria is a tool to build under-
standing and consensus when critical elements do not go according to plan.
Not every line in a project plan requires a KPI to be agreed – the focus of
this tool is primarily based upon a few ‘operational’ steps that are most im-
portant, or even critical, to the success of the project (although some other
key areas are also listed below, under ‘Typical examples’).
This tool helps to identify and define those few steps in the project where
‘success’ criteria must be clearly delineated, fully understood and communi-
cated widely. Equally importantly, if success criteria are not achieved, the
implications for the next steps in the project are also clear and agreed in
advance.
Let us take a specific operational example: ‘January 1st 20xx = First in-
bound receipt’. Assuming there is agreement in the project team that this is
a critical milestone (see ‘How to use’ below), what constitutes success? Is it
the actual arrival of a vehicle at the new facility? Is it the successful unload-
ing of the cargo, or the completion of the process to check the received
items, or the successful placing of stock into storage locations or the avail-
ability of the stock in the Warehouse Management system . . . clearly, there
are many options.
The project team must consider which outcome is required to enable the
project to move forward by understanding the impact of the milestone on
the succeeding steps of the project. In our example, the target may not be
achieved for a variety of reasons: the checking process for the received stock
takes much longer than expected due to unfamiliarity; the storage locations
for the received stock allocated by the system are not available; scanning of
labels does not work; the system is not updated by the receipt process; com-
munication between the WMS and the host system does not work; and so
on – but the critical issue is that the milestone is not achieved and this has
already been agreed as a requirement for further investigation and a poten-
tial delay in the plan.
Therefore, for each milestone to be considered a complete ‘Go / No Go’
indicator, the target for the milestone must be fully defined – so success of
‘First inbound receipt’ could be defined as the stock delivered on an inbound
vehicle is successfully unloaded, put into storage and is available on the
warehouse management system (WMS) within four hours of arrival.
For this example, a ‘Green’ outcome would be that the target is achieved
as the stock received from an arriving vehicle is all available on the WMS
within four hours of arrival.

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110 The Logistics and Supply Chain Toolkit

An ‘Orange’ outcome is that the target is mostly achieved (for example,

there is an issue with one item on a multi-item load, or the target is achieved
after six hours rather than four) and the indications are that the issue can be
fixed or there is an agreed ‘workaround’ for the problem (Note: ‘worka-
rounds’ are a temporary fix to an issue – a full solution must be in prepara-
tion).
On the other hand, a ‘Red’ outcome identifies that the process is not
working – and, crucially, that the project cannot continue until a ‘fix’ for the
problem is found and tested. In this example, a ‘Red’ outcome could be that
none of the stock was available on the WMS within four hours of arrival
because the scanners did not function or there was stock in locations that
were expected to be empty.
With either an ‘Orange’ or a ‘Red’ outcome, the project team needs to
investigate the root cause and assess next steps and a realistic time scale for
rectification – and achievement of the ‘Green’ outcome. No further critical
steps should be activated until this investigation is complete and key stake-
holders briefed.

When to use
The ‘Go / No Go’ tool should be used at four stages of a project:

1 After completing the overall project plan, select key points where the
‘Green / Orange / Red’ traffic light system can be used to define
achievement of acceptable performance. Agree those key decision points
at this early stage with the project Steering Committee.
2 Before operational activities start, define ‘Green / Orange / Red’
performance for each of the selected decision points and reach agreement
on the implications of a ‘red’ or ‘orange’ outcome on the next project
steps.
3 Shortly before each decision point is reached, review the criteria and
revisit the implications of ‘Red’ and ‘Orange’ performance with the
Steering Committee and key internal stakeholders.
4 After each decision point, update the Steering Committee and key
stakeholders with news of the outcome and the agreed next steps. For an
‘Orange’ or ‘Red’ outcome, further communication will need to be
planned.

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Warehouse management tools and guides 111

How to use
1 Select key criteria for project (the template lists some common criteria,
but these will need to be customized for every project – see next section
for more examples).
2 Agree key criteria with Steering Committee and key stakeholders.
3 Create ‘Green / Orange / Red’ performance levels for each criterion.
4 Agree performance levels and outcomes with Steering Committee.
5 Re-brief before each decision point is reached.
6 Communicate the outcome of each decision point – including remediation
activities and timescales if necessary.

Typical examples of key criteria in different parts

of a project
●● Building / construction (may be significant implications on overall
timeline if building stages are not delivered on time).
●● Approvals and permits; construction stage completions, building
handover by developer; arrival of key materials for building fit out (e.g.
steel for racking).
●● Equipment (if lead times for equipment supply are not met, this may
cause delay to overall project timeline).
●● Arrival on site of equipment (mechanical handling, automation, robotics,
IT hardware).
●● Operational / functional testing of all new equipment on site.
●● IT systems (there may be a complex ecosystem of interconnected systems
that need to be tested in isolation but also in combination and from end
to end):
●● Delivery and testing of hardware, including wireless network and
servers.
●● Testing of external system connections (examples include connections
from on-site servers with host ERP (enterprise resource planning)
systems).
●● Testing of internal IT connections (such as middleware, servers, and
warehouse execution systems (WES) for specific pieces of automation
such as robots or shuttles.

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112 The Logistics and Supply Chain Toolkit

●● Health and safety:

●● Confirm that all safety processes are in place, tested and trained before
new equipment or activity starts in any given area. Examples include
‘Working at Height’ training, training on use of forklift trucks, use of
lorry / container immobilization tools before loading or unloading.
●● Human resources (having insufficient or improperly trained staff may
cause subsequent steps to be delayed):
●● Recruitment plan written identifying what people are needed at each
project stage.
●● Training matrix written by roles and delivered according to agreed
timetable.
●● Process mapping and ‘One Point Lessons’ available for all key tasks.

●● Operational issues and delays (the most common area for critical failures
at a late stage in any project – require clear agreement on what constitutes
Green, Orange and Red performance levels).

ach physical process step from goods receipt, through put-away, to stor-
E
age, to stock management, to order assembly, despatch and returns manage-
ment (in the case of traditional warehouse activity), needs to be tested
against the expected performance levels.
For example, if the operation is designed to receive orders by 17.00 for
next day delivery (but orders are actually received by 19.00), or to assemble
orders within an average of 5 minutes per item (but is actually taking 12
minutes), or is expected to retrieve 15 units per forklift per hour (but is actu-
ally retrieving 7 units per hour), it is not acceptable to proceed according to
plan if the difference between achieved and expected parameters is neither
understood nor fixable within a short time frame.

Conclusion
A key benefit of this tool is for key stakeholders to acknowledge that, poten-
tially, not everything in a project plan will go smoothly. Many operational
elements in a project plan cannot be tested fully before they are deployed
and a single line in a project plan (such as ‘receive first orders into WMS’ or
‘start storage automation’ or ‘commence inbound receipts’) hides a complex
and not-fully tested interrelationship of systems, equipment and individuals.
The key purpose of this tool is to enable achievement of agreed performance
levels to drive project progress and for the implications of failure to achieve

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Table 1.20 Example of Go/No Go decision criteria

Note: all figures are for

Performance levels indicative purposes only.

Good. Continue Improvement Stop! Remedial Explanation/Comments

Description Metric with plan plan required plan required!

Inbound % of inbound receipts pre-advised to >95% 80–95% <80%

Warehouse Management System

Inbound % of inbound pallets correctly labelled >75% 60–75% <60%

and readable by scanners

Inbound % of receipts checked and on WMS >95% 80–95% <80%

within 2 hours of unloading

Putaway % of received items placed into >95% 90–95% <90%

storage within 4 hours of arrival

Putaway % of allocated putaway locations >99.5% 99–99.5% <99%

actually available

Storage Number of damaged items as <0.1% 0.1–0.5% >0.5%

percentage of total items in stock

Storage Number of inventory errors as <1% 1.0–1.5% >1.5%

percentage of total inventory checks

(continued )

113
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114
Table 1.20 (Continued)

Note: all figures are for

Performance levels indicative purposes only.

Good. Continue Improvement Stop! Remedial Explanation/Comments

Description Metric with plan plan required plan required!

Automation % of inbound items meeting >90% 75–90% <75%

automation conformance criteria

Automation Max throughput of units per hour >99% 90–99% <90%

achieved by storage automation as %
of design capacity

Order Number of lines assembled per hour >95% 90–95% <90%

Assembly versus target

Order Number of items assembled in error as <0.5% 0.5–1.0% >1.0%

Assembly % of total items assembled

Despatch % of items loaded onto correct >99% 95–99% <95%

outbound delivery

Health and Number of H&S incidents as % of total <0.5% 0.5–1.0% >1.0%

safety hours worked on site

Recruitment % of target workforce employed and >99% 90–99% <90%

available

Sickness % of total hours paid lost to sickness <0.5% 0.5–1.0% >1.0%

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Warehouse management tools and guides 115

a critical performance level to be understood and agreed by stakeholders in

advance.
A failure to prepare for things to go wrong or to take longer than planned,
followed by an expansion of activities according to the previously agreed
plan, is a significant root cause of poor outcomes in logistics projects. Having
an agreed ‘fall back’ position can provide breathing space for the project
team to get things back on track by reducing pressure to keep to the original
timeline.
Remember that there is no ‘list’ of the project steps to be chosen as ‘Go /
No Go’ indicators. The list will vary from project to project. Some examples
are given in the previous section. The focus should be on construction, pro-
curement, operational and process steps that lead to a step change in the
activities performed at the new site.
Equally, it is vital that the ‘Go / No Go’ indicators are chosen and agreed
with the relevant stakeholders well before the relevant activities are about to
take place. It is critical that the ‘Red’ and ‘Orange’ outcomes are communi-
cated to, and understood by, stakeholders well in advance – when the discus-
sion is theoretical – and not in the middle of a ‘real life’ issue.

Further information
More details on using the template can be found in Delivering Change: The
art and science of successful change management in logistics by Rod
Turner, available on Amazon.
Rod Turner can be contacted via www.rodturnerlogistics.co.uk (archived at
https://perma.cc/WM9H-6B43)

1.28 Flow charts

Introduction
Flow charting is a method of recording work or business processes, or for
explaining how to navigate through a series of decisions. There are many
other methods for doing this, including techniques from method study, in-
formation systems analysis and business process re-engineering, to name a
few. However, standard flow charting can be powerful and useful for im-
proving work or business processes.

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116 The Logistics and Supply Chain Toolkit

The basic flow-charting method uses symbols for operation or activity,

decisions, the start and end points, and links to the next stage, either follow-
ing immediately or elsewhere on the chart (see Table 1.21).

When to use
Flow charts are a good means of recording a current business process or ‘as-
is’ situation that you want to analyse and streamline. When the new process
is designed, the ‘to-be’ process, it can also be communicated as a flow chart.
A flow chart can therefore be used as a communication tool for discussion
leading to redesign, or for presenting or formalizing a work procedure.

How to use
The most common method of creating a flow chart of a business process is
for the person creating the chart to interview the person carrying out the
business process. The interviewer makes notes or may sketch the activities as
they are described. Later, the interviewer constructs the flow chart. Actually
drawing out the flow chart can give rise to questions about the logic of the
procedure or the sequence of activities, and it is often necessary to go back
to the person carrying out the process to check the details. The process of
constructing the final flow chart often offers ideas for improvement. The

Table 1.21 Flow chart symbols

Symbol Meaning Rule for use

Start or end Make sure that there is only one start point
and one end point in the diagram

Operation Multiple inputs are possible, but only one

(rectangle) output

Decision (diamond) One input, multiple outputs (which must

cover all eventualities, and with no
overlapping between options)

Arrow to next stage Check that the arrow shows direction of

flow

Link to another part Ensure that the link continues elsewhere,

A of the chart i.e. if there is an ‘A’ end point, there is also
one ‘A’ start point somewhere else

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Warehouse management tools and guides 117

Figure 1.17 Flow chart for goods receiving

Start

Identify PO
& supplier

Bring up
PO details

Yes
Any transit Photograph Record PO Send photos to
damage? the damage arrived procurement

Open box,
crate, etc &
check items
against PO

Yes
Any items Photograph Record PO Send photos to
damaged? the damage arrived procurement

No
All IDs Record Inform
correct? differences procurement

Yes

All No
Record Inform
quantities
quantities seen procurement
OK?
Yes

Record PO
complete

End

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118 The Logistics and Supply Chain Toolkit

process chart can be shown to all involved and used as the basis for a discus-
sion about potential improvements. Eventually, a ‘to-be’ process can be de-
veloped, tested and implemented. The flow chart thus becomes the reference
document of ‘what should happen’ and for future checking of ‘conformance
to process’.

Example
Figure 1.17 shows a flow chart for goods receiving. Note how the links en-
sure that there is only one start point and one end point, and a clear way
through the chart (‘PO’ is purchase order).

Further information
Obolensky, N (1996) Practical Business Re-engineering, Kogan Page,
London

1.29 The PDCA tool

Introduction
The PDCA tool (Plan, Do, Check, Act) or Deming Cycle, named after W
Edwards Deming, a business improvement and quality guru, is an approach
to change and problem solving. The four phases in the cycle involve:

Plan: identifying and analysing the problem.

Do: producing and trying a potential solution.
Check: measuring how successful the test solution is and analysing whether
it can be improved in any way.
Act: implementing the improved solution fully.

When to use
The Deming Cycle or PDCA is an excellent, well-ordered, precise method
for problem solving. It can be utilized in a number of areas such as:

●● assisting in the implementation of Kaizen or continuous improvement

practices, enabling the cycle to be repeated over and over as new areas for
improvement are discovered and resolved;

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Warehouse management tools and guides 119

●● pinpointing new resolutions and improvements to processes and practices

that are repetitive;
●● investigating a range of possible new solutions to problems, evaluating
and improving them before selecting the most appropriate for full
implementation;
●● avoiding the waste of resources that accompanies full-scale implementation
of an average or deficient solution.

PDCA is a proven method for removing waste or inefficient cost in an op-

eration, resulting in increased value. In our example below, Nissan Motor
Parts (NMPC) uses PDCA as part of its continuous improvement process. It
is in a competitive environment and needs to have high performance levels.
Nissan uses PDCA when examining larger change events that require
more time and perhaps investment but are critical for the business
performance. These are not in the gift of any one team, so require senior
managers’ support through active participation. They rely on data for objec-
tive root-cause analysis and for testing possible solutions before implemen-
tation. Projects tend to be more data intensive.
According to Nissan, the use of PDCA supports the development of lead-
ers and team members by providing a place for people to work together and
grow their skills for continuous improvement. It not only increases confi-
dence in individuals but also develops a good spirit in the workplace. It be-
comes a place to apply individual expertise and a place to learn about the
expertise of others by working cross-functionally in the supply chain.
Nissan uses it as a training opportunity and it becomes a place of owner-
ship, i.e. when a group of people make a change for the better in their part
of the business, they will implement the change and follow the standard
operating procedure, which is the written record of the changed procedure.
A mutual respect grows among colleagues: ‘If your colleague made the
change you support that change when you are deployed in that task because
you need your colleague to reciprocate.’

How to use it
The following is a case study example from Nissan Motor Parts UK.
Figure 1.18 shows the model that Nissan uses.

Project title: Physical Picking Claims Improvement Project

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120 The Logistics and Supply Chain Toolkit

Problem: NMPC receives dealer orders and then processes them in a manual
picking process. When carrying out this task there is the risk of a team
member in the supply process making a physical error resulting in a
dealer claim and loss of value for the part. This is at a cost of £563,869
per year.
Target: A reduction of physical errors by 10 per cent equating to a reduction
in claims value of £56,386 in total. This is equal to 1,007 physical error
claims.
Approach: Use of PDCA and DMAIC (see tool 6.8).

Step 1. Plan (Define, Measure, Analyse)

Define the opportunity and set up a project team.

Undertake a stakeholder analysis (see Table 1.22).

Produce a communication plan (see Table 1.23).

Figure 1.18 PDCA/DMAIC model produced by Nissan

DEFINE
THE
OPPORTUNITY
CONTROL MEASURE
AND ADJUST THE
NEW CURRENT
PROCESS T PERFORMANCE
AC
PL

6 Sigma follows a ANALYSE

process of DMAIC, THE

which fits with CURRENT
Kaizen and PDCA. PROCESS
6 Sigma will not
replace Kaizen,
but will supplement
CK

our process of
E
CH

Kaizen DO

IMPROVE
PROCESS
EFFICIENCY
IMPROVE
PROCESS
EFFICIENCY

SOURCE Reproduced by kind permission of Bruce Taylor, Nissan

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Table 1.22 Stakeholder analysis

Stakeholders’ Project impact SH level of SH current Explanation of SH score H=3, Action plan for SH
name and on stakeholder influence on attitude+/0/– current SH attitude M=2, l=1, +
group (SH) H/M/L success H/M/L =1,0=2, –=3

Pickers H H + Monetary reward 7 Consult and involve at each

and self-worth step using skills

TL H H + Time back, morale 7 Consult and involve at each

of team, monetary step using skills
reward, self-worth

Management H H + KPI uplift, morale of 7 Consult and involve at each

team, monetary step for approval at
reward, self-worth gateway review

Gatekeeper H H + Time to focus 7 Consult and involve at each

elsewhere step using skills

Dealers H L + Service 5 Dealer conference

improvement

Key: SH – Stakeholder
TL – Team leader
H/M/L – High/Medium/Low

121
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122
Table 1.23 Communication plan

Topic of
discussion/key
Audience/to who Media Purpose message Owner Frequency Notes/Status

Pickers Visit teams in Engage and prepare Intentions and plan Team 25/03 then as Detail to be discussed
person to brief audience for coming to utilize skills of required to ensure ownership
progress changes gaining input pickers and involvement

TL Face to face Inform and encourage Intention and Team Launch and post
feedback current status gateway review

Management Face to face Inform and encourage Intention and Team Launch and post
feedback current status gateway review

Gatekeeper Face to face Recognize role As per picker Team As all above

Dealers Conference/ Inform Relay result of Team At finish

intranet better service

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Warehouse management tools and guides 123

The stakeholder analysis and the communication plan together form the
engagement plan.
The group discussed the best methods to engage the stakeholders effec-
tively and maintained this approach throughout the project. It was decided
that the critical group of ‘pickers’ would be communicated to via a ‘road-
show’ type of presentation. The use of the same presenting team and the
opportunity to ask questions provide consistency and transparency.
This technique was employed from start to finish for both this project
and the sub-projects that came from it:

●● Produce process maps to assess the current situation.

●● Measure and validate the data for the current situation.
●● Determine the influencing factors of below-par performance and chart
them (see Figure 1.19).

At the next stage, which is the Analysis stage in DMAIC, the team looked to
identify the root cause or causes of the problem or opportunity. Using the
data produced, the problem is analysed and ‘drilled down’ to gain a better
understanding of what and where the root causes are.

Step 2. Do (Improve)
A ‘quick win’ was identified that saw Nissan provide its pickers with the
opportunity of a free eye test. Out of 77 who took the test, 33 required
glasses. A number of people were not aware they needed them. Everyone
was given the option to have free glasses up to a cost of £50 and everyone
was able to choose from a variety of styles.
Other solutions were identified, scored and ranked by effectiveness, fea-
sibility, cost and duration. The top five ideas were evaluated and a risk anal-
ysis carried out. The ideas were later either implemented or a separate pro-
ject team was set up to look at return on investment and feasibility.

Step 3. Check
The group identified a loophole in the way that the existing claims tracker
calculated overall claims scores for operatives. The existing tracker allowed
operatives to score points towards merit-based pay reviews even when they
were performing poorly in key areas. This was due to the way that the
tracker took a percentage of the overall score for each area and enabled one
good performance to guarantee a minimum score.

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124
Figure 1.19 Performance chart

Pareto chart
30 90%

80%
25
70%

Cumulative percentage
20 60%
Occurrences

50%
15
40%

10 30%

20%
5
10%

0 0%
Fatigue/ Line Quantity Quality Route Radio Unit of Rotation Dead- Noise
picking depth/ of of bands station issue lines pollution
duration quad pickers pick /lT and
end tickets issues lighting

Quantity 24 14 13 9 7 7 6 6 6 5 0
Cum % 20% 32% 43% 50% 56% 62% 67% 72% 77% 82% 0%
% of Total 20% 12% 11% 8% 6% 6% 5% 5% 5% 4% 0%

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Warehouse management tools and guides 125

A new tracker with a new calculation was developed to remove this loop-
hole and enable like-for-like comparison between operatives. This ensures
that the operatives who need the most assistance get the most coaching and
in good time.

Step 4. Act (Control)

Many of the new processes have been introduced and others are currently
being fully evaluated in terms of feasibility and cost, with the project teams
due to report back on the results.

Result
The 10 per cent reduction was equivalent to a drop of 1,007 claims over the
year. Nissan achieved a reduction of 582 claims in four months. If this is
maintained it is forecasting an annual saving of 1,746 physical error claims.
This equates to a 23 per cent reduction in physical errors.
At an average of £55.97 a claim, it has so far saved £32,574 in four
months. If this continues, the projected saving over a 12-month period will
be £97,723. Implementation resource costs were approximately circa 300
hours at £15.15 per hour = £4,650 = net saving in first year of £93,073.
The introduction of tools such as PDCA and DMAIC has resulted in staff
working together in teams to ensure continuous improvement and in many
instances exceed the targets initially set.

Further information
Further information can be found at: http://www.mindtools.com/pages/
article/newPPM_89.htm (archived at https://perma.cc/7FXE-CCGP)

(With thanks to Bruce Taylor from Nissan UK for his input.)

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126

Transport 02
management
tools
In this section we have included tools to assist you in your day-to-day freight
transport operations.
There are certain tools that have not been included such as drivers’ hours
regulations due to the differences across countries. As a result we have in-
cluded useful website addresses at the end of the chapter.

2.1 Transport audit checklists

This section provides audit checklists for a road freight transport operation;
an extract is shown in Table 2.1. The questions are not exhaustive and can
be added to by users to mirror their own operations.
Audits should be undertaken by an independent person, either an out-
side consultant or someone from another department within the company.
The purpose of the audit should be explained to the staff. Results should
be shared with all staff, who should take ownership of the results and the
improvements necessary. A timescale should be agreed to undertake the
improvements.
A full set of audit forms can be purchased from http://howtologistics.
com; discount code: lsct2024.

Table 2.1 Transport audit checklists

Transport audit (Part 1)

Carried out by: Location: Date:

Item: No Yes NA Comments

(continued )

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Transport management tools 127

Table 2.1 (Continued)

Transport audit (Part 1)

Transport yard

Sufficient space for goods vehicle parking

Comprehensive signage for drivers in multiple

languages

Comprehensive signage for visitors

Staff cars parked away from freight vehicles

Perimeter fencing in good order

Security gates/barriers in good working order

External ground in good condition, no potholes,

etc

LPG and diesel kept in suitably safe and

secure area

Vehicle and trailer wash facilities available

2.2 Calculating emissions in freight

transport
Introduction
Companies worldwide are being encouraged to lessen their impact on the
environment and many governments are likely to introduce taxation based
on greenhouse gas emissions so as to meet their own targets. This section
provides information on how to measure these emissions in a freight trans-
port environment.
Another reason for transport operators to calculate their emissions is to
provide information to their customers. For most transport operators, this
will mean calculating their total emissions, and then using an appropriate
method to fairly ‘allocate’ an appropriate share of those emissions to each
of their customers.
Greenhouse gases (GHGs) can be measured by recording emissions at
source by continuous emissions monitoring or by estimating the amount

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128 The Logistics and Supply Chain Toolkit

emitted by multiplying activity data by relevant emissions conversion

factors. These conversion factors allow activity data (e.g. litres of fuel used,
number of miles/kilometres driven, tonnes of freight carried, tonnes of waste
sent to landfill) to be converted into kilograms of carbon dioxide equivalent
(CO2e). CO2e is a universal unit of measurement that allows the global
warming potential of different GHGs to be compared. There are seven main
GHGs that contribute to climate change, as covered by the Kyoto Protocol:
carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluoro-
carbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and
nitrogen trifluoride (NF3). Different activities emit different gases and com-
panies need to report on the Kyoto Protocol GHG gases produced by their
particular activities.
Values for methane (CH4) and nitrous oxide (N2O) are presented as
carbon dioxide equivalents (CO2e) using global warming potential (GWP)
factors, consistent with reporting under the Kyoto Protocol and the sec-
ond assessment report of the Intergovernmental Panel on Climate Change
(IPCC).
This tool provides calculations for each mode of freight transport.

How to use it
The following examples illustrate how to calculate kgCO2e for diesel with
an average biofuel blend:

Total fuel used by company road freight vehicles per annum = 150,000 litres
UK emission factor for diesel is 2.51 kgCO2e/litre
Therefore total kgCO2e = 376,500 kgCO2e.

If the company does not have details of fuel consumed it is possible to use
the following formula based on DEFRA emission factors.
This is based on an average for all HGVs between 3.5 tonnes and 44
tonnes gross vehicle weight:

Total emissions = distance × emission factor

= 377,015 × 0.64258
= 242,262 kgCO2e

Table 2.2 provides the calculation for the different gases based on distance
travelled in miles and kilometres and by tonne kilometre. It is based on aver-
age loaded vehicles.

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Table 2.2 Gas and particulate emissions by truck type

Type Unit kg CO2e

Rigid (>3.5 – 7.5 tonnes) tonne.km 0.51228

km 0.48562

miles 0.78152

Rigid (>7.5 – 17 tonnes) tonne.km 0.35412

km 0.59277

miles 0.95398

Rigid (>17 tonnes) tonne.km 0.15375

km 0.97436

miles 1.56808

All rigids tonne.km 0.17819

km 0.82313

miles 1.3247

Articulated (>3.5 – 33t) tonne.km 0.11578

km 0.76647

miles 1.2335

Articulated (>33t) tonne.km 0.07421

km 0.91265

miles 1.46876

All artics tonne.km 0.07518

km 0.90644

miles 1.45877

All HGVs tonne.km 0.09696

km 0.87205

miles 1.40341

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130 The Logistics and Supply Chain Toolkit

The website shown at the end of this tool provides spreadsheets to enable
the user to calculate these figures automatically. For those working in miles
as opposed to kilometres the following formula provided by the UK Road
Haulage Association (RHA) can suffice. The calculation is as follows:

To convert miles per gallon to kilometres per litre, multiply by 0.354.

To obtain litres per kilometre, divide 1 by the kilometre/litre figure above.
To convert miles per US gallon to kilometres per litre multiply by 0.425144.
To obtain CO2 in kilograms per kilometre, multiply by 2.51.
To obtain CO2 in grams per kilometre (the accepted measure), multiply by
1,000.
Example: carbon footprint calculation:
Assume a 44-tonne articulated vehicle returning 8 miles per gallon:
8.0 multiplied by 0.354 gives 2.832 kilometres/litre;
1 divided by 2.832 gives 0.3531 litres/kilometre;
0.3531 multiplied by 2.51 gives 0.886281 kilograms of CO2/kilometre;
That figure multiplied by 1,000 gives 886.281 g of CO2/kilometre.

Other modes
Freight flights
Short haul to/from UK = 1.668155 kgCO2e per tonne kilometre
Long haul to/from UK = 1.099032 kgCO2e per tonne kilometre

Railfreight
Railfreight (UK) = 0.02779 kgCO2e per tonne kilometre

Sea freight
Crude tanker (≥ 200,000 + dwt) = 0.00294 kgCO2e per tonne kilometre
Container ship (≥ 8,000 + TEU) = 0.01266 kgCO2e per tonne kilometre
Bulk carrier (≥ 200,000 + dwt) = 0.00253
RoRo Ferry [≥ 2000 + LM – (lanes in metres)] = 0.05012

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Transport management tools 131

Further information
https://www.gov.uk/government/publications/greenhouse-gas-reporting-
conversion-factors-2023 (archived at https://perma.cc/8WE4-2LXR)

2.3 Fuel adjustment factor formula

Introduction
Fluctuations in the price of fuel have a significant impact on the rates paid
for the transportation of goods. To enable companies to pass on the increase
(or decrease) in the cost of fuel to their customers, a mathematical formula
can be used to calculate the percentage increase/decrease. Not only does the
transport supplier need to understand the mechanism but so does the cus-
tomer in terms of how it has been calculated.
Over recent years the cost of fuel as a percentage of total transport costs
for UK hauliers has been in the region of 30 per cent. The 2022 RHA cost
tables show a figure of 28.95 per cent.

How to use
At the beginning of the contract a base price for the fuel needs to be agreed
between both parties. This needs to be written into the contract. The con-
tract should also state the review frequency. If the haulier is undertaking a
large number of jobs for the customer and the price of fuel is continually
rising or falling, then maybe a weekly adjustment is required. Other con-
tracts can be set up on a quarterly or six-monthly basis.
A further calculation is the cost of fuel as a percentage of the total cost or
revenue for the transport company at the time of the fuel increase. Any fuel
taxation such as value added tax needs to be excluded from the price of fuel.
Once these figures have been calculated, the formula shown in the exam-
ple below can be used to calculate the overall increase/decrease in price for
the work undertaken. The figure is illustrative only. Figure 2.1 covers a situ-
ation where fuel has increased in price. Note there will be situations where
fuel has gone down in price and the haulier will need to adjust the cost ac-
cordingly.
In terms of container shipping there is a fuel adjustment factor called
BAF or bunker adjustment factor.

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132 The Logistics and Supply Chain Toolkit

Figure 2.1 Fuel adjustment – specimen agreement and calculations

This Agreement dated [Enter date] is between [Enter name of haulier] and [Enter
name of company].
It is agreed that:
(a) the base price of diesel for the purpose of this Agreement is [Enter amount]
pence per litre, exclusive of VAT
(b) the haulier may adjust the price(s) for work undertaken for the customer by
reference to the following formula:
(i) a change in the average price of fuel in the period shall be determined as
a percentage of the base price as in (a) above
(ii) the cost of fuel to the haulier shall be determined as a percentage of the
haulier’s total revenue, as recorded
(iii) the adjustment to be applied (by way of either increase or decrease in
price) shall be the product of (i) × (ii)
(iv) an adjustment will be triggered when the change in cost is + / − % (to be
agreed)
(c) such adjustments shall be calculated at [Enter frequency, e.g. weekly,
monthly] intervals.

EXAMPLE

1 Vehicle type 44 tonne artic

2 kms in period 120,675
3 Mpg / kms per litre 8.3 mpg / 2.94 kms per litre
4 Litres in period 41,070
5 Fuel at base price Date £ -
1.40 25/9/22
6 Fuel at av. price for period Date £ -
1.18 30/9/23
7 Increase/ (decrease) (9,208)
8 Costs in period A £201,326 -
9 Fuel as % of revenue at av B 24.71
10 Fuel % at base price C 30.11
11 INCREASE/(DECREASE) (5.4%)
(B—C)
If the trigger is + / − 2% there is no adjustment required (this depends on the actual contract agreed).

NOTES: A) Period revenue as recorded; B) Line 6 ÷ line 8 × 100; C) Line 5 ÷ line 8 × 100
The appropriate adjustment is shown in line 11.
© The Road Haulage Association and Apprise Consulting 2019

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Transport management tools 133

The BAF tariff is designed to recover fuel-related costs and it is charged

separately from basic ocean freight as the fuel cost is a very significant and
volatile part of shipping costs. The BAF consists of a trade factor and the
fuel price.
The fuel price is calculated as the average fuel price in key bunkering
ports around the world, while the trade factor reflects the average fuel con-
sumption on a given trade route as a result of variables such as transit time,
fuel efficiency and trade imbalance. Currently there is no standardization
across the shipping companies.
Depending on volumes shipped, BAF can be fixed, locked in or floating
(variable).

2.4 How to improve fuel efficiency

Introduction
Fuel represents approximately 28.95 per cent of transport costs within a
distribution operation in the UK today, based on September 2022 fuel prices.
It is therefore vital that companies look to reduce the amount of fuel con-
sumed and improve metrics such as miles per gallon or kilometres per 100
litres.
The following is a list produced by Goodyear Dunlop on how to improve
fuel efficiency. It has been supplemented by further advice from Freight Best
Practice.

Driver training
Driver behaviour is the biggest factor affecting fuel consumption. Investing
in driver training will therefore quickly pay off and cut costs.

Work with equipment manufacturers

A key aspect of driver training will often be working with the vehicle manu-
facturers, which can offer advice on how to get the most from their vehicles.
This relationship should be extended across all equipment manufacturers.
Tyre, trailer and aerodynamics suppliers can advise you on how best to use
their equipment and provide ongoing maintenance to ensure fuel consump-
tion stays as low as possible.

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134 The Logistics and Supply Chain Toolkit

Make fuel efficiency a key consideration for vehicle

procurement
Truck manufacturers are increasingly offering vehicles with improved fuel
efficiency. The upfront cost of investing in these vehicles will be more than
outweighed by the future savings from reduced fuel consumption.

Invest in cost-effective tyres

The cheapest tyres are not always the most cost-effective. Tyres should be
selected on the basis of what offers best value – this means selecting a tyre
that offers optimal safety, longevity and fuel efficiency, even if it may be
more expensive upfront. Tyre pressure monitoring systems (TPMS) can also
help maximize the cost-effectiveness of tyres in the long term.

Aerodynamic improvement
Investing in aerodynamic improvements to vehicles can pay big dividends.
Aerodynamic drag is a major factor in fuel consumption and retro-fitted
improvements such as side skirts can offer a quick return on investment
(ROI).

Perform regular and thorough maintenance

There is little point in spending money on fuel-efficient trucks, tyres and
aerodynamic improvements if this equipment is not well maintained. It is
necessary to keep all of this equipment in good condition if it is to deliver
the desired savings in fuel consumption.

Improve your logistics

Better route planning and journey organization can cut journey times, avoid
congestion and reduce empty running, saving fuel.

Work with your customers

Customers are increasingly asking for more environmentally friendly freight
services. Cooperating with them can help reduce fuel consumption by mak-
ing deliveries easier and journeys shorter. Customers can be encouraged to
place depots out of urban centres to avoid congestion, to reorganize deliver-
ies to reduce empty running and to organize distribution to ensure trucks
run full rather than half loads, improving fuel efficiency.

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Transport management tools 135

Use telematics to track fuel consumption

Using telematics software can allow fleets to track their fuel consumption. It
can be used to identify drivers who are wasting fuel and routes plagued by
congestion, allowing fleets to act on these issues.

All of the above

Improving fuel efficiency requires a holistic approach – improving in only
one area is not enough and the investment may not be recouped if other
areas are neglected. Fleets need to identify a reduction target, devise a fuel
management plan that covers all areas and then measure how successful it
is. This kind of thorough plan may be more expensive, but it will also save
much more money in the long run.

Best-practice advice to drivers

1 Always drive the truck with as low an engine speed as is practicable. This
means using as high a gear as possible and monitoring the speedometer
to ensure that the needle is always in the green band. Remember, the
higher the gear, the lower the engine revs.
2 Make full use of the engine exhaust brake or engine brake, if fitted.
3 Avoid double-declutching on a synchromesh gearbox.
4 Do not use every single gear in the gearbox when shifting up or down.
Make use of block changing/forward shift techniques where it is safe to
do so, for example: 2–4–6–8. Where a splitter gearbox is fitted, use this
facility to your best advantage. Again, do not use it automatically on each
gear, but rather in the top range only as a 1/2 gear step. It helps to keep
optimum speed up and engine revs down.
5 S afety checks and prompt defect reporting should be carried out before,
during and at the end of every shift.
6 Let the engine work for you and ‘lug’ (i.e. work within the green band)
on gradients. Remember, use maximum engine torque and thus pulling
power. Use the engine’s ‘sweet spot’.
7 Make sure tyre pressures are correct. Incorrect pressure accelerates tyre
wear, may jeopardize safety and affects fuel consumption. Fill tyres with
nitrogen as opposed to air.
8 Use cruise control, whenever safe and practicable.
9 When filling fuel tanks, take care not to fill to the brim. Never leave a fuel
nozzle unattended.

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136 The Logistics and Supply Chain Toolkit

By undertaking a combination of the above, the result will be:

●● lower fuel consumption;

●● better tractive effort;
●● reduced engine and transmission wear;
●● reduced wear on brake components;
●● reduced tyre wear;
●● optimum speeds and journey time;
●● reduced environmental impact;
●● less driver fatigue;
●● safer vehicles on the road;
●● fewer road accidents;
●● fewer prohibition notices and driver convictions;
●● less fuel spillage (both in the depot and on the road).

Reference
https://www.goodyear.eu/en_gb/consumer/learn/choosing-the-right-tire.
html (archived at https://perma.cc/YTS5-4EDB)

2.5 Incoterms® 2020

Introduction
Incoterms® are a set of uniform rules produced by the International
Chambers of Commerce for the interpretation of international commercial
terms. They define and set out the obligations of both consignors and con-
signees of goods in relation to the risks and costs that relate to each party
during the movement of the goods between the seller’s premises and those of
the buyer.
Incoterms® are internationally accepted definitions and rules of interpre-
tation for most common commercial terms. Incoterms® rules are recognized
by UNCITRAL as the global standard for the interpretation of the most
common terms in foreign trade.
A major consideration when selecting the correct Incoterms® rule is that
sellers and buyers should not use a term that imposes risks and obligations

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Transport management tools 137

beyond their control. One point to note here is that under an ex-works
agreement it is the responsibility of the buyer to load the vehicle, yet in the
majority of cases it is the seller’s staff who tend to load the vehicle on depar-
ture. The question is: ‘Who is responsible if the goods are damaged while
being loaded?’
Technically the seller should make the goods available but not load the
goods on collecting vehicles and the seller is not responsible for clearing
them for export. If the seller does load the goods, it does so at the buyer’s
risk and cost. If the parties want the seller to be responsible for the loading
of the goods on departure and to bear the costs and risk of such loading, this
must be made clear by adding explicit wording to this effect in the contract
of sale and any other specific documentation.
It is imperative that precise delivery points are identified, especially
with regard to port or terminal areas. The typical functions and responsi-
bilities identified by Incoterms® 2020 are listed below. It notes who is re-
sponsible for:

●● packing and marking of the goods (packing in cases, etc for contract and
mode of transport – not loading items in, or on containers);
●● providing and paying for the goods;
●● preparing documentation, whether in hard copy or electronically;
●● arranging dispatch of the goods to specific delivery points;
●● sorting out (and paying for) export and import clearances;
●● ensuring import and export licensing is in order;
●● ensuring security requirements are met;
●● loading and unloading of cargo at the agreed delivery points;
●● pre-shipment inspection (always the buyer for UK exports);
●● obtaining documents or their equivalent electronic messages (online
documentary considerations);
●● insuring the goods – this is for additional cargo insurance, not carriers’
liability insurance;
●● paying duties and taxes, usually at the point of import.

According to 512 Sheffield, a UK-based freight forwarder, the way to avoid

problems is to do the following:

●● ALWAYS quote the specific three-letter abbreviation.

●● ALWAYS mention a PRECISE place of delivery.

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138 The Logistics and Supply Chain Toolkit

●● ALWAYS add the phrase ‘as per Incoterms® 2020’ – in the contract, the
quotation, order, order confirmation – and on the invoice.
●● ALWAYS ensure that all parties understand that they are working to the
terms qualified in Incoterms® 2020 and not a perception of what they
think a term means.
●● ALWAYS ensure that any contractual issues that may cause deviation
from Incoterms® 2020 are clarified and resolved before the contract is
agreed and signed.

The following is a list of the 11 Incoterms® used.

When transporting goods by any mode of transport, be it air, sea, inland

waterways, rail or road:

EXW – Ex Works – (named place of delivery)

FCA – Free Carrier – (named place of delivery)
CPT – Carriage Paid To – (named place of destination)
CIP – Carriage and Insurance Paid to (named place of destination)
DPU – Delivered at Place Unloaded (insert place of destination)
DAP – Delivered at Place – (named place of destination)
DDP – Delivered Duty Paid – (named place of destination)

When transporting by sea and inland waterways only:

FAS – Free Alongside Ship (named port of loading/shipment)

FOB – Free on Board (named port of loading/shipment)
CFR – Cost and Freight (named port of destination)
CIF – Cost, Insurance and Freight (named port of destination)

As can be seen from Table 2.3, the majority of terms specifically show
whether it is the buyer or supplier who is responsible for the cost and risk
involved. However, there are situations where risk and cost will be deter-
mined by the named place of destination; these are denoted by B/S on the
chart. Table 2.3 details the responsible party based on the Incoterms® agreed.
The chart is for guidance only. A copy of the Incoterms® 2020 can be found
at https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
(archived at https://perma.cc/36GW-N845).

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Table 2.3 Incoterms® 2020 responsibilities

INCOTERMS® 2020 EXW FCA FAS FOB CFR CIF CPT CIP DPU DAP DDP

RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST RISK COST

Loading onto B B S S S S S S S S S S S S S S S S S S S S
collection vehicle

Export Customs B B S S S S S S S S S S S S S S S S S S S S
formalities

Carriage to point/ B B B B S S S S S S S S S S S S S S S S S S
place of export B B B B

Unloading of vehicle at B B B B S S S S S S S S S S S S S S S S S S
point/ place of export B B B B

Loading on main B B B B B B S S S S S S S S S S S S S S S S
mode of transport B B B B

Delivery to point/ B B B B B B B B B S B S B S B S S S S S S S
place of import

Unloading from main B B B B B B B B B B B B S S S S S S S S S S

carriage at place of
import it final delivery
point B B B B B B B B

(continued )

139
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140
Table 2.3 (Continued)

Import customs B B B B B B B B B B B B B B B B B B B B S S
clearance

Loading onto vehicle B B B B B B B B B B B B S S S S S S S S S S

at the place of import
to final delivery point B B B B

Carriage to named B B B B B B B B B B B B S S S S S S S S S S
place of destination it
final delivery point B B B B B B

Insurance for cargo in N/O N/O N/O N/O N/O N/O N/O N/O N/O N/O S S N/O N/O S S N/O N/O N/O N/O N/O N/O
transit

Import duties and B B B B B B B B B B B B B B B B B B B B S S

taxes

S represents SELLER, B represents BUYER ANY MODE OR MODES OF TRANSPORT SEA AND INLAND WATERWAY TRANSPORT
and S/B represents SELLER OR BUYER
EXW – ex works (. . . named place of delivery) FAS – free alongside ship (. . . named port of shipment)
determined by named place.
FCA – free carrier (. . . named place of delivery) FOB – free on board (. . . named port of shipment)
N/O represents NO OBLIGATION for the CPT – carriage paid to (. . . named place of destination) CFR – cost and freight (. . . named port of destination)
SELLER or the BUYER CIP – carriage and insurance paid to (. . . named place of CIF – cost, insurance and freight (. . . named port of
This guide is meant as a representation of destination) destination)
Incoterms®2020 Rules DPU – delivery at place unloaded (. . . named place of destination)
–all traders are advised to study the official DAP – delivery at place (. . . named place of destination)
Incoterms®2020Rules as issued by the DDP – delivery duty paid (. . . named place of destination)
ICCANY MODE OR MODES OF TRANSPORT

Key:
R – Risk
B – Buyer
N/O – Represents no obligation for the buyer or the seller
C – Cost
S – Seller
SOURCE Reproduced by kind permission of 512 Sheffield, www.5-1-2.com

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Transport management tools 141

Further information
UK: www.5-1-2.com (archived at https://perma.cc/Z5SK-XG6N)
United States: http://export.gov/faq/eg_main_023922.asp (archived at
https://perma.cc/XJ28-H2DT)

2.6 Load and pallet configuration

Introduction
The efficient loading of containers and trailers is crucial in today’s environ-
ment of rising transport costs. Unused space is inefficient and can cost a
company a great deal of money.
Efficient loading of vehicles and containers begins with the initial packag-
ing of the products. Companies need to ensure that the outer packaging of
their products is designed to fit perfectly onto the pallets used for both trans-
portation and storage. The ideal is to ensure no overhang whatsoever, with
a reduction in unused space.
Pallet loads need to be configured to ensure that product damage is min-
imized, cubic capacity is fully utilized, load stability is ensured and the
configuration is acceptable to the receiving location. Fortunately, there is
software available to assist not only with pallet loading but also container
and trailer loading. The software can also optimize packing within an indi-
vidual carton.
The pallet configuration software works on the basis of TiHi (tier × high),
which determines how many cartons should be placed on a layer or tier, in
which configuration and how many layers in total (see Figure 2.2).
In the figure on the left there are 12 cartons per layer and four layers,
giving a carton total of 48. Utilizing pallet configuration software, Able
Plastics was able to increase the number of cartons to 52 by changing the
layout of the cartons. This can lead to significant savings in transport costs.
Many retailers insist on products being delivered in a certain way so that
they conform to their storage mediums. For example, a retailer could ask for
the goods delivered to its distribution centre (DC) to conform to the list
shown in Table 2.4. The same can be achieved in terms of efficient container
and trailer loading.
Sophisticated software optimization can not only take into account the
cube of the products but also their weight, load-bearing strength and loca-
tion within the container. This ensures ease of offloading at the receiver, with

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142 The Logistics and Supply Chain Toolkit

all the cartons from the same product line being located together. The soft-
ware also ensures that lighter items are packed on top of the heavier ones.
Many websites provide software to enable operators to calculate the
most efficient way of loading containers and trailers, and also configuring
boxes on different pallet sizes and items within cartons.

Figure 2.2 omparison between manual planning and load configuration

C
software

SOURCE Reproduced from Able Plastics

Table 2.4 Retail DC requirement

Overall pallet height 1,500 mm

Pallet width 1,000 mm

Pallet length 1,200 mm

Cartons per layer 13

Layers per pallet 4

Total number of cartons 52

Total gross weight 780 kg

Weight per carton 15 kg

(continued )

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Transport management tools 143

Table 2.4 (Continued)

Type of pallet Chep/White/Red

Pallet exchange Yes/No

Special instructions Product label on all four corners

Ability to block stack Yes/No

If yes, how high 3

Further information
Load configuration websites:

www.onpallet.com (archived at https://perma.cc/Z8QT-3XQJ)

www.cubedesigner.net (archived at https://perma.cc/4RJR-4VVF)
www.cubemaster.net (archived at https://perma.cc/7VCN-MCTR)
www.exds.co.uk/cubiscan.htm (archived at https://perma.cc/C3LP-G9KL)
www.koona.com/qpm/ (archived at https://perma.cc/GX2X-26TF)
www.softtruck.com/ (archived at https://perma.cc/7KJL-BY86)
www.topseng.com/TOPS_Pallet_Configuration.html (archived at https://
perma.cc/27QS-YSFW)

2.7 ISO containers, weight volume

ratios and pallets
Introduction
ISO containers enable companies to ship product via a number of different
transport modes, including deep sea, short sea, inland waterways, road and
rail. There are several basic types of ISO containers, including flat racks,
open-top, dry freight, insulated, refrigerated and tank containers.
ISO 6346 requires a visual identification system for every container, in-
cluding a unique 11-character serial code used for container tracking that
defines the owner (three letters), container category (one letter), a unique
owner identifier (six numbers) and a check digit (one number), e.g. MSCU
123456 7. There are four possible category identifiers:

●● U for all freight containers;

●● J for detachable freight container-related equipment;
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144 The Logistics and Supply Chain Toolkit

●● Z for trailers and chassis;

●● R for refrigerated containers.

A further four characters denote the size and type of container:

●● character 1 denotes the length;

●● character 2 denotes the width and height;
●● characters 3 and 4 denote the type.

able 2.5 provides data regarding the dimensions and capacities of ISO con-
T
tainers in use worldwide. The dimensions will vary between different ship-
ping companies and therefore it is wise to check with them or your freight
forwarder before ordering a particular container for collection.
Other points to note are as follows:

●● The floor of a container should be able to carry a forklift truck with a

maximum axle load of 5,460 kg providing that the contact area per
wheel is at least 142 cm2.
●● The figures quoted are based on ISO 668 and ISO 1496-1, which provide
the standard dimensions for ISO containers. Some 10 ft and 30 ft
containers remain in use and in the United States containers can also be
operated at 48 ft and 53 ft lengths.
●● Container capacity tends to be expressed in 20-foot equivalent units
(TEU). An equivalent unit is a measure of containerized cargo capacity
equal to one standard 20-foot (length) × 8-foot (width) container.

Table 2.5 Standard ISO container dimensions

Length Width Height

Dimensions 6,058 12,192 13,716 2,438 2,591 2,896

mm mm mm mm mm mm

20’ 40’ 45’ 8’ 8’6” 9’6”HC

Minimum internal 5,867 11,998 13,532 2,330 2,350 2,655

dimensions mm mm mm mm mm mm

19’3” 39’43⁄8” 44’4¾” 7’7¾” 7’8½” 8’8½”

Minimum door – – – 2,286 2,261 2,566

opening dimensions mm mm mm

– – – 7’6” 7’5” 8’5”

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Transport management tools 145

Effective 1 July 2016, any container leaving from any port in the world must
be accompanied by a shipping document signed either electronically or in
hard copy by the shipper on the bill of lading listing the verified gross mass
of a container in order to be loaded onto a ship. The mandate from the
International Maritime Organization under the Safety of Life at Sea (SOLAS)
convention comes after mis-declared weights contributed to a number of
maritime casualties.

Weight/volume ratios
In terms of freight costs shipped by different modes of transport, there are
conventions that need to be understood. One of the main conventions is the
weight to volume ratio.
The following provides a guide to charging for air, sea and road freight.
Weight versus volume charges are based on weight but calculations switch
to volume over a certain threshold:

6 m3 / 1000 kg = Air freight

1 m3 / 1000 kg = Sea freight
3 m3 / 1000 kg = Road Trailer freight

Pallets
The use of pallets or skids to move and store product is familiar the world
over. The only problem is that there is very little uniformity in terms of the
sizes and types of pallets. Table 2.6 is a guide to the sizes of pallets used in
different countries. Other specialist pallet sizes for the storage and move-
ment of paper, drums, etc also exist.

Table 2.6 Pallet sizes (length × width)

Dimensions Geographic area of use

1219 × 1016 mm (48 × 40 inches) North America

1219 x 1219 mm (48 x 48 inches) North America

1000 × 1200 mm (39.37 × 47.24 inches) Europe, Asia

1165 × 1165 mm (44.88 × 44.88 inches) Australia

(continued )

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146 The Logistics and Supply Chain Toolkit

Table 2.6 (Continued)

Dimensions Geographic area of use

1067 × 1067 mm (42.00 × 42.00 inches) North America, Europe, Asia

1100 × 1100 mm (43.30 × 43.30 inches) Asia

800 × 1200 mm (31.50 × 47.24 inches) Europe

Note there are two-way and four-way entry pallets. Pallets are sometimes
known as block pallets or Stringers.
Pallets can be purchased or they can be rented. Both wooden and plastic
pallets are available for rental. Pallet suppliers and rental companies include
the following:

www.chep.com (archived at https://perma.cc/E545-FT9L)

www.ifco.com (archived at https://perma.cc/3QCU-X5XR)
www.igps.net (archived at https://perma.cc/5ZFK-L7UZ)
www.loscam.com (archived at https://perma.cc/VHF2-BFVM)
www.lpr.eu (archived at https://perma.cc/3GQ7-HTF9)
www.pecopallet.com (archived at https://perma.cc/B8WS-VU5V)
https://www.pallite.co.uk/ (archived at https://perma.cc/4EAV-5CJY)
www.goplasticpallets.com (archived at https://perma.cc/PW8E-36YP)

Further information
Further information on pallets can be found at: www.napd.co.uk (archived
at https://perma.cc/2VZL-AE2V), www.palletcentral.com (archived at
https://perma.cc/GCM5-A3EG) and www.palletlink.com (archived at
https://perma.cc/2YDE-UYJ9).
Further information on containers can be found at: http://www.iso.org/
iso/home/store/catalogue_tc/catalogue_tc_browse.htm?commid=51156 (ar-
chived at https://perma.cc/R73Q-RB6X) and https://www.hapag-lloyd.com/
content/dam/website/downloads/press_and_media/publications/15211_
Container_Specification_engl_Gesamt_web.pdf (archived at https://perma.
cc/2R24-U7M9) Shortcut – http://bit.ly/30tyYoj (archived at https://perma.
cc/E75G-E57Z)

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Transport management tools 147

2.8 Calculating road freight transport

charges and rates
Introduction
As a haulier or trucker, one of the most difficult aspects of running a busi-
ness, alongside keeping costs as low as possible and attracting clients, is
calculating charges for freight deliveries. To do this accurately you need to
understand the total costs within your business, both fixed and variable.
For each particular delivery or collection, you need to fully assess both
the time required to complete a job and the number of miles/km covered.
You must then apply to the time element the cost per day, including over-
heads, add any specific bonuses, extra hours, subsistence and sundries (tolls)
and miles/km at the appropriate cost.
This will give you a fair cost for the job for which you are quoting. To this
you must add a percentage for profit. In today’s market this is extremely
difficult because, on many occasions, you will find the costs as properly de-
termined from the cost categories below are greater than the revenue likely
to be derived from the rates being charged by your competitors.
Notwithstanding this, you must aim for a reasonable profit margin. In
the case of fuel you should always attempt to negotiate a clause into all rate
schedules and contracts allowing fuel price increases to be passed on to the
customer as they occur (see tool 2.3).
You must then decide whether you can accept a job at less than the rate
calculated and, even more crucially, whether you can accept it at less than
the true cost of undertaking it. In anything but the shortest run you cannot
afford to do the latter, except perhaps for casual or special jobs that fit into
the pattern of your overall work.

How to use
The following template (Table 2.8) allows you to calculate the costs in-
volved and the rates required. Example costs for a 44-tonne gross (6 × 2 +
tri-axle trailer) combination are shown in Table 2.7. Note that bonuses, ex-
cess hours, subsistence and similar are not included. These should be added
to costs as they are incurred, by job (Table 2.8).
NB The chargeable rate = time cost + mileage cost + job-specific cost +
profit.

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148 The Logistics and Supply Chain Toolkit

Table 2.7 Example costs for articulated truck and trailer (based on 2023 prices)

Costs for a 6 x 2 44 tonne GVW articulated Average figures Your figures

unit + tri-axle trailer

Vehicle price £121,822

Average depreciation period (years) 6

Average miles per annum 75,000

Average days worked per annum 240

Average miles per gallon 8.3

COSTS (Fixed)

Driver employment costs £55,059

Depreciation £20,304

Licences £560

Vehicle insurance £5,015

Interest on capital (6%) £3,655

Overhead per vehicle £33,195

Ownership of one trailer £4,358

Total time costs £122,145

Cost per working day £508.94

VEHICLE COSTS (variable) PPM

Fuel @ 139.95 ppl 76.65

Additive @ 49.5 ppl 3.06

Tyres (pence per mile) 2.60

Repairs and maintenance (pence per mile) 11.59

TRAILER COSTS (variable)

Tyres (pence per mile) 3.24

Repairs and maintenance (pence per mile) 4.77

Total cost per mile 101.91

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Transport management tools 149

Table 2.8 RHA template for haulage rate quotation

TEMPLATE FOR RATE QUOTATION

1 NAME OF CUSTOMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 DETAILS OF JOB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 Size of truck required

4 Estimated days/hours for job

5 Estimated trip miles/km

6 Details of market competitor (if known) & likely charge

7 Anticipated time cost for job

8 Anticipated distance cost of job

9 Job-specific costs
Subsistence
Bonus
Tolls
Ferry
Other

10 Total cost of job

11 Target profit margin

12 Target revenue

13 Target rate

14 Agreed rate

15 Return load time cost

16 Return load distance cost

17 Return load specific cost

18 Total return load costs

19 Total round trip cost (10 + 18)

20 Return load revenue

21 Minimum required outward revenue (19 − 20)

22 Actual revenue

(continued )

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150 The Logistics and Supply Chain Toolkit

Table 2.8 (Continued)

TEMPLATE FOR RATE QUOTATION

23 Actual time costs

24 Actual mileage cost

25 Actual specific costs

26 Actual profit/loss

NOTES:
(a) You will often find that a job will be completed with some hours in the day ‘left over’. These hours
will be costing you. You will need to decide whether you can use them for something else. If not, can
those hours be charged to the job without making you uncompetitive?
(b) Where a return load is involved, it is important that you cost the whole round trip, allowing for the
revenue you are likely to earn for the return and deciding how much to allow against the outward job
for which you are quoting.
(c) When you are allocating costs in lines 7, 8, 15, 16, don’t forget when using the appropriate figures
from Table 2.7, if possible, to substitute YOUR costs where they are different.
(d) Rate = time cost + mileage cost + job cost + profit.

Rates and charges – example

You are asked to give a quotation for loading a 26-pallet load weighing 24
tonnes at a shipper’s factory, delivering to a nominated address and return-
ing to base with a full load of empty pallets. You are using a 44-tonne gross
vehicle weight (gvw) articulated unit and tri-axle trailer.
You decide from your experience that this task will occupy two full work-
ing days, and you ascertain that the total distance to be covered will be 480
miles. Referring to the cost tables below, you derive the standard costs and
estimate other items as shown in Table 2.9. Substitute your own figures for
those shown.

Table 2.9 Standard costs

£ Your figures

2 standard days at £508.94 1,017.88

480 miles at 101.91 pence per mile 489.17

Driver’s subsistence 30

Driver’s bonus and any additional overtime 25

(continued )

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Table 2.9 (Continued)

£ Your figures

Bridge toll 10

Total cost 1,572.05

Target margin (say 5%) 78.60

Desired rate and quotation 1,650.65

If possible, and before submitting this quotation, try to determine what the
‘going rate’ or market rate for these movements is. Decide whether, or to
what extent, the gap between approximately £1,650 and the market rate
can be bridged. Negotiate as strongly as possible to ‘educate’ the customer
about realistic figures.

(© The Road Haulage Association and Apprise Consulting Ltd 2018.

Reproduced by kind permission of Brian Fish and the RHA, www.rha.uk.
net)

(These templates can be downloaded for free from http://howtologistics.

com)

2.9 Transport management system (TMS)

selection process
Introduction
Many companies continue to utilize whiteboards and spreadsheets and rely
on transport planner experience to manage the routing and allocation of
their vehicle fleets. This is fine, but there are systems on the market that can
optimize transport movements and introduce greater efficiency. This can
lead to an improvement in vehicle utilization and a reduction in total cost.
If you are operating your own vehicles there are two routes to imple-
menting a TMS – license the TMS from a software provider and manage the
software in-house or get the TMS provider to host the system for you. Own-
account operators and third-party logistics companies will have different

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152 The Logistics and Supply Chain Toolkit

requirements. The model from Capgemini (see ‘References and further read-
ing’) outlines the potential features of a TMS.

When to use
When you are looking to improve both the efficiency and effectiveness of
your transport fleet through introducing a TMS.

How to use
First, you have to fully understand your needs and the key business require-
ments, not only today but some time into the future so that you select the
solution that best matches your business objectives. You also need to calcu-
late the ROI on the purchase and ongoing support of the TMS (see tool 7.2).
The choice of a TMS roughly follows the same lines as that of any soft-
ware acquisition and implementation. To ensure that the system you choose
is the right one for your operation, here are some best-practice guidelines
courtesy of BASDA and Sage:

1 Ensure full commitment from the board of directors and the IT

department.
2 Form a project team:
–– Assemble a team of people capable of logical thinking who will decide
what your company needs from a TMS, what functionalities it must
have and those it will be nice to have. Members of the team should
include a member from finance, sales, operations/production (if
applicable), IT and of course the transport department.
–– Ensure the availability of all key staff throughout the project.
3 Define, record, review and improve current processes:
–– Ensure that your processes are working properly before introducing a
TMS. Do not make the error of automating poor processes.
–– Understand how the transport department communicates both
internally with other departments and externally with customers and
suppliers.
4 Create a list of key functions required of the new system:
–– Each project team member needs to compile a list of the key functions
required of a system and rank them by importance, for example 1, 2
or 3, or essential, greatly desired or nice to have.

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–– There are a number of templates that can be downloaded from the

internet to help you. A website for these can be found at the end of
this section.
5 Produce a current base cost for the operation.
6 Incorporate any future growth plans in your specification:
–– Although difficult to forecast, you need to take into account likely
future events when specifying a TMS.
7 List the benefits of a TMS to your company:
–– The right TMS can maximize the efficiency of your fleet, the
productivity of your labour and aid with network design. All of these
need to be quantified and presented alongside the ROI report.
8 Research and approach a select number of vendors and produce a list of
companies with experience of providing solutions in your market sector.
9 V
isit reference sites to look at operational effectiveness and discuss the
benefits the TMS has brought about since implementation:
–– This is very important. Try to visit a cross-section of companies and
speak to the operators, not just the managers who chose the software
in the first place.
10 Produce a ROI report:
–– This is vital if you want to convince the board to spend some money
(see tool 8.3).

This is not the type of purchase you make through an e-auction. As with
many large service offerings such as outsourcing, the likely success of the
project will ultimately come down to your relationship with the people at
the software vendor. As a previous manager of mine told me, ‘people buy
people’, therefore it is very important to meet the vendors, not only the sales
staff but also the operations and support staff.

The main aspects to look for in a partner include the following:

●● Look for providers that employ staff with significant operational experi-
ence as well as staff with the ability to produce a best-in-class TMS.
●● Not only will the operational staff have had input into the TMS but they
will also be able to understand your own requirements better. Choose a
vendor that listens effectively and understands your organization fully.
●● Check how long the company has been in business and what its credit-
worthiness is like – it will certainly check yours!

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154 The Logistics and Supply Chain Toolkit

●● Choose a vendor that emphasizes the benefits of the software, not just the
features.
●● Choose a provider that has already installed TMS with clients in your
industry.
●● Ensure that the vendor can supply not only the system but also the
installation, training, maintenance and help desk service.
●● Verify that your prospective TMS provider is reinvesting significant
capital into research and development, and future product enhancements.
●● Choose a vendor you are comfortable working with. Try to find a vendor
that is culturally similar to yourselves, is professional and well respected
in the industry.
●● Ask for a large list of customers and visit the customer sites of your
choice.
●● Choose a partner that has reasonable modification rates and is willing to
set up a realistic budget, based on your needs assessment, prior to
formalizing the relationship. Alternatively, look to set up an agreement
where your own IT staff are able to introduce certain modifications.
●● Make sure that the TMS provider can fully support you during the imple-
mentation phase.
●● Select a partner that has an adequately staffed help desk and that the help
desk is available during your company’s hours of operation. Time zones
can cause innumerable problems if they are not taken into account at the
outset.
●● Select a partner that has established partnerships with hardware providers.
●● A final decision is whether to purchase the software and hardware out-
right or to rent the software and operate it on a third-party server plat-
form (see tool 1.18 on selecting a WMS).

Further information
A comprehensive list of transport management software can be found at:
http://www.capterra.com/transportation-management-software/ (ar-
chived at https://perma.cc/35YT-8AUE)
Example TMS RFP templates: http://www.technologyevaluation.com/store/
rfp-template/Transportation-Management-System-TMS-RFI-RFP-
Template.html (archived at https://perma.cc/8MS2-WNXU)

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References and further reading

BASDA (2009) Logistics and Supply Chain Best Practice Handbook,
available at http://www.basda.org/ (archived at https://perma.cc/
N72H-HHU9)
https://www.capgemini.com/resources/transportation-management-report-2011
(archived at https://perma.cc/KXK8-EJ62)

2.10 Vendor assurance of transport

logistics service providers
Introduction
When outsourcing logistics and supply chain services, it is vital that compa-
nies understand the risk profile of the suppliers they are using if they are to
protect their brand and reputation as well as their service levels. A company
outsourcing its logistics may congratulate itself that it is no longer responsi-
ble for the headache of safety and compliance management; however, if
there is a serious accident or breach of health and safety legislation, public-
ity will normally focus more on any connection with a branded goods man-
ufacturer or retailer than on the typically less well-known logistics service
provider. Similarly, any interruption in service associated with the loss of a
facility, bankruptcy or loss of key personnel will have a dramatic and serious
impact on the outsourcing company, particularly when the service includes
warehousing or e-commerce activities.

When to use
Outsourcing companies need to include an audit of vendor risk profiles.
Ideally this is done during the tender process and repeated at appropriate
intervals throughout the life of the contract. The frequency and depth of
such audits will depend on the criticality of the service being outsourced.
Where more than one company is audited, or a company is audited more
than once over a period of time, it is best to use a standard list of questions
that reflect the risks that are relevant for that contract, with standardized
scoring for the responses. Scores may then be compared to see relative risk
and to assess progress over time. However, the main value of the audit tool
is to identify and track actions to reduce or mitigate risk.

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156 The Logistics and Supply Chain Toolkit

How to use
The questions shown in Table 2.10 should be asked and the answers re-
corded and analysed.

Table 2.10 Vendor assurance questionnaire

Area Typical questions

Health and safety Is the supplier aware of their general safety responsibilities
in line with current legislation?
What is the supplier’s approach to the safety of operations
and transport on site?
What processes does the supplier have in place?

Compliance (with Can the supplier demonstrate compliance with Operator

legal operating Licence legislation?
requirements)

Financial What is the credit rating of the supplier?

Have the supplier’s latest published accounts been
examined by a financial expert?

Performance Does the supplier issue a regular performance report to the

client and to other clients?

Contractual Is there a record of the agreement between the client and

the supplier?
Who has the controlling interest in the supplier and how
does this affect the contract (are there parent company
guarantees in place)?

Dependency Is the supplier performance dependent upon one or two key

individuals?
How dependent is the supplier upon their largest other
customer? Could loss of this contract threaten the supplier’s
viability?

Systems Does the supplier measure and report on their systems

performance, and what is the performance?
What steps has the supplier taken to protect against
systems failure? Is there a disaster recovery plan in place?
How widely used is the main software package?

Food safety or Is the supplier meeting the specific safety or quality

dangerous goods requirements related to the products carried for this contract?

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Who should audit?

Auditors should have an operational logistics background and have been
trained in national health and safety and professional competency standards
for road transport and logistics operations. They should also have received
training in quality auditing skills and techniques.

Where is the audit carried out?

Typically, an audit will be carried out at the premises where the contract is
operated from or at a similar site for such services. Health and safety, train-
ing and monitoring records should be available to the auditor on request.

Output and follow-up

At the end of the visit the supplier is given a score out of 10 for each area
(see Figure 2.3 for an example of a graphical representation of the results),
with any significant risks being highlighted. A report is written for each
audit, with details of all the areas audited and suggested actions to improve
performance. The outsourcing company should then put in place checks to
ensure that the actions are carried out by the next audit at the latest, prefer-
ably earlier, depending on the risk attached to non-compliance.

Figure 2.3
Example of radar chart summarizing how well the supplier meets the
criteria

Summary of output

Safety
10
8
Food safety 6 Compliance
4
2
0

Systems Performance

Dependency Contractual
NOTE Information on how to produce a radar chart can be found in tool 6.6.
Reference: Ruth Waring, Jo Godsmark Big Change Ltd www.bigchange.com

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2.11 Transportation of hazardous products

In terms of the movement of hazardous goods the carrier’s duties are far less
complicated than the consignor’s duties in that there is far less need for in-
terpretation. The following is expected of the carrier:

●● The carrier must decide, from the information provided by the consignor’s
dangerous goods note, as to whether it has a dangerous goods load under
the carriage of dangerous goods by road regulations.
●● The carrier’s obligations have thresholds at which the regulations become
relevant and these thresholds are based on the packing group of the goods
to be carried.
●● The carrier must appoint a DGSA (dangerous goods safety adviser).
●● The carrier must ensure the vehicle is roadworthy and not overloaded.
●● Drivers must hold vocational training certificates and be trained in
emergency action procedures.
●● Drivers must carry a photographic identification card.
●● Drivers must not carry matches or lighters, or smoke in close vicinity of
the load.

Additional requirements include the completion of a security plan that all

participants are made aware of. Note that different regulations apply to the
different modes of transport utilized. Note also that there are certain haz-
ardous items that cannot be transported together. Each mode of transport
will have a dangerous goods segregation chart detailing what can and can-
not be transported together.
The carriage of dangerous goods by sea is governed by the International
Maritime Dangerous Goods Regulations (IMDG) (https://www.imo.org/en/
OurWork/Safety/Pages/DangerousGoods-default.aspx (archived at https://
perma.cc/HUR7-EE9C)).
Transporting goods around the globe, by air, is governed by two sets of
Regulations: International Civil Aviation Organization (ICAO) and
International Air Transport Association (IATA) Dangerous Goods Regulations
(http://www.iata.org/publications/dgr/Pages/index.aspx (archived at https://
perma.cc/LKG2-PBSK)).
In the UK, the Carriage of Dangerous Goods and Use of Transportable
Pressure Equipment Regulations (CDG) and the European agreement ‘Accord
européen relatif au transport international des marchandises dangereuses par

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route’ (ADR) together regulate the carriage of dangerous goods by road

(http://www.hse.gov.uk/cdg/index.htm (archived at https://perma.cc/CG2G-
WD5F)).
Other countries will have their own specific regulations. For example, in
the United States it is covered by the Federal Motor Carrier Safety
Administration (FMCSA) (http://www.fmcsa.dot.gov/safety-security/hazmat/
complyhmregs.htm (archived at https://perma.cc/3RA7-BJF3)).
Separate pictograms are to be used for labelling hazardous goods in
transport. As these are colour coded, we have not included them here but
they can be accessed at http://www.unece.org/trans/danger/danger.html
(archived at https://perma.cc/C59G-9V9B) where there is also further

information.

2.12 Calculating customs duties

Introduction
To be able to calculate the customs duties to be paid when trading goods,
three factors have to be taken into consideration:

1 the value of the goods;

2 the customs tariff to be applied;
3 the origin of the goods.

Customs valuation is the determination of the economic value of goods de-

clared for importation. Having a standard set of rules for establishing these
goods’ value is of great importance for several reasons. Customs duties and
value added tax (VAT) are calculated as a percentage of the goods’ value.
Economic operators and customs authorities need to have clear rules on
how to perform this task.
Having a commonly agreed and accurate measuring standard is vital for
the purposes of:

●● economic and commercial policy analysis;

●● application of commercial policy measures;
●● proper collection of import duties and taxes; and
●● import and export statistics.

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The value of imported goods is also one of the three ‘elements of taxation’
that provides the basis for assessment of the customs debt, which is the tech-
nical term for the amount of duty that has to be paid, the other ones being
the origin of the goods and the customs tariff.
Once the value of the goods is determined, customs duties can be
calculated.

When to use
When importing or exporting goods.

How to use
The importer or exporter needs to understand all the criteria involved in
calculating customs duty and taxes. The three main elements are as follows.

1. The value of the goods is normally calculated

from the commercial invoice
The price actually paid or payable shall be the total payment made or to be
made by the buyer to the seller or by the buyer to a third party for the ben-
efit of the seller for the imported goods and include all payments made or to
be made as a condition of sale of the imported goods.
These payments include such things as loading, handling, transportation
(not within customs territory of the European Union), packing, insurance,
brokerage, royalties and licences plus many others if relevant.

2. Customs tariff
All imports or exports must be declared to customs authorities using a com-
modity code.
Each commodity code is made up of a number of different elements such
as the type of product, the material used to make it, and even the production
method. You must be able to accurately describe your item to search the
tool. Utilizing the Trade Tariff tool (https://www.trade-tariff.service.gov.uk/
(archived at https://perma.cc/FT69-YKWZ)) sections, the following steps
will help you find the right code:

●● Enter the search term you want to use – remember an item may not be
listed by name; it may be shown under what it’s used for or made from.

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●● The tool will suggest a section/number of sections, divided into chapters.

●● The headings in each chapter describe a particular product; only select a
sub-heading if your item is accurately described.
●● If your item is not accurately described, check further down the list – if
none of the sub-headings match your item use the ‘other’ heading.
●● When you find the correct item type you will be shown the import and
export codes, and any important information connected to the code –
such as whether you need a licence to import or export items under this
code.

NB You’re legally responsible for the correct tariff classification of your

goods.
Use the following tool to calculate the duty and tax payable in the EU:
https://ec.europa.eu/taxation_customs/dds2/taric/taric_consultation.jsp?
Lang=en&Expand=true&SimDate=20190724 (archived at https://perma.
cc/UB8A-JEQY)

3. Origin of the goods

‘Rules of origin’ are the criteria used to define where a product was made.
They are an essential part of trade rules because a number of policies dis-
criminate between exporting countries: quotas, preferential tariffs, anti-
dumping actions, countervailing duty (charged to counter export subsidies),
and more. Rules of origin are also used to compile trade statistics, and for
‘made in . . .’ labels that are attached to products. This is complicated by
globalization and the way a product can be processed in several countries
before it is ready for the market.
Goods, the production of which involves more than one country or terri-
tory, shall be deemed to originate in the country or territory where they
underwent their last, substantial, economically justified processing or work-
ing, in an undertaking equipped for that purpose, resulting in the manufac-
ture of a new product or representing an important stage of manufacture.

Useful websites
US Department of Transportation: https://www.transportation.gov/ (archived
at https://perma.cc/MM5T-32G5)
World Trade Organization: https://www.wto.org/english/Tratop_e/cusval_e/
cusval_info_e.htm (archived at https://perma.cc/H33Q-G7B4)

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162 The Logistics and Supply Chain Toolkit

EU Commission: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=152
1191466211&uri=CELEX:02013R0952-20161224 (archived at https://
perma.cc/ZCR3-KDY5)

2.13 How to become an Authorized

Economic Operator (AEO)
Introduction
Authorized Economic Operator status is an internationally recognized qual-
ity mark that shows the holder’s role in international supply chains is secure
and that they operate customs control procedures that meet AEO standards
and criteria according to the UK government.

There are two types of status:

AEOC – Authorized Economic Operator Customs Simplification

AEOS – Authorized Economic Operator Security and Safety

Companies can apply for either or both.

Authorized Economic Operator Customs Simplification

If you hold this status and are based in Great Britain (England, Scotland and
Wales), you could benefit from:

●● a faster application process for customs simplifications and authorizations;

●● a lower risk score which may reduce the number of checks customs carry
out on your documents and goods;
●● a guarantee waiver up to the level of your deferment account.

If you hold this status and are a Northern Ireland trader, you could benefit
from:

●● a faster application process for customs simplifications and authorizations;

●● your consignments receiving priority treatment for customs controls;
●● a lower risk score which may reduce the number of checks customs carry
out on your documents and goods;
●● a reduction or waiver of comprehensive guarantees;
●● a 70 per cent reduction in a business’s deferment account guarantee;

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●● a notification waiver when making entries into a declarant’s records;

●● moving goods in temporary storage between different member states.

Authorized Economic Operator Security and Safety

If you hold this status, you could benefit from:

●● a lower risk score which may reduce the number of checks customs carry
out on your documents and goods;
●● your consignments receiving priority treatment for customs controls;
●● reduced declaration requirements for entry summary declarations and
exit summary declarations;
●● reciprocal arrangements and mutual recognition.

If you have Authorized Economic Operator Security and Safety status, you
can benefit from Mutual Recognition Arrangements (MRAs). The UK nego-
tiates MRAs with other customs authorities.

The UK has negotiated arrangements with:

the European Union

Japan
the People’s Republic of China
the United States of America
Switzerland
New Zealand
Republic of Singapore

The AEO programme is open to all operators, including small and medium-
sized enterprises and regardless of their role in the international supply
chain. There is no legal obligation for operators to become an AEO; it is a
matter of the operator’s own choice based on their specific situation. Nor is
there any legal obligation for AEOs to require their business partners to
obtain the AEO status.
AEOs can be manufacturers, exporters, importers, freight forwarders,
customs brokers, warehouse keepers, importers, port operators, airline load-
ers, secure freight parking operatives or carriers.
The AEO concept is based on the Customs-to-Business partnership intro-
duced by the World Customs Organization (WCO). Traders who voluntar-
ily meet a wide range of criteria work in close cooperation with customs
authorities to assure the common objective of supply chain security.

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When to use
When companies would like to benefit from the various simplifications spe-
cifically provided for under the customs legislation.

How to apply
A responsible person, for example a Director, within the business should
apply for the status. You’ll need to give up-to-date evidence of the person’s
role, responsibilities and competences.
To meet the criteria, you must have evidence of your business procedure
and processes.
Approval for Authorized Economic Operator status involves audit visits
from HMRC staff.
For a close cooperation between customs and the applicant/AEO it is
recommended to get in contact with the Issuing Customs Authority (ICA) at
an early stage and to keep that contact even beyond the application process.
This can help to avoid misunderstandings on both sides and gives support if
any questions arise.
The company should have in place appropriate organizational measures
in the fields related to the AEO criteria, aiming at ensuring that risks linked
to their customs activities may be identified and avoided and/or minimized.
You’ll need to show evidence that you have:

●● procedures that identify and report any customs irregularities or errors;

●● taken appropriate action to deal with any irregularities;
●● procedures that report any customs business changes;
●● clear procedures for handling controlled goods;
●● customs record keeping.

When applying for the status you’ll need to provide evidence that you have:

●● a well-maintained logistics system with a full audit trail;

●● methods to allow HMRC to access your customs records;
●● a logical administrative system;
●● documented procedures to manage the flow of goods;
●● internal controls that detect illegal or irregular transactions;
●● procedures to handle licences and authorizations;
●● archive and retrieval procedures in place;

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●● trained staff to tell HMRC of any system errors;

●● procedures for checking customs declarations submitted by third parties
on your behalf;
●● information technology security measures in place.

If you make declarations on behalf of others, you’ll need to provide evidence

that you have:

●● understood your contractual responsibilities and obtained written

instructions from business partners;
●● understood your legal responsibilities if acting in the capacity of an
indirect or direct representative;
●● processes for choosing business partners;
●● documented procedures to validate the valuation, classification and
origin of goods;
●● procedures to manage or review relationships with clients who are non-
compliant.

A comprehensive list of requirements can be found at the website shown

below.
The status can take up to 120 days to approve.
You can check if a business holds Authorized Economic Operator status
at https://www.gov.uk/government/publications/check-if-a-business-holds-
authorised-economic-operator-status
There’s also information on the World Customs Organization website.
https://www.coomd.org/en/topics/facilitation/instrument-and-tools/
frameworks-of-standards/safe_package.aspx

Useful websites
https://www.gov.uk/guidance/authorised-economic-operator-certification
(archived at https://perma.cc/7P87-2ZSX)

2.14 Last mile and micro delivery options

Introduction
‘Last Mile’ is typically a delivery from the last staging post, such as a local
delivery depot, distribution or sorting centre to the customer or to a customer
collection point.

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As technology advances and even more customers’ preferences shift in

this direction, the last leg of delivery is one of the most challenging and im-
portant parts of supply chain management.
The goal of a last mile carrier is to deliver the item as quickly and cost-
effectively as possible.
According to the latest research from Style Intelligence, the market for
autonomous delivery vehicles and the wider use of autonomous vehicles in
last mile situations is still emerging.
Business models continue to evolve as vendors seek commercial partners
and different routes to scale. Trials are frequently approved, but rarely lead
to scaled-up solutions with significant commercial objectives and service
improvements.
There are, also, issues with the regulatory environment, congestion in cit-
ies, infrastructure problems (condition of pavements/sidewalks and delivery
points (space for drone landing) among others).
Parcels make up the bulk of deliveries, but online grocery orders have
increased recently together with fast-food deliveries.
According to ShipBob, last mile delivery is one of the most expensive as-
pects of retail logistics. They believe that 28 per cent of an online brand’s
bottom line comes from last mile delivery costs and on average, businesses
spend approximately $10.10 per order on last mile delivery. Given that most
retailers offer free delivery and returns this may prove to be unsustainable in
the future.

Last mile deliveries include the following:

●● Couriers – vans, cars, motorbikes, bicycles, pedestrian.

●● Pavement robots such as Starship.
●● Lockers – static and dynamic (in terms of space); ambient and temperature
controlled.
●● Autonomous delivery vehicles.
●● Drones.
●● Legged robots.

When to use
If you are considering the various options for last mile delivery of your
products.

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How to use
Table 2.11 shows the advantages and disadvantages of each type of last mile
delivery. One thing to point out here is that many companies will use a
combination of delivery methods, depending on size of products to be deliv-
ered, delivery lead time, location of customers.
Where there are stars (*) in the table, the more stars, the better the
option.

Table 2.11 Comparison of last mile and micro mile delivery methods

Courier Lockers Pavement Drones Legged Autonomous

van robots robots road robots

Speed Local N/A Circa 4 Up to Circa Local speed

speed mph 30 mph 2–4 limit e.g. 20
limit mph mph
e.g. 20
mph

Payload Up to <30kgs <30kgs <5kgs <20 kgs Up to 1500

1500 kgs
kgs

Safety ** * * * *****

No. of 100+ Collection 1–5 1 1 Depends on

deliveries only capacity

Customer Yes No No No Possibly No

handover
capability

Door to door Yes No Partially Partially Yes Partially

POD Yes No No No Possibly No

Additional No Yes Yes Yes Possibly Yes

customer
actions
required

Customer Average Good Average Average Average Average

convenience

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168 The Logistics and Supply Chain Toolkit

Conclusion
As can be seen from Table 2.11, there are advantages and disadvantages to
each of the systems.
However, many of the technologies shown above are still in their early
stages and therefore it is difficult to compare on a like-for-like basis.
There remains significant competition from courier companies operating
traditional deliveries direct to homes or via lockers located at high-fre-
quency, convenient, strategic locations.
The novelty of pavement robots, drones, legged robots and ARRs has
seen growth in these areas; however, it is difficult to see how these technolo-
gies will evolve sufficiently to take the place of courier deliveries in the near
future.

References
Autonomous delivery vehicles 2022 published by Stiq Ltd www.style
intelligence.com (archived at https://perma.cc/6PWC-PKZC)
ShipBob – https://www.shipbob.com/uk/blog/how-last-mile-delivery-works/
(archived at https://perma.cc/E2SJ-TKSX)

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169

Inventory 03
management
tools
3.1 Inventory management audit
Introduction
This audit aims to measure the extent to which the inventory is managed
against known best practices. It is not an exhaustive list of questions and
should be tailored to individual companies, sectors or environments.
Nevertheless it will give you a good start in understanding where improve-
ment could be made and will enable you to compare operations at different
sites.

When to use
This is a good tool to use when you want to improve inventory management
in your business, start a supply chain implementation project or when tak-
ing up a new job to understand how well inventory is managed in your new
company.

How to use
Table 3.1 shows the first five sections of the audit. The full audit can be
purchased from http://howtologistics.com; discount code: lsct2024.
The full audit contains over 50 questions arranged into nine sections
(inventory analysis, inventory reporting, inventory management parame-
ters, inventory accuracy, data management, demand management, supply
management, operating efficiency and process management).

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Table 3.1 Inventory management audit

Inventory Management Audit
Carried out by: Location:
Date:
Item No Yes N/A* Comments
Inventory analysis
Are inventory families identified?
Is ABC/Pareto analysis using average usage
value carried out by family?
Is ABC/Pareto analysis using average usage
value carried out by item?
Is ABC/Pareto analysis using average usage rate
carried out by family (to identify fast/medium/
slow movers)?
Is ABC/Pareto analysis using average usage rate
carried out by item (to identify fast/medium/slow
movers)?
Is the number of ABC/Pareto classes appropriate
for the inventory? (Maybe 4, 5 or 6 classes
would be more suitable.)
Are stock-outs systematically recorded and
investigated?
Is demand variation measured using statistical
methods?
Is stock cover calculated and reviewed regularly
by item and family?
Is stock turn calculated and reviewed regularly
by item and family?
Is a non-mover analysis carried out?
Is a back order analysis carried out?
Are ‘special’ items (one-off purchases, not to be
reordered) clearly identified?
Are non-standard stock (e.g., seasonal items,
check before reordering) items clearly identified?
Inventory reporting
Is the inventory value recalculated daily/weekly/
monthly? (Choose appropriate time period.)

(continued )

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Inventory management tools 171

Table 3.1 (Continued)

Inventory Management Audit
Carried out by: Location:
Date:
Item No Yes N/A* Comments
Is a variety of customer service measures
employed?
Is the level of immediate availability of all items
measured daily/weekly/monthly?
Is the fill rate measured daily/weekly/monthly?
Is the percentage of orders delivered on time
and in full measured?
Is an inventory performance report issued daily/
weekly/monthly?
Is the number of back orders days/weeks
overdue monitored closely to ensure fulfilment
as soon as possible (and to prevent ‘unreal’ back
orders when customers forget to cancel)?
Inventory management parameters
Is an inventory management strategy
(replenishment method) identified for each item/
family/class?
Is somebody responsible for setting inventory
management parameters for each replenishment
method (reorder points, safety stock levels,
reorder quantities, etc)?
Are inventory parameters reviewed at regular
intervals?
Are replenishment lead times checked and
adjusted at appropriate regular intervals?
Is stock cover reviewed at appropriate intervals?
Does a disposal policy group exist, including
representatives of users, finance, warehousing,
procurement and inventory management
functions?
Does a disposal policy exist?
Is the disposal policy clearly described and
workable?

(continued )

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Table 3.1 (Continued)

Inventory Management Audit

Carried out by: Location:
Date:
Item No Yes N/A* Comments
Are candidate items for disposal reviewed
regularly?
Is Kanban used for fast-moving, medium- or
high-value items?
Is VMI/CMI (vendor-managed inventory/co-
managed inventory) used for high-usage/
low-value items?
Are safety stock levels reviewed at appropriate
regular intervals?
Are stock cover targets set for each family/item?
Inventory accuracy
Is quantity accuracy measured regularly?
Is cycle or perpetual counting used?
Is location accuracy measured regularly?
Is condition/quality measured regularly?
Is labelling accuracy measured regularly?
Is a full stock count carried out at least once
per year?
Are random audits carried out in between formal
counting?
Data management
Is the ability to change inventory management
parameters restricted to a specific individual/
group (i.e. restricted access)?
Is there a procedure for creating new items/
codes (to prevent duplicate identities for the
same item)?
Is the new item procedure followed?
Is the coding system for new items logical and
intuitive?
When adding a new item to the system, is it
easy to check if similar items exist already?
* N/A = not applicable

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3.2 ABC Pareto analysis for inventory

management
Introduction
ABC analysis or Pareto analysis has been described as a general tool for
distinguishing ‘the important few from the insignificant many’. This is espe-
cially useful in inventory management. Because of the high cost of holding
inventory, it is critical to know which items are capable of generating the
greatest holding cost so that we can focus our effort on managing these
most important items carefully. ABC analysis for inventory management
and procurement depends on item ‘usage value’, where usage value is the
product of usage over a period of time and some indicative item value. By
ranking usage value from highest to lowest, the few most important items
can be identified. This calculation is essential because there may be a small
number of very expensive items that must still be managed carefully, or
there could be very high usage of low-value items, e.g. fasteners, to which
it may not be worth dedicating a lot of our precious management effort (see
VMI, tool 3.17).
We tend to calculate ‘usage value’ over a year but it could be calculated
over other time periods, e.g. a week or a month. Usage value has several
other applications in inventory management, including setting the limits of
the ABC classes, in order to find an appropriate balance between adminis-
trative effort (to raise orders and plan replenishment) and replenishment
quantity (which influences the average level of cycle stock and hence the
average level of inventory and inventory holding costs).

When to use
Item values and quantities consumed change over time and so it is useful to
repeat the ABC analysis periodically to ensure that the class allocations are
still appropriate, for example every 6 or 12 months.
The Pareto class of an item is used in inventory management to allocate
the most appropriate inventory replenishment method, e.g. Kanban, MRP
or classical inventory management methods for dependent items, or to un-
derstand the strategic importance of the item when applying the Kraljic ma-
trix in procurement (see tool 4.6).

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How to use
Most inventory management systems have an ABC analysis function. If this
is not the case, the data can be downloaded into Excel and manipulated
using the data ‘sort’ function. There are five main steps:

1 Calculate the annual usage value for each item under consideration
(formula 1), using some indicative item value (e.g. most recent price, or
average item value):

Annual usage value = annual quantity sold or used × (1)

indicative item value

2 Rank the annual usage values from highest to lowest.

3 Starting with the highest usage value, calculate the cumulative usage
value.
4 Express the cumulative usage value as a percentage of the total annual
usage value.
5 Identify the ABC class of each item.

Note that according to the data, it may be more appropriate to change the
class limits, or even have more than three classes. Typical limits for a three-
class system are:

A Up to and including 80% of total annual usage value (x ≤ 80.0)

B Greater than 80% and up to and including 95% (80.0 < x ≤ 95.0)
C Greater than 95% of total annual usage value (95.0 < x ≤ 100.0)

Where there are a very large number of B or C items, some companies have
identified four or five classes, by splitting B items into B1 and B2, C items
into C1 and C2, or introducing a D class to have more precise control.

Example
This example uses just 10 items to demonstrate the method. Clearly, there
will be thousands of items in practice! Table 3.2 shows the starting data of
average annual usage and indicative unit cost.
The items are then ranked in order of annual usage value (AUV), starting
with the highest AUV. Cumulative AUV is then found and this is expressed
as a percentage of the total (see Table 3.3). The class of each item can then
be identified, using the limits stated earlier.
(This example can be downloaded for free from http://howtologistics.com)

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Table 3.2 Calculating the annual usage value

Average annual Annual usage

Item no. usage Unit cost (£) value (£)

1 10 295.00 2,950.00

2 5,270 0.40 2,108.00

3 22 18.00 396.00

4 185 320.00 59,200.00

5 43 118.00 5,074.00

6 780 12.80 9,984.00

7 550 0.50 275.00

8 365 0.50 182.50

9 150 13.25 1,987.50

10 225 10.35 2,328.75

Total 84,485.75

Further information
Relph, G J and Milner, C Z (2019) The Inventory Toolkit, Kogan Page, London
Wild, T (2005) Best Practice in Inventory Management, 2nd edn, Butterworth-
Heinemann, Oxford

3.3 Ballou’s inventory-throughput curve

Introduction
Ronald Ballou is one of the early writers who integrated inventory, ware-
housing, transport and location into a coherent and modern concept of cus-
tomer service-oriented logistics management. His research has contributed
greatly to the development of the field over the years. One of the many tools
that he developed from empirical research is a method for using current and
historical data to understand the relationship between the level of business

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176
Table 3.3 Calculating the cumulative percentage annual usage value

Annual usage Unit Annual usage Cumulative annual Cumulative percentage of ABC
Item number quantity cost (£) value (AUV) in £ usage value (£) annual usage value (%) class

4 185 320 59,200.00 59,200.00 70.07 A ≤80.0%

6 780 12.8 9,984.00 69,184.00 81.89 B

5 43 118 5,074.00 74,258.00 87.89 B

1 10 295 2,950.00 77,208.00 91.39 B

10 225 10.35 2,328.75 79,536.75 91.14 B

2 5,270 0.4 2,108.00 81,644.75 96.64 C >95.0%

9 150 13.25 1,987.50 83,632.25 98.99 C

3 22 18 396.00 84,028.25 99.46 C

7 550 0.5 275.00 84,303.25 99.78 C

8 365 0.5 182.50 84,485.75 100.00 C

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Inventory management tools 177

carried out by a warehouse and the overall level of inventory required to

support that level of business.
Ballou makes the point that warehouses are often planned to have a
certain number of stock turns per year. Although this may be the target, it
is worth analysing data on existing activities to find out the actual rela-
tionship.

When to use
Periodically, owing to changes in law such as the drivers’ hours regulations
or changes in markets and demand, it is necessary to review the structure
of the distribution network. This review includes the location and size of
warehouses and distribution centres relative to the customers and markets
they are serving. Alternatively, a new warehouse may be planned to serve a
new market. Ballou’s inventory-throughput curve gives a first approxima-
tion of the total amount of inventory required to support a certain level of
business.

How to use
The aim is to plot a graph of the value of the average inventory level against
the value of annual throughput or sales. Most warehouses produce a weekly
or monthly report of value of inventory and value of shipments made. The
average value of inventory can be found by averaging the month-end inven-
tory values from a number of reports. The annual value of shipments can be
found by summing shipments across the last 12 months or extrapolating
values from the last three or six months.
If this data is plotted for each warehouse in the network, a graph can be
built up (see Figure 3.1). The best fit curve is found. If it is proposed to reor-
ganize the network or to open a warehouse in a new market with an esti-
mated volume of business, the total amount of inventory required for a
given level of business can be found (Figure 3.1).

Example
A distribution network expanded from four to six warehouses between
20xx and 20xy. Throughput and inventory data are shown in Table 3.4. All
of these points can be used and are plotted on a graph (see Figure 3.1). The
best curve has been fitted. This can be done in Excel by selecting scatter plot,

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178 The Logistics and Supply Chain Toolkit

Figure 3.1 Inventory-throughput curve

4.5

3.5
Inventory (£m)

2.5

1.5

0.5

0
0 10 20 30 40 50
Throughput (£m)

Inventory Log (Inventory)

Table 3.4 Network data

Year Warehouse Throughput (£m) Inventory (£m)

20xx 1 32.6 3.9

2 8.3 1.39

3 12.6 1.2

4 19.5 3.3

20xy 1 37.4 4.3

2 9.5 1.1

3 13.4 2.1

4 19.8 2.5

5 5.1 0.73

6 47.5 4.1

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Inventory management tools 179

and then adding the best fit logarithmic curve. A new warehouse is being
planned, which is expected to have a throughput of around £30 million. It
can be seen from the graph that following previous practice it can be ex-
pected that inventory with a value of approximately £3.6 million will be
required to support this level of business.
Note that the method assumes that systems and working practices in the
new warehouse will be the same as in the other warehouses, but this may
not necessarily be the case. (This example can be downloaded for free from
http://howtologistics.com)

Further information
See Ronald Ballou’s Business Logistics Management or his 1981 paper that
described the origins of this curve.

References
Ballou, R H (1981) Estimating and auditing aggregate inventory levels at
multiple stocking points, Journal of Operations Management, 1 (3),
February, pp 143–53
Ballou, R H (2000) Evaluating inventory management performance using a
turnover curve, International Journal of Physical Distribution & Logistics
Management, 30 (1), pp 72–85
Ballou, R H (2004) Business Logistics Management: Planning, organizing,
and controlling the supply chain, 5th edn, Prentice Hall, Upper Saddle
River, NJ

3.4 Consignment stock

Introduction
The term comes from the old phrase ‘on consignment’, where something is
supplied to a customer before payment on the basis that the customer will
only pay for what has been sold on or used and can return any unsold stock.
Consignment stock therefore refers to inventory that has been delivered
to your warehouse, but for which you have not yet paid or even issued a

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180 The Logistics and Supply Chain Toolkit

purchase order. When that material is taken out of stock for use, a purchase
order is sent to the supplier and payment is made. Ownership of the, as yet,
unused material still in the warehouse rests with the supplier and is trans-
ferred to the customer at the moment of withdrawal for use. The consignment
agreement should specify:

●● responsibility for any damage before use;

●● the grounds under which either the customer can return the product, or
the supplier can reclaim the product;
●● who pays for the return transport; and
●● whose insurance covers its presence in the warehouse.

It is common for a period of time to be specified, after which the goods are
returned to the supplier.
There is a particular application of consignment stock in the retail sector
where the supplier may use a consignment agreement to propose new prod-
ucts to a retailer, or high-end products the retailer would not normally stock.
By this means the associated financial risk is shared between both parties
and sales are equally beneficial to both.
Consignment stock can be part of an ongoing VMI/CMI arrangement
where ownership of the stock rests with the supplier, and the customer pays
only for what has been used (see tool 3.17). The advantages and disadvan-
tages for each party are summarized in Table 3.5.

Table 3.5 Advantages and disadvantages of consignment stock for each party

Advantages Disadvantages

Supplier Customer will choose your This material is no longer

material over a competitor’s available to send to another
material because it is available. customer who may have an
Can plan your deliveries such unplanned urgent requirement.
that you anticipate future There may be a long wait before
requirements and may be able to payment.
reduce the number of deliveries. Risk of damage in the
Shared financial risk for products customer’s warehouse.
that might not have been Increased inventory in the
ordered otherwise. supply chain.

(continued )

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Inventory management tools 181

Table 3.5 (Continued)

Advantages Disadvantages

Customer Can obtain favourable financial Stockholding cost of items

terms in a buyer’s market. supplied that do not have
Payment terms can be immediate use.
advantageous for the customer Increased space requirement for
since payment is due at some stock and associated
time after use, rather than some stockholding cost.
period after delivery. Increased inventory in the
Material is available if there is a supply chain.
sudden increase in demand.
Ability to offer/use products that
might not have been stocked
otherwise.

When to use
Although consignment stock looks financially attractive to the customer, it
must be remembered that the customer is holding this stock until the time of
use. If this time is not imminent, the stock is simply adding to the inventory
that must be managed (allocated space, counted, looked after, etc). In gen-
eral, supply chain thinking states that we do not want extra inventory at any
point in the chain, and that any stock on consignment, rather than delivered
against a production or supply schedule, is causing a delay in the flow
through the chain.
Consignment stock as part of a VMI agreement is more acceptable since
the VMI agreement will have taken into account the stock profile of the dif-
ferent items and set up maximum and minimum stock levels using historical
data and a plan of future requirements.
In summary, consignment stock without VMI should only be used for
fast-moving items likely to be used in the very short term. In this instance,
the flow is hardly limited, the financial effect is primarily a delay to pay-
ment, and the customer has received what they were going to order anyway.

How to use
Draw up an agreement taking into account the range of items concerned,
methods/timing of supply, payment terms, maximum stock levels, returns at

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182 The Logistics and Supply Chain Toolkit

the request of the supplier or customer, return transport cost, insurance and
damage. Specify the liabilities and responsibilities of each party.
Check the VAT rules. The application of VAT to consignment stocks
depends as much on ‘control’ (who has the right to withdraw stock) as own-
ership and it is therefore worth checking liabilities with the accounting func-
tion before setting up any agreement, particularly if material is being
supplied across borders.

Example
A manufacturer is developing a new product and is refining the specification
through trialling various thicknesses of polymer sheeting. Market research
has been very positive and the supplier has been engaged to supply material
as required on consignment, essentially sharing some of the financial risk of
the development process, on condition that its product(s) will be specified
for a minimum of the first 100,000 units of production, or one year, which-
ever event occurs first.

Further information
Wild, T (2005) Best Practice in Inventory Management, 2nd edn, Butterworth-
Heinemann, Oxford

3.5 Cycle counting or perpetual inventory

counting
Introduction
In order to have usable inventory data, it is vital to maintain the integrity of
the stock records. This requires user discipline but also a good counting
discipline. The primary purpose of stock checking is to count the items and
check the quantities found against the quantities recorded in the inventory
management system. Sometimes it is useful to take advantage of the stock-
checking process to check the location of each item, that it is labelled cor-
rectly and is still in usable condition. The traditional approach to stock
checking is to set up an annual stock count, usually at the beginning of
January, or near the end of the company’s tax year. This requires hiring

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Inventory management tools 183

temporary personnel or using existing personnel, which may halt activities

or prevent sales while the count takes place.
Another approach is to count a proportion of items regularly throughout
the year using normal stores or warehouse personnel. This is known as cycle
counting or, sometimes, perpetual inventory counting. There are two ap-
proaches to cycle counting: 1) count each item at least once during each re-
plenishment cycle (where the replenishment cycle time is the average time
between replenishments); and 2) use ABC analysis to set up a counting plan
(sometimes called a periodic counting plan).

When to use
Cycle counting or perpetual inventory counting is used as an efficient alter-
native to the annual stock count by spreading the counting effort through
the year, counting higher-value items and fast movers more often than lower-
value or slower-moving items.

How to use
1. Counting each item at least once during the replenishment
cycle
The most efficient way to do this is to count the number of items just as the
replenishment arrives, i.e. count the amount remaining just before the new
stock is added. At this point, one might expect there to be the least stock to
count. Since Pareto class A items should be replenished more frequently
than B items, this will result in counting A items more frequently. However,
some weeks may see more deliveries than others, so the counting workload
could see peaks and troughs.

2. Setting up a periodic counting plan

An alternative to counting just before replenishment is to count a certain
number of items every week and thus spread the counting workload evenly
across the year (although there may be more stock to count at times since
the count will not necessarily take place when the stock level is lowest). For
example, if the business works 52 weeks of the year and there are 1,560 dif-
ferent items in inventory, we would plan to count 1,560/52 = 30 different
items each week. Clearly we could count more than 1/52 of all items each

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184 The Logistics and Supply Chain Toolkit

week if we wanted to count the stock more than once per year. For example,
we could count 60 items each week if we thought it necessary to count all
items twice per year.
Let us say that we are planning to count all the items once per year and
this means counting 30 items each week. How should we choose what to
count each week? One method is to choose these 30 items at random from
the stock list, and allocate them to week 1, remove those items from the list
of items waiting to be allocated, choose another 30 items at random and
allocate them to week 2, and so on. This ensures that the person(s) counting
will visit the whole of the stores area and may spot any other problems as
they carry out the count. Another method is to choose 30 items that are co-
located since there is more chance of finding any misplaced items in this
way, and the area can be left well organized after counting.
Data about the 30 chosen items are then transferred to a list, either on
paper or on a handheld terminal. The data required are:

●● item code;
●● item description;
●● item location.

The person carrying out the stock count would normally be somebody fa-
miliar with the stock, for example a person who usually works in the stores.
It is important to estimate how long counting takes each week so that
enough stores people are employed and that this task is not forgotten in the
daily list of tasks and other priorities. In some large warehouses, automo-
tive spare parts for example, some people are employed full-time as stock
checkers.

Example
A good approach is to use ABC analysis to determine the frequency of
counting. First, decide the frequency at which you wish to count each cate-
gory of item; for example, to count A items four times per year, B items twice
per year, and C items once per year. Table 3.6 shows how to determine what
proportion of the total items will appear on the weekly list. Using the fre-
quencies proposed, a weekly list of 1/13 of all A items, 1/26 of all B items
and 1/52 of all C items would be created.

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Inventory management tools 185

Table 3.6 Derivation of ABC cycle counting frequencies

Desired
number of Fraction of
counts (cycles items to be Proportion of
ABC or periods) per counted in Period of items on the
class year each period counting weekly list

A 4 ¼ ¼ × 12 months 1/13
= 3 months
= 13 weeks

B 2 ½ ½ × 12 months 1/26
= 6 months
= 26 weeks

C 1 1/1 = All 1 × 12 months 1/52

= 12 months
= 52 weeks

Further information
If you are having a problem with inventory accuracy, you may find it helpful
to read David Piasecki’s 2003 book, which contains a wealth of experience
on improving inventory management: Inventory Accuracy: People, pro-
cesses, and technology, OPS Publishing, Kenosha, WI.

Further reading
Relph, G J and Milner, C Z (2019), The Inventory Toolkit, Kogan Page, London

3.6 Strategic positioning of inventory

Introduction
For centuries, holding stock has been used to offer reduced lead times to
customers. Finished goods stock has time value since it is available immedi-
ately. Work in progress can be finished quickly. Raw materials stock means
that we do not have to wait for the procurement lead times to elapse before
we can start to manufacture. Downstream activities are thus decoupled from

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upstream activities. Since the 1970s, however, we regard inventory as a liabil-

ity and not as an asset. There is, therefore, a balance between the level of
stock and its associated stockholding cost (see tool 4.19) and risk of obsoles-
cence and the financial opportunity it potentially represents in terms of
avoiding lost sales.
Strategic positioning decisions aim to optimize the location of the inven-
tory in order to increase sales without unnecessarily increasing the stockhold-
ing cost and associated risk. These stocks are often called decoupling buffers.
They can be used to reduce the lead times in a bill of materials and thus
compress the overall planning time in the material requirements planning
(MRP) calculations.

When to use
Stock levels are reviewed as part of an inventory reduction programme or as
part of a regular reassessment of investment in inventory. Positioning of
decoupling buffers is reviewed as part of a demand-driven material require-
ments planning implementation (see tool 4.17 on DDMRP).

How to use
For finished goods stock, the questions are:

●● What lead time will our customers tolerate? If we cannot achieve this
lead time, will we lose business?
●● If we can reduce this lead time by holding stock, will we gain more
business?
●● How much demand variation do we want to be able to absorb?

For work in progress, the questions are:

●● Where are the bottlenecks? Can we protect continuity of production by

placing strategic stock before the bottleneck (it must never be starved)?
●● Where are the long lead times? Can we reduce the lead time to deliver the
product to finished inventory by placing a strategic stock of part-finished
items to decouple the finishing processes from the supply processes
(procurement and initial production)?
●● How much demand variation do we want to be able to absorb?

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For stocks of raw materials, components and purchased sub-assemblies, the

questions are:

●● Which are the longest lead time items? Would holding stock to decouple
the procurement lead time from the production lead time enable a more
rapid response to customer orders?
●● Which are the riskiest items in terms of supplier reliability? Would raw
materials stock ensure continuity of supply to production?
●● How much demand variation do we want to be able to absorb?

Example
Sometimes offering a reduced lead time can win the order. Other times, there
are industry-accepted lead times at certain points in the supply chain which
schedulers plan into their build programmes or lead times are already very
short. In this case, there is no advantage in offering reduced lead times to
these customers unless you want to respond to the rare urgent demand when
the planner gets it wrong.
A company based in the United Kingdom supplying laminated flat glass
products to the building industry was reviewing levels of its finished goods
stocks. The industry-accepted lead time for simple laminates to common
specifications was next day delivery, thus requiring finished goods stock.
Failure to deliver one stock item risked losing the customer to a competitor
who could deliver all the required stock items. The question here is to de-
termine which are the common specifications and ensure finished goods
stocks of those specifications. Finished goods stock could be replenished
within 24–48 hours from production, but raw materials were subject to
occasional delays of 48–72 hours, when glass was not allowed onto the
cross-channel ferries from mainland Europe due to bad weather. Clearly, it
is cheaper to hold a stock of raw materials than finished goods. Further,
those raw materials can be made into several different products offering
better reactivity and flexibility to changing demand. It was decided to hold
enough raw material inventory of common glass sheets to cover production
for 96 hours as a decoupling buffer from the unreliability of supply as well
as allowing reactivity to demand variation.
An example of strategic positioning of inventory in demand-driven MRP
can be downloaded for free from http://howtologistics.com

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Further information
See Orlicky’s Material Requirements Planning or Demand-Driven MRP, both by
Carol Ptak and Chad Smith, published by McGraw Hill.

3.7 Measuring demand variation

Introduction
Coping with variation in supply and demand is one of the inventory man-
ager’s biggest challenges. As deliveries from suppliers become gradually
more reliable due to improvements in on-time delivery performance, the
spotlight is shifting to the demand side. While we try to obtain better fore-
casts from customers and better demand data (such as point of sale data),
many companies are still forced to manage finished goods inventory using
historical data only.
It is therefore important to be able to measure variation in historical de-
mand so as to set safety stock levels (see tool 3.14) to meet future demand
with a certain level of confidence. We shall consider two methods of measur-
ing variation in demand: mean absolute deviation and standard deviation.

When to use
A measure of demand variation is necessary to be able to set safety stock
levels for a given level of availability of finished goods stock (see tool 3.14).

How to use
Method 1: Mean absolute deviation (MAD)
The MAD is defined as:

MAD = (∑ | x – x′ |) / n (1)

where x’ is the mean demand, x is the demand in a particular time period

and n is the number of time periods being taken into account.

Method 2: Standard deviation (SD)

The standard deviation is found from:

SD (x x )2 / (n 1) (2)

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where x’ is the mean demand, x is the demand in a particular time period,

n is the number of time periods being taken into account, and ∑ means
‘sum of’.

Example
Let us consider the demand data for just one item as shown in Table 3.7. The
final column shows that total demand is 500 units over the 10-week period.
Hence, we can say that the average weekly demand is 50 units per week
(500/10 = 50). In preparation for calculating both MAD and SD, data are
entered into Table 3.8.

Table 3.7 Weekly demand for blocks of soap from weeks 20 to 29

Week 20 21 22 23 24 25 26 27 28 29 Total

Demand 48 54 57 49 51 50 46 47 53 45 500

Table 3.8 Calculations for weekly demand for bars of soap

1 2 3 4

Week Demand |x−x’| |x−x’|2

20 48 2 4

21 54 4 16

22 57 7 49

23 49 1 1

24 51 1 1

25 50 0 0

26 46 4 16

27 47 3 9

28 53 3 9

29 45 5 25

30 130

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Method 1: MAD
Column 3 in Table 3.8 shows the absolute differences between the weekly
demand and the average weekly demand (which we know is 50 per week).
For example, the demand in week 20 is 48. The difference between 48 and
the mean demand of 50 is 2. Thus we see the value 2 in column 3. The two
vertical lines either side of x – x’ mean ‘magnitude’. This means that it does
not matter if the actual demand is two units higher or two units lower than
the average. We are simply interested in how far apart the two figures are.
The sum (symbol ∑) of all these differences over the 10 weeks is found to be
30, shown at the bottom of column 3.
The final stage of the calculation is to divide 30 by the number of weeks
being considered, which is 10. We conclude that MAD for blocks of soap
from weeks 20 to 29 is 30/10 = 3.
The bigger the variability in demand, the bigger the MAD. We therefore
now have a means of measuring and expressing variability in demand.

Method 2: SD
Standard deviation of demand is a more accurate measure but is a bit more
difficult to calculate. In column 4 in Table 3.8, we can see that the absolute
difference between demand and mean demand found in the MAD calcula-
tion has been squared. To find the standard deviation, we sum all the figures
in column 4, divide by n – 1 (10 – 1 = 9) and then find the square root. The
bigger the value found for SD, the bigger the variation in demand.
2
SD x x / n 1 130 / 9 3.8

It is worthwhile mentioning that there is a rough relationship between MAD

and SD where SD is approximately 1.25 times the MAD value. For example,
for blocks of soap, we found that SD is 3.8 and MAD is 3.0, so here SD is
1.27 times the value of MAD. Although SD is more complicated to calculate,
it is a more accurate measure of spread than MAD and should be used if
possible.
(This example can be downloaded for free from http://howtologistics.
com)

Further information
Any introductory statistics textbook will provide a thorough explanation of
the two methods. See also: Relph, G J and Milner, C Z (2019) The Inventory
Toolkit, Kogan Page, London

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3.8 Periodic review inventory management

system
Introduction
The specific characteristic of a periodic review system is that the level of
inventory is checked at regular intervals and it is decided at the moment of
review whether to place a replenishment order or not. This is in contrast to
the reorder point system where the time between successive orders can vary.
Figure 3.2 shows the idea. A target stock level (TSL) has been set, made
up of safety stock plus cycle stock. The cycle stock is the amount of stock
that is used and replenished under normal circumstances; that is, the amount
of stock between the level of safety stock and the TSL. The stock level is
reviewed at regular intervals (indicated by small arrows on the horizontal
axis in Figure 3.2). At each review, a quantity is ordered that takes the actual
stock level back up to the TSL (dotted line). An order is placed and the re-
plenishment quantity arrives in due course (indicated by the solid vertical
lines). The horizontal distance between the vertical dotted line and the verti-
cal solid line is the delivery lead time (reliable in this example). During this
lead time the stock is still available for use and so the stock level will fall
during the delivery lead time.

Figure 3.2 Periodic review system

Stock level

Target stock level

Safety stock

Time

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Clearly, this type of method suits computerized inventory management sys-

tems, where the computer program checks the stock level of every item in
the system against its TSL and generates a group of orders, grouping items
together on the same purchase order where they come from the same sup-
plier. A computer system can thus review the inventory status for thousands
of items very quickly. This is rather difficult to handle in a manual system.
Where inventory is managed using a manual system, it is possible to get the
same benefits from grouping together items from the same supplier, by re-
viewing all the items from the same supplier at the same time, and spreading
the suppliers over different days of the week, for example all items from
supplier P on Monday, all items from supplier Q on Tuesday, and so on.

When to use
This is a method for managing inventory of items subject to independent
demand, that is, items that are sold from finished goods inventory. It may
also be used for C items, subject to dependent demand, that are used regu-
larly. This method also forms the basis of a family of related inventory man-
agement systems.
In a typical supermarket, the computerized inventory management sys-
tem reviews the stock levels at the end of each afternoon and sends an order
to the distribution centre for delivery during the night or early morning.

How to use
This type of system is characterized by regular review intervals and a vari-
able order quantity. The key parameters required to set up the system are the
review period (R), i.e. time between successive reviews, and the TSL.
The time between successive reviews can be any convenient period de-
pending on the location of the supplier and the ease of delivering regularly.
Although we saw above that a supermarket typically receives deliveries
every 24 hours, the delivery frequency can vary enormously in a manufac-
turing company. Usually A items are delivered more frequently and so the
review period for these items may be daily or weekly. Vendor-managed in-
ventories also use this system (see tool 3.17). A TSL is agreed between the
customer and the supplier and the vendor makes deliveries at a convenient
time to ‘top up’ the stock. This might be weekly when delivering fasteners to
a manufacturing company or every two hours when delivering freshly made
sandwiches to the shop at a petrol station.

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The review period is taken into account when calculating the TSL.
Longer time intervals between reviews means that a higher TSL will be
required. The TSL must allow for enough stock to support the users until
the next review period and until the following delivery arrives. Consider
the case where the review period is one week and the lead time is two days.
A replenishment order will be placed to take the inventory back up to the
TSL and this will arrive in two days’ time. This stock must be capable of
supplying demand until the next review period (one week from now) and
until the order placed then arrives (two days after that). Hence, we need to
take into account the average demand (Dav) over this extended time pe-
riod (formula 1):

TSL = (Dav × [review period + lead time]) (1)

+ safety stock level = (Dav × [R +L]) + Sb

If the delivery lead time L is reliable, then the level of the safety stock Sb is
calculated in exactly the same way as for the reorder point system. Note that
it is critical to ensure that all elements use the same unit of time, e.g. average
weekly demand with review period and lead time expressed in weeks.
The quantity to be ordered (Oq) is calculated from the TSL (formula 2).
Let Sc represent current stock level and Qopen be the quantity of items on
any outstanding orders (orders already placed for this item but which have
not arrived yet):

Oq = TSL – current stock level – any open orders (2)

= TSL – Sc – Qopen

Example
Example 1: Find the TSL
Item Z has the following characteristics:

Lead time = 2 weeks

Review period = 1 week
Average demand = 60 per week
Safety stock = 20 units

The TSL is found by applying formula 1:

TSL = (Dav × [R + L]) + Sb = (60 × [1 + 2]) + 20 = 200

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Example 2: Find the order quantity

The TSL for item V is 120. At the time of the periodic review, it is found that
the current stock level is 42. There are no open orders.
Applying formula 2:

Oq = TSL – current stock level – any open orders

= TSL – Sc – Qopen = 120 – 42 – 0 = 78

An order should be placed for 78 units of item V.

Further information
See Wild, T (2005) Best Practice in Inventory Management, 2nd edn,
Butterworth-Heinemann, Oxford

3.9 Reorder point inventory management

system
Introduction
The reorder point system is based on the idea that when the inventory level
falls to or below a certain level, the reorder point, we place an order for
more, for a predetermined quantity. Figure 3.3 shows what happens under
ideal conditions. The reorder point (sometimes called the reorder level),
shown as a dotted line in Figure 3.3, is one of the defining parameters of this
type of system and is set in advance. The reorder quantity (Oq) is also set in
advance.
It can be seen from Figure 3.3 that the reorder point has two components.
The first is the quantity between the level of safety stock and the reorder
point. The reorder point must be set high enough to meet the expected aver-
age demand during the delivery lead time (L), i.e. while waiting for the re-
plenishment quantity to arrive. If there is a safety stock, the reorder point
must also take into account that we do not expect to use the safety stock
under average conditions. The emphasis has been placed on ‘average’ here
because we only expect to use the safety stock under conditions that are not
average, e.g. lateness in delivery or higher than average demand.
So the reorder point is the sum of the quantity of safety stock, Sb, and the
quantity that is expected to be used during the delivery lead time, L. The

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Figure 3.3 Reorder point system

Stock level

Reorder point

Safety stock

Time
L

quantity that is expected to be used during the delivery lead time is easily
found by multiplying the average rate of demand, Dav, by the lead time, L
(see formula 1):

ROP = (L × Dav) + Sb (1)

After each transaction, the residual inventory level is checked against the
safety stock. If the inventory level is at or below the reorder point (taking
into account any existing open orders), a replenishment order is created.
This is therefore a continuous review method, with fixed order quantity.
According to the rate of demand, replenishment orders are raised as and
when required, and the time between raising successive replenishment or-
ders can vary. This means that a number of different orders could be raised
on the same supplier during the day, where a vendor supplies a number of
different items. This may not be the most efficient method for minimizing
transport costs.
Note that it is critical to express all data in the same time units, usually
days or weeks.

When to use
This is a method that is suitable for items subject to independent demand,
that is, sales from finished product stock. It can also be used for regularly
used C items subject to dependent demand (i.e. materials and components

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196 The Logistics and Supply Chain Toolkit

required for a production schedule). There are many different inventory

management systems for managing inventory subject to independent demand
and this method is one of the building blocks for many other methods.
Historically, when inventory was managed using manual records, it was
an advantage to raise orders continuously so as to spread the administrative
load. Today, using computer systems, and trying to group as many items as
possible to as few suppliers as possible, periodic review systems are more
prevalent, particularly in retail distribution.

How to use
To set up a system like this, the following steps must be taken for each item:

1 Analyse demand to obtain an average level of demand per time unit, Dav,
say average demand per week.
2 Obtain an indicative lead time, L, for each item and express this in terms
of the same time unit, say weeks.
3 Set the inventory parameters – Oq and Sb. For guidance, see the sections
on replenishment quantities (tool 3.10) and setting safety stock levels
(tool 3.14).
4 Determine the reorder point, ROP, from the data above.
5 Monitor the average demand and lead times. If they differ significantly
from the quantities used previously to calculate the reorder point, the
reorder point should be updated.

Example
Example 1: Setting the reorder point
A new item has been added to the inventory management system of a ware-
house and so the reorder point must be calculated. It is expected that about
20 boxes of this item will be sold per week and it has been decided that there
should be a safety stock of 10 boxes. Using a delivery lead time of three
weeks, we now have all the data required to set the reorder point:

Dav = 20 units per week

L = 3 weeks
Sb = 10
ROP = (L × Dav) + Sb = (3 × 20) + 10 = 70

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After each transaction, the residual inventory level is checked against the
reorder point, taking into account any open orders (formula 2):

If (stock balance + quantity on outstanding orders) (2)

≤ ROP, then place an order.

Example 2: Raising a replenishment order

An order has just been received in a warehouse for 10 boxes of plastic gloves.
The inventory record shows that there are 69 boxes in stock. The reorder
point is 60. The reorder quantity is 200. There are no open orders. Should a
replenishment order be raised? Remember that this system is a continuous
review system and we review the stock level after each transaction.

New stock balance = opening stock – quantity issued = 69 – 1 = 59.

Then we apply formula 2:

Stock balance + quantity on outstanding orders = 59 + 0 = 59

If (stock balance + quantity on outstanding orders)
≤ ROP, then place an order

We can see that 59 is less than the reorder point of 60, so an order is raised.
Let us say that later the same day another order for boxes of plastic
gloves is received. This time the order is for two boxes. We make the issue as
before and the new stock balance reduces to 57. Should we order more? We
apply formula 2 again, but this time we have an open order:

Stock balance + quantity on outstanding orders = 57 + 200 = 257

The stock balance plus quantity on open orders is greater than the reorder
point, so another order will not be placed.

Further information
Tony Wild’s book is highly recommended for learning more about inventory
management: Wild, T (2005) Best Practice in Inventory Management,
2nd edn, Butterworth-Heinemann, Oxford.
For those who wish to explore inventory management in even more detail,
see: Relph, G J and Milner, C Z (2019) The Inventory Toolkit, Kogan
Page, London, and Silver, E and Peterson, R (1985) Decision Systems
for Inventory Management and Production Planning, 2nd edn, Wiley,
New York.

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3.10 Replenishment order quantities

Introduction
A replenishment order is raised to trigger purchase or production of more
units of an existing inventory item to replace what has been used or sold. If
the replenishment order is to be produced (rather than purchased), the order
quantity will have a major impact on the level of work in progress, the num-
ber of setups and the overall lead time. The size of the reorder quantity also
has a major impact on the average level of finished goods stock that is held.
We can see this from the traditional ‘saw tooth’ inventory model shown in
Figure 3.4.
The model shows that the average inventory level is given by the safety
stock level plus the average level of cycle stock (formula 1). In this simple
model, the average level of cycle stock is half the total amount of cycle
stock:

Average level of inventory = safety stock +1/2 (cycle stock) (1)

We know that if we place a lot of small orders (where Oq, the order quan-
tity, is small), the cost of administration and delivery for those small or-
ders will be high. Similarly, if we order in large quantities, the cost of
administration and delivery will be low but the average level of stock
(formula 1) will be high. Many years ago, these two conflicting factors
were encapsulated into another theoretical model, called the economic
order quantity (EOQ) (tool 3.11), and it was used in some industries for
a number of years. These days, however, we prefer to use this model to

Figure 3.4 Saw tooth theoretical inventory model

Stock level

Working stock
Oq Active stock
Cycle stock

Safety stock

Time

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Inventory management tools 199

understand where improvement should be sought but use other methods

to calculate the actual quantity to be ordered. In short, we need to find the
smallest order quantity that is practicable. There are many more reasons
for ordering the smallest quantity possible:

●● less safety stock required;

●● more frequent deliveries, which leads to greater reactivity to changing
demand;
●● lower stock levels, which requires less storage space;
●● less chance of obsolescence, damage and other shrinkage;
●● easier to count;
●● easier to introduce new items.

It can be seen that it is the ‘soft’ costs, or hidden costs associated with inven-
tory, that are reduced by ordering in smaller quantities and so it often takes
more effort to justify this method financially. Methods for reducing the ad-
ministration and delivery costs associated with small orders include:

●● using local vendors where possible;

●● using milk rounds to collect supplies from vendors;
●● purchasing as many items as possible from the same vendor to render
frequent deliveries of small amounts of each item economic;
●● raising a blanket order and calling off deliveries against it;
●● using ‘soft’ forms or ordering by internet;
●● using VMI;
●● using Kanbans.

In production, it is necessary to continue to keep reducing set-up times in

order to minimize the penalty for switching production from one product to
another, and thus enable smaller and smaller production quantities to be
economic.

When to use
Sometimes we have little control over the size of the replenishment quantity.
The supplier insists on a minimum order quantity (or value) or supplies only
in multiples, e.g. boxes of 100. The factory insists on a certain run time or a
production tank holds only a certain volume. However, when you can buy
or make exactly what you want, how much should you buy or make?

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How to use
If you are in the fortunate position of being able to set any replenishment
quantity you wish, a good starting point is to consider what delivery fre-
quency is ideal and then try to figure out how this can be sensibly achieved.
A useful guide for doing this is, once again, ABC analysis. The delivery fre-
quency will differ according to the sector. Some examples are given below.

Example
An ABC delivery schedule for replenishment quantities will be developed for
three different sectors (see Table 3.9).
Automotive assembly lines work at a certain speed or rhythm, and to a
sequenced schedule made up of customer and stock orders. The consump-
tion rate of parts and assemblies, and the sequence in which they should be
delivered, is therefore known. Ideally, parts should be delivered at the last
possible moment (to minimize storage space required) and, ideally, to the
lineside without any unreturnable packaging.
Typical engineering companies do not consume the same volume of parts
and assemblies as automotive assembly lines and are also usually subject to
greater variation in demand. Although this means that safety stocks are likely
to be higher, it also means that deliveries will be necessarily less frequent.
In the retail sector, supermarkets are supplied with fresh goods and
fast movers every 24 hours, while dry goods and household items may be
replenished every two to three days.

Further information
See Wild, T (2005) Best Practice in Inventory Management, 2nd edn, Butterworth-
Heinemann, Oxford, and Relph, G J and Milner, C Z (2019) The Inventory
Toolkit, Kogan Page, London.

Table 3.9 Typical delivery intervals for ABC items in different sectors

Pareto class Automotive Engineering Retail

A 2 hours Weekly Daily

B ½ day Monthly 2–3 days

C Weekly Quarterly Weekly

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3.11 Economic order quantity (EOQ),

by Geoff Relph
Introduction
Ford W Harris, while working for Ford Motors in Michigan in 1913, de-
rived a method of establishing an economic order value. It is based on the
principle that there is a balance between the cost of ordering and the cost of
holding stock. Figure 3.5 shows this relationship graphically.
The essence of the formula is that the cost of holding inventory is
expressed as the cost of:

●● owning/renting the warehouse;

●● staff to secure and run the warehouse;
●● losses of stock through waste, obsolescence and shrinkage;
●● lost opportunity of the money tied up in the stock.

It is expressed as the formula Quantity ordered × Unit cost × (Cost of

holding/2).

Figure 3.5 Economic order quantity

EOQ chart
1,400.00

1,200.00

1,000.00

800.00

600.00

400.00

200.00

–
0 50 100 150 200 250 300 350 400 450

Cost of ordering Cost of holding Total cost of holding

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202 The Logistics and Supply Chain Toolkit

This is then balanced against the cost of ordering inventory, which is ex-
pressed as the cost of:

●● placing order with supplier;

●● transport to warehouse;
●● receiving and putting to stock.

It is expressed as the formula (Demand × Cost of ordering)/Quantity

ordered.
Figure 3.5 shows that the two costs reach a balance point – this is the
economic order quantity (QOPT). It can be expressed as a formula, whose
derivation is shown in Figure 3.6. Figure 3.7 shows how the formula works
and the data needed to calculate the value.
There has always been a lively debate as to the effectiveness and suitabil-
ity of the EOQ, the key being the difficulty in determining the true values of
the cost of ordering and the cost of holding inventory. However, it highlights
the essential relationship that needs to be considered when determining the
most effective order size, which balances these two costs. The issues of not
being able to evaluate these costs are addressed in the next section.

Figure 3.6 Deriving the EOQ

TC = Total annual cost

D = Demand
P = Part cost per unit
Q = Order quantity
C = Cost of placing an order or set-up cost
i = inventory carrying rate %

Cost of Cost of Cost of

Inventory management cost = purchase + ordering + holding

Q
TC = DP + D C + iP
Q 2
Cost is at a minimum when Cost of ordering equals the Cost of holding

D Q
C = iP
Q 2
By manipulating the formula you get

2DC 2(Annual demand) (Order or set-up cost)

QOPT = =
iP (Unit cost) (inventory carrying rate)

SOURCE Based on Chase et al (1998) Production and Operations Management, p 588

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Figure 3.7 EOQ formula for item 9 in Table 3.2

D = Demand 150
C = Cost of ordering/set-up £80.00
P = Unit cost £13.25
i = inventory holding rate as % 30%
W = working days in a year 250

Economic order quantity Q = 2DC Q = 215080.0 77.70

P*i £13.25*30%

When to use
All too often when suppliers are asked to give a suggested minimum order
quantity (MOQ), their motivation is to minimize their production cost and
thus maximize their profit. Often a supplier may incentivize larger batches
by offering discounts for the larger quantities. The buyers typically have
‘cost down objectives’ so will find this attractive; however, the planners/op-
erations team will suffer as a result of higher inventories.

How to use
EOQ is useful when testing to see if the discount is really worthwhile, given
that you have a reasonable estimate of the cost of ordering and cost of hold-
ing stock. It is easy to test the offer made by the supplier by calculating the
EOQ for the two costs offered by the supplier and then seeing how close to
the calculated EOQ the MOQ requirements are.

Example
Let’s say that our supplier for item 9 in Table 3.2 (tool 3.2) is offering a
discount of 5 per cent if we increase the MOQ to 150 units. We had asked
for an MOQ of 75 based on our calculations.
Table 3.10 shows the EOQ calculated for a range of different costs/dis-
count percentages from 5 to 75 per cent. It is clear from this analysis that the
5 per cent discount does not justify the increase to a MOQ of 150 as the
equivalent EOQ for 5 per cent discount or unit cost of 12.59 is only 79.72.
To achieve an equivalent EOQ to the offered 150, the discount would need
to be just below 75 per cent, which would give an EOQ of 155.41.

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Table 3.10 Showing EOQ varying with supplier discount

Annual Annual
demand Unit cost usage value EOQ % discount

150.00 13.25 1,987.50 77.70

150.00 12.59 1,888.13 79.72 5

150.00 11.93 1,788.75 81.91 10

150.00 10.60 1,590.00 86.87 20

150.00 7.95 1,192.50 100.31 40

150.00 3.31 496.88 155.41 75

NOTE Assuming cost of ordering is £80.00 and cost of holding is 30%

Table 3.10 shows that if only the cost of managing inventory is considered,
then the MOQ of 75 is cheaper, even with the 5 per cent discount on the unit
cost. However, when the cost of purchase is also taken into account, giving
the total inventory cost, the larger MOQ is cheaper. This is because, based
on the same annual demand, the savings from the cost of purchase more
than offset the higher cost of holding.
This simple financial analysis would therefore suggest that a higher MOQ
was acceptable. However, in this case additional considerations will need to
be taken into account. For example, the MOQ will be buying 12 months’
stock; is there a risk that the demand may change in the 12 months, or the
stock may deteriorate or become obsolete? Overall the benefit is only
2 per cent rather than the 5 per cent offered by the supplier, with any in-
creased costs and risks moved from the supplier to the business.

Table 3.11 nalysis of total inventory management cost to review MOQ

A
discount

Unit Cost of Cost of Cost of Annual cost Total inventory

MOQ cost ordering holding managing of purchase costs

75 13.25 160.00 149.06 309.06 1987.50 2296.56

150 12.59 80.00 283.22 363.22 1888.13 2251.35

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Further information
See Harris, F W (1915) Operations Cost, Factory Management Series, Shaw,
Chicago, IL; Relph, G J and Milner, C Z (2019) The Inventory Toolkit, Kogan
Page, London; Relph, G J and Newton, M (2014) Both Pareto and EOQ have
limitations: combining them delivers a powerful management tool for MRP and
beyond, International Journal of Production Economics, 157 (C), pp 24–30.

3.12 Combining Pareto with EOQ to enhance

group analysis, by Geoff Relph
In tool 3.2 we looked at Pareto and tool 3.11 looked at EOQ as two tech-
niques for the management of inventory groupings and determining the
optimum batch size. In tool 3.10, Table 3.9 gives suggested order periods
based on industry types. If our business does not exactly fit one of the three
categories described, the answer may be to use the EOQ.

When to use
If we are unsure of where we are in relation to the industries shown in
Table 3.9, we may want to compare the EOQ with the recommended deliv-
ery intervals. The EOQ is a quantity and the values in Table 3.9 are time
intervals. We can convert the EOQ to a time interval, known as the eco-
nomic order period (EOP). We can calculate the EOP for each item and list
them against the recommended Pareto class calculated in Table 3.3.

How to use
If we use the formula from tool 3.2 and the items in Table 3.2, we can calculate
EOQs for the 10 items, as shown in Table 3.12. What is clear is that there is no
specific relationship between the annual usage, unit cost or annual usage value
of the product to the recommended EOQ. However, items 3, 4 and 5 have
similar EOQ in spite of having entirely different Pareto positions. The typically
used order periods shown in Table 3.9 may not necessarily be the best ones.
However, we can easily convert EOQ to economic order period (EOP),
which would allow us to evaluate the days of cover. Figure 3.8 shows how
to extend EOQ to EOP – or the optimum period represented as number of
days of stock rather than the absolute quantity.

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Table 3.12 Items listed in Table 3.2 with EOQ values

Average Annual
Item annual usage Unit cost usage value EOQ

4 185.00 320.00 59200.00 17.56

6 780.00 12.80 9984.00 180.28

5 43.00 118.00 5074.00 13.94

1 10.00 295.00 2950.00 4.25

10 225.00 10.35 2328.75 107.68

2 5720.00 0.40 2288.00 2761.64

9 150.00 13.25 1987.50 77.70

3 22.00 18.00 396.00 25.53

7 550.00 0.50 275.00 765.94

8 365.00 0.50 182.50 623.97

EOQ calculations based on (i=30% and C = 80.00)

Figure 3.8 Extending EOQ formula to represent the EOP

D = Demand 150
C = Cost of ordering/set-up £80.00
P = Unit cost £13.25
i = inventory holding rate as % 30%
W = working days in a year 250

Economic order Q = 2DC Q = 215080.0

77.70
quantity (EOQ) P*i £13.25*30%

77.7/150
Economic order EOQ/D
0.518 years
period (EOP) (EOQ/D)* W
129.50 days

77.7/150
Economic order EOQ EOP = 77.70 * 250
*W 0.518 years
period (EOP) D 150
129.50 days

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We now add the EOP calculation to and create Table 3.13. Looking at the
annual usage values, we can see the higher the annual usage value, the lower
the EOP days. What is obvious in Table 3.13 is that there is a direct relation-
ship between EOP and the position of a part in the Pareto list, with item 4
being the top-ranked part having the lowest EOP of 24 days, item 5 a B-class
part with an EOP of 81 days, and item 3 a C-class part with 290 days. We
can compare the average EOP for each class and compare to the industry
types shown in Table 3.9.

Example
In Table 3.13 we can see that for the items in class A an appropriate fre-
quency might be monthly, for the B-class quarterly and the C class would be
annually.

Table 3.13 Items from Table 3.3 with EOP values added

Cumulative
Percentage
Average Annual of Annual
Annual Unit Usage Cumulative Usage ABC EOP
Item Usage Cost value Usage Value value (%) Class days

4 185.00 320.00 59,200.00 59,200.00 70.07 A 23.73

6 780.00 12.80 9,984.00 69,184.00 81.89 B 57.78

5 43.00 118.00 5,074.00 74,258.00 87.89 B 81.05

1 10.00 295.00 2,950.00 77,208.00 91.39 B 106.30

10 225.00 10.35 2,328.75 79,536.75 94.14 B 119.64

2 5,270.00 0.40 2,108.00 81,644.75 96.64 C 125.75

9 150.00 13.25 1,987.50 83,632.25 98.99 C 129.50

3 22.00 18.00 396.00 84,028.25 99.46 C 290.13

7 550.00 0.50 275.00 84,303.25 99.78 C 348.16

8 365.00 0.50 182.50 84,485.75 100.00 C 427.37

Based on i=30%, C = 80.00 and W=250 working days in a year

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3.13 Material Requirements Planning (MRP)

Introduction
Materials requirements planning (MRP) first became known in the 1960s
when computers were used to calculate the timing of manufacturing and
purchase orders for dependent items, i.e. raw materials and components to
be used in production where the quantities required depended upon the
quantity of finished product to be made. Later, MRP was a module in MRP2
systems and subsequently ERP (enterprise resource planning) systems.
MRP calculations require information from the bill of materials (BOM),
the delivery schedule or demand forecast and the inventory management
system. Due to the amount of computing power required, it was common
to use MRP for A- and B-class items only and to use classical inventory
management methods (such as periodic review or reorder point, tools 3.8
and 3.9) for C-class items.

When to use
When planning delivery of raw materials, components and sub-assemblies
for production to meet a delivery forecast of a product.

How to use
There are two processes in MRP, ‘netting’ and ‘offsetting’:

1 Net requirements = Gross requirements minus inventory

2 Time to launch the order = time when delivery is required minus lead time

Starting from product level, we work through the bill of materials, netting
out existing inventory and taking account of already scheduled arrivals into
stock, in order to determine the net requirements. Taking into account pro-
duction and procurement lead times, manufacturing and procurement or-
ders are planned and launched at the appropriate times to ensure the de-
mand forecast is met.

Example
We will use the example of an office chair. The full example can be down-
loaded for free as an Excel spreadsheet from http://howtologistics.com.

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Table 3.14 Extract from the bill of materials (BOM) for an office chair

Level Item Quantity LT (days) M/P Order qty

0 Office chair (OC) 1 1 M LFL

1 Rolling base (RB) 1 1 M 100

2 Spokes (S) 5 1 M 1000

3 Tube B (TB) 0.35 m 3 P ≥ 150 m

Key:
LT = lead time
M/P = manufactured or purchased
qty = quantity
LFL = lot for lot

Table 3.15 Level 0: Office Chair (OC)

Day 20 21 22 23

GR (OC) 100 150 180 140

SR (OC) 80 0 0 0

OH (OC) 50 30 0 0

NR (OC) 0 120 180 140

MOP (OC) 120 180 140

MOR (OC) 120 180 140

Table 3.14 shows an extract from the indented bill of materials. One office
chair needs 1 rolling base in the final assembly. The rolling base is made up
of 5 spokes, 1 hub (not shown) and 5 wheels. Spokes are cut from tube.
Fasteners are not shown.
Order quantities may be fixed (or multiples thereof), a minimum quantity
or ‘lot for lot’ (LFL) meaning that you can order exactly the quantity
required.
We start at product level, so level 0, the office chair (Table 3.15). The
forecast delivery schedule is shown as gross requirements (GR). Scheduled
receipts (SR) and on-hand inventory (OH) are netted out, leaving a net re-
quirement (NR) of 120 units for day 21, 180 on day 22 and 140 on day 23.
Since the order quantity for office chairs is lot for lot (LFL) we plan manu-
facturing orders (MOP) for these quantities. Offsetting by a lead time of one
day releases these orders (MOR) on days 20, 21 and 22 respectively.

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Release of an order for office chairs generates a demand for rolling bases at
level 1, 1 base for 1 office chair (Table 3.16). There is no on-hand inventory,
but a previously planned manufacturing order is expected to arrive on day 20,
enough to cover the demand on day 20 and part of the demand on day 21.
The net requirement for 140 units on day 22 generates an order quantity of
200 because the order quantity is fixed at 100 or multiples thereof.
Demand on day 20 for 100 rolling bases generates a demand for 500
spokes (Table 3.17). There are no scheduled receipts but a projected availa-
ble inventory of 800. Thus, demand on day 20 is covered but more are re-
quired to cover demand on day 21. Spokes are ordered in lots of 1,000. A
lot is therefore planned to arrive on day 21, for which the order is launched
on day 20.

Table 3.16 Level 1: Rolling Base (RB)

Day 19 20 21 22 23

MOR (OC) 120 180 140

GR (RB) 120 180 140

SR (RB) 200

OH (RB) 0 80 0 0

NR (RB) 0 100 140 0

MOP (RB) 100 200

MOR (RB) 100 200

Table 3.17 Level 2: Spokes (S)

Day 18 19 20 21 22 23

MOR (RB) 100 200

GR (S) 500 1000

SR (S) 0 0

OH (S) 800 300

NR (S) 0 700

MOP (S) 0 1000

MOR (S) 1000

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Table 3.18 Level 3: Tube B (TB) Requirements for tube are shown in metres

Day 17 18 19 20 21 22 23

MOR (S) 1000 0

GR (TB) 360 0

SR (TB) 0 0

OH (TB) 0 0

NR (TB) 360 0

POP (TB) 360

POR (TB) 360

Key:
POP = purchase order planned
POR = purchase order release

Spokes are cut from tube B. Tube B is delivered in 5 metre lengths. Hence,
each length of tube B can make 500/35 spokes = 14.28 or 14 spokes. For
1,000 spokes, 72 lengths are required, or 360 metres (Table 3.18). The pro-
curement lead time is three days. The minimum order quantity is 150 metres
so this requirement is met.

Further information
Download the full BOM explosion as an Excel spreadsheet for free from http://
howtologistics.com
Orlicky’s Material Requirements Planning by Carol Ptak and Chad Smith,
published by McGraw Hill, is highly recommended.

3.14 Safety stock calculation

Introduction
Safety stock is sometimes also called buffer stock or security stock. If we
examine the consumption patterns over the same 10-week period of the two
items A and B in Table 3.19, we can see that they both have an average de-
mand of 50 units per week. Now look for the maximum and minimum

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Table 3.19 Demand data for two different items

Week number Demand for item A Demand for item B

20 48 47

21 54 72

22 57 12

23 49 25

24 51 54

25 50 89

26 46 36

27 47 68

28 53 23

29 45 74

Total: 500 500

Average demand: 50 per week 50 per week

values in each column. It can be seen that item B has much greater variabil-
ity in demand, ranging from 12 to 89.
Let’s say that we replenish the stock of both items once per week. Since
item B has a very high variability in demand, a lot of extra stock, or safety
stock, will be required to ensure that we can supply during the weeks of high
demand. This is stock that is held over and above the amount of stock re-
quired to meet average demand. A key question to examine is just how im-
portant a stockout is to you. If a stockout means losing a contract or a
customer, a life-or-death situation (hospital, aircraft, pharmaceuticals, for
example), you will be prepared to invest more in safety stock. If the items
are easily substitutable (different colour, make, package size), you may not
be prepared to finance a significant amount of safety stock.
So we need to be able to measure this variability to determine how much
safety stock is required for a given level of customer service or ‘protection
level’ (protection against stockouts). If you are familiar with statistics, you
will know that standard deviation is used to measure variability in data. The
standard deviation of demand for item A is 3.8 and for B is 25.7, reflecting
the greater variability in demand for item B.

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Standard deviation is the preferred method for setting safety stock levels
but there are other methods for those who are not familiar with statistical
methods. Two easier methods are ‘time buffer’ and using historical data. In
the time buffer method, we add safety stock to cover average demand for a
certain period of time, for example two days or a week, according to how
safe you want to be. Using the historical data method, we look back at de-
mand over previous periods and identify the few times when demand was
very much higher than average. A common-sense decision must then be
made about whether to cover these occasional high demands and therefore
how much safety stock to keep.
The ‘How to use’ section will present all three methods. We will focus
mainly on covering variability in demand rather than variability in lead
time.

When to use
Safety stock is required whenever you want to meet demand that is greater
than average and/or if the replenishment lead time is highly variable. Longer
than average lead times can result in failure to meet demand and so safety
stock can be used to compensate for this.

How to use
Method 1
Formula 1 shows how to calculate standard deviation:

SD = √(∑(x – x′)2 / (n – 1)) (1)

Where: n = number of weeks (10 in Table 3.19)

x′ = mean demand (50 in Table 3.19)
x = data item (actual demand in Table 3.19)

The normal distribution is used to determine the ‘protection level’ required,

i.e. the proportion of time that demand can be met. In our example, adding
safety stock equivalent to one standard deviation of demand would yield a
protection level of 84.1 per cent (50 per cent + 34.1 per cent), since this is
the proportion of the population under the normal distribution curve
(Figure 3.9) from minus infinity up to the mean plus 1 standard deviation
of demand.

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Figure 3.9 Normal distribution

Frequency
34.1%

50.0%
13.6%

2.1%

–3SD –2SD –1SD Mean 1SD 2SD 3SD

Demand

Method 2
In the time buffer method, we add enough safety stock to cover demand for
a certain time period. For example, a particular supplier is often one week
late in delivering but rarely more, and so we may decide to add safety stock
equivalent to one week of demand for that item.

Method 3
In the historical demand method, we look at historical data. Consider the
demand for item B in Table 3.19 once again. If these 10 weeks are indica-
tive of demand over the year, we can see that in 10 per cent of the weeks,
demand is over 80; and in 30 per cent of the weeks, demand is over 70.
Using 50 weeks per year for simplicity, we might decide that it is accepta-
ble to have stockouts in five weeks of the year (10 per cent), but unaccep-
table to be out of stock during 15 weeks of the year (30 per cent). We
would then keep a safety stock of 30 units (remembering that 50 is the rate
of average demand and safety stock is used to cover demand that is greater
than average). Data for more weeks will give a more accurate picture of
demand variation and result in a more accurate estimate of the safety
stock required.

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Example
Let us say that we are looking for a 90 per cent protection level for item B
in Table 3.19, i.e. we want to meet demand for 90 per cent of the time:

●● Using method 1, normal distribution tables show us that 90 per cent

protection level requires safety stock equivalent to 1.28 standard
deviations of average weekly demand, so 1.28 × 25.7 = 33 units.
●● Using method 2, we may estimate that we need about three days of safety
stock, or half a week’s demand, so a proportion of 3/5 or 2.5/5 of average
weekly demand (assuming five trading days per week), which would be
25 or 30 units of stock.
●● Using method 3, and assuming that these 10 weeks are indicative of the
year’s weekly demand pattern, it was shown earlier that 30 units of safety
stock would give a protection level of approximately 90 per cent.

(This example can be downloaded for free from http://howtologistics.com)

Further information
For those who are unfamiliar with statistical methods, it is highly recom-
mended that logistics managers get some training in this area. Many
books and general training courses are available.
Those who are familiar with statistics may be interested in looking at Stock
and Lambert (2001), which gives a formula for safety stock that takes the
standard deviation of lead time into account in setting safety stock levels
as well as the standard deviation of demand: Stock, J and Lambert, D
(2001) Strategic Logistics Management, 4th edn, McGraw Hill/Irwin,
New York. Further information can be found in: Relph, G J and Milner,
C Z (2019) The Inventory Toolkit, Kogan Page, London.

3.15 Stock counting

Introduction
To have confidence in the inventory management system it is vital to count
stock regularly and ensure that the quantities shown in the inventory man-
agement system are actually present in stock. In this section, we consider the
nitty-gritty of looking for explanations of any differences.

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When to use
All companies should count their stock at least once per year for the purpose
of preparing the annual accounts. In the section on cycle counting (tool 3.5),
it is explained that it is often beneficial to count fast movers and higher-
value items more than once per year in order to maintain close control and
high availability.

How to use
If there is a significant amount of stock to check it may be necessary to close
the business while counting takes place. It may be carried out by the com-
pany’s employees only, over a weekend or during a shutdown, and tempo-
rary staff may be hired to supplement existing staff and speed up the process.

1. General process
●● Plan the stock count well in advance and train the staff who will be
carrying it out.
●● Specify the area to be checked and ensure that each zone and location is
clearly identified (to prevent omissions and duplications in counting).
●● Produce a list of what is expected to be found in each zone or sub-area,
including identity, description and location, listed in the order in which it
is expected that the items will be found. Do not include the actual
quantity. This list may be either in hard copy or accessed electronically by
a handheld device.
●● The stock checker moves systematically along each zone, up and down
each rack or shelf, according to the layout and height of the storage area,
identifying and counting items found.
●● Note that two staff will more than likely be required to count stock at
height.
●● It is important that there is ready and adequate means of recording any
anomalies or deviations from the list. For example, an item may be found
earlier or later than its stated location (and the new location must be
recorded), an item may be found damaged or missing an identity label,
etc, and all this must be carefully recorded.

Great care should be taken over the unit of measure for each item. For
example, should a box of 50 items be recorded as 50 items or as one box?

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Normally the list of items should show the unit quantity of each item clearly
or the stock checker should make clear what has been counted.
Some special equipment may be required, e.g. weigh scales for loose
items, dipsticks for fluids, measuring tapes, gauges, reel measuring devices,
cages for lifting personnel, etc. Sometimes it is necessary to open a box or c
rate. Materials must be provided for closing and resealing. Sometimes open-
ing such packages may damage the contents, e.g. for some aircraft parts, and
therefore information on the external labelling will have to suffice.

2. Resolving differences
A procedure must be followed to identify the source of each difference, be
that quantity, location or condition. If the difference cannot be found, the
data in the system must be adjusted.
First, we look at differences in quantity. Before making any adjustments
to the system data, consider the following questions:

●● Were any issues or receipts of the item in question made while the stock
check was being carried out?
●● If a manual system is being operated, have any arithmetic errors been
made in the receipts and issues calculations since the last stock check?
●● Was it difficult to count these items? If so, go back and recount them.
●● If using a paper-based system, are the figures recorded by the staff legible?
Could a 1 look like a 7, for example?
●● Is it possible that the items are stored in more than one place? If so,
consult the stores person or the inventory management system to find
other locations.
●● Is it possible that the count itself is not very accurate (for example,
weighing a bottle of a chemical fluid to estimate how much remains, or
measuring a length of tubing to estimate how much remains)? If the
difference is less than x per cent, then make no adjustment. The value of x
depends on the accuracy of the measuring system and the desired accuracy
of the stock count.
●● If more was found than expected, does this difference tally with a recent
loss of stock at the last count? For example, the material could have been
put in the wrong place and then somebody found it and restored it to the
right place.
●● Are there any unfulfilled orders in the warehouse or could there have
been a short shipment recently?

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●● If there is less than expected, have any unauthorized personnel been in

the storage area since the last count? Has somebody removed the item
without recording the issue?
●● If there is less than expected, is this item of use outside the business?
Might somebody have an interest in stealing it? (In general, look for sys-
tem errors first before thinking about theft. There are so many opportuni-
ties for system errors and they are the cause of the difference in most
cases.)

Next, we consider differences in location. We have already seen that items

may be stored in more than one location. The fifth point above indicates that
we did not find enough stock at a certain location and that we should look
for more locations of stock for this item. Secondly, we may find stock of an
item in an unexpected location. It is important that the location data are cor-
rect so that the stores people can find a required item quickly and efficiently.
Any differences in location should be discussed with the stores personnel so
that a decision can be made about which are the ‘correct locations’ and then
the data records can be updated accordingly.
Finally, the stock checker may notice that some items are damaged or
dirty or otherwise not in good condition. Each case should be examined and
a decision made on the future of the stock, for example whether the stock is
usable or must be removed and replaced. This can also be a good time to
identify stock that has been in the warehouse for an excessive time period
and is unlikely to be used in future.

3. How to improve future accuracy

Stock data accuracy must become part of company culture, requiring a high
level of operator discipline:

●● New employees should be well trained in company procedures and be

told exactly what is expected of them, including use of computer systems,
counting practices, etc.
●● All stock should be protected by access control measures such as card
readers, or closed-circuit television cameras.
●● All items and locations should be clearly identified. Procedures should be
accessible to all personnel, maybe via a shared area on the company
network, or printed in a folder in a common area.
●● There should be easy feedback mechanisms for any comments,
observations, etc, with a clear point of contact. A responsible ‘help’ point
should be available 24 hours a day, seven days a week.

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Example
A new set of materials-recording processes had been implemented by con-
sultants into a medium-sized manufacturing company. It appeared that the
set of processes was either incomplete or erroneous since the company was
obliged to count stock every quarter and effectively write off around
25 per cent of material that was believed to be on site! In view of the nature
and size of the materials involved, theft was not the source of the problem.
All raw materials issues, production records, semi-finished product pro-
cessing records, finished product inspection records and finished product
stock records were examined for a period of eight weeks in order to under-
stand the flow of material through the factory from suppliers to customers,
and many system and discipline errors were found. To correct the problems,
it was necessary to:

●● explain to personnel the importance of system discipline and ensure that

each person was familiar with the recording processes and was properly
trained;
●● create procedures for special products that had been ignored in the
original system;
●● clarify the production routes and recording points for each product type,
including in particular handling of withdrawals from finished stock for
further processing;
●● clarify how to record problems, e.g. rejection at inspection, re-work.

In consequence, the stock check became an annual event, carried out by

personnel over a weekend, saving 10–12 production days per year. Inventory
accuracy increased to over 95 per cent in the first year after implementation
of the changes.

Further information
For further information about sources of error and methods of correction, David
Piasecki (2003) has summarized years of experience: Piasecki, D (2003)
Inventory Accuracy: People, processes, and technology, OPS Publishing,
Kenosha, WI.

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3.16 Stock turn

Introduction
One of the easiest measures of inventory performance to implement and to
understand is ‘stock turn’. Crudely, this means how often the stock turns
over during the year. In other words, how many times on average does the
material flow in and out of the storage area? For the same level of availa-
bility, a higher number of stock turns indicates better management of
inventory.
In practice, of course, we know that different items will have very differ-
ent levels of stock turn. Some items may not be issued at all (non-movers or
stock turn of zero). Some may be used and replenished every week. Hence it
is useful to consider the overall stock turn for the whole inventory (formula 1)
and also stock turn for each individual item (formula 2); stock turn for one
item can also be calculated using values instead of quantities.

Cost of total annual issues(£) (1)

Overall stock turn =
Value of average inventory level(£)

Quantity of item i issued during the year (2)

Stock turn for item i =
Average stock level of item i

Sometimes it is not possible to obtain the cost of total annual issues and it is
easier to obtain the monthly value of stock purchases. This will work just as
well so long as the data are consistent for the year.

When to use
Warehouses and distribution centres measure overall stock turn as part of a
daily, weekly or monthly inventory performance report. In manufacturing,
monthly or even six-monthly measures suffice.
When stock turn is calculated for individual items, we can identify the
‘fast movers’ (those with the highest stock turn) and the slow movers (those
with the lowest stock turn). Non-movers in a period will have a stock turn
of zero.

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How to use
The average inventory level can be found from the inventory management
system or by averaging the end-of-month inventory level figures over a period
of time. As mentioned above, either total monthly issues or total monthly
purchases can be used to indicate throughput, so long as only one type of data
is used for the whole period under review.

Examples
Example of stock turn calculation for one item. We are going to calculate the
number of stock turns for safety boots over the year. Table 3.20 shows the
issues and end-of-month stock by month for one year. Note that a delivery of
50 pairs of boots was received in June.

Table 3.20 Issues and end-of-month stock for safety boots

Issues End-of-month stock

Jan 6 42

Feb 1 41

Mar 8 33

Apr 15 18

May 3 15

Jun 4 61

Jul 6 55

Aug 9 46

Sep 8 38

Oct 4 34

Nov 1 33

Dec 3 30

Total 68

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First, we need to find the average stock level. To do this we find that the
average of all the month-end figures is 37.2 (take the sum of all the end-of-
month stock levels and divide by 12).
Secondly, we find the total number of pairs of boots issued over the year.
From Table 3.20, we see that 68 pairs of safety boots were issued over the year.
Using formula 1, we can now calculate the overall stock turn for the year:

Quantity of item i issued

during the year
Stock turn for safety boots (1)
Average stock level of item i

Using formula 2, we can now calculate the stock turn for the year:

Cost of total sales(£)

Overall stock turn = (2)
Average cost of goods stored(£)

We conclude that stock turn for safety boots for the year was just under 2.
Example of overall inventory stock turn. Over the last 12 months, the cost
of total sales from a warehouse amounted to £5,000,000 and the average
cost of goods stored in the warehouse was £500,000.

Further information
See Relph, G J and Milner, C Z (2019), The Inventory Toolkit, Kogan
Page, London; Waters, C D J (2003) Inventory Control and
Management, 2nd edn, Wiley, New York.

3.17 Vendor-managed inventory
(and co-managed inventory)
Introduction
VMI brings efficiency through grouping more items to each supplier order,
having fewer suppliers and combining these with a regular ‘milk round’
delivery by the vendor.
On perhaps a daily or weekly basis, the vendor visits the customer’s
premises, checks the level of physical stock and adds sufficient replenish-
ment items to take the stock level back up to the desired target stock level
(TSL), keeping a record of what has been supplied. The customer is then

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invoiced, perhaps weekly or monthly. In some cases, the vendor has remote
access to the inventory management system to identify the quantities issued
of each item and is thus able to prepare the replenishment stock in advance
of the visit. Clearly, the ability to operate VMI correctly depends on the level
of stock issue discipline being operated by the customer.
Lack of discipline in some cases has given vendors considerable problems
and this is an area that must be addressed before setting up VMI. If the cus-
tomer is not disciplined, there will be unexpected stockouts that have noth-
ing to do with the vendor’s activity or efficiency. On the other side, some
customers have been concerned that the vendors have been keeping too
much stock on site (thus taking up too much space in their warehouse) or
they have experienced too many stockouts due to poor estimates of inven-
tory parameters by the vendors. Thus VMI in many cases has been super-
seded by co-managed inventory (CMI) to reflect the fact that it is often
better to set the inventory management parameters jointly. Maximum and
minimum stock levels are agreed together, as are replenishment criteria and
performance measures. If the customer anticipates extra demand, the ven-
dor should be warned in advance. If the vendor foresees any supply prob-
lems, the customer should be notified, and so on.
The main advantages of VMI/CMI are that the administrative costs of the
client company are much reduced, including the costs of setting up purchase
contracts, placing purchase orders, receiving replenishment quantities, man-
aging the stock, keeping inventory records, making issues and paying sup-
plier invoices. This can take up a disproportionate amount of time compared
to the value of the items concerned. For example, if 500 different types of
fastener can be supplied from one source, with one invoice per month, there
could be considerable cost savings compared with the cost of carrying out
purchase and delivery arrangements with perhaps over 20 suppliers, each on
different ordering and delivery cycles.

When to use
In the retail sector, VMI/CMI is used increasingly in shops of various sizes.
For example, a battery manufacturer directly replenishes batteries in super-
markets. A sandwich maker delivers more sandwiches to augment the stock
in petrol stations every two hours, thus ensuring that the product is fresh
and that the most popular fillings do not run out.
PepsiCo delivers a whole range of products directly to many small city-
centre stores in the United States, puts the stock on the shelves and invoices

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224 The Logistics and Supply Chain Toolkit

the customer for the quantities delivered. This saves stockroom space and
staff shelf-filling time but also has been found to prevent stockouts and in-
crease sales for both the retailer and PepsiCo.
In industry, VMI/CMI is being used more and more for C-class items
(low-value and/or low-usage quantities), typically fasteners, connectors and
other non-critical items such as production consumables, office supplies,
safety equipment and lubricants. In recent years, higher-value items such as
spare parts have been under vendor management, stored at the hub of an
express parcel company where it then becomes relatively economic for the
express delivery company to deliver parts over a wide area very quickly.

How to use
First, the group of items to be supplied by a particular vendor is agreed with
that vendor. It is in the interests of the customer to obtain as many items
from the vendor as is possible to minimize transport and administrative
costs. Sometimes the vendor is willing to add items to its stock list for a
particular customer.
It is important to give the vendor appropriate historical data about item
usage and the best possible forecast for future usage. If these cannot be sup-
plied or are considered to be unreliable, larger safety stocks must be used
(i.e. higher minimum stock levels).
The general conditions of setting up an operation will be discussed and
agreed, including:

●● frequency of visits, for example to fit in with the vendor’s other clients in
the area so that transport is economic;
●● maximum and minimum limits for the stock of each item, calculated by
the vendor (VMI) or agreed together (CMI);
●● frequency of invoicing;
●● taking inventory of existing stock and any outstanding orders, so that the
vendor can take over management of replenishment.

Example
A customer and vendor are setting parameters for the stock of high-visibility
jackets in a factory. Issues over the last three years appear to be reasonably
stable (see Table 3.21). However, further analysis shows that the monthly

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Inventory management tools 225

issue quantity can vary enormously (Table 3.22). Further questioning re-
veals that a party of visitors made one large withdrawal in April (which was
not returned) and on induction a group of apprentices required another
batch of jackets to be issued (and these jackets were then kept by the ap-
prentices).
Although the annual rate of usage is quite small, issue quantities can be
highly variable and so it was decided to have a large safety stock since a
stockout could have safety implications. It was agreed to hold a safety
stock of 15 jackets. Apart from the visitors and apprentices, average
monthly consumption is approximately two. The minimum level was there-
fore set at 17 to be safe, and a maximum level of 20. Fortunately, this ven-
dor supplies a wide range of other items, so the jackets were added to the
list of stock item levels to be checked on the weekly visit. In practice, this
means that the vendor checks the stock level weekly and adds enough jack-
ets to take the stock level back up to 20 jackets. Since this is a new item for
VMI, and a safety requirement, both sides agree to monitor the situation
carefully. Electronic access to the company’s inventory management system
is being discussed.

Further information
See Winters, J and Lunn, T (1996) The effective implementation of co-
managed inventory, Logistics Focus, September, pp 2–7. This article
describes a trial between the retailer Somerfield and a number of major
suppliers.

Table 3.21 Total issues during the last three years

High-visibility jackets Year 1 Year 2 Year 3

Quantity issued over the year 35 31 38

Table 3.22 Monthly issues during the last 12 months (year 3 in Table 3.19)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

5 1 0 14 2 0 5 1 9 0 1 0

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226 The Logistics and Supply Chain Toolkit

3.18 Identification and disposal

of surplus stock
Introduction
Inventory must be managed actively or it will just grow. Whether you have
taken over an inventory that has not been managed properly for a while, or
you are already actively managing your inventory, you need to identify stock
that is in excess, obsolete or time-expired and you need an agreed policy for
disposing of it. It is not always easy to set up a disposal policy since some
accountants are reluctant to dispose of stock at less than book value. Some
kind of discount is usually necessary for disposal. Nevertheless, it is impor-
tant to identify and dispose of surplus stock, otherwise it just ties up operat-
ing capital and storage space, both of which can be used for more profitable
activities.

When to use
Some businesses review their raw materials stock or finished goods stock at
regular intervals, perhaps once or twice per year. Other companies use
events to trigger a stock review; for example, reviewing spare parts inven-
tory for a machine that has just been sold or scrapped, or the need to create
space for a new range of products.

How to use
Two separate elements are required: 1) identification of surplus stock, i.e.
excess, obsolete or time-expired; 2) creation and application of a disposal
policy.

1. Identify surplus stock

‘Excess’ means that you have more stock of an item than is necessary and
can usually be identified using stock cover, calculated as:

Stock cover (days) = Current stock level / average daily rate of usage

If the stock cover seems excessive, this may be a candidate for disposal.
Investigate why the stock cover is so high. Was the demand forecast too
optimistic? Is it a slow mover? Can this item only be made or obtained in

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Inventory management tools 227

large quantities? Is there a minimum production or purchase quantity? Did

somebody buy too much so as to qualify for a quantity discount?
‘Obsolete’ means that there is no further demand for this item. These
items can be identified by looking for non-movers over a time period. ‘Non-
mover’ means that no stock of this item was issued during that period (see
Figure 3.10). The time period depends on the nature of the stock and the
industry. For example, fast-moving consumer goods companies are inter-
ested in stock movements over recent weeks. Managers of spare parts inven-
tories look at non-movers over the last few years. Again, each suspected
obsolete item must be investigated before being identified as a candidate for
disposal. If they have not been flagged up by the inventory management
system already, time-expired items are identified by searching inventory re-
cords for their time of arrival and date of expiration.

2. Disposal policy
The disposal policy must be created and agreed by a group of representa-
tives from the departments responsible for inventory management, ware-
housing, accounting and purchasing (for their experience of searching
supply markets). It covers the identification of items that are considered
to be redundant, deciding how to dispose of them, their removal from the
inventory management system and final disposal. Before creating the pro-
cedure, it is useful to brainstorm all possible disposal methods. These may
include:

Figure 3.10 Non-mover analysis

Number
of items
250

200

150

100

0
> 1 year > 2 years > 3 years > 4 years > 5 years
Period during which there have been no issues

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228 The Logistics and Supply Chain Toolkit

●● Destruction, or adding to normal company waste.

●● Adding pages to a company website indicating the items that are available
for sale, with or without a suggested price, and details of who to contact
for more information.
●● Approaching the original vendor in case these items may be of interest.
This can work well for spare parts, as the vendor may know of other
companies still using the same type of equipment that may be interested
in purchasing a job lot of spare parts.
●● Advertising in specialist magazines or websites indicating the type of
items available and who to contact for more information.
●● Placing the items for sale through internet sales portals, either general
sales sites or specialized sites for the sector.
●● Sub-contracting the advertising and sales process to a company
specializing in surplus inventory disposal, usually for a percentage of the
sales value realized.
●● Inviting a company specializing in surplus inventory to come and remove
the items for some nominal value, or for a fee.
●● Charitable donation, which can be tax-efficient.

The main elements of the policy are as follows:

1 Identify potential stock for disposal. For example, annually create a list
of surplus stock, non-movers and expired items. Apply the methods
described above.
2 Inform the users. Circulate this list to their main users (e.g. production,
maintenance, projects, engineering, transport, warehouse) for comments
to be returned before a certain date. Do the users envisage any future use
for these items?
3 Agree the final list for disposal. Each user department discusses the list of
proposed items for disposal and either agrees to disposal of the item or
makes a brief justification for retaining the stock. A list of items signed
off for disposal is returned to the inventory manager.
4 The items for disposal are physically removed from the main stock to a
separate area ‘awaiting disposal’. Their location in the inventory
management system is changed to this new location and their status is
also changed to ‘awaiting disposal’. The user departments are informed
that this has been done.

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Inventory management tools 229

5 The ‘book price’ of each item is given by the accounting department and
the disposal group agrees the best method of disposal for each item.
6 When disposal occurs, the items are issued from the ‘awaiting disposal’
area. The items are deducted from the inventory management system and
the item record is closed when all stock has been disposed of.
7 Finally, the accounting department writes off any difference between the
book value and the realized value.

Example
Many companies manage production materials very well (raw materials,
work in progress, finished product) but some do not apply the same level of
inventory control to stocks of spare parts. A new manager to a company in
the oil and gas sector in India identified a stock of obsolete parts worth
several millions of dollars that he thought could still be useful to oil and gas
companies in other parts of the world. The company set up a website that
listed the items available, their prices and conditions of sale. Over a period
of 12 months it managed to dispose of about three-quarters of the stock
value to North Africa, South America and other exploration and produc-
tion areas.

Further information
An internet search using the term ‘inventory disposal’ will bring up a myriad
of example procedures from specific organizations as well as companies that
specialize in this sector.

3.19 Managing spare parts inventory

Introduction
Inventory is generally managed using forecasts and historical data (for items
subject to unknown demand) and by stocking items for planned future
needs (expected demand). This is also true of spare parts inventory where
some spare parts are stocked for regular maintenance or projects (expected
demand) and others for breakdowns (unknown demand).

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230 The Logistics and Supply Chain Toolkit

There are now many options for managing spare parts inventory including:

●● Using suppliers that have placed stocks of strategic items at carrier hubs
for rapid delivery.
●● Holding spare parts on consignment (see tool 3.4) or ‘use or return’
agreements (e.g. for planned maintenance interventions).
●● Using 3D printing for certain parts.
●● Sharing visibility of stocks with a sister or neighbouring company.
●● Accessing a network of users of similar equipment.
●● Joint planning of major maintenance activities in a group of companies
to take place at different times so that ‘might be required’ inventory can
be moved to the next site that may need it.
●● Centralizing inventory as much as possible so as to minimize safety stock.
●● Increasing the proportion of planned maintenance so as to reduce the
number of spares to be stocked for breakdowns.
●● Using more sophisticated software and modelling for analysing
breakdowns and anticipating future failures.
●● Outsourcing some maintenance.
●● Using asset condition monitoring to anticipate failures.

When to use
It is worth reviewing the total value of the spare parts inventory against the
level of service on an annual basis taking into account the events that have
occurred over the year, e.g. new equipment to maintain, equipment that has
been sold, new tools, materials, supplier agreements, particular problems
that occurred as well as projects for the next year, e.g. refurbishment, new
equipment, modifications or higher/lower reliability requirements.
In industries with continuous production, e.g. oil and gas, any downtime
means loss of revenue. A downtime cost per minute can be calculated.
At this point, consider whether the spare parts inventory strategy should
be revised.
A non-mover analysis (see tool 3.18) should be carried out annually. A
large number of non-movers could also trigger a review.

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Inventory management tools 231

How to use
Spare parts inventory management must be linked to the management of the
maintenance, repair and overhaul (MRO) activity for which the spare parts
are being used. For planned maintenance, a list of parts required and the
time of requirement must be supplied from the maintenance planning sys-
tem to the inventory manager to enable existing stock to be checked (e.g. for
items left over from the previous requirement) and allow new stock to be
purchased in time.
Whether items are stocked for expected or unexpected demand, it is crit-
ical to carry out ABC analysis and identify each item’s class, in terms of
usage value (see tool 3.2), and also usage rate (see tool 1.3). To distinguish
usage rate classes from usage value classes, we shall call them XYZ, where
X represents fast movers and Z the slowest movers.
Items that are stocked in case of breakdowns are far more difficult to
manage and the stock will depend on a number of key questions:

●● How likely is it that the item will be required in the next year (1–10)?
(1 = unlikely, 10 = certain).
●● How critical is a stock-out of each item? Can we substitute another size/
material, etc? Give each item a criticality rating from 1 to 10 (1 =
unimportant, 10 = absolutely critical).
●● How rapidly can each item be obtained in time of crisis? Give each item
a rapidity rating from 1 to 10 (1= fast, 10 = long lead time).
●● What is the minimum quantity that must be bought?
●● Is there a ‘use or return’ (consignment stock) agreement with the supplier?
●● What was the average annual requirement for this item over the last five
years?
●● What maximum annual requirement was seen in the last five years?
●● What minimum annual requirement was seen in the last five years?

The last three questions aim to understand the level of demand (1 per year?
100 per year?) and the variation in demand (e.g. 0 some years, 10 or 15 oth-
ers?). Clearly, these questions are most critical for the A items. It is much
cheaper to hold a bigger safety stock of a C item than an A item. More im-
aginative solutions, such as some of those in the introduction to this tool,
will have to be employed for some of the A and B items.
Ultimately, the total number of different items and their stock levels will
depend on the total budget available for inventory and the desired level of

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232 The Logistics and Supply Chain Toolkit

service to the MRO operation. The ‘best guess’ of future needs will come
from an analysis of past needs for the same or similar equipment, obtained
from your company’s own records, the manufacturer or other users of this
type of equipment. Sometimes there are user groups that are willing to share
this information.
When managing spare parts inventory, it is particularly important to
record:

●● all failures to supply an item immediately (to determine level of service)

and reason for non-immediate supply (e.g. stock-out due to late delivery,
unusually large demand, dearth in supply market);
●● the time required to supply items that were not supplied immediately,
from time of demand to time of issue;
●● all returns to stores and reasons for non-use;
●● cost of any movement from one site to another (for the ‘move or buy’
decision).

Finally, it is important that the users of the inventory take a disciplined ap-
proach. In the heat of the moment, when responding to a breakdown, it is
easy for the issue to go unrecorded. If, as in many cases, the spare parts
stores are unmanned, security cameras or access control records must be
used regularly to check that all issues have been recorded.

Example
Table 3.23 shows a selection of items from a spare parts stock and the data
used to decide how each item should be managed.

Further information
A wealth of software is available for managing spare parts inventory:
some of the packages are free and some are part of a computerized
maintenance management system, some of which are also free.
Further useful web-based resources are: http://en.slideshare.net/Logio_
official/omaintec-spare-parts-workshop-part-2-8-rules (archived at
https://perma.cc/RJ28-G7B8) and https://blogs.sap.com/2016/02/22/
spare-parts-management-in-sap-plant-maintenance/ https://perma.cc/
T4PU-NTGE)

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Table 3.23 Key data for a selection of spare parts

Likelihood Diff. to Min. Ave. Min. Max.

Pareto Pareto Demand of need Crit. obtain purch. Use or ann. ann. ann.
Item code ABC XYZ E/U/B (1–10) (1–10) (1–10) qty return? use use use Policy decision

PX3494 A Z U 3 10 10 1 N 0 0 1 Hold 1 in stock

KT5228 A Y U 8 6 2 1 N 5 2 6 ROP = 0
ROQ = 1

HT3446 A X B 10 10 2 10 N 30 25 40 ROP = 5
ROQ = 1

CF7889 A X U 10 10 3 50 Y 33 10 50 VMI if possible, else ROP

CR9045 A X U 10 8 5 10 N 10 2 15 VMI if possible, else ROP

SG5786 B Y E 10 8 10 1 N 10 8 12 Buy ahead of planned use

MC2596 B Z B 10 10 5 1 N 1 0 1 ROP = 0
ROQ = 1

(continued )

233
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234
Table 3.23 (Continued)

Likelihood Diff. to Min. Ave. Min. Max.

Pareto Pareto Demand of need Crit. obtain purch. Use or ann. ann. ann.
Item code ABC XYZ E/U/B (1–10) (1–10) (1–10) qty return? use use use Policy decision

AV5489 C Z U 10 5 10 1 ? 3 1 3 Aim for consignment

MT3214 C Z B 10 8 10 1 N 1 0 1 Aim for consignment

Key: Note:
E/U/B = Expected, unexpected, both PX3494 is a very high-value highly critical item that is rarely
TSL = target stock level required and difficult to obtain because it is customized, e.g. a
ROP = reorder point furnace lining
ROQ = reorder quantity

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235

Supply chain 04
management
tools

4.1 Supply chain management audit

Introduction
Many companies have still not integrated their logistics functions (customer
order processing, transport, warehousing and storage, inventory manage-
ment, planning and scheduling, distribution) into a seamless supply chain
operation capable of interacting smoothly with their suppliers, customers
and service providers. This audit aims to highlight some of the elements of a
seamless operation in order to give companies that wish to implement sup-
ply chain management some idea of what has been achieved already and
what, if anything, remains to be done.
The questions are organized in seven sections: logistic customer service,
strategic procurement, supplier management, inbound transport, 3PLs, sales
and operations planning, and production planning and scheduling.
The fact that we talk about a supply chain indicates the linkage necessary
between the different stages of movement of a product and the different par-
ties involved to achieve this, rather than a simple series of transactions,
which is logistics management. Table 4.1 shows an extract from the full
supply chain management audit. The complete audit can be downloaded for
a small charge from http://howtologistics.com; the discount code for readers
is lsct2024.

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236 The Logistics and Supply Chain Toolkit

Table 4.1 Template for supply chain management audit

Supply Chain Management Audit

Carried out by: Location:

Date:

Item No Yes N/A Comments

Logistic customer service

Is there a range of defined logistic customer

service measures for each sales channel ?

Is the % of perfect orders measured?

Are customer complaints systematically logged

and investigated?

Are supply chain analytics used to investigate

demand and performance statistics?

Strategic procurement

Have you carried out Pareto analysis to classify

items/families?

Do you use Pareto classification in setting

procurement policy for items/families?

Do you use Kraljic matrix (or some other

purchasing portfolio method) in setting
procurement policy for items/families?

Do you use category management?

Are suppliers classified according to their

importance and performance?

Do you consciously apply a range of supplier

relationships according to supplier importance?

Is supplier performance included in vendor

selection?

Is a clear and coherent set of supplier

performance measures included in the supply
contract?

(continued )

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Supply chain management tools 237

Table 4.1 (Continued)

Supply Chain Management Audit

Carried out by: Location:

Date:

Are key suppliers involved in Kaizen or joint

problem solving when necessary?

Are suppliers involved in new product

development?

Supplier management

Do suppliers have access to a platform or

extranet (for orders, performance, demand
forecasts, etc)?

Do suppliers have access to demand

forecasts?

Do suppliers have access to order history?

Are suppliers given regular feedback regarding

delivery: on time, in full (OTIF), accuracy,
quality, etc?

Has there been an effort to reduce the total

number of suppliers?

Is collaborative planning and forecasting carried

out with key suppliers?

Do key suppliers have longer contracts than

other suppliers?

4.2 Collaborative planning, forecasting

and replenishment (CPFR®)
Introduction
(CPFR® is a registered trademark of VICS.)
We know from supply chain research that the more information that
is exchanged between suppliers and customers in the supply chain about

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238 The Logistics and Supply Chain Toolkit

demand, the less inventory we need in the chain to maintain stock availabil-
ity to the final consumer and in the chain in total. In the mid-1990s, the
Voluntary Inter-industry Commerce Standards (VICS) Association agreed to
support an initiative to enable manufacturers and retailers to forecast de-
mand jointly and subsequently plan together the supply of certain items
traded between them. This involved not only delivery planning but also ex-
changing information about forthcoming promotions and other commercial
activities, usually regarded as confidential. Since this required communica-
tion between information systems, some major software houses were in-
volved as well. The overall results reduced the number of stockouts, reduced
inventory levels, increased stock turns and increased sales, by ensuring that
the pattern of supply met the pattern of demand more closely. Protocols and
other operating methods were established.
Owing to advances in computer systems, and in the exchange of data
between companies in particular, more and more companies are undertak-
ing some kind of joint planning and forecasting with key suppliers and
customers to achieve these benefits, even though it may not be through
membership of GS1 US (which merged with VICS in 2012).

When to use
A lot of attention has been paid to improving on-time delivery in the last few
years and this has enabled incoming inventories to be reduced. Further re-
ductions to overall inventory levels can only be made by improving informa-
tion about demand and this is proving more difficult to achieve. Any
company that wishes to improve information flow regarding demand would
benefit from closer communication with key customers and by exchanging
information about their respective commercial actions (e.g. promotions,
new products) for the forthcoming months. Some companies simply have
too many products to track in this manner and so the items generating 80
per cent of sales would be an obvious focus to start with. Although the
manufacturer–retailer relationship has been most publicized, the supplier–
manufacturer link can also benefit.

How to use
Although CPFR® represented a specific agreement between companies under
the aegis of VICS, many companies can carry out some form of joint plan-
ning and replenishment in other ways. Many companies do this by simply

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Supply chain management tools 239

exchanging Excel spreadsheets. Many of these simple business tools are sent
via the internet, are undocumented and are clearly open to abuse or prob-
lems if one of the parties suffers illness or worse. If a supplier and customer
find that this kind of exchange is beneficial to them, it should be worth in-
vesting in a more formal process to increase security and ensure business
continuity.
A visit to a major supplier or customer to discuss how this could operate
and the benefits that it could bring is a good way to start. It is critical that both
parties are in agreement about the objectives and methods of data exchange.
It is useful to set up a workshop for the main personnel from each party to
discuss their business processes, planning tools and decision timing. It may
require two or three days to agree the most efficient way to work together.
Process maps or flow charts (see tool 1.28) are a useful tool for this.
The main process steps are:

1 Supplier first creates a top-level forecast from historical records.

2 Customer updates this forecast to include any extra information it has,
e.g. more/fewer shops, expanding/contracting business, and adds
information regarding commercial actions.
3 Supplier adds information regarding promotions, product launches, etc.
4 Supplier proposes replenishment plan.
5 Customer agrees or modifies and sets up replenishment orders.

Example
One CPFR® case study that really grabs the attention was the cooperation
between Henkel and Eroski. Henkel is a large multinational manufacturer
of over 10,000 items with headquarters in Germany. Eroski is a retail chain
of supermarkets and hypermarkets mainly based in Spain. A CPFR® pilot
study was introduced for nearly 2,000 items supplied by Henkel to Eroski.
Overall results included an increase in customer service level while also re-
ducing inventory in the Eroski warehouse, significantly improving the reli-
ability of forecasting, increasing truck and pallet fill and reducing the num-
ber of urgent orders.
Another example concerns a supplier to the automotive aftermarket and
a major customer who wanted to carry out joint planning and replenish-
ment, rather than formal CPFR®. A team of three or four people from each
organization spent several days together in a Kaizen workshop to discuss
their processes for replenishment planning and how they could work

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240 The Logistics and Supply Chain Toolkit

together in the most efficient way. The overall objective was to reduce the
‘soft’ costs associated with replenishment planning and ordering while min-
imizing the level of stock and maximizing availability of product. The out-
comes of the workshop included harmonized timing of decision making, an
agreed format of data in an Excel worksheet, and clear processes and re-
sponsibilities.

Further information
URLs for the Henkel–Eroski case study keep changing but it is well worth
the effort to look for it. The search terms ‘Henkel Eroski CPFR case
study’ will usually find a document or slide show summary pretty quickly.
Simply using the search terms ‘CPFR case study’ will find many more cases
of interest. See http://www.gs1us.org/ for a wealth of information on
supply chain data standards.

4.3 Demand forecasting

Introduction
Many companies do not produce good forecasts, if any. This can be under-
stood to a certain extent since the mathematics can rapidly become compli-
cated. This tool will not enable you to make forecasts, but it is hoped that
you will be inspired to think about how better forecasting can help your
business, and then take steps to implement an improved forecasting process.
In essence, forecasting uses historical data to identify patterns that are
likely to continue, enabling us to predict what may happen in future. The
safest way to handle forecasts is to remember that ‘All forecasts are wrong!’
but some are better than others. It is worth making the effort to improve
forecasting. Companies that have a better idea of what the future may bring
are usually better prepared for that future.
Demand forecasting is particularly critical in supply chain management.
The more information we can get about future demand, the less likely we
are to suffer from excess inventory or shortages.

When to use
Forecasts are important for planning and decision making. We use sales
forecasts to ensure that we have enough capacity for production and enough

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orders placed with suppliers for goods and services. The sales forecast is the
basis for the procurement budget, which in turn must be financed. Similarly,
the sales forecast will determine the capacity plan, which must be resourced
in terms of space, equipment and labour.
Depending on the purpose of the forecast and the sector, the frequency of
forecasting can vary from a rolling 20-year plan for equipment investment
in the heavy engineering sector to a daily sales forecast for fast-moving con-
sumer products in the retail sector.

How to use
It is beyond the scope of this short introduction to describe forecasting
methods in any detail but we can consider the major elements of forecasting
to see what is involved. The overall process has three steps:

1 Collect data on historical demand, by product family or individual items.

2 Use a mathematical method to create the forecast.
3 Use market-specific knowledge to add any other factors that may have a
bearing on the situation and determine whether the forecast is pessimistic
or optimistic and whether some ‘tweaking’ is required.

1. Collect data
This information can be extracted from an inventory management system to
identify sales or usage of an item on a daily, weekly or monthly basis.

2. Use a mathematical method to analyse the data

The first method to look at is ‘time series analysis’ where the historical data
can be considered to be a ‘time series’, i.e. a data item that is changing over
time. A time series has four major components that can be separated out:

a Overall trend – is the level of sales increasing, decreasing or remaining

stable over time?
b Seasonality – is there an effect of changing demand at different times of
the year, for example increased sales of chocolate at Christmas and
Easter?
c Cyclic change – are there other factors that increase demand on a regular
basis, for example increased sales of DIY products at the weekend?
d Random variation or ‘noise’ – if the effects of trend, seasonality and cyclic
change are removed from the time series, some random variation will
remain.

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242 The Logistics and Supply Chain Toolkit

Any demand forecast will have to take account of trend, seasonality and
cyclic change. Our next stage is to consider how to create the forecast. There
are many methods, ranging from simple moving averages to exponential or
regression models, and others.
A certain amount can be done by hand but the use of forecasting soft-
ware is highly recommended, either as part of the business management
software that you are using already, or as a separate package. It is worth-
while identifying somebody in your organization who has an appropriate
mathematical background or capability and who would be willing to under-
take a short course in forecasting, or learn to use a forecasting package.
Finally, it is worth mentioning that there are several methods for measur-
ing the accuracy of the forecast and this is an essential part of generating
confidence in the forecasting process. As data quality and forecasting meth-
ods improve, there should be an equivalent improvement in forecasting ac-
curacy, measured and observed.

Example
The Henkel and Eroski case study used to illustrate CPFR® (see tool 4.2) is
an excellent example of how forecast accuracy can be improved and the
benefits this can bring. The majority of demand forecasts were more than 50
per cent wrong at the beginning of the project period but within 12 weeks,
80 per cent of the product forecasts were less than 20 per cent wrong. This
was achieved by improving the quality of data being used by both compa-
nies for forecasting.
In summary, it is possible and highly desirable to improve the quality of
forecasts used in your business but it does take some mathematical effort
and interest to do so.

Further information
Many standard texts on operations management give a good introduction
to forecasting. For those who really want to study the subject, Makridakis
et al (1998) explain the many different approaches clearly: Makridakis,
S, Wheelwright, S C and Hyndman, R (1998) Forecasting: Methods and
applications, 3rd edn, Wiley, New York.
Use search term ‘Henkel Eroski CPFR case study’ to find a document or
slide show on this case study.

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4.4 Factory gate pricing (FGP)

Introduction
FGP was introduced into the UK in the early 2000s by UK retailers to reduce
their overall transport costs, reduce inventory holding in their distribution
centres (DCs) and stores, and increase efficiency by reducing the number of
vehicles delivering to site and improving throughput through improved co-
ordination and consolidation. The introduction of lean principles into the
retail supply chain (known as quick response) led to smaller, more frequent
deliveries, which increased the pressure on the DCs.
Previously this system would have been described as supplier collection
and – to a certain degree – nominated carrier schemes. The principle is very
similar to an ex-works situation (see tool 2.5) whereby the consignee col-
lects from the consignor and is liable for all the costs entailed. From a re-
tailer viewpoint, vehicles delivering to stores from the distribution centres
are able to call back into suppliers on their return journeys and collect prod-
uct destined for the DC. This can be full or part loads or a number of collec-
tions from multiple suppliers. This will ultimately depend on the capacity
available on the truck and the time available for the driver.
This will result in an increase in on-time delivery at the DCs and greater
visibility within the supply chain. Studies have shown (Potter et al, 2007; Le
Blanc et al, 2004) that logistics-related costs can be reduced by between five
and eight per cent. Potter et al (2007) describe FGP as ‘the use of an ex-
works price for a product plus the organization and optimization of trans-
port by the purchaser to the point of delivery’.

When to use
When companies are looking to reduce costs and improve visibility within
the supply chain. In reality, any company with a fleet of vehicles making
deliveries to customers that has suppliers in close proximity can use this
system. This can include the collection of raw materials, provided that the
vehicles are suitable for both inward and outward journeys.
If vehicles are continually running back empty to base and have sufficient
time available to collect goods from local suppliers, then, provided that an
agreement on cost can be arrived at with the supplier and a regular pattern
of collections set up, there is no reason why it cannot be instigated. Daily

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244 The Logistics and Supply Chain Toolkit

fixed transport costs are now shared across two deliveries rather than one.
This also reduces the amount of empty running that takes place on today’s
roads.
However, there can be issues for the suppliers who may well have opti-
mized their fleet and achieved transport efficiency when including these de-
liveries to the customer. Any reduction in delivery volume will have an effect
on the cost per delivery and the overall efficiency of that operation. This is
also the case where suppliers have contracted with a local haulier or 3PL to
undertake their deliveries, with FGP resulting in less volume being trans-
ported by these companies.
In fact, suppliers need to address the following, according to Alan
Braithwaite, a leading British expert on logistics and supply chain manage-
ment:

●● How much discount can they afford to allow the retailers for collecting
their product?
●● How do they deal with the different pace of change adopted by the
various retailers who will introduce FGP at different speeds?
●● How do they deal with their existing infrastructure and logistics contracts
as volume is transferred to retail control – making it less cost-effective?
●● What commercial, pricing and ‘terms of trade’ policies and structures are
appropriate in this new era?
●● Finally, how will FGP affect their own fleet operations if volumes are
going to reduce significantly?

There needs to be a workable agreement between supplier and buyer and if

the supply chain as a whole is going to gain, the two parties need to work
together on this initiative. It can be seen as very one-sided.

How to use
The first step is to identify which suppliers can be incorporated into the
scheme. This will be based on location, volume, frequency of delivery, out-
bound vehicle delivery schedules and current cost of outbound and inbound
delivery (if this can be extrapolated from the product cost).
Where it is not cost-effective to change from supplier delivery to FGP, the
situation with those particular suppliers will remain as is. However, there
are instances where suppliers are now collecting from DCs and delivering to
stores on their route back to their facility (see Figure 4.1).

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Supply chain management tools 245

Figure 4.1 Example of supplier collections on return from DC to store delivery

Delivery to
store
Supplier B

Supplier A

Store

The buyer will need to invest in an IT system that can manage this whole
process. There are many transport management and supply chain optimiza-
tion systems on the market; many of these can be found from tool 2.9.
Compatibility of product is a factor in terms of which supplier collections
can be consolidated. This can include cube, weight, temperature require-
ments, fragility and whether hazardous or not. Scale is also important here,
as is the availability of a good information technology system to manage the
movements.
Finally, there needs to be an understanding on behalf of the buyer’s logis-
tics team of the supplier’s warehousing operation. This needs to include
hours of operation and means of loading vehicles. The increasing use of
double-deck trailers by retailers for store delivery can cause issues at sup-
plier locations if their loading bays are not capable of receiving such vehicles.
Communication between the inventory and logistics team is vital, as is
the relationship with the suppliers to ensure a smooth and accurate flow of
information between parties.

References
Le Blanc et al (2004) Factory Gate Pricing: An analysis of the Dutch retail
distribution, Center for Applied Research Discussion Paper No. 2004-35,
Tilburg University, Netherlands

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246 The Logistics and Supply Chain Toolkit

Potter, A, Mason, R and Lalwani, C (2007) Analysis of factory gate pricing

in the UK grocery supply chain, International Journal of Retail &
Distribution Management, 35 (10), pp 821–34

4.5 Kanban
Introduction
Kanban is the Japanese word for signboard or card (Japanese Management
Association, 1986) and is just one element of the Toyota Production System
that has been generalized into ‘Lean’ production. Here, we are looking at
how Kanbans are used as a method of replenishment.
There are different types of Kanban signals and Kanban systems, but for
our purposes we will just consider a simple circuit where Kanbans are used
to pull parts from a previous stage in the supply chain. These parts could be
coming from a previous production stage or an external supplier.

When to use
This is particularly useful for supplying to production lines parts of high
value or parts that are frequently used. It can be used for parts that are sup-
plied nearly all the time (runners), or regularly (repeaters), but is not appro-
priate for parts that are rarely supplied again (strangers). It is an excellent
method for reducing cycle stock of parts from external suppliers (particu-
larly if they are local) or for minimizing work in progress for parts from
internal suppliers.

How to use
Figure 4.2 shows the Kanban circuit. It can be seen that a full box of parts
is sent to the customer, internal or external. Once all the parts are used, the
empty box is returned to the previous production stage or to the supplier to
be refilled. If the supplier is external, the supplier collects the empty boxes
when the next delivery is made, whether that is by the supplier’s own vehicle
or milk-round vehicle, or other transporter.
There are three essential elements to setting up and running a successful
Kanban system. The first is the nature of the containers that move the parts
and the second concerns the number of containers or boxes in the system.
The third element is system discipline.

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Supply chain management tools 247

Figure 4.2 Kanban circuit

Kanban card shows

part name and code
number, quantity per
box, supplier name,
point of use on the
assembly line, and
card number out of
total number of cards.

Empty box returns

to supplier factory

Supplier
Customer’s
factory
assembly line

Full box is sent to

assembly line

Parts are moved in boxes, where a known and fixed number of parts are al-
lowed in the box. Although boxes are used most frequently, the ‘container’
may be anything that holds a certain number of parts safely and can be
moved easily. This could be, for example, a hanging rail, tube, crate or trol-
ley; ‘box’ is used here for simplicity. Normally, ‘inserts’ (formed packaging
with shaped spaces for the parts) in the box ensure that only that type of
part can be put into the box, and only a certain quantity of parts. The ideal
quantity and therefore size for a box is about one hour’s work or a box that
will hold a weight that can be easily lifted. This varies enormously according
to the size and weight of the part. Usually a Kanban card is attached to the
box and the Kanban identifies the part name, part number, quantity to be
held in the box, source of the part, destination of the part, and the sequence
number of the box against the total number of boxes for that part type.
The total number of cards for that part type in circulation controls the
overall level of inventory that is allowed for that part type. The more cards
that exist, the greater the amount of inventory there will be, with all its as-
sociated holding costs and tied-up operating capital. The number of cards and
boxes required, however, depends on all the elements that control the flow of
parts in terms of capability to supply and rate of consumption of boxes.
The number of boxes is calculated from formula 1 below. It can be seen
that a longer lead time to supply will result in more cards being required.
Similarly, if there is high hourly demand or if a greater safety stock is
required, a greater number of cards are necessary. However, if parts are

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248 The Logistics and Supply Chain Toolkit

small and the capacity of the container is relatively large, then a smaller
number of cards will be required.

d t s (1)
Number of Kanbans (N)
c

Where: N = number of Kanbans

d = hourly demand
c = capacity of container
t = average time to obtain a replacement box (in hours)
s = safety stock (in hours)

For the system to operate well, the rules must be strictly observed. The box
must contain only the exact number of parts shown on the Kanban card, no
more, no less. Only the appropriate box for that part may be used to trans-
port it. The box must contain only good, usable parts. A box must never be
supplied without a Kanban card. The box must be emptied completely be-
fore being returned to the supplier.

Example
An assembly line makes 100 washing machines per day and the motors are
supplied by Kanban in containers holding five units. The working day is
eight hours. A safety stock of two hours is required.
It can be seen immediately that 20 (= 100/5) containers of motors will be
required each day, but how many boxes should there be in the circuit?
Empty containers are picked up every hour to be taken back to the goods
receiving area, awaiting collection when the next delivery arrives from that
supplier. This supplier delivers every two hours, and the supplier is about
half an hour away from the washing-machine assembly company. The sup-
plier usually refills the boxes within an hour of their arrival and then they go
out on the next delivery run. Once at the washing machine company, it may
take up to an hour before the boxes are delivered to the assembly area. The
total time in this refill circuit is summarized in Table 4.2.
Let us now substitute this data into formula 1:

d = hourly demand = 100/8 hours = 12.5 units per hour

c = capacity of container = 5 motors per box
t = average time to obtain a replacement box (in hours) = 7 hours
s = safety stock (in hours) = 2 hours

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Supply chain management tools 249

Table 4.2 Time in the Kanban circuit

Maximum time
Stage required (hours)

Removal to goods receiving 1

Collection by supplier 2

Travel to supplier 0.5

Refilling by supplier and wait for next delivery to customer 2

Travel to customer 0.5

Delivery to assembly area 1

Total hours = 7

d t s 12.5 7 2
Number of Kanbans ( N ) = 23
c 5

It is concluded that we need 23 containers and cards in the circuit. We can

see that, at any one time, there could be five full boxes waiting for assembly
(safety stock of 2 hours = [12.5 × 2]/5), two or three boxes waiting to be
returned to goods inwards (12.5/5), plus a maximum of five boxes waiting
to be returned to the supplier ([12.5 × 2]/5), plus five boxes coming back
from the supplier plus two or three boxes waiting to be delivered to the as-
sembly area, plus some in transit for a short time (5 boxes for half an hour ≈
2 or 3 on average). In practice, we would see how this number of Kanbans
worked and then adjust it accordingly.

Further information
See Bicheno, J and Holweg, M (2009) The Lean Toolbox, PICSIE Books,
Buckingham.

Reference
Japanese Management Association (ed) (1986) Kanban: Just in time at
Toyota: Management begins at the workplace (tr DJ Lu), Productivity
Press, Portland, OR

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250 The Logistics and Supply Chain Toolkit

4.6 Kraljic matrix

Introduction
The procurement function has changed dramatically since the 1990s, from
a ‘purchasing’ activity that was regarded as primarily administrative, look-
ing for the ‘best value’ items to buy, to a strategic function (see tool 4.22)
that is capable of generating profit and competitive advantage for the busi-
ness by sourcing from high-performing suppliers. One of the milestones in
this transformation was a paper by Peter Kraljic (1983) in which he de-
scribed a way of analysing the portfolio of purchased items and services.
The purpose was to adapt the method of procurement to the complexity of
the supply market, and the relative importance of that purchasing decision
to the business.
The overall complexity of the supply market depends on such factors as
the number of potential suppliers available, the rate of technological change,
barriers to entry for potential new suppliers and potential transport com-
plexity, perhaps due to distance or special packaging requirements.
The relative importance of the purchasing decision to the business de-
pends on such factors as the overall value of the decision, the strategic im-
portance of the item to the business and impact of the price of this item on
profitability.
These two factors form the axes of a 2 × 2 matrix and an approach to the
procurement task is defined for each quadrant (see Figure 4.3).

When to use
This is not an everyday tool but is useful for periodic re-evaluation of pro-
curement approaches in the business. The relative importance of items or
families can change over time as new products are introduced and the prod-
uct mix changes. It can also be useful before the introduction of a new
product in order to review the relative importance of its different compo-
nents, assemblies or raw materials.
The Kraljic matrix is a good communication tool for explaining procure-
ment methods and strategies to different user functions. Communication
between the procurement function and user departments is vital to making
the best supplier and product selections.

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Figure 4.3 Kraljic matrix

Material management Supply management

(Leverage items) (Strategic items)
Importance of purchasing decision

Group items together and Evaluate potential suppliers

High negotiate with several potential very carefully
suppliers Set up long-term agreements
12–24-month contracts Explore mutual cost reduction
Negotiate delivery frequency Invite supplier’s experience
for new products and projects

Purchasing management Sourcing management

(Non-critical items) (Bottleneck items)

Annual contracts Keep searching for alternative

Low Look for local suppliers suppliers/products
Vendor-managed inventory Devise contract to minimize risk
Relationship development

Low High
Supply market complexity

How to use
It is advisable to carry out a Pareto or ABC analysis (see tool 3.2) first in
order to understand which purchased items or families have the greatest
financial importance. Then the items or families can be placed in the quad-
rants, either by the procurement function or by discussion between procure-
ment and user functions. Finally, the appropriateness of current procurement
methods for each family can be reviewed against the methods appropriate
to that quadrant.

Example
A manufacturing company has determined that its outsourced logistics and
supply chain services fall into six main categories:

1 full vehicle ambient transport;

2 market distribution transport to customer;
3 global sea freight services;
4 global air freight services;

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252 The Logistics and Supply Chain Toolkit

5 a single national distribution centre providing co-packing and returns

management services;
6 pallet supplies.

After some discussion, they position each family into the matrix as shown in
Figure 4.4. One of the outcomes of the discussion was to try to find alterna-
tive suppliers for some of the specialist transport and market distribution
services where there was currently only a single supplier identified, and that
fell in the ‘sourcing management’ quadrant. It was recognized that the secu-
rity and development of the single national distribution centre was key and
that the current supplier might not be the right partner for the joint develop-
ment of after-care services.
Global air and sea freight services had high spend and criticality in ser-
vice for the company and needed to be tendered regularly.
(Example provided by BigChange, bigchange.com, formerly Labyrinth
Consulting)

Reference
Kraljic, P (1983) Purchasing must become supply management, Harvard
Business Review, September–October, pp 109–17 (or find out more by
googling ‘Kraljic matrix’)

Figure 4.4 pplication of Kraljic matrix to outsourced logistic and supply chain
A
services

Material management Supply management

(Leverage items) (Strategic items)
Importance of purchasing decision

High Global sea freight National distribution centre

Global air freight

Purchasing management Sourcing management

(Non-critical items) (Bottleneck items)

Low Full vehicle transport Some specialist transport

Normal pallet supplies Some market distribution
Some pallet supplies

Low High
Supply market complexity

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4.7 Maturity models

Introduction
The general purpose of a maturity model is to enable users to position them-
selves in terms of the level of advancement, or ‘maturity’, of the function or
activity under consideration and thus to determine what to do next to seek
improvement towards some kind of ideal or high-performing function or
activity. Typically maturity is described at four or five levels, from low per-
forming to high, but any number of levels can be included (see Figure 4.5).
There is a good parallel between a maturity model for the logistics and
supply chain function and the four ‘stages in the evolution of manufactur-
ing’s strategic role’ proposed by Hayes and Wheelwright (1984, 1985). At
the lowest level of contribution to the business, they describe the manufac-
turing function as being ‘internally neutral’ where it is reactive and requires
outside assistance to make strategic decisions. Looking outside the business,
it can move to the next level of performance and become ‘externally neutral’
by adopting industry best practices. The next level, ‘internally supportive’, is
achieved by ensuring that manufacturing strategy is developed from, and
supports, the business strategy. The highest level, ‘externally supportive’, is
achieved when manufacturing has a level of innovation in processes and
technologies such that it is involved in major marketing and engineering
decisions.

Figure 4.5 Linking improving performance with maturity

Innovate
Search for and
adopt best
practices
Increase
Level of performance

awareness
through
training

Level of maturity

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254 The Logistics and Supply Chain Toolkit

Maturity models have thus been created for many purposes and many dif-
ferent activities. They are particularly useful in logistics and supply chain
management, as some companies still have a long way to evolve in terms of
supply chain management while others have developed significantly in the
last couple of decades. A maturity model enables a company to create a
‘route map’ for improvement to best performance.
A maturity model can be created for any ‘pillar’ of supply chain manage-
ment, e.g. inventory management, warehouse management (see maturity
scan for warehouse management in tool 1.21), information systems, trans-
port or procurement, or an integrated model can be created to communicate
overall direction.

When to use
A maturity model is a tool for determining strategy for the development of
a function leading to improvement of the business. A functional workshop
can be used to set up the first maturity model and thereafter it can be the
basis of an annual review to discuss progress, how the model should be fur-
ther developed to explain the long-term direction and agree on how the
priorities for the next two to three years will be delivered.

How to use
Two approaches can be taken. The first is to task a manager with searching
the literature for all existing models, selecting desired characteristics and
then creating an initial model, perhaps with some alternatives at each stage.
The second approach is to use the concept to develop a shared vision of how
supply chain management should develop in your business, by means of a
facilitated workshop involving all those concerned with the high perfor-
mance of the supply chain. This might include, for example, representatives
from marketing, the customer service function, accounting and operations.
The outcome of the workshop should be an agreed, summarized diagram,
rather like Figure 4.6, plus an action plan for moving to the next level of
maturity.

Example
Figure 4.6 shows a simplified example of a general maturity model for sup-
ply chain management.

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Supply chain management tools 255

Figure 4.6 Simplified supply chain management maturity model

Distribution
network is
optimized
Supplier Multi-echelon
relationship inventory
Level of performance

management management
All supply chain- Extensive Strategic
related costs are performance sourcing
identified and reporting
classified Optimized
Customers’ Partnerships in processes
logistic service Basic data development
requirements exchange Leveraged
are understood Joint forecasting partnerships
Supply chain with key
Main customer strategy created customers and
service suppliers
Agreed
measures are
vocabulary
in place

Level of maturity

Further information
See Lahti, M, Shamsuzzoha, A H M and Helo, P (2009) Developing a matu-
rity model for supply chain management, International Journal of Logistics
Systems and Management, 5 (6), pp 654–78, also available at https://www.
researchgate.net/publication/235256591_Developing_a_maturity_model_
for_Supply_Chain_Management#fullTextFileContent (archived at https://
perma.cc/B4GD-FRMJ)

Two examples of supply chain maturity models can be found at:

https://talkinglogistics.com/2018/04/17/data-transform-supply-chain/
(archived at https://perma.cc/Y28F-Q99P)
https://slidemodel.com/how-to-start-digitizing-your-supply-chain-
management/four-stages-of-supply-chain-maturity/ (archived at https://
perma.cc/684H-AK27)

References
Hayes, R H and Wheelwright, S C (1984) Restoring Our Competitive Edge:
Competing through manufacturing, Wiley, New York
Wheelwright, S C and Hayes, R H (1985) Competing through manufacturing,
Harvard Business Review, January–February

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4.8 Postponement
Introduction
‘Postponement’ is the term applied to the customization of a product at the
latest possible time. One of the earliest well-documented examples was the
Hewlett-Packard LaserJet printer. Instead of making all the different vari-
ants of the LaserJet printer at the factory, it was decided to produce a ge-
neric printer there, and ship the generic printers to the regional warehouses
across the world. The final customization and packaging for a particular
market was carried out at the warehouse. Although this finishing operation
was slightly more expensive to carry out in the warehouse, the savings in
transport costs and inventory massively outweighed this small d isadvantage.
Another famous example is provided by Benetton, the Italian clothing
group, which delays dyeing of knitted products until orders are received
from the shops. Similar to HP, just one stock reference is held of each knit-
wear design and this stock may be transformed into a range of SKUs. In
general, the advantages of postponement are:

●● having common product and associated processes until a very late stage
encourages economies of scale, reduces the number of set-ups or
changeovers required and reduces the amount of product to be managed;
●● adding variety as late as possible reduces the financial risk of holding
inventory of less popular variants;
●● ability to meet rapidly increasing demand for those members of a product
family that are selling well;
●● reduced number of SKUs to be managed;
●● early processes can be standardized, usually leading to advantages in
processing time and cost.

Products subject to postponement are sometimes called ‘T’ products or

‘mushroom’ products, to indicate graphically that variety is introduced to-
wards the end of the process.

When to use
When designing a product, or the production process, ask yourself if the
components or processes that give rise to product variety can be delayed to
the final stages of production, or even to the point of distribution.

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How to use
First, consider the importance of product or service variety to your custom-
ers. For those products or services where variety is or could be important,
consider how and when that variety is introduced.
It requires some imagination to review all the different ways in which
variety can be introduced later in the sequence of processes rather than ear-
lier, so that the product design and production processes are common for as
long as possible. This may require a cross-functional team or process design
review project.

Example
Flat laminated glass for architectural purposes is a ‘sandwich’ of glass and
vinyl layers and is used in a number of security applications. For example,
shop windows can be fitted with laminated glass to stop would-be thieves
from entering the shop. Even though the glass will break under attack, the
vinyl layer will usually prevent the aspiring robber from gaining access.
Thicker and more complex ‘sandwiches’ enable the glass to become bullet-
proof, such as is used on high-security delivery van windscreens and side
windows.
Because of the number of layers involved, thick laminated glass can have
very many different specifications and it was common at one time to make
up the ‘sandwich’ for a specific order. In order to use the glass economically,
the different glass layers were cut to size before layering up the ‘sandwich’.
However, the complexity of the production process meant that the customer
would usually see a minimum lead time of at least 24–48 hours before the
finished product was available.
It was recognized that one way of reducing the lead time to the customer
would be to have stock sheets of thick laminate available, to a commonly
accepted specification. Customers requesting thick laminate were offered a
lead time of several days for their own specification or several hours if they
accepted the standard specification laminate. On receiving an order for
standard thick laminate, the stock sheet could be sawn to size and the edges
finished. The total lead time for these operations was three to four hours.
Customers were generally happy to pay a premium for speedy delivery.
In this example, two elements caused variety: the laminate specification
and the dimensions of the product. Both causes were addressed. The

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258 The Logistics and Supply Chain Toolkit

s pecification variety was eliminated by encouraging customers to choose a

standard specification, with the advantage of greatly reduced lead time, and
the dimension variety was managed by introducing the variety at a much
later stage in the process – final sawing.
The disadvantage was that stock of expensive product was held. This fi-
nancial risk was minimized by holding a minimum amount of stock of a
very small number of specifications, but which could nevertheless cover
more than 50 per cent of applications if the customer was flexible enough to
accept a slightly different specification.

Further information
Ronald Ballou (2004) gives a good summary of the principle of postponement
and the types of firms that could be potentially interested: Ballou, R H
(2004) Business Logistics Management: Planning, organizing, and
controlling the supply chain, 5th edn, Prentice Hall, Upper Saddle
River, NJ.
Early work in this area was carried out by Walter Zinn and Donald J
Bowersox: Zinn, W and Bowersox, D J (1988) Planning physical
distribution with the principle of postponement, Journal of Business
Logistics, 9 (2), pp 117–36.
An internet search for information about the HP LaserJet printer supply
chain will give rapid results.

4.9 Product Flow Path Design, by Fortna

Introduction
Product Flow Path Design, introduced by Fortna, defines the most cost-effi-
cient and service-effective routes by which to move products from suppliers
to customers. It provides a strategy, a business case and a prioritized road
map for moving forward. It is seen as the critical link in the distribution
network strategy cycle (see Figure 4.7).
To execute the Product Flow Path Design (PFPD), an important question
often is: ‘How many facilities do you need and where should they be?’
Ideally, this is answered through a network optimization analysis. Network

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Figure 4.7 Outline of the distribution network strategy cycle

1) Define the future flow path design

Prioritize the
Reassess over time
alternatives to assess

Product Flow Path

Design

2) Determine the number and Emphasis: 3) Develop a detailed strategy and

general location of facilities plan based upon practical
• Physical attributes
constraints
• Supply chain
Network characteristics
optimization Network strategy
• Assessing alternative
Emphasis: flow paths from supplier
to customer Emphasis:
• No. and theoretical
location of facility(ies) • Actual location(s)
• High-level business case
• Service assumptions and road map • Practical constraints and
considerations
• Freight cost analysis
• Inventory deployment plan
• High-level warehouse and
inventory costs Prioritize the areas • Service implications
• Identifying minimum in which to focus • Detailed transition and
logistics costs of possible human resource planning
scenarios via optimization
• Detailed budgeting and
engine
cash flow requirements
• Financial justification

SOURCE Reproduced by kind permission of Fortna, www.fortna.com

259
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260 The Logistics and Supply Chain Toolkit

optimization takes an in-depth look into the estimated freight costs associ-
ated with alternative distribution facility locations.
Most often, a commercial software tool is used that has an optimization
algorithm that essentially functions like a linear programming model to de-
termine the minimum cost of alternative locations and product flows.
(Examples of companies supplying this software are listed at the end of this
tool.) It’s a highly data-intensive and theoretical process requiring trained
analysts. The most important input is identifying the alternative scenarios
and flow paths to analyse. Rarely do these projects have sufficient time or
budget to evaluate all the potential flow path scenarios or product segment
permutations. So, a PFPD avoids sub-optimizing your study by providing a
prioritized set of alternatives to evaluate.
The resulting network optimization analysis following PFPD is valuable
input to the broader and more comprehensive requirements of a distribution
network strategy. A distribution network strategy includes inventory de-
ployment planning, service capability definition across channels, systems
planning and detailed financial budgeting. It is also based on practical con-
straints and considerations such as the availability of resources and logistics
partners to execute and maintain the strategy.
Because all businesses change over time, the network strategy needs to be
periodically re-evaluated. This need creates a loop back to PFPD.
A PFPD aims to answer three strategic questions:

1 What are the most effective and efficient methods (balancing cost and
service) to flow unique product groupings from suppliers to customers or
stores?
2 What is the impact of the recommended product flow paths on existing
operations (near and longer term)?
3 What is the supporting business case and migration plan to support the
recommended changes?

Recommended tasks and deliverables from this effort are outlined in

Figure 4.8.
The result can be a myriad of alternative flow paths depending on prod-
uct attributes, source, lead times and destinations. These can include direct
shipments, global distribution centres, national distribution centres, regional
centres, cross-docking and consolidation centres, local warehouses or a

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Figure 4.8
Tasks and deliverables in a Flow Path Design Project

Develop
Prepare for Assess product Define impact to business case
project flow paths existing operations and migration plan

• Confirm scope & • Kick-off project • Identify high-level • Create long-term

objectives & • Conduct interviews changes to: implementation roadmap
determine team • Assess available data & – Overall mission • Develop near-term
• Determine data needs information – Facility throughput migration plan with
• Collect & validate • Develop product segments and storage volumes ‘relief valves’ to address
Primary initial data set • Determine flow path costs by segment capacity shortfalls
activities • Schedule initial • Assess cost per – Warehouse processes • Develop financial
interviews segment per flow path & systems business case
• Prepare kick-off • Conduct sensitivity – Planning processes • Develop final report
document analysis and systems • Conduct executive
• Develop project plan • Develop recommended • Assess impact on costs review sessions
flow paths per segment and required space

• Product segment criteria • Impact on:

• Project team • Long-term road map
structure • Alternative scenarios – Throughput volume • Near-term migration
• Data collection list • Recommended flow path – Storage volume plan
by product segment
Key • Initial data collection – Facility & space • Financial business case
• Sensitivity analysis results requirements
deliverables • Initial interview • Executive presentation
schedule • Summarized impact on – Processes document
costs, inventory, and
• Kick-off document – Systems
service
• Project plan – Operating costs
• Key assumptions
– Service capabilities

SOURCE Reproduced by kind permission of Fortna, www.fortna.com

261
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262 The Logistics and Supply Chain Toolkit

combination of the above. It is crucial, therefore, to produce a more man-

ageable set of alternatives to evaluate. A sensible approach is to:

●● apply deductive reasoning in developing a set of hypotheses for the

potential future supply chain;
●● allow business priorities to dictate where to focus your analysis;
●● create a set of logical product segments by which to assess alternative
flow paths;
●● develop and use a financial model to compare the impact and sensitivity
of each hypothesis versus your current operation, which becomes the
baseline.

PFPD takes a holistic view of supply chain assets, service levels, cost to serve,
profits and investments. The idea is to think outside the box, look beyond
what you’ve done in the past, improve on benchmarked results, define the
possibilities and evaluate what is practical.
Suppliers of supply chain network design software include the following:

Coupa – https://www.coupa.com/products/supply-chain-design
Infor – www.infor.com/solutions/scm/
Supply Chain Optimizer – www.insight-mss.com
Blue Yonder – https://blueyonder.com
Logility – www.logility.com/
We Supply – https://www.truecommerce.com/uk-en/

4.10 SCOR®
Introduction
The Supply Chain Operations Reference (SCOR®) model is a product of the
Supply Chain Council (SCC), which merged with APICS, now called the
Association for Supply Chain Management (ASCM). The SCOR® model is
a framework that links business process, metrics, best practices and technol-
ogy features together into a unified structure to support communication
between supply chain partners. It assists companies in improving the effec-
tiveness of their supply chain management and related supply chain im-
provement activities.

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Supply chain management tools 263

SCOR® identifies five core supply chain performance attributes: reliabil-

ity, responsiveness, agility, costs and asset management. Consideration of
these attributes makes it possible to compare an organization that strategi-
cally chooses to be the low-cost provider against an organization that
chooses to compete on reliability and performance.
Membership of ASCM is open to all companies and organizations inter-
ested in applying and advancing state-of-the-art supply chain management
systems and practices. Member companies pay an annual fee to become in-
volved and have access to:

●● frameworks, benchmarking, templates and other resources developed

from ongoing research efforts;
●● professional development via training and certification programmes;
●● networking via peer events and online portals.

Members include manufacturers, distributors, retailers and service provid-

ers as well as technology solution providers, business consultants, academic
institutions and government organizations.

When to use
SCOR® is typically used to identify, measure, reorganize and improve supply
chain processes.

How to use
SCOR® works through a cyclic process of:

●● Capturing the configuration of a supply chain, which is driven by:

–– plan: levels of aggregation and information sources;
–– source: locations and products;
–– make: production sites and methods;
–– deliver: channels, inventory deployment and products;
–– return: locations and methods;
–– enable: manage the supply chain.

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264 The Logistics and Supply Chain Toolkit

●● Measuring the performance of the supply chain and comparing against

internal and external industry goals. Supply chain performance is
focused on:
–– reliability: achievement of customer demand fulfilment on time,
complete, without damage, etc;
–– responsiveness: the time it takes to react to and fulfil customer
demand;
–– agility: the ability of the supply chain to increase/decrease demand
within a given planned period;
–– cost: objective assessment of all components of supply chain cost;
–– assets: the assessment of all resources used to fulfil customer demand.

●● Realigning supply chain processes and best practices to fulfil unachieved,

or changing, business objectives. This realignment is achieved through a
combination of:
–– classic process re-engineering from ‘as-is’ to ‘to-be’;
–– lean manufacturing analysis and process change;
–– Six-Sigma analysis of defective processes;
–– theory of constraints analysis of systems or processes to elucidate
root-cause issues;
–– ISO-9000-style process capture and control;
–– Balanced SCOR® cards and benchmarking;
–– a host of other combined industrial-engineering-based best-practice
techniques in improvement.

The SCOR® process reference model contains:

●● Performance metrics: standard metrics to measure process performance.

There is a suite of key performance indicators but first-line metrics
include:
–– the perfect order: on time, in full, damage free and complete
document accuracy;
–– order fulfilment cycle time;
–– supply chain flexibility;
–– supply chain management cost;
–– cash to cash cycle time;
–– total cost to serve.

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Supply chain management tools 265

●● Processes: standard descriptions of management processes and a

framework of process relationships.
●● Practices: management practices that produce best-in-class performance;
they help companies:
–– Standardize processes: what is our standard way of operating this
part/aspect of supply chains?
–– Identify alternative ways of operating the supply chain: how can we
organize the process differently to address performance gaps?
–– Formulate a wish list of process configurations/automation.
–– Formulate a blacklist of undesired (move-away-from) process
configurations.
●● People: training and skills requirements aligned with processes, best
practices and metrics.

Example
One of the success stories of SCOR® implementation is the use of this meth-
odology by Siemens Medical Solutions for their ‘computed topography’ de-
vices. These medical devices are made to order in Germany and China for
customers all over the world. Several hundred employees were organized in
teams for the project. Although the original aim of the project was to move
supply chain processes to an e-business environment, there were stunning
results in the supply chain itself. Delivery time was reduced from 22 to 2
weeks, costs were reduced by 30 per cent, and inventory reduced by 60 per
cent.

Further information
SCOR® is copyright Association for Supply Chain Management (ASCM);
see:
https://www.ascm.org/corporate-solutions/standards-tools/scor-ds/apics-
scc-scor-quick-reference-guide.pdf (archived at https://perma.cc/E4FS-
ESFG)

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266 The Logistics and Supply Chain Toolkit

4.11 Supplier relationships

Introduction
An important component of the inbound side of supply chain manage-
ment – supply management – is the development of an appropriate relation-
ship with each supplier. Kraljic’s matrix (see tool 4.6) gives guidance on an
overall approach to the procurement of different items according to the
complexity of the supply market and the strategic importance of the item. In
recent years, a lot more effort has been focused on identifying different
kinds of relationships that may exist with suppliers and when each type of
relationship is appropriate.
At one time the focus was on ‘partnerships’, a word that was much used –
and abused. One useful classification is given by Lambert et al (1996), where
they see a progression of relationships from ‘arm’s length’ transactions,
through three levels of partnership to joint ventures and finally, vertical in-
tegration. Rather than use the word ‘partner’, some companies identify ‘pre-
ferred’ or ‘principal’ suppliers, to indicate a relationship that is closer than
‘arm’s length’.

When to use
It is worth carrying out an annual review of the supplier base, looking at
those suppliers that represent the top 80 per cent of spend. These are the key
suppliers and a closer relationship with them can bring significant advan-
tages. Stock and Lambert (2001) make the point that partnership is not a
requirement for business success but not having a partnership where one is
appropriate wastes the opportunity for competitive advantage. It is there-
fore useful to review the nature of the relationship with these key suppliers
against the list of criteria below and consider whether there is any benefit in
moving towards a closer relationship with any of them, and what this would
entail.

How to use
Many companies recognize the advantages of closer links with their key
suppliers. In purely economic terms, better understanding of how the other
party works can save a lot of time and energy when placing and monitoring
orders, or when sorting out problems. However, there can also be significant

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Supply chain management tools 267

Figure 4.9 Supplier relationships added to Kraljic matrix

Material management Supply management

(Leverage items) (Strategic items)
Importance of purchasing decision

High Low-level partnership Strategic alliance or close

partnership

Purchasing management Sourcing management

(Non-critical items) (Bottleneck items)

Low Arm’s length transactions Medium-level partnership

Low High
Supply market complexity

advantage in involving the supplier in new product development projects, or

sharing plans regarding future demand and promotions (see CPFR® for ex-
ample, tool 4.2).
Looking at the Kraljic matrix again, one can allocate a type of supplier
relationship according to the matrix quadrant (see Figure 4.9). To be more
specific, the following points indicate some of the dimensions that can con-
stitute the relationship:

●● Giving information about production schedules to suppliers – the more

they know about your exact requirements, the more likely they are to
fulfil them on time and in full.
●● Number of people in each business interacting with one another – the
closer the relationship and the longer that it has been in existence, the
more points of contact there are likely to be.
●● How problems are resolved – fast resolution by joint discussion and
investigation (looking after the final customer first) is preferable to
reading the fine print of the contract to apportion blame.
●● Date of termination of relationship – the closer the relationship, the less
likely there is to be an envisaged termination date.
●● Meetings to discuss how to work better together – members of both
companies come together in a workshop to discuss how to streamline the
ordering/delivery processes.

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268 The Logistics and Supply Chain Toolkit

●● Level of management effort required to maintain an expected level of

supplier performance – close and healthy relationships are based on high
levels of performance as well as trust.
●● Involvement in new product design – suppliers in close relationships are
consulted and involved in new projects, to engage their experience and
innovations.

Finally, it is worth remembering that ‘partnerships’ are rarely built on the

first meeting. It usually takes time and experience of working together for
two organizations to achieve the level of trust and confidence required to
make a partnership work.

Example
In 2008, Airbus signed a major contract with Kuehne and Nagel to manage
and operate Airbus’s logistics hubs in Germany, France, the UK and Spain.
Although Kuehne and Nagel started by operating the existing warehouse
facilities, the agreement foresaw Kuehne and Nagel consolidating the storage
requirements and rationalizing the delivery network across Europe. Kuehne
and Nagel had been working with Airbus since 2003, so both companies had
had the opportunity to understand one another’s needs and operations be-
fore Kuehne and Nagel were appointed ‘lead logistics provider’ for a signifi-
cant contract period.

References
Lambert, D M, Emmelhainz, M and Gardner, J T (1996) Developing and
implementing supply chain partnerships, International Journal of
Logistics Management, 7 (2), pp 5–13
Stock, J R and Lambert, D M (2001) Strategic Logistics Management,
McGraw Hill, New York

4.12 Supply chain risk assessment

Introduction
Two other sections in this book discuss risk assessment and management:
warehouse risk assessment (tool 1.22) follows the recommended health and
safety approach to managing risk in a warehouse, and supply chain risk

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mitigation and contingency planning (tool 4.13) describes the risks to mon-
itor and what to do when things go wrong. This tool brings the other sec-
tions together to create a supply chain risk management framework, based
on a simplified version of failure mode effect and criticality analysis
(FMECA), the methodology developed by NASA to eliminate the chance of
a potential failure or mitigate its impact should it occur.

When to use
The first risk management plan can be set up at any time: the sooner the
better! After this, it is highly recommended that an annual review takes
place. An important event, such as a major contract or concern about a
critical supplier or customer, could trigger a review of the plan before the
anniversary review.

How to use
The overall approach is as follows:

1 Brainstorm the potential things that could go wrong at each stage of your
supply chain, working systematically through the supply side, your
operations, outbound side, customers and general business environment.
2 For each potential failure, use the SLD matrix in Figure 4.10 to award
levels of severity of impact (S), likelihood of occurrence (L) and chance of
detecting the failure before it occurs (D).
3 For each potential failure, calculate the criticality number (CN) from the
product of S, L and D. Thus CN = S × L × D (thus CN will be a minimum
of 1, maximum of 125).
4 Rank the potential failures in order of criticality, largest first.
5 Going down the list of potential failures in turn, starting with the highest
CN, brainstorm ways of eliminating the risk. For each potential solution,
estimate the cost of implementation and the practicality of the solution in
eliminating the potential failure. For each potential solution, reassess the
SLD values, find their product, and use this as an estimate of ‘residual risk’.
6 If the risk cannot be eliminated, what mitigating actions can be taken to
reduce the impact if failure occurs? For each potential solution, estimate
the cost of implementation and the practicality of the solution in mitigating
the potential failure. For each potential solution, reassess the SLD values,
find their product, and use this as an estimate of ‘residual risk’.

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270 The Logistics and Supply Chain Toolkit

7 From all the solutions proposed for elimination or mitigation, choose the
solution that gives an acceptable reduction in risk for an acceptable cost
to implement. Include this in an action plan, showing clear responsibilities
for implementation and the target completion time.
8 Record the solution implemented and the residual risk.
9 Continue to monitor risks and review the plan periodically.

Example
A country in Africa was evaluating the idea of using container-based fuel
stations for distributing fuel more widely across the country, in particular to
rural areas. A specially designed 40-foot container would house two pumps,
a supply of diesel and a supply of petrol. When the fuel supplies were ex-
hausted, the whole container would be replaced by a full one.
Table 4.3 shows the beginning of the risk assessment, with the identifica-
tion of potential problems and their CN ranking. Table 4.4 shows some of
the potential solutions, and residual risk.

Figure 4.10 SLD risk assessment

S L D
Severity of effect Likelihood of occurrence Likelihood of detection

No direct effect on Probability of Detectability of the

1 operating service levels occurrence: once in failure in the long term
many years is very high

Minor deterioration in Probability of Considerable warning

2 operating service levels occurrence: once in of failure before
many months occurrence

Definite reduction in Probability of Some warning of

3 operating service levels occurrence: once in failure before
some weeks occurrence

Serious deterioration in Probability of weekly Little warning of

4 operating service levels occurrence failure before
occurrence

Operating service levels Probability of daily Detectability is

5 ceased occurrence effectively zero

SOURCE Adapted from Slater (2005)

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It can be seen that location of the containers was thought to be critical in

reducing their exposure to bad driving. Once located, however, only some
kind of mechanical barrier would prevent a vehicle impacting the container,
and a surrounding fence was believed to be the best solution. Unfortunately,
this was expensive and needed a higher-level decision.
Meanwhile, it was decided to locate a manned cabin with a telephone to
address the other potential problems. Placing equipment on site capable of
handling leaks or fires is a mitigation measure in case the failure occurs.
The overall idea of using containers to deliver and dispense fuel in remote
areas was believed to be feasible enough for further evaluation.

Further information
More rigorous approaches to FMECA can be found from any good
textbook on total productive maintenance.

References and further reading

Gibson, R (2013) Know your risk, know your risk appetite for growth,
Focus, 15 (5), pp 40–43
Slater, A G (2005) Vulnerability in the supply chain, Visiting Professor of
Logistics, Huddersfield University, lecture notes.

4.13 Supply chain risk mitigation

and contingency planning
Introduction
According to SCOR®:

supply chain risk management is the systematic identification, assessment, and

mitigation of potential disruptions in logistic networks with the objective of
reducing their negative impact on the logistic network’s performance. Potential
disruptions can occur either within the supply chain (e.g. insufficient quality,
unreliable suppliers, machine breakdown, uncertain demand, etc) or outside the
supply chain (e.g. flooding, terrorism, labour strikes, natural disasters, etc).

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272
Table 4.3
Risk assessment part 1 – identifying and classifying the potential problems

Potential failure or CN =
Failure no problem L (1–5) Effect of failure S (1–5) Cause of failure D (1–5) L×S×D

1 Car/lorry crashes into 3 Explosion, death of 5 Poor driving skill 5 75

the container driver

2 Attempts to steal fuel 4 Potential explosion 5 Container left in 3 60

unsafe condition

3 Attempts to steal the 1 Operation ceased, loss 5 Criminal 5 25

whole container of asset interference

4 Pump failure 2 Customer frustration 3 Poor maintenance 4 24

5 Leakage 1 Fire risk, 5 Bad handling 3 15

environmental damage

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Table 4.4
Risk assessment part 2 – action plan for elimination or mitigation of the risks

Target Whose Residual Residual Residual Residual

Failure no Action completion date responsibility? L (1–5) S (1–5) D (1–5) CN

1 Locate containers carefully, not 03/20xx GM 2 5 5 50

near bends or other potentially
hazardous places

1 Fencing around whole area to Wait for budget 1 5 4 20

prevent accidental approach from
road

1 Protective posts or bars around Wait for decision 2 5 5 50

edge of container zone, to take first on fence
shock of impact

2 Permanently manned cabin 04/20xx 2 4 3 24

3 Manned cabin – permanent guard 04/20xx 1 5 3 15

4 Set up and follow maintenance plan 04/20xx 1 3 2 6

5 Ensure drivers are trained to handle 04/20xx 1 5 3 15

these containers carefully

5 Appropriate equipment on site for 04/20xx 1 4 3 12

handling leaks or fires

273
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274 The Logistics and Supply Chain Toolkit

Both are considered in an integral multi-phase approach for supply chain

risk mitigation and contingency planning. SCOR® best practice suggests un-
dertaking the following:

●● Establish context: define and document the objective and scope (internal
and external) for managing risk.
●● Identify risk: collect and document all potential risk events that may
impact the organization and prevent it from meeting its goals.
●● Assess risk: collect and document for each potential risk the causes,
probability and consequences (understand the value at risk).
●● Evaluate risk: prioritize risks, determine for each risk whether mitigation
actions are required or the risk is acceptable.
●● Mitigate risk: determine the actions required to eliminate, reduce, or
accept and monitor the risks (risk mitigation plan).
●● Monitor risk: continuously monitor effectiveness of mitigation plans;
identify emerging risks and changes in internal and external context.

A 10-step plan to avoid or minimize disruption in the supply chain has been
put forward by JP Morgan Chase; this is an adaptation:

1 Undertake regular risk assessments – identify areas of concern:

●● Political and labour issues.
●● Physical and geographical risks such as weather.
●● Market conditions.
●● Oil prices.
●● Currency fluctuation.
●● Inflation.
2 Create a response team:
●● Create an empowered group responsible for decision making during
an emergency and communicate their actions throughout the supply
chain.
●● Ensure they have suitable competencies.
●● Ensure access to communication lines.
●● Both suppliers and customers have to be informed.
●● Ensure you have trained staff to deal with the media.
3 Produce a contingency plan:
●● Ensure that your suppliers also have a workable and realistic
contingency plan.

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Supply chain management tools 275

●● List details of emergency services.

●● List details of providers of agency labour.
4 Give yourselves options:
●● Establish and maintain relationships with alternative suppliers and
logistics networks.
●● Use multiple shippers, forwarders, ports and transport modes.
●● Alternative power sources.
5 Test the contingency plan regularly:
●● Review and update regularly.
●● Run potential scenarios.
6 Keep documentation and information up to date:
●● Ensure that telephone numbers and email addresses are up to date.
7 Continue to track and be aware of current events likely to impact your
supply chain:
●● Weather patterns.
●● Political unrest.
●● Labour unrest.
●● Labour shortages.
●● Market conditions.
●● Raw material shortages.
●● Natural disasters, earthquakes, floods, volcanic eruptions.
●● Terror attacks.
●● Major fires.
8 Introduce cross-training:
●● Develop a flexible workforce that can react quickly.
●● Ensure staff have a cross-section of skills and abilities.
9 Save time and avoid congestion:
●● Utilize quieter shipping routes.
●● Move product away from ports quicker.
10 Back up and save all documentation:
●● Ensure that this is done daily and stored off site electronically.

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References
Supply Chain Operations Reference (SCOR®) model Overview https://
www.ascm.org/corporate-solutions/standards-tools/scor-ds/ (archived at
https://perma.cc/267N-NZ4T) Adapted from J P Morgan Chase Vastera
cited in The Unexpected Happens: Is your supply chain prepared? by
William Keenan, Jr, http://www.inboundlogistics.com/cms/article/
the-unexpected-happens-is-your-supply-chain-prepared/ (archived at
https://perma.cc/8QDF-GTKB)

4.14 Sustainable sourcing

Introduction
As natural resources become scarcer and as companies want to extend their
level of corporate social responsibility (CSR) back up the supply chain, sus-
tainable sourcing is becoming more and more important in procurement.
Companies that are most closely involved are those that use natural ma-
terials directly in their product, for example palm oil, coffee beans or timber.
Sustainable sourcing aims to ensure that the plantations and farms that pro-
duce these natural materials are managing their land and other natural re-
sources in such a manner as to ensure that production can continue in the
long term by putting as much back into the environment as is being taken
out of it. For example, this includes replanting areas that have been har-
vested, managing water use and treating all waste products before releasing
them back into the environment. Fair pay for the workforce and appropri-
ate training, working conditions and contracts are increasingly part of the
evaluation.
Beyond the purchase of these natural resources, all companies that buy
goods and services can still implement sustainable sourcing, focusing on the
carbon footprint (see tool 2.2) and overall environmental impact of the pro-
cesses of their suppliers: use of energy, use of water, treatment of waste,
packaging materials, etc. Note that sustainable sourcing will not be credible
unless your company is also making clear progress to sustainability itself.

When to use
Sustainable sourcing is a policy that must be agreed and supported by top-
level management. Having decided how to approach this, the procurement

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function will review the existing supply base for sustainable practices and
will be looking for commitment from all new suppliers.

How to use
Once top-level commitment has been obtained, the procurement function
will be asked to develop a company policy and then implement it. A good
approach is to assemble an internal working party made up of interested
members of different functions, including accounting and finance, market-
ing, operations and supply chain. Even though the focus will be on sustain-
able sourcing, information will be required from different functions. There
will also be implications for different user functions and a learning process
for the whole business to improve the sustainability of their own practices.
The first task of the group will be to choose a focus area as a starting
point. This could be one family of items or services and could be, for
example:

●● transport services;
●● energy or water supplies;
●● cleaning services;
●● raw materials;
●● components;
●● equipment – taking a lifecycle viewpoint of the next purchase.

In general, it is a good idea to start with products where there is a clear en-
vironmental link, such as paper or food, or products where there could be
high potential for cost savings over their lifetime, e.g. high-energy-consum-
ing products. The first family will be used as a learning process, specifically
to answer questions such as:

●● What criteria will be used to assess sustainability in this case?

●● How will sustainability be measured?
●● What are the associated costs or risks?
●● To what extent do suppliers meet the new requirements already?
●● Will there be any kind of consultation process with key suppliers?
●● How will suppliers be informed, e.g. next invitation to tender, quarterly
communication?
●● How will potential or new suppliers be informed about the new company
policy?

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●● How can we help or support suppliers in their adoption of sustainable

practices?
●● How important are we to these suppliers? To what extent can we influence
their sustainability programme?
●● How will the success of our policy be measured?
●● How will we react if a supplier is not interested or pays only lip service
to our proposals?

It is always useful on a new project such as this to encourage the group

members to carry out background research and provide summaries of their
reading or visits to other members of the working party. This will suit some
people more than others, but doing the underpinning research is essential
education for the whole group. The main UK professional institutions are a
good source of information, as well as a growing body of accessible books
on the subject (e.g. Emmett and Sood, 2010).

Example
A high-profile sustainability programme was launched by Marks & Spencer
in 2007. Known as ‘Plan A’ (there was no plan B), the project involved sup-
pliers, customers and employees and covered the use of sustainable raw
materials, environmental impact of the stores, e.g. energy and water use,
waste, carbon footprint in distribution, healthy lifestyle and the final desti-
nation of its products. Its commitment has been unwavering and has brought
many benefits for all concerned. More information, including the annual
sustainability report which shows the progress that has been made, is avail-
able on the website: https://corporate.marksandspencer.com/sustainability

Further information
See Emmett, S and Sood, V (2010) Green Supply Chains: An action
manifesto, Wiley, Chichester
Browne, M et al (2015) Green Logistics, Kogan Page, London
These sites have a carbon footprint calculator to help companies in
measuring their supply chain’s impact on the environment: https://www.
gov.uk/guidance/carbon-calculator (archived at https://perma.cc/EE37-
ZQSV), https://www.carbonfootprint.com/calculator1.html (archived at
https://perma.cc/LB6E-FF8V)

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https://www.carboncare.org/en (archived at https://perma.cc/2JMU-Z87Q)

and https://www.carbontrust.com/client-services/advice/footprinting/
(archived at https://perma.cc/ALL2-3GLB)

4.15 Theory of constraints

Introduction
Eli Goldratt developed the ‘theory of constraints’ in the 1980s. Following on
from his work on factory scheduling by starting scheduling from the bot-
tleneck resource (Goldratt and Cox, 1984), the theory of constraints
(Goldratt, 1990) was developed as a more general approach to improving
business performance.
There have been many approaches to business performance improve-
ment, but the theory of constraints is particularly relevant to supply chain
management because one of its major pillars is reduction of inventory. A
major outcome of applying the theory of constraints is improved flow
through a resource or series of resources, which is also an objective of sup-
ply chain management.
Goldratt (1990) argues that there are only three ways to improve busi-
ness performance:

1 Improve ‘throughput’, that is the rate at which saleable goods are output
and can therefore generate revenue.
2 Reduce ‘inventory’ (for the same throughput), where inventory includes
fixed assets as well as materials.
3 Reduce ‘operating expense’, which includes overheads and operating
capital.

Crucially, this improvement process must be continuous (not just a quick

fix), and also must involve everybody in the organization.

When to use
The theory of constraints can be used as the process for a business or supply
chain improvement project. It is more suited to an ongoing improvement
process than radical supply chain redesign.

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How to use
The theory of constraints is an approach to business improvement that has
captured the imagination of some managers. Through training, and often
the involvement of an external change agent such as a consultant, these
managers will lead business improvement projects. Advocates claim that it
is a flexible method that can be used to attack almost any business problem
effectively.
Goldratt (1990) outlines the main steps in the process of improvement
using the theory of constraints:

Step 1: Identify the system’s constraints. A constraint is anything that is

preventing the organization from achieving its business development
goals. Usually there are just three or four key constraints preventing the
system from performing better. In general terms, these can be, for example,
capacity, product quality or lead time.
Step 2: Having identified the system’s constraints, there is no point in the
non-constraining resources operating independently and at a higher
performance level than the level at which the constraints will allow the
whole system to operate. Thus the non-constraint resources should serve
and supply the constraint resources. The second step is to identify how
this can be done.
Step 3: Having identified how the non-constraint resources can serve and
supply the constraint resources, the constraint resources take priority
from now on, and all decisions regarding non-constraint resources are
secondary to decisions and actions involving the constraints.
Step 4: Now is the time to consider how to ‘break’ the constraint by doing
something about it, by making some improvement to the system. In the
examples in step 1, solutions to a capacity problem might include working
an extra shift or reducing downtime on a piece of equipment, whereas
solutions to a product quality problem might include redesigning the
product, refurbishing a piece of equipment or training operators in
problem solving to identify and improve process quality themselves.
Solutions to a lead-time problem might include reducing set-up times and
batch sizes or increasing capacity.
Step 5: Clearly, if a constraint in one area or activity has been eased, then
another area or activity becomes a constraint. Thus improvement is an
ongoing process of identifying the next constraint and tackling it using
the same steps. Thus we return to step 1.

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Example
Case studies of successful implementations are available on the Goldratt
Institute’s website (see www.goldratt.com). Nike reports improving stock
turns of socks from 2.3 to 7 within four months, and later to around 10,
using the theory of constraints. Nike says that it did not change its IT sys-
tems or improve its forecasting but simply focused on the link between man-
ufacturing and distribution. It was also able to reduce warehousing costs by
$2 million per year and increase sales by 40 per cent during the peak season.
Reports from other companies are equally impressive and include im-
provements in on-time delivery, inventory reductions, increases in sales and
reduced operating expense. The Goal, written by Goldratt, is certainly one
of the most informative business books we have read and we recommend it
as simple to understand and easy to read.

Further information
See http://www.goldratt.com/ (archived at https://perma.cc/DJ9J-RDLE)

References
Goldratt, E M (1990) What Is This Thing Called Theory of Constraints and
How Should It Be Implemented? North River Press, New York
Goldratt, E M and Cox, J (1984) The Goal, North River Press, New York,
also published by Gower Publishing

4.16 Value stream mapping

Introduction
The purpose of value stream mapping (VSM) is to understand which parts
of the existing supply chain add value and which parts do not. Analysis of
the existing supply chain encourages us to think about how the stages could
work better and therefore enables us to map how the chain should work –
the ideal future state. The task is then to create an action plan to move from
the existing state to the ideal future state. Physical movement of components
and products is mapped as well as information flow.

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It is important to set the scope of the map. Ideally, it should go from raw
materials through to the final customer, so it may be useful to involve critical
suppliers and major customers to ensure cohesion and smooth flow along
the chain. Areas which appear to block or slow down the flow should be
investigated in more detail.

When to use
Value stream mapping is a good tool to use with a group of employees from
one area. Facilitating the group to create the map provides an interesting
activity in which everybody can participate and think about how the pro-
cesses can be improved.
Value stream mapping is often used as part of a Lean Management intro-
duction.

How to use
Total throughput time is made up of four components: waiting time, change-
over time, cycle time and move time to the next operation. Only cycle time
is value-adding time. Value-adding time is frequently just a small proportion
of throughput time. The overall objective is to understand why this is and
what can be done to increase the proportion of value-adding time. This may
need radical change to the processes.
There are many variants of supply chain mapping and just one example
is shown in Figure 4.11 and Figure 4.12 described below.

Example
Figure 4.11 shows the main stages in making a small electrical product.
Currently, the product is made in batches of 50. The value stream map
clearly shows that each product must wait for all the other units in the batch
to be completed before the batch can move to the next operation. However,
it is often necessary to change the set-up for another product. Thus, it is only
possible to reduce the batch size if the set-up or changeover time can be re-
duced. Average waiting times between operations are also shown.
The current total value-adding time per unit is 5 + 9 + 2 + 1 minutes = 17
minutes.

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Figure 4.11 Current state value stream map: trolley capacity = 50

Orders Production Orders

Supplier Customer
control

Schedules

Raw material
stock

RM WIP WIP WIP

Unit assembly Unit assembly
Inspect & test Pack
stage 1 stage 2
Wait 30 m Wait 10 m Wait 20 m

Cycle time 5m Cycle time 9m Cycle time 2m Cycle time 1m

C/O time 10 m C/O time 15 m C/O time 0 C/O time 0

VA time/unit 5m 9m 2m 1m

Thro-put time 255 m 486 m 108 m 69 m

Key: m = minutes, C/O time = changeover time, WIP = work in progress, VA time = value-added time

283
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284
Figure 4.12
Future state value stream map: trolley capacity = 10, takt time = 5 minutes

Orders Production Orders

Supplier Customer
control

Schedules

Raw material
stock

RM WIP WIP
Unit assembly Unit assembly
Inspect & test Pack
stage 1 stage 2
Wait 5 m Wait 0 m

Cycle time 5m Cycle time 5m Cycle time 3m

C/O time 5m C/O time 8m C/O time 0

VA time/unit 5m 5m 3m

Thro-put time
50 m 58 m 27 m

Key: m = minutes, C/O time = changeover time, WIP = work in progress, VA time = value-added time

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However, in the worst case, where each workstation needs a changeover, the
total throughput time could be (255 + 5) + (486 + 9) + (108 +2) + (69 + 1) =
935 minutes. This means over 15 hours of lead time for 17 minutes of value-
adding time!
The value stream map in Figure 4.11 also shows the total imbalance be-
tween the work rate of the different stations. Under Lean, the Takt time
(time between successive completions, see further information) determines
the rate of work of each workstation, according to the rate of customer
demand.
In order to help define a future state, the Takt time is determined to be 5
minutes. Unit assembly stage 2 will either need an improved process or two
workstations to achieve this. The workstations ‘inspect and test’ and ‘pack’
could be combined.
The ideal future state would be a batch of 1 but this is not feasible until
the changeover time can be eliminated. It is decided that a feasible target is
a batch size of 10 and halved changeover times. Figure 4.12 shows the fu-
ture state based on these criteria. If the line produces to this rhythm, then
waiting times between stations should be eliminated or negligible.
The new total cycle time is 5 + 5 + 3 minutes = 13 minutes.
The new total throughput time is (50+5) + (58+5) + (27+3) = 148 m inutes.
The total throughput time is now just under three hours, reducing the
level of work in progress and increasing reactivity to changing demand.

Further information
A good presentation of mapping given in The Lean Toolbox by John Bicheno
and Matthias Holweg, published by PICSIE books. Takt time is also
explained.
There are many online sources, see for example: https://www.lean.org/the-
lean-post/articles/understanding-the-fundamentals-of-value-stream-
mapping/ (archived at https://perma.cc/8HHU-JVZ4)

4.17 Demand-driven MRP (DDMRP)

Introduction
Demand-driven MRP (DDMRP) has been developed from a combination of
methodologies – MRP, periodic replenishment inventory management, Lean

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and Goldratt’s theory of constraints. It aims to overcome the main limita-

tions of MRP and provide a more flexible response to changing demand.
The main purpose is to protect internal operations from variability in the
external environment such as unreliable suppliers and changing customer
demand, while buffering against potential difficulties in the internal envi-
ronment such as bottlenecks.
Several sections of this book provide understanding of the basic compo-
nents of DDMRP (tool 3.6 on strategic positioning of inventory, tool 3.8 on
periodic review inventory management and tool 3.13 on material require-
ments planning).

When to use
DDMRP can be used for planning the supply of manufactured products and
retail products.

How to use
Software is required, usually as part of an enterprise resource planning
(ERP) system. Its methodology is best demonstrated by an example. We will
use the same example as that presented in tool 3.13 on MRP, the office chair.
There are five stages which will be treated in turn in the example:

1 Determine where inventory should be strategically positioned.

2 Set buffer profiles and levels.
3 Make dynamic adjustments to buffer levels.
4 Carry out demand-driven planning.
5 Execute the plan in a visible and collaborative manner.

Example
1. Determine where inventory should be strategically
positioned (see tool 3.6)
In our example, wheels are considered to be a critical component subject to
unreliable supply. There is a plate between the seat and the lifting mecha-
nism which is made in-house but this operation is carried out where there is
a machine bottleneck and so stockholding is required. The finished goods
stock of office chairs must be protected against variability in demand. The

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total cumulative production and procurement lead time is determined by the

seat lifting mechanism and so a four-day buffer stock of lifting mechanisms
will be maintained to reduce the total lead time to six days (five days re-
maining procurement + one day for final assembly).
Decoupling stocks will be put in place at each of these positions.

2. Set buffer profiles and levels

Buffer inventories in DDMRP have three zones called green, yellow and red,
which enable rapid visual monitoring of their state, where green means all is
well (no action required), yellow means that an open order should exist (if
not then raise one) and red means that rapid corrective action is required.
Here is the basic data for the four buffers of our office chair:
We calculate the size of each buffer in turn, starting with yellow. The yellow
zone represents cycle stock, the inventory that is normally used during the
delivery lead time of the replenishment.

Yellow zone size = average daily usage rate (ADU) × decoupled lead time (DLT)

Table 4.5
Extract from BOM (where LT = lead time, M/P = manufactured or
purchased, qty = quantity, LFL = lot for lot)

Level Item Quantity LT ( days) M/P Order qty

0 Office chair (OC) 1 1 M LFL

2 Wheels 5 4 P 1000

1 Lifting mechanism 1 5 P LFL

1 Plate 1 1 M ≥150

Table 4.6
(where ADU = average daily usage, DLT = decoupled lead time, LF =
lead time factor, VF = variability factor, DOC = desired order cycle)

Level Item ADU DLT LF VF DOC

0 Office chair (OC) 145 1 0,8 0,5 7

2 Wheels 725 4 0,8 0,2 7

1 Lifting mechanism 145 5 0,8 0,8 7

1 Plate 145 1 0,8 0,2 7

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Table 4.7 Yellow buffer calculation

Level Item ADU DLT Yellow

0 Office chair (OC) 145 1 145

2 Wheels 725 4 2900

1 Lifting mechanism 145 5 725

1 Plate 145 1

Then we calculate the red zone which mitigates two kinds of risk. The lead
time factor mitigates against the higher risk associated with shorter lead
times and a variability factor which mitigates against variability in the lead
time associated with transport or supplier reliability.

Min Max Typical value

Lead time factor (LF) short LT = higher risk = 0.65-1.0 0,65 1 0,8

medium LT 0,34 0,64 0,5

long LT 0 0,33 0,2

Variability (VF) high 0,8

medium 0,5

low 0,2

The impact of these values is to increase the size of the inventory by adding
safety stock.

Red zone base = yellow × lead time factor = ADU × DLT × LF

Red zone safety = red zone base × variability factor = ADU × DLT × LF × VF

Finally, we calculate the size of the green buffer.

Green zone = maximum of {min OQ, ADU × DLT × LF, DOC × ADU}

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Table 4.8 Red buffer calculation

Level Item Yellow LF Red base VF Red safety

0 Office chair (OC) 145 0,8 116 0,5 58

2 Wheels 2900 0,8 2320 0,2 464

1 Lifting mechanism 725 0,8 580 0,8 464

1 Plate 145 0,8 116 0,2

Table 4.9 Green buffer calculation

Level Item Min OQ Red base DOC x ADU Choose:

0 Office Chair – 116 1015 116

2 Wheels – 2320 5075 2320

1 Lifting Mechanism – 580 1015 580

1 Plate 150 116 1015 116

Table 4.10 Buffer components

Level Item Red base Red safety Yellow Green

0 Office chair (OC) 116 58 145 116

2 Wheels 2320 464 2900 2320

1 Lifting mechanism 580 464 725 580

1 Plate 116 23 145 116

This adds usage until the next replenishment order is raised (whereas the
yellow zone covers usage during the delivery lead time) where DOC = de-
sired order cycle (review period).
We talk about ‘top of’ each buffer section in order to get a visual image
of the buffer stocks.

Top of red = red base + red safety

Top of yellow = top of red + yellow buffer
Top of green = top of yellow + green

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Table 4.11 Buffer trigger points

Level Item Top of red Top of yellow Top of green

0 Office chair (OC) 174 319 435

2 Wheels 2784 5684 8004

1 Lifting mechanism 1044 1769 2349

1 Plate 139 284 400

3. Dynamic adjustments to buffer levels

It is important to review buffer levels frequently as circumstances change –
for example, seasonal products, increasing or decreasing demand trend,
short-term shortages or transport difficulties. Thus the values of all the fac-
tors involved in the calculations are reviewed periodically.

4. Demand-driven planning
Office chairs will now be sold from stock according to actual demand. As
soon as the stock level falls below 435 into the yellow zone, a replenishment
order will be generated. The replenishment order will arrive in six days
according to the new maximum lead time in the BOM due to the stock of
lifting mechanisms.
The MRP process is followed as before, except for the lifting mechanism,
plates and wheels. The stocks of office chairs, lifting mechanisms, plates and
wheels are monitored daily and action is taken accordingly.

If the stock level is in the green zone, no action is taken.

If the stock level is in the yellow zone, check that a replenishment order has
been raised.
If the stock level is in the red zone, urgent expediting action is required.

5. Execute the plan in a visible and collaborative manner.

It can be seen from step 4 that the colour-coded inventory levels are very
helpful for rapid evaluation of any action required.
These visible stock levels can be communicated to suppliers and partners.
This example can be downloaded in full as an Excel spreadsheet for free
from https://howtologistics.com

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Further information
Demand-driven MRP by Carol Ptak and Chad Smith, published by
McGraw Hill, is highly recommended.

4.18 Calculating ordering cost

Introduction
Historically, knowledge of the ordering cost enabled some ‘ideal’ purchase
quantity to be defined that minimized the total cost of stockholding and
replenishment (see tool 3.11). Typically, ‘ordering cost’ was the total cost of
replenishment, i.e. procurement, transport, goods receiving and inspection,
and costs associated with returns or non-conformance. Today, we separate
out from general overhead and other catch-all budgets all these supply chain
costs so that better decisions can be made about movement of product
through the supply chain. Here, we evaluate the cost of the procurement
activity only, or average procurement cost per order because it is the most
complex. The procurement function, like any other function, must look at
the value it adds to the business against its own operating costs.
The costs of goods receiving and inspection may be taken as the time (e.g.
hours per week, month or year) spent on these activities multiplied by the
hourly cost of employment of the person carrying out the task. Reducing the
need for these activities, for example by making suppliers responsible for
inspection before shipment, will result in a cost reduction. The costs associ-
ated with returns and non-conformance usually fall to the procurement
function as they have to resolve the problems.
Procurement cost is also a baseline against which to measure future re-
ductions by means of ‘soft orders’ (electronic), blanket orders, longer con-
tracts, VMI (see tool 3.17), grouping more items to fewer suppliers, etc.

When to use
It is not necessary to calculate procurement cost frequently but it is a useful
exercise at the beginning of a supply chain management implementation
project or supply chain cost reduction exercise. Thereafter, it can be re-
viewed every year or two.
Some small and medium-sized businesses outsource procurement to a
specialist group in order to benefit from greater purchasing power. In this
case, it is important to understand the internal procurement cost against the
benefits and costs of external procurement.
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How to use
As with any ‘office-based’ activity, the procurement function is embedded in
the business and the costs of its activities are often divided between an op-
erating budget for direct costs (salaries, expenses) and general overhead for
indirect costs (telecommunications, IT systems, heating, lighting, etc).
The first stage is to complete Table 4.12 by obtaining as much data as
possible from the accounting system and then making sensible estimates for

Table 4.12 Cost data required to estimate total procurement cost

Estimated
Category Description annual cost

Office space Rental or depreciation

Taxes
General maintenance
Fire detection and extinction system
Office equipment – desks, chairs, etc
Insurance
Utilities – electricity, water, etc

Office systems Telecommunications

Computer hardware, software, support
Mobile phones

Direct Salaries
employment Overtime
costs Agency costs
Expenses Staff cars
Transport, subsistence, accommodation costs
Training
Office consumables
Postal

Cost of services Access control

consumed Security
Fire system testing
Cleaning
Waste disposal

Proportion of Legal
cost of shared Personnel
functions Accounting
Inventory management
Production management
Transport
Logistics
Other

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the missing data. For example, heating cost can be estimated by taking the
floor area occupied by the procurement function as a proportion of the total
office floor area and using this as the proportion of total office heating cost.
The second stage is to make use of this information by analysing the
orders placed:

1 Calculate average cost per order placed (for use as a future comparator).
2 Carry out Pareto analysis to understand the spread of order cost and in
particular the C orders – those 50 per cent of orders that likely account
for 5 per cent of the total annual value of orders placed.
3 Carry out Pareto analysis based on number of order lines to find the C
orders – those 50 per cent that have very few order lines.
4 Consider how these C orders can be reduced, e.g. by management credit
cards, VMI, grouping items to fewer suppliers.
5 Consider the items on the B orders and look at where they are placed on
the Kraljic matrix (see tool 4.6). Can they be moved to a more regular
contract or agreement? Can the contract time be extended for some items?
6 Review the total procurement cost and cost per order.

(Table 4.12 can be downloaded for free as a template from http://howtologistics.

com). In summary, a general expression of ordering cost against quantities
delivered will not be obtained (as required for EOQ calculations) but total
procurement cost and average cost per order can be useful markers against
which to measure progress in reducing operational costs during a project to im-
prove supply chain or procurement efficiency.

Further information
Ordering cost is part of acquisition cost. See Burt et al (2003) or any
comprehensive textbook on procurement or supply management for a
further discussion: Burt, D N, Dobler, D W and Starling, S L (2003)
World Class Supply Management, McGraw Hill, New York.

4.19 How to calculate stockholding cost

Introduction
Calculating the costs associated with material flow, that is ordering, trans-
port and stockholding costs, is one of the first stages in implementing supply
chain management. It is essential to know these costs in order to make the

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best choice from among the many alternative options for managing procure-
ment, transport, storage and warehousing.
For specialist transport or warehousing operations, it can be easy to ac-
cess these costs. In other cases, they must be carefully separated out from
overheads or shared facilities’ costs. As a simple example, what is the cost of
providing hardware, software and support for the computer system in the
finished goods store of a factory? In this case, perhaps the number of termi-
nals located there as a proportion of all terminals across the site might yield
a proportion of system cost that could be allocated to the warehouse. This
is just one element of a multitude of costs that must be added together to
understand the real cost of holding stock.

When to use
Stockholding cost is part of the first stage of a supply chain management
project. Recalculation every two to three years should suffice unless there
are major changes to some of the factors.

How to use
Select a person to do this who is tenacious, capable of searching through
cost data and making sensible estimates. Complete the template in Table 4.13
as far as possible and arrive at a total annual cost.

Table 4.13 Template for estimating annual stockholding cost

Estimated
Category Description annual cost

Building Rental or depreciation

Taxes
Maintenance
Fire detection and extinction system
Office equipment

Storage Depreciation of:

Racking
Shelving
Pallets, totes, boxes, etc

Packaging Stretch wrap, bubble wrap, boxes, tape, etc

consumables

(continued )

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Table 4.13 (Continued)

Estimated
Category Description annual cost

Mechanical Depreciation
handling Fuel, tyres, lubricants, etc
equipment (MHE) Maintenance

Services Utilities: water, gas, electricity, steam

MHE maintenance and repair
Pallet maintenance and repair
Environmental control
Pest controlaccess control
Security/fire system testing
Cleaning
Waste disposal

Systems and Hardware

communications Software
System support
Telephone/internet
Staff mobile phones

Personnel Full employment costs (salary plus overheads)

Overtime
Staff vehicles
Training
Personal protective equipment

Safety/security Insurance/special licenses

Stock losses Spoilage/breakage

Obsolescence
Shrinkage: theft; errors in location,
counting or issues from stock

Costs of shared Transport to other sites

or relocated Returns to supplier
inventory

Proportion of cost Personnel

of shared Site maintenance
functions Accounting
Legal
Project engineering
Other

TOTAL:

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To this must be added the financial investment in the stock and, particularly,
the loss to the business of having capital tied up in the stock. Some compa-
nies use lost opportunity cost for this; others use the bank interest rate.
Since the loss to the business of the financial value of the stock is usually
expressed as a percentage of its value, it is common to express total
stockholding cost as a percentage of the value of the stock rather than as a
dollar/pound cost. Both figures are useful. The most important point is that
a year-on-year reduction is sought, either as a reduction in the stock value
or the cost of holding stock or both.
Some people say that if you have a warehouse, you might as well fill it! In
supply chain thinking, we are always trying to reduce the amount of inven-
tory (thus increasing stock turns). If this frees up part of the warehouse, then
rent out that space to another business and receive some income for it. If
you are renting the warehouse anyway, move to a smaller one.
Further categories of costs are shown in tool 7.1, activity-based costing.
(A comprehensive table can be downloaded for free as a template from
http://howtologistics.com)

Further information
A good description of the elements of stockholding cost can be found in
any good textbook on supply chain management, logistics or
warehousing, for example: Stock, J R and Lambert, D M (2001)
Strategic Logistics Management, McGraw Hill.

4.20 Sales and operations planning (S&OP)

Introduction
For many people, S&OP is just a module in the enterprise resource planning
(ERP) system or a process to balance future demand and supply but research
into top-performing companies has shown that a good S&OP process is an
important element of supply chain and business success. On a rolling basis,
S&OP provides a continuously renewed coherent plan that is created jointly
and followed by the supply functions (procurement and production)
and demand (sales and distribution) functions. The plan states how much
will be produced and sold over the coming months. Involving the finance

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department gives confidence that the plan is feasible, and that the cash and
profit implications are understood. The critical success factor is that all
functions involved take ownership of the plan and contribute to its mainte-
nance and execution. In large companies with multiple sites, product fami-
lies and markets, S&OP may be carried out at site level as well as at regional
and corporate levels. Achieving a good balance between sales and produc-
tion ensures that customer demands are met with minimum inventory and
greatest production efficiency.
Using S&OP for demand and supply balancing is beneficial at the opera-
tional level. However, the S&OP can provide an effective cross-functional
forum for discussion of future business shape and performance. Conducted
at the most senior levels, this form of S&OP provides an important tactical
and strategic vehicle for business management. Sometimes the higher-level
planning is called integrated business planning, to distinguish it.
Although much of the discussion will be in value terms, the easiest com-
mon currency, quantities are usually expressed per product family in broad
brush terms, in whatever units have common meaning in the business, e.g.
tonnes, dollars, square metres, millions of units and so on. Depending on the
sector, the horizon can be one to five years (ideally 18 months or longer).
Having agreed the plan, it then becomes the basis for more detailed ca-
pacity planning, materials forecasting, the procurement budget, recruitment
(if necessary), and other plans that ensure that the overall plan is executed.
Some companies with sophisticated information systems are now finding
it possible to automate parts of the S&OP process. At the simplest level,
digital technology can help compile reports. Greater levels of analytics can
automate parts of the process and support decision making. However, de-
spite these capabilities, it is important to recognize the human side of the
process and that great value comes from constructive dialogue between the
functions and a shared approach.

When to use
S&OP is necessary when the company’s products are sufficiently complex or
numerous to warrant a higher-level process than a master production sched-
ule (MPS). However, S&OP can still be valuable in smaller organizations in
developing a shared business plan and a forward-looking view of the
company.

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How to use
The following steps are carried out in each monthly cycle:

1 Supply-side progress against the current plan is monitored using a group

of key performance indicators (KPIs) including supplier performance,
procurement expenditure, production volumes, stocks, percentage
achievement of plan, production costs, etc.
2 Sales progress against the current plan is monitored using a group of KPIs
including sales volumes, revenue, percentage achievement of plan,
delivery achievement to customers, service levels achieved, etc.
3 The sales function updates the demand forecast and makes this available
to the production and supply chain functions. Note that good forecast
accuracy is critical for realistic S&OP (see tools 4.2 and 4.3). Product
launches, promotions, new market entries or other non-routine events
are flagged up.
4 Taking into account projected available inventory in future and safety
stock requirements, the production function updates the production
forecast. Major changes in capacity (shutdowns, new/closing facilities,
etc) are flagged up.
5 The supply chain function reviews the sourcing requirement and flags up
any potential problems.
6 The demand (sales) and supply (procurement and production) forecasts
are then used as the basis for a number of sub-calculations, carried out
either by the S&OP module in the ERP system or in Excel, including:
●● revenue forecast;
●● production cost forecast;
●● feasibility of obtaining all parts and materials in time by using macro-
bills of material, i.e. the most critical items due to long lead times or
other market difficulties;
●● estimation of the labour workload and the capacity required on the
most heavily loaded machines by using macro-routings, i.e. operations
on bottleneck and near-bottleneck workstations;
●● proposing alternative scenarios if production and supply cannot be
balanced, for example products may need to be allocated to customers
or markets if capacity is constrained;
●● procurement budget forecast and cash flow projections.

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7 Supply chain analytics may be used to spot trends, identify cause and
effect links and hence enhance the information available during S&OP
decision making.
8 An S&OP information pack is created and circulated to the managers of
the key functions involved. Each manager prepares for the monthly
S&OP meeting, which may require some extra preparation on potential
solutions if problems are anticipated. A cover sheet using traffic light
indicators allows focus on areas that need attention.
9 The team discusses the results of the sub-calculations and adjustments
are made until final agreement is reached between all parties on a feasible
and coherent S&OP. The S&OP is then used as the basis for the MPS.
Once a management team becomes familiar with the S&OP process, it
has been found that it is more efficient to focus on exceptions and key
issues rather than going through every detail of the plan each month.
10 The team executes the plan and monitors its progress. Any serious
deviations are investigated and logged for future learning. Thus the cycle
recommences.

Example
Wacker Polymers (see URL below) has made available a slide set that ex-
plains its S&OP process. The plan covers the next 18 months and is updated
monthly on a rolling basis. It enables the business strategy to be realized and
resources to be planned. The plan is expressed in dollar terms and also units.
Using 18-month forecasts, first the demand plan is reviewed, then the
supply plan. The supply plan is then agreed and used as the basis for the
revenue forecast, procurement planning, production and distribution plans,
and financial and sales planning.
In consequence of better S&OP, improvements have been seen in four key
measures: improved forecast accuracy, improved adherence to production
schedules, reduction in inventory days of supply (stock cover) and improved
financial forecast accuracy. The process seems to be working so well that
S&OP meetings have become boring – a sign of success!

Further information
Propokets (2012) and Iyengar and Gupta (2013) give good introductions to
S&OP. Wallace and Stahl (2008) present a comprehensive guide to sales

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300 The Logistics and Supply Chain Toolkit

and operations planning. Ling et al (2010) provide a good overview of

S&OP deployment to drive business performance and its use in more
complex business environments. They also provide a means of assessing
the maturity of S&OP use in a company.
Wacker Polymers’ presentation can be found at: http://fr.slideshare.net/
guestdd5f19/executive-sop-case-study-gpseg-1915590 (archived at
https://perma.cc/VN9S-NBN3)

References
Iyengar, C and Gupta, S (2013) Building blocks for successful S&OP, Supply
Chain Management Review, November, pp 10–17
Ling, D, Coldrick, A, Bissell, B and Whitewood, D (2010) Breakthrough
Sales & Operations Planning, Touchmark Publishing, Tukwila, WA
Propokets, L (2012) S&OP: What you can learn from the top performers,
Supply Chain Management Review, May/June, pp 28–35
Wallace, T F and Stahl, R A (2008) Sales and Operations Planning: The
how-to handbook, T F Wallace and Company, Montgomery, OH

4.21 S&OP self-assessment by Supply Chain

Movement and Involvation
Introduction
Your objective is a supply chain which is optimally aligned with market
demand. Hence, sales and operations planning (S&OP) is crucial. But what
does S&OP really contribute to your company’s performance? Is S&OP
delivering demonstrable results? To help you discover how well your S&OP
process is actually functioning, Supply Chain Movement and Involvation
have developed this practical self-assessment model.

When to use
When you wish to review the S&OP activity in your business.

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Supply chain management tools 301

How to use
Fill in the answers, scoring zero for each ‘No’ and the number of points shown
for each ‘Yes’. Add up the points to find your total score. There are two
groups of questions which will form the two axes of a matrix: integral/holistic
approach (Table 4.14) and alignment with business strategy (Table 4.15).

Table 4.14 Integral/holistic approach

Yes No Score

1 Our company has to contend with a certain 10 0

degree of supply and demand complexity

2 The tasks and responsibilities of Sales and 10 0

Operations are clearly defined.

3 Involvement in the S&OP meetings is proactive 15 0

and constructive

4 All participants appreciate the benefit and 15 0

importance of S&OP

5 Decisions by Sales and Operations are supported 15 0

by figures and assumptions

6 KPIs are defined at group level and do not lead to 15 0

sub-optimization per discipline

7 Within our company there is sufficient 10 0

transparency and trust between Sales and
Operations

8 Communication between the various disciplines 10 0

runs smoothly

Table 4.15 Alignment with business strategy

Yes No Score

1 The business strategy is clear and unambiguous, 10 0

and has been translated into operational execution

2 In business planning, there is a clear distinction 10 0

between long-term and short-term planning. The
S&OP focuses primarily on the medium-long term
(3–18 months)

(continued )

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302 The Logistics and Supply Chain Toolkit

Table 4.15 (Continued)

Yes No Score

3 In S&OP there is a continual evaluation of trade- 15 0

offs between supply and demand.

4 In S&OP we make decisions at aggregated level 15 0

without getting bogged down in the operational
details.

5 Our KPI structure is aligned with business strategy 15 0

6 In S&OP we make use of scenario planning so that 10 0

we can proactively anticipate opportunities and
threats

7 Gap analysis between target and forecast is part of 15 0

our S&OP process

8 Our CEO and CFO both regard S&OP as an 10 0

important instrument for achieving business
objectives

Add up the scores for each axis and determine in which quadrant of the 2 ×
2 matrix you are (Figure 4.13).
Score 0–50 points for integral/holistic approach and 0–50 points for stra-
tegic alignment:

The S&OP process is like a 100-metre sprinter who is striving for personal
victory, focused only on the next race. In this type of S&OP, there is little to no
alignment between the various disciplines. Departments have individual targets
that bear little or no relation to the overall business strategy.

Score 51–100 points for integral/holistic approach and 0–50 points for stra-
tegic alignment:

S&OP is like a relay runner who must deliver an optimal team performance in
the next race. Within companies with this type of S&OP, there is some degree
of collaboration and alignment between departments. However, the focus is on
short-term operational execution and there is little connection to the long-term
strategy.

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Supply chain management tools 303

Figure 4.13 Result positioning matrix

100
Alignment with business strategy

Triathlete Hockey team

Sprinter Relay runner

0
0 50 100
Integral / holistic approach

Score 0–50 points for integral/holistic approach and 51–100 points for stra-
tegic alignment:

S&OP is like a triathlete who must deliver a strong individual performance and
follows a strategy for optimally completing the various stages in order to secure
the gold medal. Companies with this type of S&OP primarily strive towards
their own departmental goals, yet with a focus on long-term success.

Score 51–100 points for integral/holistic approach and 51–100 points for
strategic alignment:

S&P is like a hockey team in which each team member fulfils their role for the
benefit of the whole team in order to seize the title at the end of the season.
In this type of S&OP the business strategy and the vision are central when
considering trade-offs between different disciplines. The disciplines are focused
on the achievement of long-term success and all activities are aligned with the
long-term objectives.

References
This and other self-assessments can be found at www.supplychainmovement.
com (archived at https://perma.cc/R9QS-A9G6)
https://www.supplychainmovement.com/sop-self-assessment-2023/
(archived at https://perma.cc/J75L-3JHG)

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4.22 Strategic procurement

Introduction
Strategic procurement is the result of major changes to the purchasing func-
tion since the 1990s. The name acknowledges the strategic importance of
good procurement practices. Depending on the sector, the function is in-
volved in 70–90 per cent of company expenditure (i.e. just about anything
that is not salaries or depreciation) and a business of any size would do well
to make sure that its expenditure is funnelled through the procurement
function as far as possible.
A good proportion of this expenditure is supply-chain-related and effec-
tive procurement is an important element of supply chain management. It is
critical that supply chain management, and hence procurement, has board-
level representation.

When to use
Many companies can improve their procurement practices and this tool is
intended to give you some insight into how strategic procurement can help
your business.

How to use
Use this tool to review the procurement activity in your business. If you
would like to know more about these ideas, shown in Table 4.16, see the
further information section.

Example
A procurement professional was appointed to a small business to take over
all the procurement activity that had previously been handled by the manag-
ing director (MD) and his assistant. The MD made the decisions and the
assistant executed them. While the MD could claim that company expendi-
ture was being carefully controlled, this did not mean that procurement was
being handled analytically or in the best long-term interests of the company.
The procurement professional immediately started analysing the item
catalogue, set up families, identified different purchasing approaches for the

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Table 4.16 Some of the best practices that form strategic procurement

What What is involved

Analysis of Set up families of similar items

purchased Use ABC Pareto analysis to identify items and families in each
items class. Set up appropriate procurement strategy for each item/
family according to its importance, i.e. aim to spend more
time on the most important or valuable items (see tool 4.6)

Category Divide up the purchased equipment, services and materials

management into logical ‘categories’, which are then allocated to individual
procurement professionals. These category managers then
develop specialist knowledge of the supply market. This is
particularly useful for centralized procurement of A and B items
(see below). It also prevents duplication, inefficiency or vendor
proliferation in large organizations with multiple sites/countries

Supplier Set up clear procedures for selecting suppliers depending on

selection importance and value of item, involving users where
appropriate, including technical and quality assessments,
financial stability, transport options, delivery reliability, ability
to contribute to new product development
Look at the local, national, regional and worldwide supply
markets as appropriate

Minimum Choose suppliers that the business wants to work with rather
number of than the ‘best’ supplier for each individual item. The business
suppliers works to ensure good performance from those suppliers is
achieved across a wider range of items. A number of different
functions could be involved as well as procurement,
e.g. quality, production planning, transport

Supplier status Suppliers may be approved, preferred, lead, sole supplier etc.
range Set up appropriate supplier relationships (tool 4.11)

Supplier Provide close or real-time links with suppliers through access

management to extranet, a platform or portal, to share forecast demand,
order history, recorded delivery performance and in some
cases actual sales information (e.g. EPOS)

Communication Visit suppliers periodically (depending on location and

with suppliers importance of supplier), and give them regular feedback
on performance, e.g.through a platform or portal as above.
Communication could also include participation in
joint workshops regarding problem solving, new product
development, closer cooperation on planning and
forecasting,etc

(continued )

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306 The Logistics and Supply Chain Toolkit

Table 4.16 (Continued)

What What is involved

Total cost of In addition to the invoiced amount, take into account the cost
acquisition of transport, cost of rejects, administrative effort required to
work with this supplier, training, commissioning,
consumables, etc

Lifetime cost of In addition to the invoiced amount for equipment, take into
equipment account the installation, commissioning, operating and
maintenance costs, shipping and packaging, spare parts
requirements, consumables, training, etc

Cooperation Remember that procurement ‘serves’ internal users and can

with key user only do this effectively by being involved as early as possible
functions in development projects such as new products, new facilities,
etc. This may require engaging with user departments to
explain the role of procurement and the value they add to the
business

Supply market Keep up to date with the main players and new developments
monitoring in the supply markets for key items and families

Supply chain Carry out periodic risk assessments on key suppliers, major
risk analysis items, new projects, etc

Information Use an appropriate module or package, e.g. SAP Ariba

management

Centralization Use ABC analysis to set policy for centralized or decentralized

vs procurement of different items or categories, e.g. centralized
decentralization procurement for A and B items/families and C items where
aggregated demand across all branches or sites or countries
makes it worthwhile

different families, formalized a supplier database and reviewed all purchase

orders (POs) placed over the previous 12 months. The majority of POs were
individual transactions, many to the same companies. Supply agreements
were set up with key suppliers with forecasts of aggregated demand.
After a couple of years of reviewing and renewing the supplier base, the
purchasing budget had reduced by nearly 15 per cent, supplier performance
had increased and production shortages significantly reduced (thus reducing
the amount of time spent on expediting).

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Supply chain management tools 307

As a rule of thumb, we can say that a procurement professional can re-

duce the cost of purchases by about 10 per cent over two years if the ex-
penditure has not yet been analysed methodically. Thereafter, year on year
reductions of 3–5 per cent can be expected depending on the sector. This is
not about ‘squeezing’ suppliers nor is it about ‘switching and baiting’. It is
about choosing good and reliable suppliers, especially for key items, setting
appropriate working relationships with them, securing supplies where the
supply market is difficult, working closely and cooperatively with internal
user functions and involving suppliers in future projects.

Further info
See www.cips.org (archived at https://perma.cc/6QCK-RAZL) for all
matters regarding procurement, training, industry news, events, etc;
https://www.kearney.com/web/the-purchasing-chessboard/ (archived at
https://perma.cc/76VN-WH3P) identifies 64 methods from AT Kearney’s
experience that reduce cost and increase value with suppliers.
The following standard textbooks are highly recommended (for UK and the
United States):
Baily, P, Farmer, D, Jessop, D and Jones, D (2005) Purchasing Principles and
Management, FT Prentice Hall, Harlow (UK)
Burt, D, Dobler, D and Starling, S (2004) World Class Supply Management,
McGraw Hill, New York (USA)
Lysons, K and Farrington, B (2006) Purchasing and Supply Management,
FT Prentice Hall, Harlow (UK)
Monczka, R, Handfield, R, Giunipero, L, Patterson, J and Waters, D (2009)
Purchasing and Supply Chain Management, South-Western, Mason, OH
(USA)

4.23 Supply chain strategy, by Julian Amey

Introduction
Twenty years ago, companies developed manufacturing strategies or, in
some cases, operations strategies. It is now recognized that while manufac-
turing can be an important capability, the company really needs an effective
supply chain strategy. This recognizes the shift that many companies have

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308 The Logistics and Supply Chain Toolkit

made from being pure ‘manufacturers’ to ones with more complex sourcing
arrangements and that customers, products and markets are what drive
company performance. Indeed, certain experts would say that companies
now compete on their supply chains, necessitating a clear, well-formulated
and executed supply chain strategy.
The supply chain strategy must be created to support the company’s (or
business unit’s) strategy and commercial ambition. Developing the supply
chain strategy requires a clear understanding of customer and market re-
quirements, the products and services that need to be delivered and how the
company competes and delivers value to its customers.
The strategy must be forward looking. Although it may seek to address
current performance issues, it must consider the future needs of the com-
pany and the supply chain (e.g.what product launches are required, what
the cost and cash pressures are, in what markets expansion or contraction
will occur, how the company’s operating or selling model may need to
change). This is necessary because of the likely time that it will take for some
facets of the strategy to be implemented. An effective strategy will install the
necessary capabilities ahead of their requirement in order to create a leading
organization.
A supply chain strategy can have many dimensions and areas to address.
These could include:

●● Supply chain performance in areas such as customer service and inventory.

●● Sourcing arrangements and supply chain configuration/re-configuration:
asset strategy, make vs buy, supply base.
●● Geographical reach: customer base, supply base, logistics services.
●● Product portfolio: new product introduction, product divestments,
product lifecycle-driven changes.
●● Cost and cash pressures.
●● People: skills and talent development, recruitment, organization
development.
●● Operating model changes: global vs regional vs local, value-adding
service offerings.
●● Technology: manufacturing capabilities, technology transfer.
●● Processes and systems: streamlining or harmonizing processes,
information management capabilities, digitalization.
●● Infrastructure.

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There is the temptation to put too much into the strategy. This should be
avoided. It is important to be realistic and focus on the crucial elements that
will deliver the most benefit or the changes most critical to future success.
Typically, a good strategy should be simple and clear with a number of key
principles or messages. A simple strategy is easier to communicate and to
gain buy-in for than a complex one. It is also more likely to be i mplementable.
The strategy should not be seen as a document. To add value, the strategy
needs to be implemented. This will require good project management and
communication.
An increasing area of focus for many companies developing supply chain
strategies is the impact of digital technology on their business and supply
chains. Some are now considering digital transformation as the next signifi-
cant step that they need to take. New digital approaches can have a funda-
mental impact on the business’s operating model; however, there is also still
a need to focus on the basics of supply chain processes and people while
using digital as an important enabler.

When to use
A company should always have a valid and up-to-date supply chain strategy.
Because of the pace of change of business conditions and competitive envi-
ronments, the strategy should be reviewed at least annually and will prob-
ably require revision every three years, the likely time horizon for implemen-
tation of the previous edition.

How to use
The supply chain strategy must be developed in consultation and collabora-
tion with other functions in the company. Key among these will be:

●● Research and development – to understand the future product/service

portfolio and plans for new product introduction.
●● Sales and marketing – to understand the commercial plans, long-term
forecasts and geographical ambitions.
●● Finance – to understand the financial imperatives and constraints (e.g.
cash flow, profitability, tax).

As part of the strategy’s development, a business case needs to be created

since the strategy is likely to involve change. Resources will be needed to

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310 The Logistics and Supply Chain Toolkit

effect the change. Hence the business case should justify the effort and re-
sources required. A strong financial case will also generate commitment
within the business towards implementation.
Implementation of the strategy will not happen by accident. Effective
project management with a clear plan and monitoring steps is essential.

Example: AstraZeneca
Following the merger of the pharmaceutical companies Astra and Zeneca in
1999, an operations strategy was generated that focused on the immediate
issues of company integration and the imperative of launching major new
products. In 2001, the strategy was radically revised to become a supply
chain strategy that addressed issues of poor customer service and high in-
ventories through:

●● implementation of lean and demand-driven supply to reduce lead time

and improve efficiencies to provide capacity headroom for new products
without major capital investments;
●● lifecycle management of products;
●● greater emphasis on outsourcing;
●● shifting the focus of operations from being a manufacturing organization
to one focused on customer service and supply.

Implementation of the strategy de-bottlenecked supply of certain products,

leading to increased sales, reduced inventory by circa $500 million and
raised customer service levels to >99 per cent. In consequence, operations’
reputation was enhanced and it was seen as a great place to work.
Following attrition in the company’s new product portfolio leading to
absence of the expected product launches and confronted by impending pat-
ent expiries of a number of major brands, in 2006 the strategy was r evised to:

●● place more aggressive focus on the continued implementation of lean,

supporting a continued drive to reduce cost of goods;
●● full end-to-end supply chain management by organization realignment
and implementation of advanced planning systems to provide full supply
chain visibility;
●● inventory optimization to free up cash for investment in licensing
opportunities;
●● stronger regional focus to align with the sales organization;

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Supply chain management tools 311

●● shifting the geographical footprint to align with future growth in emerging

markets; and
●● much greater focus on outsourcing to avoid significant capital investments
and manage risk.

Further information
More information can be found in:

Chopra, S (2015) Supply Chain Management: Global edition: strategy,

planning, and operation, Pearson, Harlow
Christopher, M (2005) Logistics and Supply Chain Management, FT Prentice
Hall, Harlow
Hill, T (1993) Manufacturing Strategy, Macmillan, London
Slack, N, Brandon-Jones, A and Johnston, R (2013) Operations Management,
Pearson, Harlow

4.24 3D printing or additive manufacturing

ROI
Introduction
Additive manufacturing is a process in which a machine makes a three-di-
mensional (3D) object from a CAD (computer-aided design) file.
3D printing can print items with thermoplastics, photopolymers, com-
posites and metals.
Some manufacturing-grade printers are expensive; however, you can find
a 3D printer for manufacturing purposes from $3,500. The ones costing
over $100,000 are usually large-format plastic or metal printers, which fre-
quently require special facility requirements and safety equipment.
While some say that 3D printing is replacing high-volume manufactur-
ing, the time and cost required to 3D print parts at high volume is often far
greater than that of traditional manufacturing.

When to use
The primary uses for 3D printed parts for manufacturing are prototyping,
tooling and fixtures, spare parts and low-volume end-use parts.

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3D printing could potentially revolutionize the maintenance stores and

spare parts industry. Rather than hold a comprehensive stock of automotive
parts, for example, a company can manufacture to order.

How to use
When choosing a 3D printer, you need to ask yourself these questions:

1 What are your biggest manufacturing challenges?

• Prototyping (number/time of iterations, lead time/cost);

• tooling (time/cost to tool up, custom tooling);

• spare parts (lead time, batch sizes);

• end-use parts (cost, quality, lead time).

2 What are your current costs for outsourcing or machining parts in-house?
3 How important is it to have strong parts?
4 Do your parts need to be resistant to heat or chemicals?
5 Do you have specific material restrictions (thermoplastic, composites,
photopolymers, metal)?
6 Are you currently missing deadlines because of time spent machining or
outsourcing parts?
7 Is the company losing revenue due to reduced production?
8 Are your engineers relying too heavily on expensive equipment for non-
revenue parts?
9 Are you holding significant numbers of items for a ‘just in case’ scenario?

Here are a few areas where manufacturers have benefited by utilizing 3D

printers:

●● Design flexibility – make parts that were otherwise unable to be fabricated

traditionally.
●● Greater agility – 3D printing allows you to create more iterations, fail
faster, and achieve better end products. Finding and fixing design flaws
early also helps to avoid costly design revisions and tooling changes in
production.
●● Less machine downtime — continuously innovate with minimal
downtime.

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Further information
Each of the following websites provides an ROI calculation comparing 3D
printing to either in-house manufacture or outsourcing to a third-party
manufacturer.
How to calculate the ROI and cost of 3D printing https://formlabs.com/blog/
how-to-calculate-3d-printer-cost/ (archived at https://perma.cc/3G4L-
H3FQ)
ROI calculator https://markforged.com/blog/metal-x-roi/ (archived at
https://perma.cc/363C-ZVFG)
Simple spreadsheet for determining the ROI of a 3D printer purchase https://
strategic3dsolutions.com/simple-spreadsheet-determining-roi-3d-printer-
purchase/ (archived at https://perma.cc/H6NB-33FP)

4.25 Supply chain analytics

Introduction
Today most businesses have the opportunity to analyse vast quantities of
data efficiently and cost-effectively due to the massive increase in data avail-
able in their business and via the internet, together with the affordability of
ever-increasing processing power and the continuing reduction in the cost of
data storage. The use of ‘big data’ in business analytics attracted much at-
tention a few years ago. Business analytics employs a range of methods for
analysing data, including statistical and economic analyses and modelling,
simulation and optimization, which have all been developed over many dec-
ades. However, it is only in recent years that so much information has be-
come publicly available, and it has become time- and cost-effective to merge
and sort all this information, to construct larger models than ever before
and to test out many more future options. Supply chain analytics (SCA) is
the application of these methods to logistics and supply chain management
(LSCM).
According to Russom (2011), big data business analytics (BDBA) can
help businesses make better decisions and improve their strategy, operations
efficiency and financial performance.
Before getting too enthusiastic about the ability to solve all our problems
at a stroke, it is wise to remember that we cannot model everything all the
time. The most successful applications of SCA focus on a particular question

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314 The Logistics and Supply Chain Toolkit

or set of related questions in one of the main areas of LSCM. Of interest to

us here are the sorts of questions that could be asked and an understanding
of the processes that can be used to address them.
Many business management systems now have SCA modules as an op-
tion and there are also SCA ‘platforms’, which extract and manipulate data
from your business database. Often, these platforms have a specialized
focus; for example, SAP Business Network focuses on procurement.
Alternatively, you can outsource your problem to specialist consultants who
will interrogate your database for you and may also combine it with data
from public sources.
There are three general purposes of analytics (Wang et al, 2016):

●● ‘descriptive’, which refers to identifying problems and opportunities

through summarizing a situation or drilling down, either at regular
intervals or as and when required;
●● ‘predictive’, which uses algorithms and programming to discover
explanatory and predictive patterns in the data; and
●● ‘prescriptive’, which uses algorithms to create and evaluate alternative
scenarios by means of multi-criteria decision making, simulation and
optimization.

Many websites offering SCA modules or platforms list the many questions
that can be asked. Here, our examples give a flavour of the processes used
to answer a question. This is useful since you will get an idea of the wide-
ranging application of the method.

When to use
When you need to make an important decision and you believe that you can
obtain more and better information on which to base that decision by min-
ing the company database and/or public data sources.
There are two key points to recognize from big data used for business
analytics. First, many strategic projects would earlier have been argued from
a largely qualitative point of view using common sense, experience and a
few numbers created by extrapolating from, or averaging, available data.
Second, the starting point of the problem given to a business analyst was
quite often, ‘Here’s my plan, now go and find the data to support it’. In
BDBA and SCA, the starting point has changed to, ‘Here is the situation,
now how can we leverage this for best benefit?’

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How to use
These methods require deep experience of statistical and mathematical
methods as well as data management and manipulation. If neither you nor
a colleague have this sort of knowledge then, from our point of view, the
most important thing is that you know the method is available and roughly
how it could work for you. A supply chain consultant and analyst will be
able to assist you.

Example
1. To support the decision of where to position
a new warehouse
Current approaches to deciding where to position a new warehouse focus
primarily on analysing the location of customers and their ordering patterns
in terms of frequency and volume, labour cost and availability, local legisla-
tion, plus the transport infrastructure for arrival and distribution of product
by different modes of transport. In the past, we might only have considered
the 20 per cent of clients that represent 80 per cent of turnover. Big data
allows us to consider all transactions in the last 5–10 years. In addition,
however, the analyst can use public information to enrich the analysis, for
example to understand the potential local workforce. Using heuristics (rules
of thumb), such as 75 per cent of people live and work in the same area, or
that most people do not want to travel more than 45 minutes to work, or
that more highly skilled people are willing to travel further to work, the la-
bour catchment area can be estimated. Looking at the population, roads and
trains in the catchment area allows the size of the work pool to be estimated.
By adding in employment data, the local availability of particular skills can
be assessed.

2. To support the decision of where to expand a retail network

After several years of working on different projects, and by combining data
from many public and commercial sources, including, for example,
Companies House, the Office of National Statistics, trade figures, business
databases such as FAME, and Post Office address files, a data analysis con-
sultancy has constituted their own database of all business premises in the
UK, which number over two million. This required merging, sorting and
cleaning the data and the application of many heuristics. The result is that
they understand the nature and financial weight of virtually all economic

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316 The Logistics and Supply Chain Toolkit

activity (e.g. gross value added) in the UK. This has been used successfully in
such projects as proposing uses for wasteland that would synergize with and
complement local economic activity rather than compete with it, or for pre-
dicting the growth in local employment in consequence of the establishment
of a business park, or determining if there is capacity locally for an innova-
tive business in a certain sector.
With thanks to Geoff Wainwright and John Burns of Impact Data Metrics
(see www.impactdatametrics.com)

Further information
Some further insight into what can be achieved by supply chain analytics
can be obtained from the following sources:
https://www.ibm.com/blogs/watson-customer-engagement/2019/05/06/retailers-
are-running-out-of-inventory-heres-what-to-do-about-it/ (archived at https://
perma.cc/ZAK3-LVYW)
https://www.xeneta.com/blog/supply-chain-analytics (archived at https://
perma.cc/5XFT-GGZ3)
https://www.mckinsey.com/business-functions/operations/our-insights/big-
data-and-the-supply-chain-the-big-supply-chain-analytics-landscape-part-1
(archived at https://perma.cc/5LWR-6VC6)

References
Russom, P (2011) ‘Big data analytics’, TDWI Best Practices Report, Fourth
Quarter, tdwi.org (archived at https://perma.cc/G28Y-GF67)
Wang G, Gunasekaran, A, Ngai, E and Papadopoulos, T (2016) Big data
analytics in logistics and supply chain management: certain investigations
for research and applications, International Journal of Production
Economics, 176, pp 98–110

4.26 Logistics 4.0

Introduction
Logistics 4.0 is the term given to the concept that logistics and supply chain
management will benefit from the application of similar technologies to
those which make up Industry 4.0, or the arrival of smart factories, marking

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the fourth industrial revolution (the first being the use of steam to power
machines, the second being the use of assembly lines for mass production
and the third being the application of information technology to a utomation).
Overall, the application of these new technologies will increase the effi-
ciency (reducing time and cost) and effectiveness (increased customer
satisfaction) of the supply chain by better integration of processes thus in-
creasing transparency and visibility of product and data moving through the
value chain (not just the supply chain). Technologies used to achieve this
include the internet of things (IoT) and cloud computing, automation and
robotics, machine learning, big data and artificial intelligence, simulation
and augmented reality.
The main components of Logistics 4.0 are listed in Table 4.15. The reader
has probably heard of most of them but it is their combination which pro-
vides the step change in performance.

When to use
Logistics 4.0 is definitely upon us but it requires understanding and vision
to spot the opportunities for your business.
There is no time to lose! Learn as much as you can about Logistics 4.0
and how it can benefit you, your partners and your customers. Not all the
solutions are expensive.

How to use
Potential applications in logistics and supply chain management are shown
in Table 4.17 for each of the different components. You can start experi-
menting with some off-the-shelf solutions, e.g. IoT, drones or robots, or en-
gage someone with more experience to help you to set objectives and draw
up a strategy.
Note that increased digitalization and flow of data increases exposure to
hacking and fraud. Increased cybersecurity is thus a vital additional compo-
nent to any Logistics 4.0 project.

Example
Logistics 4.0 at UPS: https://www.forbes.com/sites/bernardmarr/2018/06/15/
the-brilliant-ways-ups-uses-artificial-intelligence-machine-learning-and-big-
data/?sh=62d6c8885e6d

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318 The Logistics and Supply Chain Toolkit

Table 4.17 ain components of Logistics 4.0 and their applications in logistics
M
and supply chain management

Component Explanation Potential applications

Big data and We can now store and Logistic system performance,
analytics process more data than ever analysis of customer
before, quickly and cheaply. complaints, where to locate a
This data can be mined using warehouse, breakdown
statistical applications to find analysis, data platforms
the answers to ever more
precise questions

Artificial From an initial base of facts, Re-routing packages in the

intelligence rules and experiences, new case of a problem in one part
knowledge and competences of a system, optimizing a
can be inferred and generated distribution system, optimizing
international distribution,
international inventory location
determination, production
planning and scheduling,
augmented operators

Robotics Machines can carry out a wide Warehouse picking,

variety of tasks autonomously autonomous delivery vehicles,
autonomous ships, delivery
drones, picking drones

Machine Machines such as robots can Warehouse picking robots,

learning be programmed to learn how ABC analysis, autonomous
to do certain tasks. Artificial delivery vehicles, autonomous
intelligence allows them to ships
design methods to carry out
new and different tasks

Cloud Rather than having all Sharing data, accessing

computing applications and data in a applications, connected
memory situated in the locations and teams, software
computer or machine, these as a service (SaaS)
programs and data may be
stored remotely and accessed
as required thanks to faster
internet

(continued )

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Table 4.17 (Continued)

Component Explanation Potential applications

Simulation A virtual model can be built of Warehouse layout and design,

a process or product enabling distribution system design,
experimentation and testing supply chain performance,
before the process or product picking system operation,
is created in real life and bottleneck diagnosis
without risk of harm to the
real-world product or process
or their environment. A ‘digital
twin’ (see tool 4.27) uses this
technique, as well as machine
learning and artificial
intelligence, updating the
model using real-time data

Internet of Devices may be connected to Smart products, product

things the internet. Connection to the status and location, machine
internet enables remote performance, remote
application and analysis of the maintenance, storage
data and remote decision conditions, material and
making product movement through
the supply chain

Additive Parts may be produced rapidly Rapid prototyping, spare parts

manufacturing in plastic or metal thus delivery
enabling rapid prototyping or
reducing the need for stocks
of spare parts

Augmented Computer-generated Visualization of a new product,

reality information is applied to a visualization of a new process,
real-world environment, for training warehouse staff
example to enable us to see
how a new product or process
fits into our world

Further information
See https://www.adlittle.com/sites/default/files/prism/logistics_section.pdf
(archived at https://perma.cc/76D8-E4VA) for some good examples of
new businesses and transformation of existing businesses.

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320 The Logistics and Supply Chain Toolkit

Also look at the websites of the leading sector players such as the big
consultancies and integrators such as IBM, SAP, Microsoft. Your
professional institution may also be a good source for information,
meetings, conferences or presentations of ongoing projects.

4.27 Digital twinning

Introduction
Digital twinning is one of several components of Industry 4.0 which are use-
ful in logistics and supply chain management. A digital twin is a digital
replica of a logistics system or component such that the system or compo-
nent can be tested and experimented with, without any impact on the real-
life system or component. However, testing and experimentation can be
carried out with confidence that the real-life system or component will react
in exactly the same way. For example, the digital twin could be of a ware-
house or a distribution network.
This is very useful for testing out how the system or component will react
under new circumstances such as extreme load, or failure of a sub-system,
or when using different customer priority rules, for example.
The digital twin is not a model built separately from the real-life installation
as discrete event simulation models used to be. The twin continuously moni-
tors what is happening in the real-life system and is updated with real-time
data. The digital twin uses other elements of Industry 4.0 such as machine
learning to analyse changes in the real-life system and artificial intelligence to
assess how to integrate them, thus helping future decision making.

When to use
The digital twin is constantly updating itself but becomes particularly useful
if a decision is required on a new investment or to develop a new strategy.

How to use
Specialist software is required but the underlying approach is the same re-
gardless of which software is used. The main steps are:

●● Define the scope of the model, its elements and the relationships between
the elements.

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Supply chain management tools 321

●● Collect data on the operating characteristics of the real-world situation

and decide how this data will be transmitted to the future twin (sensors,
video etc).
●● Build the model feeding in real-time data.
●● Test and validate the model by analysing its responses to changes in the
real-time data against the ongoing changing real-life situation.
●● Continue to develop and adjust the model until it images the real-life
system or components as closely as possible.
●● Once validated, the model can be subjected to analysis and experimentation
which may require exporting the data to other tools.

The main software being used at the time of writing are IBM Digital Twin
Exchange, Microsoft’s Azure platform and Amazon Web Services (AWS) IoT
TwinMaker.

Example
Reckitt is an international group known for hygiene, health and nutrition
products. Reckitt collaborated with Risilience, a company which has devel-
oped from research on climate risk carried out by the University of
Cambridge Judge Business School, to build a digital twin model of its busi-
ness. The model was deployed as part of Reckitt’s strategy to reach net-zero
emissions across its entire value chain by 2040 and mitigate risk due to cli-
mate change. Sub-targets included reducing greenhouse gas emissions
(GHG), reducing energy consumption, using 100 per cent renewable ener-
gies and reducing its product carbon footprint.
Business functions and other stakeholders were involved in developing
the platform, supplying data and testing out future scenarios, in order to
mitigate climate risk and identify new business opportunities.
See the full story at https://risilience.com/customer-stories/reckitt-2/
Significant benefits have already been achieved. Reckitt’s 2022 TCFD
(Taskforce on Climate-related Financial Disclosures) report states that,
compared with 2015, there has been a 66 per cent reduction in GHG and a
3 per cent reduction in use of energy per tonne in operations, while 93 per
cent of the energy used in manufacturing comes from renewable sources.
The full report can be found at https://www.reckitt.com/media/ydvb4g2s/
climate-change-2022.pdf

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Further information
See https://aws.amazon.com/fr/iot-twinmaker/ (archived at https://perma.
cc/XD2Q-QRT6)
https://www.ibm.com/blog/schiphol-worlds-leading-digitally-innovative-
airport/ (archived at https://perma.cc/5NBE-BX4Q)

4.28 Blockchain in supply chain

management by Frank Findlow
Introduction
The use of blockchain technology offers a huge upgrade to the current sup-
ply chain system, which often relies on tracking physical paperwork be-
tween siloed parts of the multinational network. It is a trusted, decentralized
network that allows for the transfer of digital values such as currency and
data.
By allowing digital information to be distributed but not copied, block-
chain technology has created the backbone of a new type of internet.
The world of blockchain technology has undergone a big transformation
over the past 10 years as the concept evolved from offering a simple means
of exchange between two parties to a broad ecosystem full of protocols with
real-world applications, ranging from decentralized finance to one-of-a-
kind digital art. It is fair to say the applications of blockchain are continuing
to evolve almost daily.
Top of mind for efficient and reliable management of goods, the cargo
industry will benefit massively from blockchain. Every year trillions of dol-
lars of freight are transported globally, 90 per cent of which is sent via ocean
freight.
Given that the major freight companies are among the largest businesses
in the world, it is amazing to discover that many of their supply chain pro-
cesses are still completed with paperwork. The processing of such paper-
work is usually very time-consuming as it must all be completed manually,
not to mention far riskier.
A lost document could cause huge delays as the handlers would need to
trace transaction documents by contacting the other party for copies etc.

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A blockchain database could almost completely automate the entire

rocess, all the way from the factory to the retailer. An initial block could be
p
created for the goods as they leave the factory, thereby initiating the
blockchain.
This block would detail the time, type and quantity of goods, as well as
the transport company’s confirmation of goods received, etc. A new block
could then be added for each step of the journey until the goods finally reach
their destination.
The main benefits of blockchain within supply chain are listed in Table
4.18 below.

When to use
Blockchain is not going away and in fact, more and more examples are
being developed to prove it is not just about cryptocurrency.
There is no time to lose! Learn as much as you can about blockchain in
supply chain and how it can benefit you, your partners and your customers.
Not all the solutions are expensive.

How to use
A blockchain is essentially a digital ledger of transactions that is duplicated
and distributed across the entire network of computer systems in the chain.
Each block in the chain contains several transactions, and every time a new
transaction occurs on the blockchain, a record of that transaction is added
to every participant’s ledger.
The decentralized database managed by multiple participants is known
as distributed ledger technology (DLT).
Blockchain is a type of DLT in which transactions are recorded with an
immutable cryptographic signature called a hash.
This means if one block in one chain is changed, it would be immediately
apparent that it had been tampered with. If hackers wanted to corrupt a
blockchain system, they would have to change every block in the chain,
across all the distributed versions of the chain.
To get the best from blockchain, think big, but start small.
Your final goal may be to completely revamp all your businesses’ supply
chain processes but it is very likely that you will not get buy-in for that.
Start with a project that can go from pilot project to production quickly.

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324
Table 4.18 Main benefits of blockchain within supply chain

Component Explanation Potential applications

Faster & leaner Invoicing and inventory management, by Documents upload, manage, edit, and share any type of document
logistics in removing friction from multiparty workflows – along your supply chain.
global trade these systems save cost and time. The Documents module helps optimize efficiency for information
management, certify origins, and ensure they are real.

Improving From an initial base of facts, rules and The ability to successfully stop outbreaks of food-borne illnesses
transparency & experiences, new knowledge and competences through food traceability protocols includes the accuracy and speed
traceability can be inferred and generated. of obtaining tracking information and the inability of third parties to
Companies that attain top recall accuracy and manipulate that tracking information.
speed by implementing investigation Unlike traditional supply chains, blockchain-based supply chains will
improvements can reduce recall costs, losses, automatically update the data transaction records when a change is
reputational damage and, in the case of food made, enhancing traceability along the overall supply chain network.
recalls, save lives.

Automating With the use of ‘smart contracts’. Smart Identity – document-less citizenship, promotes portable
commercial contracts work by following simple ‘if/when… identification. Healthcare – eliminates drug counterfeits, tracks
processes then…’ statements that are written into code on patient information.
a blockchain. A network of computers executes Banking & finance – better processing of cross-border payments –
the actions when predetermined conditions higher level of security & privacy.
have been met and verified.

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Component Explanation Potential applications

Trust & single Business model innovation – this is the next We will increasingly see blockchain-based systems used to
version of the level of the sharing economy where there needs demonstrate compliance with regulations regarding data source and
truth to be a higher degree of collaboration in real data handling. Trustworthy data is also key to sustainability
time where participants work off a common reporting: a bonus is that many blockchain-based solutions (e.g.
ledger or single version of the truth. Blockchain track-and-trace, or contract compliance in resource extraction)
solves a ‘social problem’ – it enables privacy and already have this data.
transparency at the same time when sharing A classic example of a shared network is an airport, used by many
data. different airlines which are in competition with each other. Imagine
This is very useful whenever there are ‘issues of a world where each airline had to build its own airport – it would be a
trust’ between parties. mess and very expensive. But that is the system in which we
exchange our data today.

325
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326 The Logistics and Supply Chain Toolkit

Choose one that makes an existing process more efficient and will result in
a win/win situation. Tangible business benefits will make it easier to get
more funding; and, as decision makers get more comfortable with the tech-
nology, they will start championing the initiative.
They may even come along with new ideas.

Further information
See https://medium.com/enrique-dans/the-blockchain-is-coming-so-get-on-
the-program-87ae373859d9 (archived at https://perma.cc/4ZEP-RXBA)
Frank Findlow Triple EFF Consulting – https://tripleeffconsulting.com/
(archived at https://perma.cc/U558-2EQR)
Also look at the websites of the leading sector players such as the big
consultancies and integrators such as IBM, SAP and Microsoft. Your
professional institution may also be a good source of information,
meetings, conferences or presentations of ongoing projects.

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327

Outsourcing 05
tools
5.1 Outsourcing
Introduction
Outsourcing is about recognizing a task or process that isn’t your organiza-
tion’s core competence and getting a third party to operate it more effi-
ciently and hopefully more cost-effectively. There are many models to guide
companies through the process of determining whether to outsource, how
to go about outsourcing and how to ensure that the implementation is suc-
cessful.
We have looked at a number of different models and combined the best
elements of each to ensure a complete end-to-end process. We have also
simplified the model and taken into account the likely benefits and barriers
to outsourcing.

When to use
There are many situations when a company needs to evaluate whether out-
sourcing logistics can be a fundamental part of an ongoing strategy. This
model enables the company to assess its current situation and decide whether
to outsource or not. Part two of the model (Figure 5.2) provides a methodol-
ogy for outsourcing and implementation.

How to use
Before tackling the main model, there is a simplified version produced by
Kate Vitasek et al (2013), which can be seen in Figure 5.1.

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328 The Logistics and Supply Chain Toolkit

Figure 5.1 Outsourcing decision matrix

Non-Core Core activity for the

company

Potential Value to the Organization

High
Collaborative Do not outsource
approach

Non-Core Non-Core

Transaction based To be driven

Low

primarily by
Conventional financial
Outsourcing consideration

Low High
Organizational Expertise

SOURCE Adapted from Vitasek (2013)

Main model
At each stage in the model there are a number of questions that need to be dis-
cussed, the answers to which will, in part, determine the next steps (Table 5.1).

Table 5.1 Outsourcing questionnaire

Don’t Yes No
know
Current situation
Is logistics a core activity within our business (define R O
what is ‘core’)?
Do we have the expertise (core competence) internally? R O
Do we compare favourably against our competitors in BM R O
logistics terms?
Does our logistics operation give us differentiation? R O
Are we able to leverage economies of scale within the R O
operation?
Are there internal political reasons for retaining an R O
in-house operation?
(continued )

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Table 5.1 (Continued)

Don’t Yes No
know
Do we have sufficient capital to fund a logistics R O
operation?
Are we a risk-averse company? R O
Do we worry about losing control of a key activity? R O
Does operating our logistics give us greater flexibility? R O
Is there a likelihood of a loss of crucial expertise if we R O
outsource?
Do we have sufficient wider market knowledge? R O
Can outsourcing threaten our corporate image? R O
Are we able to manage industrial relations issues R O
internally?
Feasibility of outsourcing
Is the availability of suitable suppliers a problem? R O
Is comprehensive market knowledge essential for our R O
business?
Do we have greater capability than the potential R O
suppliers?
Are there constraints to outsourcing (list constraints) e.g.: R O
• Legal, e.g. TUPE
• Existing long-term leases
• Unionized environment?
Is our logistics operation very complicated? R O
Are there likely to be technological issues with R O
outsourcing?
Are there confidentiality and security issues with R O
outsourcing logistics?
Do we have problems finding suppliers with the right R O
cultural fit?
Do we have the capability and expertise to undertake R O
value-adding services?
Is our own performance sufficiently reliable to avoid R O
issues with the LSPs?
Cost and service
Are service levels likely to decline if we outsource? BM R O
Are costs likely to increase if we outsource? BM R O
O = Strongly consider outsourcing; R = Retain in-house and optimize performance; BM = Benchmark
(see tool 6.7)

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330
Figure 5.2 Stages of an outsourcing process

First stage
Ensure buy-in from the management Discuss with Decide on involvement Decide whether any external
Set up a project team
board procurement department of procurement department assistance is required

Detail the outsourcing requirement

Define priorities and organize Identify milestones Prepare and
Define the scope of the project Identify any constraints
the team and produce a Gantt chart manage data collection

Research
Collect information and analyse Benchmark the Identify Generate request
Screen potential suppliers
the supplier market current operation competitors’ suppliers for information

Strategy
If you choose the RFP route, Provide sufficient time to complete
Decide between direct discussion If direct, discuss requirements, elicit costs
shortlist between 6 and 8 suppliers the quote and allow opportunities to
with a supplier or produce an RFP/ITT and compare with existing operation
and circulate RFP visit the existing operation

Presentations and selection

Analyse suppliers’ proposal Shortlist to a maximum of three candidates Visit supplier operations Negotiate with the suppliers

Validate and finalize

Choose the most Validate the offer and produce Negotiate the contract, agree a charging mechanism Agree a Sign the
appropriate supplier a recommendation to the board and set up a service level agreement start date contract

Implementation
Set up a project team for the Identify milestones and
Produce an implementation plan Implement the contract
implementation. Ensure IT involvement produce a Gantt chart

Benchmarking and review

Set up key performance Arrange operational and strategic meetings Review charging mechanisms with Perform periodical re-evaluations
indicators at various levels of the organizations a view to introducing gain share of the contract

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Outsourcing tools 331

We aren’t always going to get absolute yes and no answers; however, there is
likely to be a preference one way or the other. If it is a genuine ‘don’t know’, you
will need to undertake further work. The term ‘logistics’ can be replaced by any
other function in the company, such as facilities management, IT, procurement,
customer service, etc. (A printed version of the questionnaire can be down-
loaded for free from http://howtologistics.com)
Follow the suggestion indicated by the majority of yes and no answers.
There may be a requirement to undertake a benchmarking exercise to fully
assess the current logistics operation and examine the feasibility of out-
sourcing. If the majority of the answers point towards outsourcing, we need
to follow a process to ensure that it runs smoothly (see Figure 5.2).

Further information
There are numerous books to choose from on logistics outsourcing. Kate
Vitasek et al’s book on vested outsourcing takes us away from
traditional outsourcing to more collaborative relationships: Vitasek, K,
Ledyard, M and Manrodt, K (2010) Vested Outsourcing: Five rules that
will transform outsourcing, Palgrave Macmillan, New York.
Godsmark, J and Richards, G (2019) The Logistics Outsourcing
Handbook, Kogan Page, London

References and further reading

McIvor, R (2000) A practical framework for understanding the
outsourcing process, Supply Chain Management, 5 (1), pp 22–36
Richards, G (2017) Warehouse Management, 3rd edn, Kogan Page,
London
Vitasek, K (2013) Vested Outsourcing: Five rules that will transform
outsourcing, 2nd ed, Palgrave Macmillan, New York, NY

Introduction
The decision to outsource your logistics operations is difficult enough, but
then you have to decide what type of organization to place the contract
with – third-party logistics providers (3PL), lead logistics providers (LLP) or
fourth-party logistics providers (4PL©)?

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332 The Logistics and Supply Chain Toolkit

In terms of definitions, 3PLs will utilize mos their own resources on the
contract. Lead logistics providers will utilize their own assets and those of
others to operate the contract, whereas, according to Accenture, which came
up with the name, ‘A 4PL© is an integrator that assembles the resources,
capabilities, and technology of its own organization and other organizations
to design, build and run comprehensive supply chain solutions.’ A true 4PL©
has the following attributes:

●● non-asset-owning company – in terms of warehouses and trucks;

●● sophisticated IT systems;
●● a strategist that manages all logistics operations on behalf of companies;
●● is expected to provide the most cost-effective logistics systems to its
clients;
●● an intermediary between the shipper and the transport companies;
●● develops contracts on behalf of the shipper with an optimum number of
transport and warehousing providers.

●● the ability to step back from the day-to-day operations to see the big
picture;
●● a neutral party looking to optimize your supply chain rather than their
own assets;
●● an ability to select the best 3PLs for the task required;
●● an unbiased service;
●● ability to instigate shared user transportation for clients;
●● greater access to resources and greater flexibility;
●● greater information flow through sophisticated supply chain systems;
●● single point of contact;
●● seamless key performance indicators;
●● shared interest with customer, better view of whole market;
●● payment-by-results options such as profit-share schemes;
●● a global reach in many circumstances.

The disadvantages are:

●● reliant on partners to provide the service;

●● profit on profit;

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Outsourcing tools 333

When to use
When reviewing your supply chain operation and your current outsourcing
arrangements.

How to use
Table 5.2 is a straightforward yes or no questionnaire that will give you the
opportunity to decide whether working with a 4PL© is right for your company.

Question Yes No
Section 1
1. D
oes your organization struggle to manage increasing levels
of supply chain complexity?
2. Do your customers’ supply chain demands exceed your
organization’s capacity to deliver?
3. Do you wish you had full visibility throughout your supply
chain?
4. Would you like to have access to the technology capabilities to
integrate processes and logistics providers across your supply
chain?
5. Can you make better use of your capital currently dedicated to
supply chain assets such as staff and IT?
6. Do you wish you had experienced supply chain managers
within the company?
7. Are you operating warehouses and manufacturing plants
globally with little coordination between them?
8. Are you looking to expand your business globally?
9. Are neutrality and objectivity fundamental to your choice of
logistics provider?
10. Is your relationship with your suppliers and logistics providers
adversarial?
11. Is dealing with a multitude of logistics providers taking up too
much management time?
(continued )

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334 The Logistics and Supply Chain Toolkit

Table 5.2 (Continued)

Question Yes No
12. Are you under pressure from your customers to become more
environmentally friendly, with an expected target of carbon
neutrality?
13. Are you happy to enter into a longer-term partnership?
14. Are you happy to share resources with your competitors?
15. Are you comfortable with having ‘all your eggs in one basket’?
16. Do you want your logistics contracts to be based on a gain
share/cost reduction basis?
17. Are you looking for more than a task- or function-oriented
logistics provider?
Section 2
A. Do you consider the supply chain critical to your organization’s
success?
B. Is supply chain management a core competency within your
company?
C. Is full control of your supply chain very important to you?
D. Do you undertake regular supply chain reviews in order to
improve efficiency and reduce costs?
E. Do you have full visibility throughout your supply chain?
F. Is the relationship with your current logistics providers
important to you?
G. Do you want full control over the choice of logistics providers?
H. Does your company have a policy against single supplier
sourcing?
I. Is having internal supply chain and logistics expertise important
to you?
J. Are you risk averse?

If you have answered yes to the majority of the questions in Section 1, it is

definitely worth considering 4PL© companies. If you answered yes to the
majority of questions in Section 2, a 4PL© may not be a preferred option. (A
printable version of the questionnaire can be downloaded for free from
http://howtologistics.com)

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Further information
This can be obtained from the book written by Paul Van den Brande: Van
den Brande, P (2010) 4PL: The book that should never have been
written, Noble House Group https://www.amazon.com/dp/
B0CDCM6MSN?ref_=nav_signin&language=en_US&currency=GBP
(archived at https://perma.cc/S957-TLA8)

Further reading
Bade, D J and Mueller, J K (1999) New for the millennium: 4PL,
Transportation and Distribution, 40 (2), pp 78–80

5.3 A risk-based approach to logistics

outsourcing
Introduction
There are several types and levels of logistics and supply chain outsourcing
solutions and the nature of the industry allows for bespoke service offerings,
with an eagerness among service providers to avoid a one-size-fits-all solu-
tion, although a number of proposals are presented on that basis. A large
number of customers of logistics service providers (LSPs) remain very pre-
scriptive in their control of their LSPs and have an ongoing role in managing
the outsourced relationship. It is also not always clear what degree of risk
each service offering entails for the customer and the service provider.

A risk-based approach
This approach is illustrated in Figure 5.3, which describes a pyramid of
outsourcing solutions, balancing them with the degree of control and risk
inherent to the parties involved.
At the base of the pyramid lies ‘buying’ the blind outsourcing decision,
where customers aspire to a better state of affairs and see outsourcing as a
route to a better way of working. There are few or no criteria and the solu-
tion is left to the incoming service provider; the balance of risk is high for
both parties in the absence of agreed success criteria. In this environment the

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336 The Logistics and Supply Chain Toolkit

Figure 5.3 Control vs risk of outsourced solution

Balance of risk
Customer supply to customer
chain control and service provider

High Low

Organizations WIIFWe
share
infrastructure,
assets, cash and risk
Prescriptive: Customer
owns infrastructure and
assets. LSP supplies labour
and intellectual property within
clearly defined and closely
managed boundaries
Outsourcing to change an element of the
supply chain that customer cannot do on
their own. End result defined in terms of
infrastructure, people & process is agreed with
the customer pre contract. Targets agreed across term
‘Traditional outsourcing’ led in partnership with customer’s
logistics team or consultants. Process includes ITT, RFI, etc
Procurement officer outsourcing: Specification based
on previous 12 to 18 months’ performance. Save money
Low Blind outsourcing: No service or operational criteria, customer High
not able to specify requirements, probably chasing a cost saving

SOURCE Reproduced by kind permission of Dr Richard Gibson, Idris Logistics

LSP may encounter a dynamic environment with a high degree of scope drift
and this poses a significant risk to any long-term commercial arrangement.
The next step on the pyramid is procurement officer outsourcing, which
is focused on saving money using performance over the previous 12 to 18
months as a benchmark from which to make logistics procurement deci-
sions. This commoditization of logistics procurement does not rely on a high
degree of ongoing control from the customer supply chain team, if indeed
there is one in situ. There is a high risk that this purchase will move to an-
other provider at the end of the contract term, and this is not a basis for the
long-term success of such an agreement.
Traditional outsourcing is the tried-and-tested formula developed in the
post-World War II era. The familiarity with the process and pitfalls ranks
this element a medium risk to the customer and service provider and re-
quires a medium level of supply chain control on behalf of the customer.
Concepts such as 3PL, LLP, 4PL© and 5PL sit in this element.
The next step on the pyramid is using outsourcing to change an element
of the supply chain; this is when the activity moves from functional to

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Outsourcing tools 337

t ransformational and warrants a higher degree of control from the customer.

Because this is transformational outsourcing, it may be assumed that it will
be part of the customer’s overall supply chain management strategy, with
clearly defined objectives. The service provider becomes a means to an end
with a specific remit and timescale to follow as it executes part of the cus-
tomer-driven project.
The prescriptive step sees the balance of power in the longer-term rela-
tionship moving from the service provider to the customer. Requiring a
greater degree of control, the customer typically owns the infrastructure and
assets, while the service provider supplies labour and intellectual property
within clearly defined and closely managed boundaries. The customer ben-
efits from having a service provider for short-term flexibility in other parts
of its supply chain and for speedy supply chain access to new markets as
well as territories. This step is very much a master-servant relationship and
because it is prescriptive, the balance of risk to both the customer and ser-
vice provider is low.
The top segment of the pyramid moves the relationship into an equity-
sharing arrangement, where both organizations share assets, cash and risk
in delivering the supply chain solution. Customer and supplier are locked in
a mutual arrangement with a common suite of brand delivery objectives.
The behaviour set exhibited by both may be described as ‘what’s in it for we’
(WIIFWe) (Vitasek et al, 2010).
The model links some iterations of outsourced logistics service provision
with the degree of control expected from the customer and a risk of engage-
ment profile for the logistics service provider.

Summary
The pyramid in Figure 5.3 may be used to define and assess the risk profile
of a logistics outsourcing strategy. The risk is defined in terms of ‘low to
high’ for the parties involved; it looks at the process as a whole and is thus
not blinkered to one point of view. The optimal relationship is balanced
between both parties and demonstrates a WIIFWe set of behaviours.

Reference
Vitasek, K, Ledyard, M and Manrodt, K (2010) Vested Outsourcing: Five
rules that will transform outsourcing, Palgrave Macmillan, New York

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5.4 Supply chain and logistics outsourcing

Introduction
The supply chain satellite is a strategy assessment tool developed by a group
of logistics professionals and academics. They have combined their special-
ist experience to develop a framework for supply chain outsourcing.

When to use
When reviewing your supply chain strategy and when contemplating out-
sourcing all or part of your logistics and supply chain operation.

How to use
The model consists of two axes, x and y, that form the basis of your posi-
tion. You need to decide where you are on each axis.

x. Added value of your supply chain

This axis measures the extent to which your supply chain and specifically
your logistics process adds value to your product. It determines whether,
and to what extent, differentiation of your logistics processes can impact
your competitive position. Indirectly this axis also measures the impact of
logistics on your bottom line since a differentiated logistics model will jus-
tify higher margins.

y. Complexity of your supply chain

This axis forms the unit of measure for the complexity of your logistics op-
eration. It measures how easy it is to standardize your logistics processes. It
is a fundamental factor that highly influences the type of relationship you
will have with a logistics service provider. The four segments shown in
Figure 5.4 are discussed below.

1. Price buyer
Cost containment in the logistics chain is your main objective. You have
limited or no need for the highly specialized logistics competences of the
LSP. This makes it easy for you to select a provider. You make sure you
know the cost leaders among the LSPs and develop relations with them in
each geographical market.

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Outsourcing tools 339

Figure 5.4 Supply chain satellite matrix

Expertise buyer Strategic partner

Complexity

Undecided

Price buyer Do it yourself

Value added

Minimizing the logistics cost as part of the final selling price of your product
represents an important source of competitive advantage. It can lower the
price for which you can offer your product to the end user, or improve your
margin. The logistics operation should contribute to these objectives but
does not, in itself, impact the perceived value of your products.

2. Do it yourself
You do not outsource or hardly outsource any logistics activities and have
no need to develop relations with LSPs. Because of your highly customized
handling and shipping requirements you have custom built these capabilities
yourself. Other reasons for your situation could be that you are locked into
an insourced logistics operation. Reorganization costs would outweigh the
potential benefits of outsourcing. Alternatively, you could have had previous
negative experiences with LSPs or you are sceptical about the true cost of
outsourcing.

3. Expertise buyer
Your logistics activities are complex and you have a wide portfolio of prod-
ucts, suppliers and customers. Product lifecycles are short and you face c ritical
time-to-market requirements in a volatile market. Logistics outsourcing in

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340 The Logistics and Supply Chain Toolkit

principle should be a long-term commitment to the LSP as this allows you to

capitalize on continuous improvement and cost reduction. LSPs are selected
on specialist expertise, technologies and assets and will be deployed in those
parts of the supply chain where they bring substantial benefit.

4. Strategic partner
Your logistics activities are complex and of high strategic importance. You
have a wide portfolio of products, suppliers and customers. Product lifecy-
cles are short and you face critical time-to-market requirements in a volatile
market. Your contracts with LSPs aim to facilitate long-term commitment.
Together with your LSPs you work on a programme of continuous improve-
ments in service levels, flexible delivery options, lead times, warehouse effi-
ciency and eventually cost reduction.

Undecided
There is no or almost no conscious strategic approach. You either take con-
flicting approaches to the management of your logistics operations or you
lack a clear approach. There can be many possible reasons for this lack of
strategic direction. In a positive scenario you find yourself in a transitional
period where a strategy is defined but far from implemented. Conflicting
views within the supply chain function or in your company’s strategic man-
agement can also cause logistics processes and improvement projects to even
each other out and result in a status quo.

5.5 Non-disclosure agreement (NDA)

Introduction
A non-disclosure agreement is used when sensitive and confidential data is
shared between two or more parties. In a situation where a company is plan-
ning to outsource its logistics or supply chain operations it needs to provide the
logistics services provider (LSP) with sufficient data to provide a meaningful
quotation for the services to be outsourced.

When to use
At the beginning of the outsourcing process.

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Outsourcing tools 341

How to use
The party planning to outsource its operations should send a copy of the
NDA to each of the participating organizations and ensure that it is signed
by a senior director and returned before any data is sent to the LSP.

Figure 5.5 Non-disclosure agreement example

CONFIDENTIALITY AGREEMENT – Project Echo

THIS AGREEMENT is made between the PARTIES
I. Apprise Consulting Ltd (Registration number:4987218) whose registered
office is at: 1 & 2 Mercia Village, Torwood Close, Westwood Business Park,
Coventry, CV4 8HX acting on behalf of its client (To be advised) and
II.
………………………………………………………………………
Please enter the name of your company, registration number and registered office
address

BACKGROUND
“Apprise Consulting Ltd” acting on behalf of its client wishes to disclose
information to you relating to the client’s business for the purpose of producing
a proposal for the warehousing and distribution of its products in the UK.

IT IS AGREED as follows:

1) In this Agreement:
a) “Authorised Representative(s)” means those employees, officers and
directors of the receiving party or any member of its group together with
its professional advisers;
b) “Confidential Information” means any information or data relating to the
disclosing party, any member of the disclosing party’s Group or to their
respective businesses which is in written, electronic or other visual or
machine readable form or which is communicated orally, including but
not limited to, any kind of commercial or technical information, business,
financial and marketing information, computer software and know-how
which is made available to the receiving party in connection with the
Purpose.
(continued )

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342 The Logistics and Supply Chain Toolkit

Figure 5.5 (Continued)

2) PROVIDED THAT Confidential Information does not include any information

which the receiving party is able to demonstrate:
i) is already in the public domain or which becomes available to the public
through no breach of this Agreement by the receiving party or its
Authorised Representatives;
ii) was in the possession of the receiving party prior to receipt from the
disclosing party;
iii) is independently developed by the receiving party without any use of
Confidential Information;
iv) is approved for release by the written agreement of the disclosing party;
or
v) is required to be disclosed by law or the rules of any governmental or
regulatory organisation.
3) “Group” means the group of companies comprising the company in
question together with its subsidiaries and affiliates as implied by the
company registration number above.
4) The territory covered by this agreement is the UK.
5) For a period of five years following the date of this Agreement the receiving
party shall procure that the members of its Group and its Authorised
Representatives shall:
a. keep the confidential information confidential and shall not disclose it to
anyone other than to its Authorised Representatives who need to know
such information for the purposes of considering or advising in relation to
the Purpose; and
b. use the Confidential Information exclusively for the Purpose and shall not
permit the Confidential Information to go out of its possession or control;
and
c. not make any announcement concerning, or otherwise publicise, the
Purpose or any other arrangement with the receiving party in any way
relating to the Purpose; and
d. procure that each Authorised Representative to whom disclosure of
Confidential information is made, is made aware in advance of disclosure
of the provisions of this Agreement and shall procure that each
Authorised Representative adheres to these provisions as if such person
were a party to this Agreement; and
e. immediately upon request by the disclosing party deliver to the disclosing
party all Confidential Information (including all copies, analyses,
memoranda or other notes made by the receiving party or its Authorised
Representatives) and delete all electronically held Confidential Information
or, with the consent of the disclosing party, destroy the same and provide
the disclosing party with a certificate confirming that the provisions of
this clause 5.e have been complied with.
(continued )

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Outsourcing tools 343

Figure 5.5 (Continued)

6) No right or licence is granted to the receiving party in relation to the

Confidential Information otherwise than as set out in the Agreement.
7) The receiving party acknowledges that damages would not be a sufficient
remedy for any threatened or actual breach of this Agreement and that the
disclosing party will be entitled to other remedies, incl. but not limited to,
injunctive relief and specific performance.
8) The receiving party acknowledges that neither the disclosing party nor any
of its Authorised Representatives makes any express or implied warranty
about, or accepts responsibility for, the accuracy or completeness of any of
the information supplied under this Agreement.
9) Neither party shall assign this Agreement without prior written consent of
the other party.
10) Notices under this Agreement shall be in writing and shall be deemed
validly given if delivered by hand, email, fax (supported by positive
transmission report) or post (recorded delivery, with proof of posting) and
shall be deemed served on the date of despatch.
11) This Agreement shall be governed by and construed in accordance with
the laws of England and Wales.

SIGNED by
duly authorised for and on behalf of
………………………………………
Print name:
Date:

SIGNED by
duly authorised for and on behalf of
APPRISE CONSULTING LTD

Print name: Gwynne Richards

Date: 24/09/2023

5.6 Outsourcing questionnaire

Introduction
A logistics services provider (LSP) requires comprehensive data in order to
provide a quotation for their potential customer. This questionnaire can be
utilized by an LSP to elicit data from a potential client or it can be utilized
by a potential outsourcer to gather the data required.

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344 The Logistics and Supply Chain Toolkit

When to use
When collecting data for a potential logistics outsourcing contract.

How to use
This questionnaire (Figure 5.6) can be utilized for a standard warehousing and
distribution operation. It can be adjusted in line with the customer operation.
The first section is specifically for the LSP.
The second section is for both parties.

Figure 5.6 Outsourcing questionnaire

Company name:

Contact:

Contact email:

Contact telephone number:

Company website address:

Types of product involved:

Timeline for outsourcing process:

Potential contract start date:

Current situation – in-house/outsourced

Type of service required? Freight transport/Warehousing/Returns operation/

Combination

Is there a temperature-controlled environment required?

Are the products of a hazardous nature?

Is there a requirement for a Customs and/or Excise regime?

Please provide a brief outline of the services required (as much detail as can be
shared)

Type of contract envisaged – Open Book/Transactional/Gainshare

(continued )

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Outsourcing tools 345

Figure 5.6 (Continued)

Data required - General

Current turnover

Expected growth over the next 5 years

Current & required hours of operation?

Current indirect/direct head count?

Inbound

Total Units received per week over 12 months?

Number of vehicle deliveries per annum by type:

Loose-loaded Total number Average cases Average SKU

per load per load

45’ container

40’ container

20’ container

Courier
deliveries

Palletised Total number Average no. pallets Average SKU per

per load load

Full truck loads

26 pallets+

Rigid truck load

45’ container

40’ container

20’ container

(continued )

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346 The Logistics and Supply Chain Toolkit

Figure 5.6 (Continued)

Average Units per carton?

Average cartons per Pallet?

Size of pallet – 1200 x 1000; 1200/800; other – please state

Average pallet heights on receipt

Average pallet weight on receipt

If mixed pallet sizes state %

Are cartons single SKU or mixed? If mixed is inbound sortation required?

Are pallets white pallets or rental e.g. Chep Blue, LPR red

If mixed pallet types state % rental v non-rental

Is product clearly labelled/barcode labelled? Type of barcode?

Do products require batch control? If yes what %?

Does any stock require any rework at inbound? E.g. labelling or re-boxing? If so,
please provide %s and brief details

How many different suppliers?

Level of Inbound Count/Check Required by %?

% of QC checks required if required?

Please provide an Excel spreadsheet with inbound volumes per day/week for
past 12 mths

Please provide an Excel spreadsheet detailing product codes, carton sizes and
weights

Storage

Total number of SKU to be stored

Average number of pallets to be stored

If block stacked – how high?

Average number of shelf locations occupied (1400 w x 450 d x 600 mm high)

Any additional floor space required – please state?

(continued )

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Outsourcing tools 347

Figure 5.6 (Continued)

Any office accommodation required – please state?

Current warehouse footprint and height (sq. ft)

How many pallets of consumables do you require stored?

Potential expansion/reduction requirement?

Annual stock turn

Please provide a week-by-week picture of pallets stored and shelves occupied

Outbound

Total Number of orders received per week?

How are orders received – EDI, Email, Post, Telephone, Other

Total Number of Units ordered by week?

Average Units per Order

Average Number of SKU per order

Average order size

Number of Parcels despatched by week

Number of full pallet, single SKU despatched per week

Number of mixed pallets despatched per week

Order lead time – same day, next day, 3 day etc.

Order cut off time for next day delivery?

Inventory control procedure – FIFO, LIFO, best before date, batch numbers,
specific serial nos?

Types of delivery points by % – DCs, business premises, home delivery, lockers

If applicable, which platform(s) do you use for e-com?

(continued )

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348 The Logistics and Supply Chain Toolkit

Figure 5.6 (Continued)

% of International Orders despatched

Please provide an Excel spreadsheet with outbound volumes per day/week for
past 12 mths

Please provide an Excel spreadsheet showing product code, units in stock,

sales per annum

Value Added Services

Please detail the outbound packing process with any additional requirements
(labelling, gift wrapping, shrink and stretch wrapping, inserts, product
configuration/assembly etc.) Please provide photographs if possible

Packaging specification, % in mailing bags, cartons, totes etc.?

Do you require any kitting or point of sale kits produced? (please provide
examples)

Despatch

Names of parcel and pallet carriers used?

How do you integrate with them? e.g. Direct or via CMS (Carrier Management
System)

Returns Process

% of returns. Units despatched / units returned %

How will return stock be delivered to the warehouse?

Please explain the basic returns process & any detailed rework/salvage required
(spot cleaning, repairs, steaming etc.)

Return to Stock %?

Disposal routes? Landfill/charity/eBay

(continued )

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Figure 5.6 (Continued)

Information Technology, Reporting and Performance Measures

Any specific reporting requirements?

Any specific administration/management requirements?

Is there a requirement for a full, wall-to-wall stock count? How often?

Is a perpetual inventory count sufficient?

Which ERP system are you using?

Do you require the warehouse operator to provide a Warehouse Management

System? If no, which WMS will be used? Please provide as much detail as
possible.

What is your current method of integration with your/your current warehouse

operator’s WMS and current capabilities to integrate via different means?

Expected KPIs and targets? E.g.

Dock to stock time

In full despatch

On time despatch

Order lead time

Damage %

Distribution

Delivery addresses

Any issues regarding opening times, height restrictions etc.

Transportation method – box vans, tail-lifts, curtain siders, hanging garments,

refrigerated

Delivery methods – pallets, cartons, totes, roll cages, other

List of delivery addresses including postcodes

Delivery frequency i.e. x times per week (milkround) or as and when ordered?

(continued )

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350 The Logistics and Supply Chain Toolkit

Figure 5.6 (Continued)

Any delivery time information i.e. 08:00-16:00 any day

Any delivery point restriction information if known i.e. pedestrian precinct

Any vehicle size restrictions if known

Any other information that will help model the requirements

5.7 Logistics services provider (LSP)

criteria and decision table
Introduction
When outsourcing a logistics operation it is likely that the company will
have contacted a number of companies to quote for the business. The com-
pany will need to differentiate between the different potential suppliers, and
a decision table will assist you greatly in deciding on the most suitable LSP.
Having decided on your criteria as listed in Table 5.3, weigh their impor-
tance and score each company against these criteria, which will vary from
company to company, as will the weighting for each criterion.

When to use
When looking to choose the most suitable supplier for logistics services.

How to use
Form a team of people to first choose the criteria and provide weights to
them, then ask each member of the team to score each of the LSPs based on
their requirements.
The team is normally made up of managers/directors from a number of
departments including logistics, finance, operations, human resources, IT
and procurement.

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Table 5.3 Criteria for general logistics services

Criteria Source Comments

Price RFP Are they competitive? How does the price
compare across different routes or
elements of the services? When you
weight this with volume are they still
competitive?
Value and price Historic pricing; Has the specification delivered a tight and
credibility market research; credible spread of pricing? Does it match
competitor expectations? Is it likely to be sustainable?
pricing spread Does it represent value?
Experience of Market research; How credible is their experience of
supplying RFP response; operating in this marketplace? Do they
service interview work for your competitors?
response;
references
Synergies in As above Are they part of, or operating, a relevant
logistics market network of transport movement, hubs or
shared services?
Locations RFI, RFP Are the geographies in which they have
capability a match for your business? How
will they manage new areas or areas with
low volume?
Size relative to RFI, RFP What is the size of their relevant
purchasing operations versus the business you are
organization awarding?
Dependency RFI, RFP Are they dependent on one or more
customers? What would happen if this
customer removed the business
(particularly relevant for shared
warehousing services and transport
networks)?
Growth RFI, RFP, Do they have the capability to match your
potential interview growth forecasts? What evidence is there
response, of this?
references
Use of RFI, RFP, How do they manage the performance
subcontractors/ interview and risk of their subcontractors? What
partners response, proportion of the service are they planning
references to outsource?
Personal Face-to-face Have you met them? Are they responsive
relationship/fit meetings and easy to deal with? Is there a cultural
fit? This is a crucial element for strategic
services.
(continued )

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352 The Logistics and Supply Chain Toolkit

Table 5.3 (Continued)

Criteria Source Comments
Alignment RFP/interview/ Are the objectives of the supplier aligned
market research to your own? Is your segment/service a
core or development area for them? Are
you an attractive client for this service?
Technical RFP/interview/ Are the assets proposed sufficient? Is
credibility and benchmarking/ there enough flexibility and resilience built
resilience of expert review in for peak demand/growth/failures? Have
the proposal they suggested improvements or changes
to your specification? For strategic
services it is worth getting an expert
review of this.
Continuous RFI/RFP/ Do they have a track record of making
improvement references improvements during the life of a
contract? What structure have they put in
place to support this?
Innovation RFI/RFP/ Does the company have a track record of
references innovation (over and above continuous
improvement)? Only include a criterion if
truly important for your service. If
important, is it properly resourced?
Other RFI/RFP Credible list of customers? Do you know
customers any of them?
served
Financial status P&L; company Is the business stable? Is there a parent
accounts company?
Quality RFI/RFP What quality management systems and
systems and relevant accreditations do they have? Only
accreditations review ones that are relevant to your
business.
Terms and Pre-contract Have they accepted your contract/terms?
conditions discussion Are they insuring the goods for sufficient
value?
KPI acceptance RFP Will they provide management reports
and KPI reporting? Do their suggested
KPIs match your requirements?
Human RFP response/ Is this a unionized environment or will
Resources interview there be a transfer of staff? Will there be
capability redundancies? Does the company have
the resources, experience and approach to
manage these issues well?
(continued )

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Table 5.3 (Continued)

Criteria Source Comments
IT capability RFP response/IT Does the supplier have the internal or
analysis of external capability to deliver the IT aspects
response/ of the services including timely
references implementation of any interfaces and
changes to systems?

The next tool explains how to use a decision table in this process.

5.8 Decision matrix analysis (DMA)

Introduction
Decision matrix analysis is a quasi-scientific method to aid decision making
when there are many different factors to take into account and a number of
alternative options or courses of action. It is particularly useful when a
group of people must make a joint decision, since it allows the discussion to
be more objective, giving some distance from individual ‘pet’ projects.
This can be an effective tool when there are a significant number of com-
peting alternatives and myriad factors that need to be taken into account.
This tool can assist managers in making a choice where there isn’t a clear
and obvious outright candidate, supplier or product. Being able to use DMA
means that you can take decisions confidently and rationally, at a time when
a team is finding it difficult to come to a consensus.
In all cases, a method of this nature improves the quality of discussion,
moving the arguments away from the subjective and closer to the objective.

When to use
This is a useful technique when you have a difficult choice to make; where
you have a number of alternatives and many different factors to take into
account. This could be, for example, the choice of some major piece of
equipment, location of a new plant or warehouse, or for comparing tenders.
Note that the method does not make the decision for you – it is not that
sensitive – but it does enable a more objective and analytical discussion to
take place among a group of decision makers, or the range of options to be
narrowed down to the last two or three.

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354 The Logistics and Supply Chain Toolkit

How to use
Identify the key criteria that will be used to compare the different options
and give them a relative weighting from 1 to 5 (where 5 is most important).
Each factor is allocated to a row in the decision matrix. Each option is allo-
cated to a column in the decision matrix.
Working across each row, score each option on a scale of 1 to 5 (where 5
is best) on how well it meets the criterion. Multiply the score awarded by the
weighting to arrive at a sub-total for that criterion for that option. Add up
all the subtotals for that option to arrive at a total score. The option with
the highest score is the most logical choice based on the scores and weight-
ings allocated.
When using this tool, don’t assume that it is totally objective. If the scores
are very close, further analysis should take place. Utilize a spreadsheet to
compile the figures as this will enable you to change weights and scores very
quickly and produce overall totals in a much faster time.

Example
The following is taken from an outsourcing exercise where a company was
looking to change supplier for its warehousing and pallet load distribution
operation. It is a comparison based on the tender responses and presenta-
tions made by the 3PLs.
All of the criteria were discussed internally and given weights based on
the consensus of opinion. Each member of the management team involved
in the decision-making process scored the contractors based on the criteria.
The weighting and scoring criteria were:

Weighting Score
1. Nice to have 1. Very poor
2. Fairly important 2. Poor
3. Important 3. Average
4. Very important 4. Good
5. Most important 5. Excellent

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Table 5.4 3PL decision matrix
Company Company Company Company Company
A B C D E
Service/Benefit Weight Score Total Score Total Score Total Score Total Score Total
Total cost 25 3 75 2.8 70 1.8 45 4.5 112.5 5 125
Proof of continuous improvement 25 3 75 2.3 57.5 4.8 120 4.8 120 1.5 37.5
culture
On-site pick and pack experience 20 2.5 62.5 1.8 45 4.8 120 4.8 120 2.8 70
Staff flexibility 20 4 100 3.8 95 4.5 112.5 4.3 107.5 2.3 57.5
System ability to deal with multiple 20 2.8 70 4.5 112.5 4 100 3.5 87.5 1.5 37.5
clients
Management team we are 20 2.8 70 3.5 87.5 4 100 3.8 95 3.3 82.5
comfortable working with
Dedicated senior contract 15 3.5 87.5 2.8 70 2.5 62.5 3.5 87.5 5 125
management
End-to-end supply chain management 15 2.8 70 3.8 95 4 100 3.3 82.5 2.3 57.5
capability
Warehouse management system 15 4 100 3.8 95 4.3 107.5 4.3 107.5 1.3 32.5
(WMS) capability
Current use of scan technology within 15 3.3 82.5 2.8 70 4.3 107.5 3.5 87.5 1 25
the warehouse
Pool of capable management talent 15 3.5 87.5 3 75 4 100 3.8 95 1.3 32.5
Capacity to expand 15 3.8 95 4.3 107.5 2.5 62.5 4 100 3 75
Proposed service levels 15 2.8 70 3.8 95 4 100 3.5 87.5 3.5 87.5
Suitability of space 15 2.8 70 4.5 112.5 3.5 87.5 3.8 95 3 75
Implementation costs 10 1 25 4 100 3 75 3.8 95 5 125
Payment terms 10 3 75 3 75 4.8 120 3 75 3 75
Existing supplier/understanding of 10 2.3 57.5 4 100 3 75 2.8 70 4.8 120
culture
Implementation timescale 10 3.8 95 3.5 87.5 3.8 95 4.3 107.5 1.5 37.5
Other customer synergy 10 3 75 3.3 82.5 4.8 120 3.8 95 2 50
Total score 300 1,442.5 1,632.5 1,810 1,827.5 1,327.5

355
NOTE Scores are rounded up or down based on decimal places.

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356 The Logistics and Supply Chain Toolkit

Table 5.4 is an amalgamation of the scores from each of the management

team involved. As can be seen from the table, the contract is likely to be
placed with either Company C or Company D after further discussion and
negotiation. (A spreadsheet version of the matrix can be downloaded for
free from http://howtologistics.com)

References
Turner, S (2002) Tools for Success: A manager’s guide, McGraw-Hill, London
Decision Matrix Analysis: http://www.mindtools.com/pages/article/
newTED_03.htm (archived at https://perma.cc/8DQZ-GD59)

5.9 Mind maps

Introduction
The ‘brain’ of a computer operates in a purely linear fashion; our brains do
not. Brains work by comparing, processing and integrating information; in
essence, they work associatively. Every single thought that we produce is
linked to other thoughts, sights, sounds and concepts.
Mind maps were developed by British psychology author Tony Buzan.
Tony also hosted a BBC TV series called Use Your Head. During this show,
Tony frequently and enthusiastically used a ‘tree-like’ diagram to visualize
his thoughts while also using colours to highlight key words and phrases.
The reason we often ‘sketch’ things in this format is down to the fact that
this ‘map’ takes on the same structure as our memory, i.e. it is associative. It is
an easier way to see and recognize things and thus recall them. Mind mapping
is therefore a way of ‘brainstorming’ (see tool 8.1) or making notes but in a
more visual way.

When to use
When you want to brainstorm a particular problem and then provide a
visual representation to both yourself and your colleagues.

How to use
The brainstorming potential of a mind map is immense. You start with a
basic problem and put it at the centre of the ‘map’ and then generate ideas
from it. As you generate these ideas, other thoughts come to mind that are

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Outsourcing tools 357

then added to the major spurs. By presenting your thoughts in this visual
way a better overview is frequently gained. Colours and pictures can be used
to accentuate the data.
The mind map shown in Figure 5.7 has been produced in response to an
enquiry to outsource a logistics operation. The diagram shows the thought
processes that the person went through when thinking about the task in
hand. Figure 5.7 is a simplified version; Figure 5.8 shows how complex a

Figure 5.7 Mind map for outsourcing a logistics operation

Wide Aisle
Narrow Aisle
Flow Rack
Automation?
No. Docks
Facility (location) Layout
Good In / Out
VAS Area Mezz
Narcotics Bunker
Temp Controlled
Frozen
Labour/Resource Model (directs) Ops Validation
Indirects resource model
People
Solution Design Management Team
Organization Structure
MHE FLTs/PPTs
WMS = SAP
TMS = ARTIS
IT Middleware
RF
MHRA Voice Pick
ISO Pallets
AEO Quality & Compliance Carrier/s Parcels
GDP (new GDP) Service Levels 24/48
5S Kitting
VAS
Orders & Lines Assembly
Seasonality Term
Legal
Delivery Prof ile / Geodata NewCo Bid TUPE
Data
Weight & Dims Strategic Fit & Benefits
Dangerous Goods Performance Management
Order Cut Offs Talent for Tomorrow
Q&A People Development PDP Appraisal
Submit Objectives
Bid Timeline
Presentations Skills Gap Matrix
First Cut SOPs Receive - Put Away - Pick - Pack - Ship
Profit - EBIT / ROS
Fit Out
Asset Transfer
Investment
TUPE
Commercial IT
Working Capital Exposure
Proposal
Investment Appraisal Payback
ROCE
Price Book Fixed & Variable Charges
BCP / Disaster Recovery
Project Team
Methodology
Milestones
Implementation
CPA
Project Plan
Risks & Mitigants
Change Control
Customer Service & Account Management
Continuous Improvement
CRS

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358 The Logistics and Supply Chain Toolkit

Figure 5.8 Mind map for inventory management

assortment
being
able to
deliver
conditions working capital

product type

batch size stock

safety stock
transit inventory INVENTORY FINANCIAL
FUNCTION IMPACT return on assets
anticipation inventory
inventory
capacity inventory types

Work in Process (WIP)

1 2
strategic stock
dead stock
warranty stock
logistic costs
insurance inventory
consignment stock
effective
economic inventory inventory
+reserved inventory

determine product range

assortment Inventory
product lifecycle management Management inventory valuation
planning promotions
strategic products

bottleneck products vendor

management basic structure
routine products
lever products
control

order
4 3

EXECUTION LOGISTICAL information

performance
logistics CONCEPT
measurement
Creators Mindmap:

slimstock
Plan-Do-Check-Act improve organization
data
responsibility management
update master files products
cycle counting

mind map can be. We can see that the central theme is inventory manage-
ment but with a number of sub-themes such as finance and logistics.
The inventory management mind map replaces pages of text that the
reader would find difficult to take in all at once. The map not only provides

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Outsourcing tools 359

information but also helps in decision making. (The full version of this mind
map can be downloaded from http://howtologistics.com)
Utilizing a mind map enables you to quickly understand, identify and
absorb the structure of a subject. However, more important and due to the
fact that a mind map is the ‘same shape’ as your memory, it enables you to
recall the information.

Further information
Free mind map software can be found at: http://freemind.sourceforge.net/
wiki/index.php/Main_Page (archived at https://perma.cc/59CZ-N9A6)
(With thanks to Joe Fogg of BIS Henderson and Richard Evans from
Slimstock.)

5.10 RACI matrix by Rod Turner

Introduction
During any project, it is important to identify all the roles and activities that
are affected to any degree by the changes required to deliver a successful
outcome in a specific project. These individuals and groups are all stake-
holders in the project and may be either internal stakeholders (working in
the organization delivering the project) or external stakeholders (external to
the organization but impacted by the project).
As stakeholders, they can be impacted positively or negatively by the
project as a whole or by specific steps in the project. Such projects are not
unique to logistics and supply chain management – indeed the tool is used
extensively in general project management activities.
In this arena, there are often wider implications to any change project
and there can be impacts on very diverse groups and individuals both within
and outside the organization.
The RACI (Responsible, Accountable, Consulted, Informed) matrix focuses
on the requirement to communicate with different internal stakeholders at dif-
ferent stages of the project. It identifies the key tasks and/or decisions involved
in the project and assesses the expectations of stakeholders, but also the needs
of the project at each of these points if the overall project plan is to be achieved.
The outcome of the correctly completed RACI matrix is to ensure data is
available when needed, decisions are reached when required, and information
is shared when necessary.

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360 The Logistics and Supply Chain Toolkit

This matrix supports three important aspects of the change management

process:

1 Identification of the steps in the project that impact on key stakeholders

or require input from key stakeholders.
2 Identification of the individuals or groups that are affected by the project.
3 Clarification of the relationship between each stakeholder and each step
in the project.

When to use
During the process of establishing a project plan for any significant change
management activity and when creating a list of stakeholders for any project.

How to use
Review the project plan (the list of activities needed to deliver the project
with timings for each activity). If there is no formal project plan, create a list
of all the activities needed to deliver the project.
Identify all items that require information, approval or other input from
any stakeholder and list those items in the first column of the spreadsheet.
Focus on items that are internal to the organization – the intention is not to
replicate every item in the project plan in the RACI.
Create a column for each stakeholder. There is no need to list stakehold-
ers in order of importance or seniority. It is possible to combine groups of
individuals – for example, the project ‘Steering Committee’ or ‘Human
Resources’ or ‘Demand Planning’ may be a homogenous group.
Identify which of the four categories (see below) best reflects the relation-
ship between each item in the first column and each stakeholder.
The four categories are:

1 Responsible: Must endorse or approve any decision taken or action

planned on this item – for example, the ‘Steering Committee’ should
endorse the selection of a key supplier for a project.
2 Accountable: Must provide the data or perform the work required to
deliver a specific item – for example, the HR team are expected to recruit
10 warehouse workers by the end of Q3 or the Demand Planners provide
a forecast for stockholding levels by the end of Q4.

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Outsourcing tools 361

3 Consulted: Before a decision is taken, the project team will engage with
this group to include their opinions and feedback – for example, the
Head of Finance should be consulted on the expected payment terms
with a chosen supplier or the budgeted annual costs.
4 Informed: After a decision is taken, there will be formal communication
with these groups and individuals – for example, heads of departments
should be informed about the choice of lead supplier.

Place a single value (‘R’, ‘A’, ‘C’, ‘I’) in the cell that intersects the stakeholder
with the project step.
Review the chart once completed to ensure expectations are realistic and
achievable – for example, normally only one stakeholder is ‘Accountable’
for a task and, normally, only one stakeholder is ‘Responsible’.
If it is not clear who is responsible or accountable for a task to be com-
pleted, the project team should clarify with the project sponsor or the project
Steering Committee. This is one of the critical benefits of a complete RACI
matrix – it becomes clear to all involved who is responsible, and accountable,
for every step of the project. Therefore, ensure that whoever is noted as
‘Responsible’ or ‘Accountable’ for any task is both aware and in agreement
with the actions required of them.
Allocating responsibility or accountability for a task without communi-
cating is a recipe for failure! Equally, note that the RACI matrix is not
‘time-bound’ so the overall project plan must be available in the communi-
cation process.
Once the cell allocation process is complete, and the final chart has been
reviewed and accepted, the project team should begin to communicate to all
stakeholders, so they understand the expectations and timing and required
outputs.

Typical example
In the first column, list all elements of the project plan that require internal
stakeholder interaction. In the top row, allocate a separate column to each of
the internal stakeholders and enter the relevant initial at the intersection of
each column and row. If the matrix looks too big or too complex, sub-divide
into functional areas such as ‘IT/IS/Systems’ or ‘Planning’.

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362
Table 5.5 RACI template example

Project sponsor

Project Manager

Head of Sales

Head of Procurement

Head of IT

Head of Planning

Head of Production

Head of Finance

service
Head of Customer

Head of Engineering

Resources
Head of Human

Head of Legal
Task
Agree volume forecast for Q2 and Q3 C I A I I R A C I I I I
Agree new product launch programme Q2 C I R C I C A C C I I I
Confirm IT system freeze dates C C I C R A I C C I I I
Complete ‘make’ or ‘buy‘ decision R A I A C C C I I I I I
Identify and qualify suppliers A C I R I I C I I I I C
Launch tender R C I A C C C I I I I I
Agree budget A C C C I I I R I I I I
Negotiate with suppliers A A I R I I I I I I I C
Agree supplier choice A A I R I I I I I I I C
Sign contract A A I R I I I I I I I A
Complete project team R A I C I I I I I I A I
Key
R – Responsible
A – Accountable
C – Consulted
I – Informed
NOTES: Add columns for additional stakeholders as required.
Add rows for additional tasks as required.

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Outsourcing tools 363

Further information
The RACI matrix was adapted from: https://www.stakeholdermap.com/
(archived at https://perma.cc/8VU8-T9VJ) which has many useful
resources for Project Planning.
More details on using the template can be found in Delivering Change:
The art and science of successful change management in logistics by
Rod Turner, available on Amazon.
Rod Turner can be contacted via www.rodturnerlogistics.co.uk (archived
at https://perma.cc/CXY4-8PG9)
A new book on logistics outsourcing was published in December 2019:
Godsmark, J and Richards, G (2019) The Logistics Outsourcing
Handbook, Kogan Page, London.

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364

Performance 06
measurement
and quality
improvement
6.1 Performance measurement
and quality improvement
Introduction
‘If you do not measure, you cannot manage’, or so the theory goes. According
to a survey by Aberdeen Group (2010), best-in-class companies are 1.9
times more likely to utilize established standards against which employees
can be measured. They are also 2.7 times as likely to undertake employee-
specific data collection. The companies will use both individual and group
performance metrics to monitor, motivate and encourage the workforce.
KPIs are introduced into companies to both measure and control
performance:

●● To measure in order to extend vision and strategy to performance, create

a discipline and communicate the non-negotiables, i.e. those targets that
are essential.
●● To control so as to expose gaps between aspirations and actual
performance and to close those gaps.
●● To change behaviours and future performance to let people know what a
good job looks like and create understanding, change attitudes and align
energies.

KPIs should not primarily be thought of as measures but as drivers and ena-
blers of vision – they should help take you where you want to go by translat-
ing your vision into effective performance.

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Performance measurement and quality improvement tools 365

When to use
When looking to improve performance within the company.

How to use
You have to translate the board’s vision into bite-sized chunks to let every
employee know what a good job looks like. To achieve this, you need to:

●● Structure the plan, i.e. determine the scope of the activities to be measured
and identify the organization and department-level objectives.
●● Communicate the plan.
●● Drive the plan by determining the operating processes and methods
required and set the goals.
●● Measure against the plan.
●● Support employee behaviours through training and mentoring.
●● Report progress.
●● Initiate remedial action where required.
●● Benchmark excellence to create best practice (see tool 6.7).

You need to monitor performance against the criteria that are important to
your customers (service). You also need to monitor performance against the
criteria that are important to you (costs).
Do not introduce too many measures, as you will end up spending too
much time measuring and not enough time managing and controlling. To
ensure success you need to:

●● produce accurate data;

●● validate and ensure completeness of data;
●● target the correct audience;
●● put emphasis on user ownership;
●● react to changes in business activity;
●● measure against historical data but also benchmark current best practice;
●● simplify processes and measurements to ensure ease of maintenance;
●● spend less than the savings gained from improved productivity.

Finally, these KPIs need to be focused on the future, lead to behaviour

change and help you realize your vision.

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366 The Logistics and Supply Chain Toolkit

Table 6.1 provides examples of eight measurements for four key business
drivers that are introduced in the Balanced Scorecard tool (tool 6.5).
Taking customer service as an example, Table 6.2 provides details of each
of the KPIs for customer service together with standards and targets. As
discussed in tool 6.2, these need to be SMART.
In Table 6.2, ‘critical’ is a situation in which, unless improvement is intro-
duced quickly, the business will fail. A failing score denotes a requirement
for immediate action to be taken to prevent the operation reaching a critical
stage where loss of business is inevitable.

Table 6.1
Eight measurements for each of the four perspectives
of the Balanced Scorecard

Customer service and satisfaction Financial performance

1 On-time delivery Operational cash flow

2 Orders in full first time Budget vs actual

3 Error-free documentation Days’ sales outstanding

4 Damage claims Overtime costs

5 Perfect order Inventory days of supply

6 Total order cycle time Logistics cost as a % of sales

7 Customer complaints Logistics cost per unit shipped

8 Returns level Stock loss/stock obsolescence

Business process improvement People and environment

1 Forecast accuracy Employee turnover

2 Stock accuracy % turnover spent on training

3 Dock to stock time Training days per employee

4 Picking accuracy Accident levels

5 Returns percentage Sickness and absence

6 Space efficiency percentage Carbon emissions/carbon footprint

7 Order to completion time Level of waste

8 Audit results Energy usage

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Table 6.2 Performance indicators for customer service with standards and targets

1. Customer service and satisfaction

Above
Key indicator Precise definition Critical Failing Standard standard Target How verified?

On-time delivery Number of orders delivered on or before the <90 <95 97.5 98.5 99.5 System check/
agreed-upon time, against total number of manual records
orders received, expressed as a %

Order in full first Number of orders that shipped completely <90 <95.5 98 99 99.5 System check/
time as per the initial order, against total number manual records
of orders received, expressed as a %

Correct Number of orders for which the customers <96 <98 99.3 99.7 100 System check/
documentation received an accurate invoice and other manual records
required documents etc. against total
number of orders dispatched

Damage claims This measures the number of customer 97.5 98.5 99.5 99.8 99.9 System check/
orders received in good and usable condition manual records
expressed as a % of total orders dispatched

Perfect order The result of multiplying the above four 75.8 87.6 99.4 97 98.9 System check/
metrics together manual records

(continued )

367
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Table 6.2 (Continued)

368
1. Customer service and satisfaction

Above
Key indicator Precise definition Critical Failing Standard standard Target How verified?

Total order cycle The time taken in hours from placement of >72 48–72 40 33 30 System check/
time order to receipt of order by the customer manual records

Customer Time taken in hours to fully answer a 48 24 6 4 2 System check/

complaints customer query/complaint manual records

Back orders Back orders as a % of total orders received >8 >4.5 2 0.6 0.2 System check/
manual records

SOURCE Table adapted from Performetrix

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Performance measurement and quality improvement tools 369

A standard is that which must be achieved for the warehouse/team/individ-

ual to be seen as being satisfactory – this is the minimum level of acceptable
performance. Finally, a target is a level of performance above standard that
is desirable to achieve in order to impress and stretch the warehouse/team/
individual. It is likely to be best in class in the industry.
Performance results need to be communicated both internally and exter-
nally. This can be achieved through regular operational meetings – weekly,
monthly and/or quarterly. Results can be posted on noticeboards for all staff
to see.
As for incentives, these can be individual or team based. In the case of
outsourcing, a gain share arrangement can be introduced where logistics
service providers share in the savings and productivity increases they have
instigated.
To complete the process, ensure that the KPIs are aligned within the com-
pany – a customer’s perception could be totally different from that of indi-
vidual departments. For example:

●● 100 per cent dispatch of what’s available from the warehouse doesn’t
mean it’s what the customer ordered – the order may have been stock
adjusted before being sent to the warehouse for picking.
●● Dispatch within 24 hours of the warehouse receiving the order from sales
may not have been 24-hour dispatch from receipt of the customer order –
it could have sat on someone’s desk for a day!

Further information
See Rushton, A, Croucher, P and Baker, P (2010) The Handbook of Logistics
and Distribution Management, Kogan Page, London
Further information on automating your performance management system
can be found at https://performetrix.wordpress.com/ (archived at https://
perma.cc/FP5A-J9P6)
Further information on performance management within warehousing can
be found at www.WERC.org (archived at https://perma.cc/7ZB8-4PGG)

References
Aberdeen Group (2010) Warehouse management excellence https://www.
supplychainmarket.com/doc/warehouse-management-excellence-0001
(archived at https://perma.cc/5G55-4LWT)

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6.2 SMART
Introduction
Many companies operate with far too many key performance indicators
(KPIs), which leads to problems not only in terms of the time taken to cap-
ture and analyse the data but also the relevance to the staff of some of the
measures. This tool focuses management attention on a number of aspects
in relation to KPIs.

When to use
When a company is looking to introduce performance measures, there are a
number of stages that need to be followed. A company needs to choose the
KPIs that are right for it and its customers and will lead to improved perfor-
mance.

How to use
The first known uses of the mnemonic SMART appeared in an article by
George T Doran in the November 1981 issue of Management Review. It
gives guidance to managers to ensure that the correct measures are chosen.
When deciding on a KPI, that measure needs to pass five tests:

S – Specific. The measure has to explain exactly what the company is

measuring and why. This includes the specific area to be measured, how
it is measured and who is involved in the measurement. It needs to be
clear and unambiguous to all involved. For example, ‘On-time delivery’
relates to the number of orders that were delivered to the client at the
time requested. This can be expressed as a percentage based on the
number of on-time deliveries divided by the total number of deliveries
made within a particular time frame. However, if the delivery is made 24
hours before the deadline is this on time? This is why the KPI needs to be
specific. A less specific measure would be customer satisfaction, which is,
as we will see next, more difficult to measure.
M – Measurable. The performance indicator has to be measurable. You need
to be able to compare the current figures with past data, or data from
other sources such as budgets, competitors, peers. The measure needs to

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Performance measurement and quality improvement tools 371

be objective rather than subjective, with little room for ambiguity. It

needs to be quantifiable in terms of numbers, monetary value, time etc.
A – Achievable. There is no point in setting targets that cannot be achieved
under any circumstances. This leads to demotivation. The performance
measure also needs to challenge staff and therefore should not be set too
low either. The target should be achieved ‘with effort’. An on-time delivery
target of 100 per cent every time is probably not achievable, yet a delivery
target of 50 per cent on time should be easily achievable and therefore
not a realistic target.
R – Relevant. The indicator also needs to be relevant to the business. It
should dovetail with other parts of the business and assist in achieving
the company’s overall goal and vision. The specific goal needs to take you
somewhere, i.e. it needs to drive the business forward. This can be seen
clearly in the Balanced Scorecard tool (see tool 6.5) where different
departments share the same goals but have their own specific targets in
order to achieve these goals.
T – Time-based. This covers a number of areas. For example, we need a time
frame over which to measure so that we can compare year-on-year data,
and we also need a target date to ensure that everyone knows we are
working towards a deadline.

Finally, according to Matthews (2013), KPIs need to be future focused:

●● a clear vision will drive KPIs;

●● effective KPIs will drive effective behaviours;
●● effective behaviours will drive effective performance;
●● effective performance drives sustainable profit.

References
Doran, G T (1981) There’s a SMART way to write management’s goals
and objectives, Management Review, 70 (11) (AMA Forum), pp 35–36
Matthews, E (2013) https://performetrix.wordpress.com/ (archived at
https://perma.cc/AVD4-LVCV)

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372 The Logistics and Supply Chain Toolkit

6.3 Performance measures
for freight transport
As previously discussed, it is not a good idea to have too many KPIs. Here
we have provided a comprehensive list from which you can choose those
most relevant to you as a company and for your customers. Table 6.3 shows
examples of freight transport KPIs. It is not suggested that all of these meas-
ures are introduced.

Table 6.3 Examples of performance indicators for freight transport

Key performance Description

indicator

Cost indicators

Average cost per unit Average cost of delivering a specified unit (e.g. a
delivered (£) pallet or tonne of goods)

Total whole vehicle cost Total cost of your fleet per mile/kilometre. Made up
(pence per mile/ of running, standing (fixed) and driver costs
kilometre)

Average running cost Average cost of running your fleet per mile/
(pence per mile/ kilometre. These are the costs incurred for running
kilometre) the vehicles (fuel, tyres, additives, lubricants and
maintenance)

Average standing cost Average standing costs for your fleet. Standing
(cost per day based on costs are those incurred whether or not the vehicle
number of days worked is running – depreciation of the vehicle, vehicle
per annum) excise duty, vehicle levy, operator licence fees,
overheads, insurance etc

Operational indicators

Asset efficiency Average utilization of fleet in cubic capacity or

tonnes carried (outbound and inbound)

Vehicle fill efficiency This calculates the percentage of actual load carried
against the potential capacity of the vehicle fleet
(tonnes or cube). Note it should include both
inbound and outbound
(continued )

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Performance measurement and quality improvement tools 373

Table 6.3 (Continued)

Key performance Description

indicator

Average miles per gallon/ Average fuel consumption rate for your fleet or by
Litres per 100 km individual truck and driver

Total empty miles/km run Total number of miles/km run by your fleet without
(’000s) a payload

Total miles/km run (’000s) Total number of miles/km run by your fleet

Percentage empty Total distance run by your fleet without a payload as

running total a % of total miles/km run

Average time utilization This calculates the percentage of time that the
vehicle fleet was actually in use against the
potential time available

Demurrage time Excess time spent at premises waiting to load or be

unloaded

Service indicators

Percentage of late Late/on-time deliveries made by your fleet as a

deliveries/on-time % of total deliveries
deliveries

Percentage of damaged Damaged items as a % of total items delivered

items

Number of claims Number of claims received as a % of total

deliveries

Correct paperwork Number of delivery notes/invoices, etc completed

correctly/total number of deliveries

Compliance

Overloading Total number of overloads in the fleet as a % of

loads moved

Traffic infringements Total number of traffic infringements in the fleet as

a % of vehicle movements

Drivers’ hours Total number of drivers’ hours infringements in the

infringements fleet as a % of trips made

(continued )

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374 The Logistics and Supply Chain Toolkit

Table 6.3 (Continued)

Key performance Description

indicator

Maintenance

Failed safety inspections Number of failed or overdue safety inspections for

your fleet as a % of total safety inspections

Vehicle maintenance % time vehicles off road (VOR) due to maintenance/

downtime (VOR) accidents

Total maintenance cost Total cost of maintaining the fleet per mile/
(pence per mile/ kilometre
kilometre)

Vehicle maintenance Percentage of defects rectified in 24 hours total

capability

Environment

CO2 produced per km Average CO2 produced (kg) per mile/km travelled by
your fleet

Total CO2 Total CO2 emissions produced by the fleet over a

period

Safety indicators

Accident record Time lost through incidents as a % of total working

days

Accident record Number of days/miles/km since last reportable

incident

6.4 Warehouse KPIs

Table 6.4 shows some examples of KPIs that can be applied in a warehouse.
It is not suggested that all of these measures are introduced; choose the ones
that are important to you as a company and to your customers. Note the
warehouse is not responsible for final delivery, therefore in these KPIs we
use dispatched on time as opposed to delivered on time.

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Performance measurement and quality improvement tools 375

Table 6.4 Examples of performance indicators for a warehouse

Key performance Description

indicator

Cost indicators

Average cost per Total cost of warehouse operations/Total units shipped

unit shipped (£)

Warehouse costs as Total cost of warehouse operations/Cost of goods sold

a percentage of cost (as per the P & L statement)
of goods sold

Warehouse costs as Total cost of warehouse operations/Total sales (as per P

a percentage of & L statement)
sales

Cost per order Total cost of warehouse operation/Total orders shipped

shipped from warehouse

Actual cost per Total activity cost/Activity instances

activity

Productivity indicators

Orders picked per Orders picked/Warehouse labour hours allocated to

hour picking

Product lines picked Lines picked/Warehouse labour hours allocated to picking

per hour

Items picked per Items picked/Warehouse labour hours allocated to item

hour picking

Pallets picked per Pallets picked/Warehouse hours allocated to pallet pick

hour

Cases picked per Cases picked/Warehouse hours allocated to case pick

hour

Service indicators (no = number)

On-time dispatch Total no orders shipped on time/Total no orders shipped

Order fill rate Orders filled completely/Total no orders shipped

On time in full first No orders filled completely first time and dispatched on
time time/Total no orders

(continued )

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376 The Logistics and Supply Chain Toolkit

Table 6.4 (Continued)

Key performance Description

indicator

Damage-free Damage-free items shipped/Total items shipped

shipments

Paperwork accuracy No orders shipped with correct paperwork/Total no

orders shipped

Order accuracy No orders shipped without errors/Total no orders shipped

Line accuracy No lines shipped without errors/Total no lines shipped

Order cycle time Actual ship date minus date customer order received

Internal order cycle Order ready time minus order receipt by warehouse time
time (hours)

Perfect order No orders shipped on time, in full, damage free, with

completion correct paperwork/Total no orders shipped

Dock to stock time Time taken from vehicle arrival to stock input onto sales
system

Utilization percentage

Operator hours 100 × Labour hours used/Labour hours available

MHE utilization 100 × MHE hours used/MHE hours available

Picker utilization 100 × Actual case pick rate achieved/Expected cases to

be picked

Pallet locations 100 × Pallet locations occupied/Pallet locations available

Environment

Total CO2 Total CO2 emissions produced by the warehouse over a

period

Safety indicators

Accident record Working days lost through incidents as a % of total

working days

Accident record Number of days since last reportable incident

Near miss reports Number of near misses reported each month

(continued )

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Performance measurement and quality improvement tools 377

Table 6.4 (Continued)

Key performance Description

indicator

Other measures

Workforce turnover Number of operatives who left during the year/Average

number of operatives employed over the year

Inventory days on 365 x Average inventory value/Total cost of goods sold

hand

Inventory count Items in correct locations in correct quantity/Total

accuracy number of locations counted

Stock turnover Total annual cost of goods sold/Average inventory value

(can also be calculated with no of units)

Inventory shrinkage Items lost and damaged/Total items in stock (in quantity
or value)

Further information
DC Measures is published every year. The report is now sold through
WERC. The most recent report can be purchased from https://werc.org/
page/DCMeasures (archived at https://perma.cc/P4PU-SCF6)

6.5 Balanced Scorecard

Introduction
Much has been written on the Balanced Scorecard and we cannot do full
justice to the subject in a few pages; however, we will outline the premise
and suggest how you can begin the process and decide whether this is a
performance tool you can use in your own company.
Kaplan and Norton (1992), who developed the Balanced Scorecard, be-
lieve that you cannot judge the performance of a company solely through
financial measures. They suggested three other areas that required a com-
pany’s attention. The model is now made up of four areas, namely: financial;
customer satisfaction; internal practices and procedures; and training and
development. The first two perspectives are relevant to the here and now

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378 The Logistics and Supply Chain Toolkit

(customers and shareholders) and the last two are relevant to the future
(people and processes), thus forming a balanced approach. Many writers
have looked to enhance the model by including other aspects within the
business that require the attention of staff at all levels throughout the
organization.
Figure 6.1 shows an adaptation of the Balanced Scorecard model pro-
duced by Performetrix, a producer of software, to enhance the Balanced
Scorecard. As can be seen, environmental issues have been added to the
people quadrant. The Balanced Scorecard is no longer just a simple perfor-
mance measurement framework but has evolved into a strategic planning
tool and management system.

When to use
When the company is looking to establish and formalize a performance
measurement system and instil a culture of continuous improvement. Note
that a Balanced Scorecard will take some time to set up.

How to use
The premise is to begin with a vision, determine a strategy or strategies to
achieve it and then break these down into activities that have their own

Figure 6.1 Adaptation of the Balanced Scorecard

Customer perspective Financial perspective

Customer satisfaction, Profitability, growth, debt/equity,
new clients return on investment

For longer-term
business development
all four of these
interdependent ’drivers’
must be kept in
productive balance with
each other

People, innovation &

environment perspective Process perspective
Adding value, protecting Growth, not just
the environment maintenance of processes

SOURCE Reproduced by kind permission of Performetrix

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Performance measurement and quality improvement tools 379

measurements. The ideal scenario sees departments within the company all
working towards the same vision, with relevant and related KPIs.
First, you need to set out the company’s vision and the strategies to
achieve this. A SWOT analysis (see tool 6.9) is a good tool in this respect.
The perspectives mentioned above need to be clear and understandable to
all, both within and outside the business. The top-level scorecard needs to be
translated into more detailed plans and tasks and each department given
measures and goals that will play a part in achieving the overall vision of the
company.
The following steps need to be taken (this can take up to two months to
complete):

1 As with the majority of new initiatives, you need to gain board

commitment.
2 Find a suitable project owner.
3 Confirm/review/revise your company vision.
4 Define your four business perspectives and ensure clarity and
understanding.
5 Formulate the overall strategic aims.
6 Identify the critical success factors and create your initial KPIs with
unambiguous definitions. Ensure they are SMART (see tool 6.2).
7 Create the metrics for your KPIs (see tools 6.1, 6.3 and 6.4). Each
measure has objectives and targets that are measured against actual
performance.
8 Analyse the measures and ensure that they provide ‘balance’.
9 Establish a comprehensive top-level scorecard and filter through the
organization.
10 Translate the vision into a strategy and the strategy into day-to-day
tasks.
11 Produce both long- and short-term goals.
12 Develop an action plan to achieve these goals.
13 Continuously review and be prepared to change.

Figure 6.2 is an example of how a warehouse operation can assist in the

success of the company’s vision by providing a performance that leads to the
achievement of the goals set.

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380

Figure 6.2 Warehouse operation Balanced Scorecard

Company vision

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People and
Finance Customers Internal processes Perspective
environment

Return on Employee
Customer
investment Process satisfaction
satisfaction
Return on capital improvement Trained workforce Strategic aims
Increase customer
employed Process alignment Low carbon
base
Increased sales footprint

Adherence to Eradication of Low employee

budget Perfect order bottlenecks turnover
Critical success
Lower cost per item delivery High labour and Fully trained
factors
Low stock loss Stock availability equipment workforce
Cash to cash cycle utilization Reduced emissions

Staff turnover <7%

MHE utilization Absence rate <5%
Cost ≤ Budget Perfect order
≥92% 5% of labour hours
Cost per case ≥98.5%
MHE downtime spent on training
dispatched <$0.50 Returns <2%
through Landfill waste Warehouse
Stock turn >20 Back orders <1%
maintenance ≤7% reduced by 20% department
Inventory accuracy Customer
Cases picked per Electricity usage measures
≥ 99.5% complaints <0.2%
hour >140 reduced by 15%
Energy cost Packaging
Dock to stock time No of reportable
reduction >15% reduction by 10%
≤2 hours accidents <3 per
annum
Performance measurement and quality improvement tools 381

The use of a Balanced Scorecard in this example should result in:

●● greater staff safety;

●● improved practices and procedures;
●● fully trained and inspired employees;
●● improved communication and information systems;
●● a significant increase in customer satisfaction;
●● improved environmental credentials;
●● increased profit.

A software program that can help companies in setting and reviewing their
performance can be found at https://performetrix.wordpress.com/

Further information
See the original papers by Kaplan and Norton (1992, 1993, 1996) and their
book (1996), listed below.

References and further reading

http://www.businessballs.com/balanced_scorecard.htm (archived at https://
perma.cc/8FF9-JYJ8)
Kaplan, R S and Norton, D P (1992) The Balanced Scorecard – measures
that drive performance, Harvard Business Review, Jan–Feb, pp 71–9
Kaplan, R S and Norton, D P (1993) Putting the Balanced Scorecard to
work, Harvard Business Review, Sep–Oct, pp 134–42
Kaplan, R S and Norton, D P (1996) Using the Balanced Scorecard as
a strategic management system, Harvard Business Review, Jan–Feb,
pp 75–85
Kaplan, R S and Norton, D P (1996) The Balanced Scorecard, Harvard
Business School Press, Boston, MA
Turner, S (2002) Tools for Success: A manager’s guide, McGraw Hill,
Maidenhead

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382 The Logistics and Supply Chain Toolkit

6.6 Radar chart

Introduction
This tool can be used to show the gap between actual and targeted perfor-
mance and present it visually. Normally you would include 6–10 organiza-
tional factors. Radar charts can also be used to compare alternative methods
or equipment and their efficiency against expected results.

When to use
When you wish to present to a customer or show internal colleagues where
there are gaps in performance. The chart clearly shows which factors require
the most attention.

How to use
Decide on the performance categories to be measured and compared (KPIs
can be taken from the lists shown in tools 6.1, 6.3 and 6.4). Ensure that each
category has consistent measures both for the target and actual perfor-
mance. These can be shown as percentages or scales from 0–10 or 0–5, for
example. Then, produce the chart:

1 Draw a diagram with as many sides as there are performance categories.

In Figure 6.3 we have drawn a heptagon.
2 Label each of the outside points with the performance category.
3 Draw lines from the outside points to the centre of the shape.
4 Beginning from the outside, draw parallel lines from the outside to the
inside at increments denoting the performance figures. This can be from
5 (excellent performance) to 0 (poor performance) or you can use
percentages as shown in Figure 6.3. Ensure that the number of lines
drawn equates to the number of increments.
5 Plot the target scores and connect each of the target scores.
6 Plot the actual results figures and link them.
7 Once complete, evaluate the figures and look for areas for improvement.

Figure 6.3 looks at seven specific KPIs related to warehouse operations and
plots the difference between target and actual performance.

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Performance measurement and quality improvement tools 383

Figure 6.3 Radar chart

Perfect order
100.0%
97.0%
Dock to stock time
94.0% On-time delivery
within 4 hours
91.0% Target
88.0% Actual
85.0%
Accurate
Damage-free items
paperwork

Complete order
Stock check accuracy
dispatched

Target Actual

Perfect order 95.0% 88.1%

On-time delivery 98.0% 98.5%

Damage-free items 99.0% 96.0%

Complete order dispatched 98.5% 97.0%

Stock check accuracy 99.3% 99.0%

Accurate paperwork 99.4% 96.0%

Dock to stock time within 4 hours 98.0% 96.0%

As can be seen in the figure, there are issues in terms of paperwork accuracy
as well as damaged items, which both impact perfect order attainment. On-
time delivery is ahead of target.
With regard to performance improvement, it is important to focus on the
biggest gap in the most important category.

Further information
Radar charts are found in Excel and PowerPoint and are easy to construct.

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6.7 Benchmarking
Introduction
According to Natarjan (2005), benchmarking is:

the practice of being humble enough to admit that someone else is better at
something and being wise enough to try to learn how to match and even surpass
them at it. It is a systematic approach to business improvement where best
practice is sought and implemented to improve a process beyond the benchmark
performance.

Best practice as it is today is not the best possible practice. ‘As good as’ is not
‘better than’. It is not a substitute for creativity and innovation.
Benchmarking is a way of comparing your own performance with that of
your peers, be they internal or external, to find out how efficient and effec-
tive your business or department is compared to others. By identifying high-
performance or best-in-class operations, you can learn what it is they do
that allows them to achieve competitive advantage. It also provides you
with targets based on other operations currently achieving these levels of
performance. Note that, according to Sweeney (2007):

Benchmarking is not about copying other companies’ approaches; rather

it is about learning and adapting appropriate practices so that they can be
usefully adopted in an effort to improve efficiency and/or effectiveness (adapt
before adopting!). Companies do not need to be the world’s best at everything.
All companies have finite resources and benchmarking can help to identify
where these resources should be targeted.

When to use
●● When you need to understand your own business performance.
●● When you want to identify areas for improvement.
●● When the competition is stealing a march on you and you need to discover
what they are doing better.
●● When you need to manage and accelerate change within the business.
●● When you are looking to set performance targets that can be proven to
be achievable.

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Performance measurement and quality improvement tools 385

Table 6.5 Stages of benchmarking

Stage Explanation

DEFINE

Select the area to be Think about what your customers want from the
studied business. What are the issues likely to attract and
retain business today and in the future?

Define the process Think about those processes that can really make an
to be benchmarked impact on the business. Think about the parts of the
business that add value for the customer and can
produce a competitive edge.

Identify potential Who do you consider the best in the industry? Who is
benchmarking partners regarded as being world class in this area? Are there
companies in other industries with a reputation for
excellence?

Identify the data Brainstorm ideas for the types of data that you can
required, sources and collect to measure the performance of your own and
appropriate methods the benchmark company. Alternatives to contacting
of collection external companies include trade fairs, company
accounts, journals, magazines, customer surveys,
etc – these can all provide useful information.

ANALYSE

Collect your data From all the ideas created from the Define stage you
and select need to evaluate the various options. Take into
benchmarking partners account factors such as the quality of the data, the
cost and time involved in collecting it and whether
you are prepared to share the data with other
companies. An independent consultant or educational
establishment can provide anonymity and
independence in this.

Determine the Make honest comparisons between your

performance gap performance and that of the companies you are
benchmarking. You need to identify areas where there
is significant room for improvement and which will
contribute to business success.

Establish the difference Examine the benchmarked company in more detail.

in the process Dig beneath the data to understand what they are
actually doing better than you and, more importantly,
how they are doing it.

(continued )

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386 The Logistics and Supply Chain Toolkit

Table 6.5 (Continued)

Stage Explanation

Target future Once you have understood the potential for

performance improvement, you need to develop realistic targets
for internal improvement projects.

IMPLEMENT

Communicate and gain The data collected during the Analysis stage can be
commitment used to convey the scale of the problem and potential
for improvement. This can help to create acceptance
and commitment to the improvement process.

Adjust targets and Individual improvement projects should be

develop improvement established to address the areas for improvement.
plan Plans and targets for these projects should be
developed by the people who will be running them,
not necessarily the benchmarking team.

Implement and monitor There is no point in benchmarking if you are not going
to make improvements. You need to implement any
changes and monitor them to ensure they are
achieving what you expected.

REVIEW

Review progress and Note that the best in the business is always improving
recalibrate on current performance, so you need to continue the
process. If you are fully satisfied with a particular
area, look for others to improve.

SOURCE Adapted from Sweeney (2007)

How to use
Step 1
Decide the critical success factors or areas of improvement that you want to
measure. Don’t choose processes that do not have a significant effect on the
business or sufficient potential for improvement.

Step 2
Have a detailed knowledge of your own operations and processes. Gather
sufficient data to be able to compare accurately with other operations.

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Performance measurement and quality improvement tools 387

Step 3
Decide whether to benchmark internally or externally. Mondelez (previ-
ously Cadbury) compares the internal performance of its warehouse with
that of its third-party logistics providers. If you are looking to compare
performance with your competitors, you need to choose carefully. At the
end of this section there is a list of specific supply chain and logistics bench-
marking clubs you can join to share data and best practice.
A point to note here is that accurate benchmarking relies on companies
being open, honest, willing to collaborate and respect confidentiality.
According to Turner (2002), there is a benchmarking code of conduct that
states: ‘Never ask for something you would not be prepared to share in re-
turn.’

Example
Table 6.6 shows a benchmark exercise for a leisure clothing producer. As
can be seen, most companies provided comprehensive information, with a
few exceptions. The companies were all able to measure their own perfor-
mance against their peers and concentrate on their areas of weakness, be it
stock turn, items picked per hour or cost as a percentage of sales.
A word of warning: not every competitor or peer for that matter will
have exactly the same product and order profile, for example, and therefore
an exact comparison is rarely achievable.

Some benchmarking clubs and reports

UK
Logmark – https://ciltuk.org.uk/Membership/Organisation/LogMark
(archived at https://perma.cc/T8GD-ZZSP)

Palmark – https://ciltuk.org.uk/Membership/Organisation/PalMark
(archived at https://perma.cc/U6M4-99QD)

United States
APQC – https://www.apqc.org/benchmarking-portal/learn-more (archived
at https://perma.cc/868A-ZSQQ)
DLMB Consortium – http://dlmbc.com/benchmarking-clients
WERC – http://www.werc.org/ (archived at https://perma.cc/4VA5-KF5X)

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388
Table 6.6 Example benchmark exercise – clothing producer (NK = not known)

Measure Company A Company B Company C Company D Company E Company F Company G

Stock turn 7 8 20 5.2 11 7 7

Logistics costs as a % 6.04% NK 8–10% NK Reluctant to Reluctant to 4.7%

of sales share share

Warehouse costs 3.16% 2.90% 3.2% 2–5% 2.75% 3% 4.25%

as a % of sales

Lines per hour picked Not Not 50 9.3 Not 8 8

measured measured measured

Units per hour picked 79.4 48 Not Not 89 Not Not

measured measured measured measured

Shipping accuracy 99.89% 99.9% 98% 99.2% 99% 98.2% 98.6%

Stock accuracy 99.89% 99.995% 99.6% 98.66 99% 97.5% 98.1%

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Australasia
Benchmarking Success – https://www.benchmarkingsuccess.com/ (archived
at https://perma.cc/TZT7-K52N)

Other benchmarking sites

www.benchmarking.com (archived at https://perma.cc/QWQ4-QVLS)
https://www.valuebasedmanagement.net/organizations_benchnet.html
(archived at https://perma.cc/WF8A-TTVW)

References and further reading

Natarjan, R (2005) Technical Education, Current Status and Future
Direction, vol III, ICFAI University Press, India
Richards, G (2017) Warehouse Management, 3rd edn, Kogan Page,
London
Sweeney, E (2007) Supply chain benchmarking and performance measure-
ment: towards the learning supply chain, in Perspectives on Supply
Chain Management and Logistics: Creating competitive organizations
in the 21st century, ed E Sweeney, Blackhall Publishers, Dublin, ch 15,
pp 283–94
Turner, S (2002) Tools for Success: A manager’s guide, McGraw-Hill,
Maidenhead

6.8 DMAIC: a process improvement tool

Introduction
The DMAIC tool tends to be synonymous with Six Sigma. The tool is used
to identify problems, develop ideas on how to improve the process, produce
a solution and finally ensure that the fix is sustainable. DMAIC is not exclu-
sive to Six Sigma and can be used as a framework for other improvement
applications.
DMAIC stands for Define, Measure, Analyse, Improve and Control. All
of these steps are necessary and are undertaken in that order (see Figure 6.4):

1 Define. Document what is known about the problem, assess and clarify
the facts, set objectives and put together a project team to work on the
problem.

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2 Measure. Decide what is to be measured and how to measure it. Ensure

that the measures are specific, the data easy to collect and monitor. At this
stage the process needs to be tested to ensure feasibility.
3 Analyse. The data collected are analysed to determine the root cause of
the problem. A gap analysis can be undertaken to identify differences
between current performance and the target performance.
4 Improve. At this stage, ideas for improvement can be discussed. The most
feasible ideas can be tested and the most effective idea introduced.
5 Control. Finally, once introduced, the improvements need to be monitored
to ensure continued success.

Process documents need to be produced together with a system of continuous

improvement. At this stage, the new ideas can be shared and, as in the 8-D
model (see tool 8.4), the project team should be recognized for their efforts.

Figure 6.4 DMAIC

(D) Define (M) Measure (A) Analyse (I) Improve (C) Control
• Define • Define ‘defect’ • Define causal • Develop ideas • Establish
customers and and hypothesis and remove standard
requirements ‘opportunity’ root causes measures to
• Identify
• Develop units and • Validate monitor
‘vital few’
problem metric potential performance
root causes
PROCESS

statement, • Develop improvement • Determine

• Validate
goals and detailed ideas through process
hypothesis
benefits process maps pilot studies capability
• Develop of appropriate continuously
• Standardize
high-level areas
solution • Correct
process map • Collect data
• Measure problems
• Identify team for relevant
results as required
and resources metrics
• Develop • Develop
project process
plan and capability
milestones baseline

Fully Metrics Root causes Solution Documented

assembled definition best practices
and trained
team
DELIVERABLES

Process maps Data collection Quantified gap Implementation Process

plan and plan capability
improvement
opportunity
Targets Current
process Sigma
level
Project plan

SOURCE Diagram courtesy of Precision CEM

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When to use
This tool is used to identify problems and form ideas on how to solve them
and ensure that there is no recurrence.

How to use
Let’s take achieving ‘Daily cycle counting for 98–100 per cent inventory re-
cords accuracy’ as the project at hand:

1 Define what our goal is: 98–100 per cent daily inventory records accuracy.
2 Measure where we are now: take a sample cycle count of a mixture of A,
B, C and D items.
3 Divide the total count into the amount correct: let’s say 10 items were
counted and six were correct = 60 per cent inventory records accuracy for
this trial count. This is far from good enough.
4 Analyse: why were four counts incorrect? Analyse the transaction detail
in the warehouse management system (WMS) to find the root causes for
the four variances: warehouse counts to computer counts.
5 Improve: improve through daily cycle counting of A, B, C and D items
throughout the warehouse. As you find root-cause errors, do a root-cause
error frequency distribution and eliminate these root causes by writing
standard operating procedures (SOPs).

You should be holding steady at 98–100 per cent daily inventory records
accuracy if you follow this proven system.
The key now is C = Control. You must maintain and control this 98–100
per cent inventory records accuracy level through daily cycle counting and
root-cause analysis. This control step is the most critical step. You can reach
this point, but it has to be maintained and controlled. When you do control
this level of inventory records accuracy, you can consider eliminating the
annual wall-to-wall physical inventory count if this is also agreed with your
auditors.

Reference
Using DMAIC Aside from Six Sigma, by Chuck Intrieri for The Good
Word, experienced Third-Party Logistics (3PL), Logistics, and
Warehouse Operations Consultant. Article used with permission.

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6.9 SWOT analysis

Introduction
Undertaking a SWOT analysis enables companies to identify their Strengths,
Weaknesses, Opportunities and Threats. Strengths and weaknesses tend to
concentrate on the internal situation, whereas opportunities and threats
look outside the organization. It is a strategic tool to identify the company’s
current situation and how it needs to adapt to future challenges.

When to use
When the company is looking to change strategy or make certain strategic
decisions as a result of a performance issue, an acquisition, governmental
intervention or in response to a change in the market.

How to use
The first step is to assemble a group of people to identify the strengths and
weaknesses of the company, and potential and existing opportunities and
threats. The group should be cross-functional and all points should be con-
sidered and evaluated. This can be done through brainstorming (see tool 8.1).
The next step is to draw out a four-box grid as shown in Table 6.7. This
grid can be used to record the points discussed. Continue the discussion
until the list is exhausted for all four areas. As for a number of the other
tools, honesty and openness are vital for the success of this exercise.

Example
Let us take for example both the US and UK postal services. They are under
threat from the growth of the internet in terms of a reduction in letters
posted, but have an opportunity to expand with an increase in e-commerce,
both business to consumer and consumer to consumer. Table 6.7 shows an
example of a SWOT analysis for these corporations. As can be seen in the
table, a threat could potentially be an opportunity, such as the possibility of
being privatized.

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Performance measurement and quality improvement tools 393

Table 6.7 SWOT analysis for postal service

Strengths Weaknesses

Internal Nationwide coverage Strength of labour unions

Worldwide/European network Industrial unrest among long-term
through partnerships workers
Advanced technology – readable Uniform charge for 1st class mail
postcodes, digital signature (UK)
capture, online Loss-making in the main
Mailshots door-to-door service Lower revenue generated per
Recognizable and strong brand employee compared to
Cost advantage competition

Property portfolio High employee costs

Large database of individuals

and companies
Retail and financial business

Opportunities Threats

External Growth of online shopping Electronic communication such as

globally email and text messaging
Growth of C-to-C business Online greetings cards
(consumer to consumer) Increasing number of competitors
Last-mile deliveries for other Fuel price increases
organizations
Economic slowdown
Large number of collection
Reduction in government support
points and drop-off points
Increased postal deregulation
Privatization
Being privatized and broken up
Industry consolidation
Internet banking

Once the table is completed, produce a plan to maximize the strengths, com-
pensate for the weaknesses, understand and look to combat the threats and
take advantage of the opportunities.

Further information
Further information can be found in Ansoff, H I (1987) Corporate
Strategy, Penguin, Harmondsworth.

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394

Financial 07
management
tools and ratios
Introduction
These tools can be utilized in all aspects of logistics and supply chain. The
examples provided are all related to logistics.

7.1 Activity-based costing (ABC)

and time-driven activity-based
costing (TDABC)
Introduction
ABC is a financial cost accounting model. It differs from traditional finance
models as it attempts to allocate all costs, including overheads, directly to
each product, activity or customer.
Traditional cost accountancy models allocate indirect costs or overheads
on the basis of volume or as a percentage of total direct cost. In a traditional
costing model, all products and customers are allocated the same percentage
overhead, such as management time spent on them, irrespective of activity.
As a result, low-volume products and smaller customers are not always al-
located the true cost of producing or servicing them. This can result in un-
der-priced products and customers being either under- or overcharged. This
became very apparent to the author when he became customer services
manager for a leading 3PL. With over 25 clients, it always seemed to be the
smallest client that took up a large percentage of time, rather than the large
corporate clients – yet the same percentage costs were spread across the
clients, based on their volume of business.

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As ABC assigns the cost of each activity in an organization to all prod-

ucts, services and customers according to the actual consumption of the re-
source, this becomes more difficult when we look to allocate costs such as
the human resources, finance, sales and marketing, IT, and health and safety
departments.
The main drawback to ABC is the time it takes to gather all of the infor-
mation and to accurately allocate the indirect and overhead costs. A further
drawback is the fact that not all costs can be allocated precisely. With this in
mind, Kaplan and Anderson (2004) came up with time-driven activity-based
costing, which will be discussed in the last section of this tool.

When to use
This tool is for companies that want to be more accurate in terms of allocat-
ing costs. It can also be used to identify non-value-adding processes such as
relabelling or double checking. Time-driven ABC also highlights available
capacity and areas for productivity improvements.

How to use
To illustrate the tool we have used the example of a shared user third-party
warehouse. First, we need to gather the overall cost of the business by
category:

1 Identify the major elements of cost within the company:

a Labour (direct and indirect)
–– Salary, overtime, NHI, pension, insurance, PPE, holiday pay, sick
pay, training
–– Agency labour
b Equipment
–– Fork-lift truck, lease or rental, depreciation and interest,
maintenance, energy
–– Automated equipment depreciation and interest
–– Cleaning equipment, stretch-wrap machines
–– Scanners, voice units, pick to light systems depreciation and
interest
–– Pallets and packaging material

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c Storage
–– Facility – lease, rent or depreciation and interest, rates, taxation,
insurance, maintenance, landscaping, cleaning, security, sprinkler
depreciation and maintenance, alarms, pest control, waste disposal
–– Equipment – rack and shelving depreciation, maintenance,
inspection
d Utilities
–– Heat, air conditioning, lighting, water
e Overheads
–– Management, supervision, administration, office equipment
depreciation and interest, IT hardware and software rental or
depreciation and interest, maintenance, training, communication
costs, legal and professional, taxation and licences, travel
expenses, insurance and claims, claim losses due to damages,
shortages, errors

2 Identify and define the relevant activities carried out in the company:
a In-handling
b Put-away
c Storage
d Order picking
e Replenishment
f Value-adding services
g Dispatch
3 Determine the relationships between activities and costs.

4 Identify cost drivers to assign costs to activities. These can include number
of pallets stored, orders processed, pallets received, etc.

5 Any costs that cannot be attributed to specific activities should be pooled

together with other one-off costs, such as donations to charity, and
termed residual costs.

Points to note here are that the cost of collecting, analysing and allocating
the data should not outweigh the benefits, and that allocation within 5–10
per cent is acceptable in the initial stages.
Finally, when asked how much time staff spend on activities, they neglect
to mention the idle time, including breaks, waiting for instructions, delays, etc.

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This needs to be addressed by examining the warehouse management or

labour management systems or undertaking time-and-motion studies.

Example
In the standard ABC model the information shown in Table 7.1 applies for
a warehouse with a total cost of £3,500,000.
In terms of the traditional costing model, it is likely that the IT and tele-
coms cost will have been combined with the support costs and allocated
equally across all of the activities. As we can see in Table 7.1, the support
costs are allocated based on the time involved on each activity by the sup-
port staff.
Having calculated the total cost by activity, we can now identify the cost
drivers. For example, in terms of in-handling we can choose the number of
pallets and/or cases received, and for order pick we can use the number of
orders processed or the number of cases picked. In the case of in-handling,
if both pallets and loose cartons are received the cost will need to be broken
down further, as shown in Table 7.2.

Time-driven ABC
In time-driven ABC (TDABC), Kaplan and Anderson (2004) have come up
with a simpler version of ABC. They suggest that managers need to work
out the resource required to service a transaction, product or customer. We
therefore need to know the cost in time units (and space if we are discussing
warehouses) and the time taken per activity.
First, we need to estimate the actual productive time of the staff. This can
be done by interrogating WMS and LMS systems or initially producing a
guesstimate. For example, where staff are working a 45-hour week we can
guesstimate their productive time at 80 per cent of the total available hours.
This equates to 36 hours per week.
When reporting the time it takes to undertake a task, it is unlikely that
staff will include such things as delays, preparation time and breaks, either
scheduled or non-scheduled. We therefore need to check the WMS system
again or undertake a time-and-motion study for the various tasks. In terms
of the in-handling example, we end up with Table 7.3, based on the time
taken to undertake each of the tasks.

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398
Table 7.1 ABC model

Warehouse activities

Value
adding
Cost centres Total cost (£) In-handling Put-away Storage Order pick Replenishment services Dispatch

Direct employees 862,000 10% 5% 55% 10% 10% 10%

Supervision and 200,000 10% 5% 55% 5% 15% 10%

management

Building 1,400,000 10% 75% 5% 10%

Equipment 386,000 15% 5% 5% 45% 10% 5% 15%

Material 38,000 15% 40% 15% 25% 5%

IT and telecoms 200,000 10% 5% 20% 45% 10% 5% 5%

Support costs 414,000 10% 5% 20% 35% 5% 15% 10%

Total 3,500,000 371,200 103,100 1,207,300 998,400 175,500 287,100 357,400

Potential cost No of pallets No of pallets No of pallets/ No of No of pallets No of No of

drivers locations orders units pallets

No of loads No of cases Square No of No of cases Time No of

metres items taken loads

No of cases No of units Cubic metres No of lines No of lines No of No of

staff cases

No of units Cube/weight No of units No of locations No of

orders

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Table 7.2 Cost allocation

Allocated Rate per

Activity % time spent cost Volume item

In-handle pallets 13.9% 51,556 52,000 0.99

In-handle cases 86.1% 319,644 1,395,000 0.23

Total £371,200

Table 7.3 Time-driven ABC

Unit time Total Total Cost per

Activity (minutes) Volume minutes cost (£) unit

In-handle 1.154 52,000 60,000 39,600 0.762

pallets

In-handle 0.3 1,395,000 418,500 276,210 0.198

cases

Total capacity 478,500 315,810

used

Total supplied 561,600 371,200

Unused 83,100 55,390

capacity

If we base our calculations on five staff members, we have a productive time of

36 hours × 5 staff × 52 weeks × 60 minutes, which gives us a cost per minute of
£371,200/561,600 = £0.66. In Table 7.3 we see that the cost per unit is lower
than in the traditional ABC method and we end up with £55,390 of unallocated
costs and 1,385 spare hours. Based on the above figures, we know that we have
additional capacity for increased volumes and additional clients. We can also
determine whether, by further increasing productivity, we can reduce the head-
count by at least one person.
Figure 7.1 shows that a percentage of support costs/overheads and some
of the unallocated activity costs end up as residual cost, and therefore they
are not allocated to specific products or customers unfairly, as they would
be in a traditional overhead allocation system. These costs become indirect
until they are reduced, removed or allocated to new customers.

Further information
Further information and articles can be found at: http://www.brighthub.com/office/
finance/articles/78752.aspx (archived at https://perma.cc/2S9U-WZHU)

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Figure 7.1 Cost allocation based on consumption

Costs from
Accounts

Product, service Activity- Support

Unallocated Non-specific
or customer- specific costs/
activity costs one-off costs
specific costs costs overheads

Customers/ Residual
services/ unabsorbed
products cost

Reference
Kaplan, R S and Anderson, S R (2004) Time-driven activity-based costing,
Harvard Business Review, 82 (11), November, pp 131–8, p 150

7.2 Calculating return on investment

and payback period
Introduction
Return on investment is a financial measure used widely within companies
to decide whether investment in an asset such as technology, machinery or
software is going to be cost-effective and how long the payback period is
likely to be. The tool can also be used to compare investment in different
projects, thus enabling the company to decide on the most efficient and cost-
effective investment. The higher the ROI and the shorter the payback period,
the more attractive the investment.

When to use
When you are contemplating the introduction of new equipment or technol-
ogy to improve processes and/or reduce cost.

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Seeking improvements in a process can require investment in new equip-

ment, technology or software. As a manager you are likely to need to justify
such an investment. You will therefore need to know the cost of the en-
hancement along with other costs such as training, annual maintenance, loss
of performance during implementation, etc, together with the potential sav-
ings and, once calculated, the time frame for the return on your investment.
ROI time-frame expectations are reducing and therefore the more accu-
rate the report and the shorter the time frame, the more likely the invest-
ment is going to be considered.

How to use
When deciding to introduce a new solution into the business you need to
understand the total costs of the project. This not only includes the cost of
the hardware and software but also the cost of implementation, staff costs,
training and peripherals. You also need to know what your operation is
achieving at present (the base case) without the enhancement and what it is
likely to achieve once the enhancement has been introduced. Having calcu-
lated these figures, you can then work out what your savings are and, as a
result, your ROI and the timescale over which the new system will pay for
itself.

Example
During a recent voice picking trial a client calculated that its ROI, by replac-
ing barcode scan picking, was approximately 25.4 per cent in the first year,
with a payback period of nine and a half months. The method of calculation
was as follows:

(Gain from investment [or savings made] − cost of investment)

× 100
Cost of investment

A similar calculation was the payback period. This is calculated by dividing

the net investment by the benefit accrued. This basically measures how long
an investment takes to pay for itself. It does have drawbacks, however, as it
does not properly take into account finance costs and opportunity costs,

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402 The Logistics and Supply Chain Toolkit

pportunity cost being what must be given up (the next best alternative) as
o
a result of the decision. The figures were as follows:

Pick productivity savings £52,800

Increased accuracy savings £33,600

Total savings (TS) £86,400

Investment in voice (I) £68,900

Therefore (£86,400 − £68,900)/68,900 = 25.4%

Payback period = £68,900/£86,400 × 12 months = 9.6 months

This isn’t a totally accurate picture as no account was taken of the extra
training costs and the effect on the business during the early stages of imple-
mentation, etc. However, as the voice system is likely to last at least five
years, this looks like a good investment.
A risk analysis should also be undertaken to confirm that these potential
savings are accurate and can be achieved with the introduction of voice.
This gives the company a reasonably accurate picture of the potential ROI
achieved through the introduction of voice technology.
One drawback of using payback period as a method of choosing which
investment to go for is that it doesn’t take into account the cash flow outside
the payback period, as is illustrated in Table 7.4. Project A has the shortest
payback period; however, projects B and C have the greatest profit/saving.

Table 7.4 Payback period comparison

Project A Project B Project C

Initial investment (’000) 240 240 300

Year 1 profit/saving 80 60 60

Year 2 profit /saving 80 60 60

Year 3 profit/saving 80 60 60

Year 4 profit/saving 10 60 60

Year 5 profit/saving 0 60 60

Profit/saving over 5 years 250 300 300

Payback period

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Further information
Marsh (2013) provides step-by-step guides and templates for different finance
models.
An ROI payback calculator for voice picking can be found at https://www.
bcpsoftware.com/solutions/voice-technology-solutions/voice-payback-calculator/
(archived at https://perma.cc/A9LA-NV9K)

References and further reading

Marsh, C (2013) Business and Financial Models, Kogan Page, London

7.3 An engineered approach to calculate

equipment ROI, by Aaron Lininger
Introduction
Too many companies buy warehouse equipment and technology on a ‘best
case’ scenario. Using an ‘engineered’ approach to evaluating the ROI pro-
vides a more accurate picture of cost and productivity benefits. This is an
alternative to the method discussed in tool 7.2.
Many investments fail to deliver promised gains because vendors’ initial
estimates of cost and productivity benefits are often based on a ‘best case’
scenario. Those estimates often prove to be inaccurate because each facility
has unique physical, process and data constraints, making it difficult to de-
termine what a new technology or piece of equipment can accomplish in a
particular environment.
An ‘engineered’ approach is a more effective method for evaluating po-
tential capital investments. It entails studying the current state of opera-
tions at a ‘micro’ level and pinpointing the specific elements affected by
introducing a new technology. The degree to which each element will be
affected can be assessed using work-study techniques and/or realistic esti-
mates made by experts. This approach develops a savings estimate
reflecting the reality of a particular facility, thereby improving a company’s
insight into bottom-line impacts of cost-saving initiatives and reducing the
potential for costly mistakes.

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When to use
When contemplating the purchase of new technology or equipment.

How to use
Step 1
Identify specific aspects of an operation the company is targeting for im-
provement, and how each will change as a result of introducing new tech-
nology or equipment.

Step 2
Consider how this solution will impact other areas of the operation, both
upstream and downstream processes, as well as maintenance and support
functions – if at all.

Step 3
Consider the impact on a facility’s physical layout and traffic patterns. For
example:

●● Can the equipment be positioned so as not to impede the traffic flow?

●● How will the equipment interact with other pieces of equipment in the
workspace?
●● Will the pre- and post-trip inspections or preventive maintenance
programmes need to be modified and/or introduced to ensure the safety
of those working with it or in its vicinity?

Step 4
Understand the degree of reliability the new solution must have and the
maintenance needed to support the new solution.

Step 5
Gather a baseline value (often measured in time for labour savings) for each
step of the task being examined. Each step is broken into smaller steps called
elements. Elements unaffected by the new technology can be ignored, allow-
ing the buyer to isolate the true differences between the operation before
and after the new solution has been implemented. Methods of collecting the

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times to carry out each element include stopwatch studies and time-and-
motion studies.

Step 6
Project how each element will be affected after implementation. Under
ideal circumstances, a potential buyer would introduce the equipment or
technology into a facility, train individuals in how to employ it, and then
study how it performs and what impact it has in the environment in which
it will actually be used. Testing the solution at a facility can reveal unfore-
seen pitfalls and shortcomings as well as provide fact-based information
for subsequent discussions with the vendor. Because many capital invest-
ments are large and complex, it may not be possible to test them like this.
In such cases, simulation models can be used; however, it is imperative to
document all assumptions as they will form the framework for any conclu-
sions drawn from the data.

Step 7
Calculate the differences and apply them to the labour model and affected
processes in order to determine the new solution’s cost and productivity
implications (see Table 7.5).

Example
The management team of Company A’s distribution centre (DC) attended a
trade show where a vendor was showcasing a new electric pallet jack that
automatically advances to its next location without the operator touching
the controls. Company A’s DC uses pallet jacks during order selection (pick-
ing), which is the largest use of labour in the facility. The vendor claims that
its automatic pallet jack will improve productivity in order selection by up
to 30 per cent by eliminating the steps operators take to return to the equip-
ment controls, allowing them to walk directly to their next location.
When scaled to its facility, the 30 per cent productivity improvement
represented huge financial savings for Company A; even achieving one-third
of that would be worth serious consideration. Before making a large capital
expenditure, the company opted to take an engineered approach to evaluat-
ing the technology.

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406 The Logistics and Supply Chain Toolkit

The company already had baseline numbers for the potentially impacted
areas:

●● the steps to and from the pallet jack to the pick location;
●● the steps from the case-placement location back to the equipment
controls;
●● grasping of the controls;
●● the acceleration constant for their fleet of equipment.

The vendor allowed Company A to test one of the automated pallet jacks
at its facility to help in the decision-making process and hopefully close
the sale. Company A invested several weeks in training an individual so
that the pallet jack would be operated as the vendor intended. An engineer
then studied the equipment under normal operating conditions, focusing
on generating values for the affected elements of the picking process. In
studying the new equipment, the engineer discovered an additional factor
to consider: a system-response delay before the equipment moves forward.
Table 7.5 shows a summary of the values collected.
The element values indicate that potential savings exist but overall sav-
ings cannot be determined until the appropriate frequency of occurrence for
each element is applied to each value. In the absence of simulation capabili-
ties in a labour management system, the frequencies can be calculated using
the following:

●● total cases selected;

●● total locations visited;
●● percentage of cases selected after short travel (from 9 feet to 40 feet (2.77
to 12.31 metres) between selection bays; manual travel will still be used
for longer distances);
●● percentage of locations visited after short travel (from 9 feet to 40 feet
between selection bays).

Once the company calculated those frequencies and knew the elemental
times, it simply had to ‘do the maths’: see Table 7.5. Several factors were not
considered in this calculation, including maintenance-support hours and the
impact on congestion delays. With these factors excluded, the values shown
represent a ‘best case’ scenario. Based on the cost of the additional invest-
ment in this technology, the results of the study would need to yield at least
a 10 per cent saving to justify serious consideration of such an investment.

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Table 7.5 Engineered approach to ROI using time-and-motion studies

Labour
Baseline Future Frequency Frequency 2 savings
Element (seconds) state Difference Frequency 1 1 data Frequency 2 data (hours)

Steps to first case 3.0 2.5 −0.50 100,000 Locations 30,000 % locations after −4.17
short travel

Steps with first case 2.9 2.25 −0.65 100,000 Locations 30,000 % locations after −5.42
short travel

Steps to additional 2.5 2.4 −0.10 125,000 Cases 43,750 % cases after −1.22
case short travel

Steps with additional 2.5 2.4 −0.10 125,000 Cases 43,750 % cases after −1.22
case short travel

Return to drive short 3.0 0.0 −3.00 100,000 Locations 30,000 % locations after −25.00
distance short travel
Grab equipment 1.0 0.0 −1.00 100,000 Locations 30,000 % locations after −8.33
controls for travel short travel

Pallet jack 5.0 6.0 1.00 100,000 Locations 30,000 % locations after 8.33
acceleration/ short travel
deceleration

System response 0.00 1.0 1.00 100,000 Locations 30,000 % locations after 8.33
time short travel

Labour hours reduction −28.7

Current labour hours 580
New labour hours 551.3
% impact 4.95%

407
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408 The Logistics and Supply Chain Toolkit

After calculating a solid value of the projected labour gains, the manage-
ment team decided not to purchase the equipment unless the vendor was
able to significantly reduce the price or further enhance the equipment to
provide additional gains at the same price. The vendor’s projected gains of
30 per cent were actually closer to 20 per cent and new pallet jacks would
only affect 25 per cent of the total labour component of order picking, thus
bringing down the overall savings into the neighbourhood of 5 per cent.
Other factors not included in the trial results include improved health and
safety of the operators.
This methodology can also be used for increased accuracy in resource
planning (see tool 1.8).
(Adapted from ‘A better way to calculate equipment ROI’ by Aaron
Lininger, a manager at West Monroe Partners LLC, which first appeared in
the Quarter 2 (2012) edition of CSCMP’s Supply Chain Quarterly.)

7.4 Supply chain financial ratios

and metrics
Introduction
An understanding of finance is essential for the majority of managers in to-
day’s business world. Supply chain and logistics is no exception so we have
put together a list of financial ratios that can impact supply chain opera-
tions.

Financial ratios are used as a tool to analyse the financial situation of your
business through its financial statements. The following ratios and metrics
are used substantially within the supply chain.

Return on assets (ROA)

This ratio determines how efficiently assets are being used to generate in-
come; it is expressed as a percentage. A high return on assets can suggest a
rapid turnover of assets or a high profit margin, or both.

Net profit before income tax

ROA =
Total assets ´ 100

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Financial management tools and ratios 409

Return on capital employed (ROCE)

ROCE can be calculated in a number of different ways. Calculations can be
made with actual figures or averages. It has the advantage of being simple to
use but it doesn’t take into account the timing of cash flows. ROCE is
calculated as follows:

●● Average profit before interest and tax (PBIT)/Capital employed × 100.

●● Where PBIT or operating profit is defined as sales minus operating
expenses before the payment of interest and taxes.
●● Where capital employed (CE) is defined as share capital plus reserves plus
long-term loans or fixed assets plus working capital (net current assets).

For a specific investment of, say, $120,000 and average profit returned over
a period of 5 years of $24,000, we get a ROCE figure of 20 per cent.

Discounted cash flow and net present value/internal

rate of return
According to Marsh (2013), these are the most widely used methods of in-
vestment appraisal as they take into account the timing of cash flows. As
money changes value over time, we need a method that takes account of this.
The net present value (NPV) calculation compares the price of the invest-
ment to the level of future savings that it will provide. One simple example
of an NPV calculation is to consider whether you would rather have $100
today or $120 a year from today. To arrive at an answer in this example, you
would have to decide how much interest could be earned in a year on the
$100. If you could earn more than 20 per cent you would accept the $100
today, because your earnings after one year would be greater than the $120
you would otherwise receive.
To calculate the NPV on an investment, several pieces of information are
needed. First, determine the total cost of the project. Second, calculate the
annual savings for at least the first four years after implementation. Finally,
determine the rate of return required by the company on capital investments.

Example
Assume you spend $300,000 today for a WMS that will provide estimated
savings of $100,000 in the first year and $150,000 in years two to four.
Note that the present-day value of these savings is less than $100,000 and

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410 The Logistics and Supply Chain Toolkit

$150,000, respectively. Your objective in calculating the NPV is to deter-

mine the value of those annual savings today and compare it to present-day
cost ($300,000).
Assume that your management requires a return of 15 per cent on all
capital investments. At 15 per cent, the first year’s savings of $100,000 is
worth $86,960 at the present day. Present-day value of $150,000 savings for
years two to four are $113,415, $98,625 and $85,770, respectively. Add the
total savings in today’s dollars and you get $384,770. Because the total sav-
ing in today’s dollars ($384,770) is greater than the total price of the WMS
($300,000), the investment can be justified.

Operating profit/net profit

PBIT
×100
Sales

Where PBIT = Sales – operating costs. This measures the profit of a company
before the payment of interest and taxes.

Days payable outstanding

Accounts payable
(Total annual cost of goods sold / 365)

This measures the average number of days a company takes to pay its
suppliers.

Days sales outstanding

Accounts receivable
(Annual revenue / 365)

This measures the average number of days it takes a company to collect its
money from its customers.

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Financial management tools and ratios 411

Inventory turnover ratio

Cost of goods sold
Average inventory value

A low number here may indicate that either your stock is slow moving or
that there may be problems such as the presence of obsolete stock, low cus-
tomer demand or order quantities are too high for the demand, resulting in
little or no movement. Low numbers are typical in a spare parts operation
where stock is held just in case.

Inventory days of supply

Current total inventory value
old / 365)
(Total annual cost of goods so

This measures the quantity of inventory on hand in relation to the number

of days of usage to be covered.

Distribution cost as a percentage of sales

Total distribution costs

×100
Total sales
Total distribution costs
×100
Total cost of goods sold

Both these metrics can be used to benchmark against other companies. Total
distribution costs can include both warehousing and transportation costs. It
can also be widened to include inbound costs.
Other financial metrics include:

●● Fixed cost versus variable cost split.

●● Cost increase versus sales revenue increase.
●● Inventory value change versus sales value change.

All of these are compared with previous years’ figures.

Reference
Marsh, C (2013) Business and Financial Models, Kogan Page, London

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412

Problem-solving 08
tools
Introduction
These tools can be used in all aspect of logistics and supply chain manage-
ment. All the examples provided relate to logistics.

8.1 Brainstorming
Introduction
Brainstorming is an organized problem-solving discussion. It is when a team
of people get together to produce ideas for the solution of a problem or for
a new service or product. A cross-functional team is seen as ideal, as some-
times people are too close to a problem to come up with workable solutions.

When to use
When solutions for a particular problem are hard to come by and it needs a
team of people to come up with some new ideas or solutions.

How to use
Assemble a group of people together in a room to suggest as many ideas as
possible in the hope of arriving at a solution to an ongoing problem or for
a new strategy or service.
Brainstorming is normally seen as a group activity; however, recent re-
search has suggested that individuals should spend time alone, thinking of
potential solutions before coming together with colleagues to discuss their
various ideas. This overcomes some of the issues of people being reticent
about coming forward with ideas in a group environment.

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Problem-solving tools 413

Figure 8.1 Brainstorming using Post-it® notes

Supplier In-handling Drivers don’t

Transport Not enough
sends wrong team is help with
always late forklifts
product agency offload

No
Scanners Can’t read Wrong instructions
don’t work carton labels barcodes for new
suppliers

No booking- Checking
Manual input
in times Dave off sick takes too
of data
given long

System
Clerical staff
updates
finish early
every 2 hours

All participants should write down their ideas on Post-it notes and place
them on a wall or whiteboard. These can be discussed as they’re placed on
the wall or discussion can take place later (see Figure 8.1).

Method
Turner (2003) proposes the following steps:

1 Choose a cross-section of people.

2 Set aside sufficient time with no interruptions.
3 Clearly state the problem or topic and make sure everyone understands.
4 Ask each team member to present his or her ideas, one at a time, in
sequence (team members can pass if they don’t have anything to add).
5 Record all the ideas exactly as given. No judgements are made until the
end of the session.
6 After all the ideas are listed, check for clarification from the team
members.
7 When the ideas dry up, it’s time to stop.

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414 The Logistics and Supply Chain Toolkit

Figure 8.2 Affinity diagram

Systems/
Suppliers People Transport Equipment
process

In-handling
Can’t read Manual input No booking- Not enough
team is
carton labels of data in times given forklifts
agency

Checking
Wrong No booking- Transport Scanners
takes too
barcodes in times given always late don’t work
long

Checking No instructions Drivers don’t

Dave off
takes too for new help with
sick
long suppliers offload

Supplier System
Clerical staff
sends wrong updates
finish early
product every 2 hours

8 The group then examines each idea in turn, expanding on them,

categorizing them and perhaps combining or eliminating some.
9 Put time limits on the discussions.

It may be possible to group the ideas and put them under headings that can
then be used as key areas to take forward (see Figure 8.2).
The rules for brainstorming are:

●● No criticism of the person, just the idea.

●● State ideas quickly.
●● Basic ideas initially.
●● Don’t worry about stating the obvious.
●● Don’t worry about repeating ideas.
●● Link ideas and try to improve on others.
●● No questions during the session.
●● Quantity is good.

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Problem-solving tools 415

Once the ideas are exhausted, they are grouped together under specific head-
ings as shown in the affinity diagram example in Figure 8.2. Note that a
problem can initially be put under multiple headings. By going through a
process of 5 Whys (see tool 8.3) we can determine exactly where the prob-
lem lies.

Further information
See Stevens, M (1996) How to be a Better Problem Solver, Kogan Page, London.

Reference
Turner, S (2003) Tools for Success: A manager’s guide, McGraw Hill,
Maidenhead

8.2 Cause and effect analysis, or fishbone

or Ishikawa
Introduction
Cause and effect analysis was introduced by Professor Kaoru Ishikawa, a
quality management guru, in the 1960s. The technique was then published
in his 1990 book, Introduction to Quality Control. The diagrams created
with cause and effect analysis are known as Ishikawa diagrams or fishbone
diagrams (because a completed diagram can look like the skeleton of a fish).
Cause and effect analysis was initially developed for quality control;
however, it has now been extended into other areas, including problem solv-
ing. For instance, you can use it to:

●● understand the specific cause of a problem;

●● uncover holdups in your processes;
●● discover why and for what reason(s) a specific process isn’t working.

When to use
This tool can be used to think through the causes of a problem that is affect-
ing your operation. It helps you look for the root cause as opposed to the

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416 The Logistics and Supply Chain Toolkit

symptoms. It is based on producing a diagram that gives a visual representa-

tion of the problem. It enables you to consider all the potential factors caus-
ing the problem, not just the more obvious ones. By bringing your team
together you are able to brainstorm (see tool 8.1) the problem and produce
a diagram detailing all the potential factors. We find that being able to visu-
alize a problem is very effective.

How to use
Identify the problem and write it down on the right-hand side of a piece of
paper or screen (see Figure 8.3). Then decide on the major factors that may
be contributing to the problem; these can include technology, people, equip-
ment, processes, environment, information, etc. Draw lines at an angle away
from the horizontal line and record the major factors at the end of each line
or ‘rib’. Collect the causes within each of the major factors that contribute
to the effect. Brainstorm by asking each person in the team to provide po-
tential causes and plot them on the ‘ribs’ within each of the major categories.
Use the 5 Whys tool (8.3) to delve deeper into each of the potential causes.
Discuss how these impact the ultimate problem and concentrate on those

Figure 8.3 Fishbone diagram

People Equipment

Too many errors Too few order pick trucks

Poor
selection Health and safety issues
Lack of training
procedure
Use of ladders
Poor Skill shortage
induction
Use of
No scanners
Inexperienced Agency staff
team leaders
Poor communication
Inaccurate
order picking
Single order
Paper-based
pick Poor labelling
system
Unplanned
Serial product Unable to read product
number locations code
capture Poor lighting
Method
Takes too
long Single pick face for ‘A’ products
Lack of Congestion in aisles
No WMS heating
Too few ground floor locations
Replenishment at same time as pick
Technology Environment

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Problem-solving tools 417

that have the greatest impact. Once the diagram is completed, each area can
be analysed in detail to find the root cause of the problem.

Further information
See http://www.mindtools.com/pages/article/newTMC_03.htm (archived at
https://perma.cc/A5SJ-4EKA)

8.3 The 5 Whys

Introduction
If you are a parent, you will have often heard your children ask why things
are as they are. They repeat the question until they are satisfied with the
answer. It’s the same in business. Although called the 5 Whys tool, we need
to keep asking ‘why’ until we get to the root cause of a problem.
This is a simple problem-solving tool that helps users get to the root
cause of the problem faster. It can also be used in conjunction with cause
and effect analysis (tool 8.2). The tool is based on the philosophy that a
problem provides an opportunity to fully understand the causes and thus
treat the cause rather than the symptoms.

When to use
The 5 Whys tool attempts to get to the root cause of any particular problem.

How to use
1 Define the problem, e.g. Customer X is very unhappy.
2 Put together a cross-functional team of people.
3 Ask your team why Customer X is very unhappy and capture the
responses, e.g. we delivered late again.
4 Ensure that all staff are open and honest with their responses.
5 Continue to ask why until no more answers can be given, e.g. we didn’t
finish the pick, we were a person short, we didn’t plan for this volume, we
were given the wrong volume information.

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418 The Logistics and Supply Chain Toolkit

6 Use the answers to identify the problem and the actions that need to be
taken, e.g. the sales team got their forecast wrong and we need to discuss
how this can be improved.

The tool enables you to drill down more than you would normally to find
the exact cause of the problem. A simple example from Toyota is as follows:

1 Our forklifts keep breaking down – why?

2 Shrink wrap gets caught in the drive motors – why?
3 The warehouse floor gets very messy – why?
4 The team throw shrink wrap on the floor – why?
5 They don’t use the bins provided – why?
6 They are in the wrong locations and constantly full.
7 Answer: relocate bins and empty more often.

The chart shown in Figure 8.4, adapted from a design by Six Sigma Material,
is a good way of mapping out the problem and the potential causes. If we
take the example of the wrong items being sent to a customer, there are a
number of potential causes. In this diagram we have looked at three poten-
tial areas: people, technology and the environment (in this case the working
area).
Note that we may need to ask more than five questions to get to the root
cause of the problem and there could be a number of reasons for the poor
accuracy. The point is to take this exercise seriously, ask the difficult ques-
tions and get to the bottom of the problem. For example, two of the streams
in the figure end with the fact that there is no warehouse management sys-
tem, and the reason for this could be a lack of budget. Keep drilling down
until you can proceed no further. Note that it can also branch off into other
directions.
To concentrate resources, the following need to take place:

●● Address each major cause in turn.

●● Assign one person to the corrective actions of each root cause.
●● Assign one person to the preventive actions of each root cause.
●● Agree on a specific completion date for each assignment.
●● Record all the names of the people involved in the exercise.
●● Record the date the exercise was completed.

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Figure 8.4 5 Whys chart

Inaccurate order
picking

Possible causes People Technology Environment

Manual changes on
1st Why Use of agency labour Too many distractions
orders

Replenishment at
2nd Why Inadequate training Difficult to read Congestion in aisles
same time as pick

Insufficient
No sequencing of
3rd Why Lack of processes Incomplete data quantity in pick
orders
face

Inexperienced team Single pick face for

4th Why Paper-based system
leaders popular items

No warehouse No warehouse
5th Why Poor training
management system management system

419
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420 The Logistics and Supply Chain Toolkit

References and further reading

http://www.six-sigma-material.com/5-WHY.html (archived at https://perma.
cc/3BKA-BPW3)
Turner, S (2003) Tools for Success: A manager’s guide, McGraw Hill,
Maidenhead

8.4 The 8-D approach

Introduction
8-D is a quality management tool. An 8-D resolution and corrective action
approach concentrates on resolving problems permanently, with the primary
objective of preventing any reoccurrence. The premise is to get to the root of
the problem as soon as possible rather than use a trial-and-error approach to
problem solving. The 8-D approach provides excellent guidelines, allowing
us to get to the root of a problem, and provides ways to check that the solu-
tion actually works and that the same problem is unlikely to recur.

When to use
When a potential problem has been identified and it requires a team ap-
proach.

How to use
The 8-D process follows a structured path with an emphasis on document-
ing every stage of the process. It also stresses the need to involve people from
outside the problem area to get a different perspective.
8-D is especially useful as it results not just in problem solving, through
utilizing a tried-and-tested process, but also produces an ongoing standard
and a reporting format that can be utilized in many different circumstances.
It is enhanced as a problem-solving tool by introducing other tools at
various stages of the process. For example, the 5 Whys tool (tool 8.3) and
root-cause analysis can be used at stage D4 to discover the root cause of the
problem. FMEA (failure mode and effects analysis) can be used at stage D5
to check the effectiveness of the solution.
Figure 8.5 provides a step-by-step guide to the 8-D problem-solving process.
A worksheet for the 8-D approach can be found at http://thequalityportal.com
(archived at https://perma.cc/NU62-7Q8Y)

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Problem-solving tools 421

Figure 8.5 The 8-D process

D0 The planning stage – do we have a problem?

D1 Establish a team
• The champion – the owner of the problem who ensures that sufficient resources and
support are provided
• The team leader – gets the job done
• The writer – ensures the integrity of all the documentation
• The time manager – ensures that milestones and tasks are completed on time
• The outside expert – possesses vital skills and comes from outside the department

D2 Describe the problem

• What’s wrong with what?
• When did it happen?
• Where did it happen?
• What is the size and seriousness of the problem?

D3 Develop an interim containment action (ICA)

• Buy time until a permanent corrective action is implemented
• Protect the customer from the effect(s) of the problem
• Contain the problem from a cost, reputation and quality perspective

D4 Define the root cause and identify the escape point

• Verify the root cause – use the 5 Whys approach (see tool 8.3)
• Undertake a root cause analysis
• Isolate the point in the process where the problem could have been detected and
identified earlier but wasn’t

D5 Permanent corrective action (PCA) for root cause and escape point
• Identify the best possible PCA so that it doesn’t happen again
• Ensure that it is easier to identify the escape point
• Produce a timeline for completion

D6 Implement the PCA

• Produce a project plan and timetable for implementation
• Implement and validate the PCA
• Remove the ICA if PCA is working
• Monitor the results

D7 Prevent reoccurrence
• Modify the existing systems, policies, practices and processes
• Make further recommendations if required

D8 Recognizing the efforts of the team

• Undertake a before-and-after comparison
• Ensure that the documentation is complete
• Reward the team members appropriately

SOURCE Worksheet provided by The Quality Portal team at http://thequalityportal.com

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422 The Logistics and Supply Chain Toolkit

Example
Problem: incorrect delivery to the customer:

D0 – We know we have a problem as the customer has told us so.

D1 – We form a team to investigate the problem:
–– the champion: the owner of the problem who ensures sufficient
resources and support are provided; in this case the warehouse
manager;
–– the team leader: gets the job done; in this case the outbound
supervisor;
–– the writer: ensures the integrity of all the documentation; in this
case the general manager’s PA;
–– the time manager: ensures milestones and tasks are completed on
time; in this case the human resources manager;
–– the outside expert: possesses vital skills and comes from outside
the department; in this case the operations manager.
D2 – Describe the problem. ‘We received a number of calls from clients
complaining they received the wrong deliveries. This has occurred over
the last three days. We’re not sure where the issue is but it hasn’t stopped,
we had another call this morning.’
D3 – Develop an interim containment action. Allocate staff to check every
order before it leaves the warehouse and record any incorrect orders and
who picked them.
D4 – Define the root cause and identify the escape point. Use the 5 Whys
tool (8.3) to discuss the problem and identify possible causes. Could the
problem have been identified earlier?
D5 – Permanent corrective action (PCA). In this example the error was a
problem with the use of agency labour and their lack of product
knowledge. PCA is an induction for all temporary labour, with an
emphasis on product knowledge and awareness. Key performance
indicators to be extended to all staff. A time frame of six weeks to
introduce an abridged version of the company induction programme for
temporary labour.
D6 – Implement the PCA. Induction scheme for all new and existing
temporary staff. KPIs set up and monitored for existing and temporary
staff. Full checks on all orders leaving the warehouse to be removed if
accuracy levels have improved.

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Problem-solving tools 423

D7 – Prevent reocurrence. Warehouse procedures to include induction for

all temporary staff prior to deployment.
D8 – Recognizing the effort of the team. Team dinner organized for members
and partners.

Conclusion: by following through this process, not only is the initial prob-
lem detected but a temporary fix is put in place immediately while a long-
term solution is sought. The final act is to reward all those individuals who
were involved, both within the team and in the implementation of the final
solution.

Further reading
8-Discipline Problem Solving, Noshir Khory, PhD, Motorola, Automotive and
Industrial Electronics Group, 16 October 2000, report supplied by Mark
Bergkotte.

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424

APPENDIX 1

Useful websites
With a large amount of business undertaken online and most people utiliz-
ing the internet to search for their service providers and for up-to-date
information, we have compiled the following list of useful websites. There
are many others; however, we hope that this list will help you find what
you are looking for in the field of logistics. This list can be downloaded
from http:// howtologistics.com where it is constantly updated.

Name Website Description

AIM Global www.aimglobal.org Auto ID information

APICS – The Association www.ascm.org Professional body

for Supply Chain
Management

Apprise Consulting Ltd www.appriseconsulting. Consultancy

co.uk

Balance Small Business https://www. Newsletter

thebalancesmb.com

BigChange www.bigchange.com Logistics software

British Association of www.bar.co.uk Trade association

Removers

British International www.bifa.org Trade association

Freight Association

British Quality www.bqf.org.uk Professional body

Foundation

Canada’s Supply Chain www.insidelogistics.ca Magazine/blog

Magazine

(continued )

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Appendix 1 Useful websites 425

(Continued)

Name Website Description

Capterra www.capterra.com List of logistics IT

companies

Chartered Institute of www.ciltuk.org.uk Professional body

Logistics and Transport

Chartered Institute of www.cips.org Professional body

Purchasing and Supply

Cold Chain Federation https://www. Trade association

coldchainfederation.org.
uk

Council of Supply Chain http://cscmp.org Professional body

Management
Professionals

DC Velocity www.dcvelocity.com Magazine/blog

Department for Transport www.dft.gov.uk Government department

European Foundation for www.efqm.org Quality organization

Quality Management

Freight Transport See Logistics UK Trade association

Association

Georgia Institute of www.scl.gatech.edu S/C Institute

Technology

GS 1 www.gs1.org Barcode information

Health and Safety www.hse.gov.uk Health and safety

Executive UK

How to Logistics http://howtologistics.com Online toolbox

IFW http://www. Logistics news

lloydsloadinglist.com

Inbound Logistics www.inboundlogistics. Magazine/blog

com

(continued )

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(Continued)

Name Website Description

Institute of Chartered http://www.ics.org.uk Professional body

Shipbrokers

Institute of Supply Chain www.ioscm.com Professional body

Management

Kogan Page www.koganpage.com Publisher

LinkedIn www.linkedin.com Professional network

Lloyds Loading List www.lloydsloadinglist. Freight community news

com

Logistics Handling www.logisticshandling. Logistics news and blog

com

Logistics Management www.logisticsmgmt.com Magazine/blog

Logistics Manager www.logisticsmanager. Magazine/blog

com

Logistics Matters https://www. Magazine/blog

logisticsmatters.co.uk/
Home

Logistics UK Logistics.org.uk Professional body

Logistics Viewpoints http://logisticsviewpoints. Logistics news

com

Logistics World www.logisticsworld.com Directory

Manufacturing and www.logisticsit.com Magazine/blog

Logistics IT

Modern Materials www.mmh.com Magazine/blog

Handling

Motor Transport https://motortransport. Magazine

co.uk

Occupational Safety and www.osha.gov Health and safety

Health Administration,
US Department of Labor

(continued )

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(Continued)

Name Website Description

Road Haulage https://www.rha.uk.net Trade association

Association

Robotics and Automation https://www.roboticsand Magazine

automationmagazine.
co.uk

Stiq Ltd https://www. Research company

styleintelligence.com

Supply Chain 24/7 supplychain247.com Magazine/blog

Supply Chain Brain www.supplychainbrain. Magazine/blog

com

Supply Chain Digest www.scdigest.com Magazine/blog

Supply Chain www.supplychainmarket. Newsletter

Management Review com

Supply Chain Market www.scmr.com Magazine/blog

The Chartered Institution www.ciht.org.uk Professional body

of Highways &
Transportation

The National Industrial www.nitl.org Professional body

Transportation League

The Warehousing www.werc.org Professional body

Education and Research
Council (WERC)

Toyota https://toyota-forklifts.co. Truck manufacturers

Transport for London http://www.tfl.gov.uk UK government

department

Transport Intelligence https://www.ti-insight. Research

com

TRL http://www.trl.co.uk Logistics research

(continued )

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(Continued)

Name Website Description

UK Chamber of Shipping www.ukchamberof Trade association

shipping.com

United Kingdom www.ukwa.org.uk Trade association

Warehousing Association

UTAS https://utas.libguides. Maritime library guide

com/maritimeindustry

Warehouse and Logistics www.warehousenews. Magazine/blog

News co.uk

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429

APPENDIX 2

Imperial/metric conversions
A number of countries continue to use both imperial and metric measures.
The following table helps to convert from metric to imperial and vice versa.

Converting Converting
A to B B to A
Function A B multiply by multiply by

Length Millimetres (mm) Inches (in) 0.03937 25.4

Centimetres (cm) Inches (in) 0.3937 2.54

Metres (m) Feet (ft) 3.2808 0.3048

Metres (m) Yards (yd) 1.0936 0.9144

Kilometres (km) Miles 0.62137 1.6093

Kilometres (km) Nautical miles 0.53995 1.852

Area Square Square inches 0.155 6.4516

centimetres (cm²) (in²)

Square metres Square feet (ft²) 10.7639 0.0929

(m²)

Square Square miles 0.3861 2.59

kilometres (km²) (mi²)

Hectare Acre 2.4711 0.4047

Cube Cubic Cubic inches 0.061 16.387

centimetres (cm³) (in³)

Cubic metres (m³) Cubic yards 1.308 0.7645

(yd³)

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(Continued)

Converting Converting
A to B B to A
Function A B multiply by multiply by

Cubic metres (m³) Cubic feet (ft³) 35.3147 0.0283

Volume Litres UK Pints 1.76 0.5683

Litres UK Gallons 0.21997 4.54611

UK fluid ounce Millilitres 28.413 0.03519

US Gallons Litres 3.78541 0.26417

UK Gallons US Gallons 1.2009 0.83267

Fuel usage Miles per UK Kilometres per 0.35400 2.82490

gallon litre

Miles per UK Litres per 100 282.48/mpg 282.48/lpk

gallon (mpg) km (lpk)

Miles per US Litres per 100 235.22/mpg 235.22/lpk

gallon (mpg) km (lpk)

Miles per UK Miles per US 0.8327 1.201

gallon gallon

Weight Tonnes Long Tons 0.9842 1.016

Grams Ounces 0.0353 28.35

Kilograms Pounds 2.2046 0.4536

Kilograms Hundredweight 0.01968 50.802

Speed (lift) Metres per Feet per 3.2808 0.3048

second second

Speed travel Kilometres per Miles per hour 0.62137 1.6093

hour

Temperature Centigrade (c) Fahrenheit (f) (9/5)Tc+32 (5/9)(Tf−32)

NOTE In this example T is the temperature, e.g. if temp is 26° Celsius the formula is (9/5)*26+32 =
46.8+58 = 104.8 °F. If temperature is 97.4° Fahrenheit the formula is (5/9)*(97.4−32) = 0.555556*65.4 =
36.33 °C.

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431

INDEX

Page locators in italic denote information contained within a figure or table.

ABC (Pareto) analysis 17–21, 54, 173–75, Authorized Economic Operators 162–65
183–85, 200, 205–07, 293, 306 automated storage and retrieval systems
Able Plastics 141 (AS/RS) 54–55, 56, 57
Accenture 332 automatic identification (autoID) 104–06
accident record KPIs 374, 376 see also barcode scanning; RFID (radio
‘accountable’ stakeholders 360, 361 frequency identification) tags
achievable targets 371 automation 55, 71, 77, 114, 297, 324
‘act’ stage (PDCA cycle) 120, 125 see also automated storage and retrieval
see also process management systems (AS/RS); goods to picker
activity-based costing 18, 296, 394–400 (G2P) systems
actual cost per activity KPI 375 automotive sector 184, 200, 239, 312
additive manufacturing (3D printing) autonomous guided vehicles (AGVs)
311–13, 319 53–55, 56
adjustable pallet racking 44, 45 autonomous mobile robots (AMRs) 22,
ADR regulations 159 53–55, 56, 57
advanced shipping notifications 33 autonomous road robots (ARRs) 167, 168
aerodynamic improvements 134 Autostore 54
affinity diagrams 414 average cost per unit delivered KPI 372
AGVs 53–55, 56 average cost per unit shipped KPI 375
air conditioning 98 average inventory level calculation 177, 198,
air freight (freight flights) 130, 145, 252 221, 222
Airbus 268 average miles per gallon KPI 373
aisle width calculations 50, 51–52, 53 average running cost KPI 372
Amazon 54, 78 average standing cost KPI 372
Amazon Web Services 321 average time utilization KPI 373
AMRs (autonomous mobile robots) 22, ‘awaiting disposal’ areas 228
53–55, 56, 57 Azure 321
AN-8 107
annual usage value 174–75, 176, 206, 207 back-loading 43
approvals 111 back orders 171, 368
ARRs 167, 168 BAF 131, 133
articulated trucks 45, 50, 129, 130, 148 Balanced Scorecard 366, 371, 377–81
artificial intelligence 318 Ballou, Ronald 175, 177–79
ASOS 92 barcode scanning 29, 33, 104–06, 107–08
asset efficiency KPI 372 BASDA 152
Association for Supply Chain Management baseline values 404, 407
(ASCM) 262, 263, 424 batch picking 22, 25
Ast4 (Ast3) 51–52 battery charging 99
AstraZeneca 310–11 benchmarking 384, 388
attendance requirements 95 analysis stage 385–86
audits 4–7, 10, 13–14, 126–27, 155–57, definition stage 385, 386
169–72, 235–37 implementation 386, 387
augmented reality 319 review of 386
Authorized Economic Operator Customs Benchmarking Success 389
Simplification 162–63 Benetton 256
Authorized Economic Operator Security and best-of-breed WMSs 76–79
Safety 163 best practice 10, 253, 264, 305, 384

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432 Index

big data 315, 318 classification systems 101–03, 104

big data business analytics 313, 314, 318 cleaning (shining) 9–10, 11, 13
bill of lading 145 clearing out (sorting) 8, 11, 13
bill of materials 186, 208–09 cloud computing 318
bins 10, 11, 98, 418 CLP Regulation 101
blind outsourcing 335–36 cluster picking 21–22, 24, 35
block pallets see pallets co-managed inventory (CMI) 180, 223–25
blockchain 322–26 cobots see autonomous mobile robots
Blue Yonder 262 (AMRs)
board responsibility 152, 304, 330, 365, 379 Codablock F 108
bonus payments 10, 147 Code 32 107
brainstorming 227, 269, 356–57, 385, 392, Code 39 107
412–15, 416 Code 128 107
see also mind maps collaborative planning, forecasting and
breakdowns 229, 230, 231, 232 replenishment 237–40
BREEAM 100 collaborative robots 56
buffer inventory 186, 187, 287–90 collaborative warehouse maturity 88
see also safety stock (security stock) commodity codes 160–61
building costs 294 communication 95–96, 111, 122, 123,
bulk carriers 130 250, 305
bunker adjustment factor (BAF) 131, 133 compliance 156, 373
business analytics 313, 314 confidentiality agreements 340–43
business case development 309–10 configuration (straightening) 9, 11, 13
business continuity committees 96 conforming (standardization) 10, 11, 14
business model innovation 325 consignment stock 179–82
business strategy 301–02, 371 constraints 37, 279–81
Buzan, Tony 356 consultancy services 80, 83, 320, 424
‘consulted’ stakeholders 361
Cadbury 387 container shipping 130, 131, 141–45
carbon dioxide equivalent (CO2e) 128–30 contingency planning 92–97, 274–75
Carbon Trust Implementation Services continuous improvement (Kaizen) 117, 119,
99–100 239–40, 352
cardboard boxes 101 see also Shitsuke (sustainability)
carousels 37, 53, 55, 56 contracts 81, 138, 156, 324
carriage and insurance paid (CIP) terms 138, controls 390, 391
139–40 conveyancing 12
Carriage of Dangerous Goods see also transportation
Regulations 158–59 corporate social responsibility (CSR)
carriage paid to terms 138, 139–40 97–100, 276
carton flow racks 35, 37 cost and freight terms (CFR terms)
CASBEE 100 138, 139–40
case quantity dimensions 36 cost as percentage of cost of goods sold 375
cases picked per hour KPI 375, 380 cost as percentage of sales 375
category management 305 cost, insurance and freight terms (CIF
cause and effect analysis 415–17 terms) 138, 139–40
CFR terms 138, 139–40 cost per order shipped KPI 375
champions (sponsors) 76, 80, 361, 362 costs 291–95, 372, 375, 395, 411
chargeable road freight rate calculation 147 lost product 66
‘checking’ stage (PDCA) 120, 123, 125 shrinkage 66, 67
see also process management traditional costing model 394, 397
chemical hazards 36, 101–03 warehouse 63, 65–67
CIF terms 138, 139–40 WMS 69–70, 74, 75, 87
Cimcorp 54 see also activity-based costing
CIP terms 138, 139–40 CO2 produced KPI 374
claims KPI 373 CO2e 128–30

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Index 433

counter balance 3 wheel trucks 50 digital twinning 319, 320–22

counter balance 4 wheel trucks 50 direct employment costs 292
Coupa 262 discounted cash flow 409
couriers 166, 167, 168 dispatch (delivery) activities 44, 114,
Covid-19 pandemic 92, 95 347–48, 367, 369, 375
CPFR® 237–40 see also couriers
CPT terms 138, 139–40 distributed ledger technology 323
criticality analysis 269 distribution cost as a percentage of sales 411
cross-aisles 8 distribution networks 134, 141, 142–43,
cross-docking 25, 27, 32–34 177–79, 258–60, 349–50
CSR 97–100, 276 DLMB 387
cube automated storage and retrieval DMAIC 123, 389–91
systems (AS/RS) 54–55, 56, 57 ‘do it yourself’ (outsourcing) 339
cumulative percentage annual usage dock to stock time KPI 376
value 174, 176 docking 58
customer complaints 368 see also cross-docking
customer service 65, 69, 367–68, 373, documentation (paperwork) 80–81, 85,
375–76 96, 137, 275, 367, 373, 376,
customs duties 159–62 389, 390
customs-to-business partnership 163 see also bill of lading; bill of materials
customs valuation 159 ‘doing’ stage (PDCA) 120, 123
cycle counting (perpetual inventory see also continuous improvement
counting) 18, 183–85, 216 (Kaizen); process management
cycle stock 191 Doran, George T 370
cyclical change 241 double-deep racking 44–46
double-skinned packages 101
damage-free shipments KPI 376 DPU (delivered at place unloaded)
dangerous goods safety advisers 158 terms 138, 139–40
DAP (delivered at place) terms 138, 139–40 drive-in racking 33, 34, 44, 45, 46
data analysis 241, 390 driver hours legislation 168, 177, 373
see also big data; big data business drivers 133, 135–36, 158, 168, 177, 373
analytics drones 166, 167, 168
data entry 66, 67, 85 dual cycling 39, 43–44
data matrix code 108 dynamic slotting 54
data take-ons 85, 86
days payable outstanding 410 EAN International (GS1) 105, 106,
days sales outstanding 410 107, 238
DDP (delivered duty paid) terms EAN-13 107
138, 139–40 economic order period 205–07
decision matrix analysis 353–56 economic order quantity (EOQ) model 198,
see also ‘go/no go’ decision criteria 201–07
decision symbol 116 effective warehouse maturity 88
decoupling buffer stock 186, 187, 287 8-D approach 420–23
defects 12, 17, 135, 374 80/20 (Pareto) analysis 17–21, 54, 173–75,
delivered at place unloaded (DPU) 183–85, 200, 205–07, 293, 306
terms 138, 139–40 elements 404–05, 407
demand-driven MRP (DDMRP) 285–91 emergency contact lists 93, 94
demand forecasting 240–42 employment costs 292
historical 213, 214, 215 end symbols 116
demand variation 186, 188–90 energy saving 97–100
Dematic 54 engagement plans 123
Deming, W Edwards 117 engine torque 135
Deming cycle (PDCA tool) 15, 117, 119–25 engineered ROI calculation 403–08
demurrage time 373 engineering sector 200
descriptive analytics 314 environmental factors 63, 97–100, 374, 376

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434 Index

equipment 111, 133, 217, 395 free on board terms (FOB) terms 138,
see also handling equipment 139–40
Eroski 239–40, 242 freight transport 130, 372–74
ERP (enterprise resource planning air freight 145, 252
systems) 36, 71, 76–79, 111, 286 sea 138, 145
see also S&OP (sales and operations see also inland waterway transport; road
planning) freight
European Regulation No 1272/2008 101 frequent order storage 35
European Union (EU) 101, 103, 158–59 fuel adjustment factor formula 131–33
evacuation plans 95 fuel efficiency 133–36, 270–71
Ex Works (EXW) agreements 138, 139–40, fuel management plans 135
243 fuel tanks 135
Excel spreadsheets 239, 240
Exotec 54 gearbox usage 135
expenses 292 Geek+ 54
expertise buyers 339–40 Gemba Kanri 7–16
external stakeholders 359 Gemba Walk 15–16
‘externally neutral’ maturity 253, 255 geographical reach 308
‘externally supportive’ maturity 253, 255 glass production 257–58
Global Electronic Party Information
factory gate pricing 243–46 Register 106
failed safety inspections KPI 374 global warming potential factors 128
failure mode effect and criticality analysis ‘go/ no go’ decision criteria 106, 108–15
(FMECA) 269, 420 Goal, The (Goldratt) 281
family product groupings 35 Goldratt, Eli 279–81
FAQs 96 goods received see in-handling (inbound)
FAS terms 138, 139–40 operations
fast mover items (runners) 18, 35, 37, goods to picker (G2P) systems 23, 26,
220, 246 52–57
fast-moving consumer sector 181, gravity-fed racking 45
227, 241 green buffer inventory 287–90
FCA (free carrier) terms 138, 139–40 ‘green’ decisions 109
Federal Motor Carrier Safety greenhouse gas emissions measurement
Administration 159 127–31, 321
feedback 122, 218, 305 Greenstar 100
Finance function 309, 362 GreyOrange 54
financial management tools 394–411 GS1 105 106, 107, 238
fishbone analysis 415–17 GSI DataBar Expanded 107
512 Sheffield 137–38 GSI DataBar Omnidirectional 107
5 Whys 417–20, 422 GS1-128 107
5S (5C) 7–16
flat laminated glass production 257–58 Hai Pick 54
flow charts 115–17, 118, 239 hand pallet trucks 50
FMECA (failure mode effect and criticality handling equipment 9, 22
analysis) 269, 420 MHE 295, 376
FOB terms 138, 139–40 see also forklift trucks
forecasting 37, 240–42, 298 Harris, Ford W 201
forklift trucks 45, 50, 51–52, 144 haulage rate quotation template 149–50
Fortna 258–62 hazards 36, 90, 91, 100–04, 158–59
4PL© decision making process 333–34 health and safety 7, 8, 10, 14, 16, 35, 95,
4PLs© 331–35 103, 112, 114
fourth Industrial Revolution 317 KPIs 374, 376
free alongside ship (FAS) terms 138, safety checks 135
139–40 suppliers 156, 157
free carrier (FCA) terms 138, 139–40 heating costs 293

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Index 435

help desk (support) cover 74, 218 International Civil Aviation

Henkel 239–40, 242 Organization 158
heuristics 315 International Maritime Dangerous Goods
Hewlett-Packard LaserJet 256 Regulations 158
HGVs 128, 129 International Maritime Organization 145
hi-lifters 50 Internet of Things (IoT) 319, 321
high level order pickers 50 inventory count accuracy 377
HIKRobot 54 inventory days of supply 411
historical demand forecasting 213, 214, 215 inventory days on hand 377
Hive system 55 inventory management 10, 12, 65, 169–234,
Honeywell 54, 65 324, 358, 377, 411
hub operations 33, 224, 230, 268 accuracy of 69
Human Resources function 352, 362 buffer 287–90
see also people (personnel) processes; cycle (perpetual inventory) counting 18
recruitment; training reduction of 66, 67, 279
slotting 34–38, 54
IBM 320 stockholding costs 293–96
IBM Digital Twin Exchange 321 strategic positioning 286–87
in-handling (inbound) operations 39, 40–41, inventory management audits 169–72
44, 109–10, 113, 118, 345–46 inventory protection levels 212, 213
in-house WMS development 71 inventory shrinkage 377
incentive systems 38, 369 inventory-throughput curve 175, 177–79
see also bonus payments inventory turnover ratio 411
Incoterms® 136–41 invitation to tender (ITT) 70
Indigo 78–79 IoT (Internet of Things) 319, 321
individual brainstorming 412 IoT TwinMaker 321
individual order picking 21, 24 Ishikawa analysis 415–17
Industry 4.0 316–17 ISO containers 143–45
see also digital twinning ISO 668 144
Infor 76, 262 ISO 1496-1 144
information management problems 65 ISO 6346 143–44
‘informed’ stakeholders 361 Issuing Customs Authority 164
infrastructure 63, 70 IT 75, 80–81, 86, 99, 111, 156, 292, 295,
see also Finance function; Human 349, 353
Resources function; IT; Marketing item families 305
function; Procurement function; item profiling 34–38
Research and Development function; items picked per hour KPI 375
Sales function; shared function items sold (hits) 37, 375
costs
inland waterway transport 138, 140 JDA 64, 65
innovation 352 Juran, Joseph 17
insurance 137, 295
CIP terms 138, 139–40 Kaizen (continuous improvement) 117, 119,
integrated business planning 297 239–40, 352
Intergovernmental Panel on Climate see also Shitsuke (sustainability)
Change 128 Kanban (Kanban boxes) 246–49
interim containment actions 421, 422 Kanban cards 247–49
interim management 80 Kanban inserts 247
internal order cycle time KPI 376 kinetic-energy plates 99
internal rate of return 409–10 Knapp 54
internal stakeholders 359 KPIs (key performance indicators) 106–15,
‘internally neutral’ maturity 253, 255 298, 352, 364–77, 422
‘internally supportive’ maturity 253, 255 Kraljic matrix 250–52, 266, 267
International Air Transport Association 158 Kuehne and Nagel 268
International Chambers of Commerce 136 Kyoto Protocol 128

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436 Index

labelling 9, 28, 100–04, 217 medium mover items (repeaters) 18, 246
labour management (resource planning) metrics (measurement) 78, 264, 349,
38–42, 63, 65, 67, 94, 112, 298, 395 364–93, 408–11
labour management systems (LMSs) 38, see also KPIs (key performance
39, 42 indicators)
large order quantity 198 Microsoft 76, 320, 321
last mile delivery 165–68 mind maps 356–59
lead logistics providers 332 mini-load warehouse systems 54–55
lead times 186–87, 196 minimum order quantity 203–04
leadership 93, 96 mis-picks 36, 65
see also board responsibility mobile racking 45, 46
Lean production 243, 246, 285, 310, 324 module height calculation 59, 60
see also value stream mapping module length calculation 59–60
LEED 100 module width calculation 58–59
legged robots 166, 167, 168 Mondelez 387
licences 67, 70, 137 MRO activity 231, 374
lifetime cost of acquisition 306 MRP see material requirements planning
line accuracy 376 (MRP)
link symbol 116 MSI/Plessey 107
Llama Soft 64 Mushiny 54
load configuration 141–43 mushroom products 256
location numbering 47–48 Mutual Recognition Arrangements 163
lockers 166, 167, 168
Logility 262 NASA 269
Logistics 4.0 316–20 natural disasters 92
logistics service providers (LSPs) 335, near miss KPI 376
350–53 net present value 409–10
see also 4PL©s; lead logistics providers; net profit 410
3PLs netting 208, 210
Logmark 387 ‘next stage’ symbol 116
lost product costs 66 Nike 281
‘lot for lot’ quantity 209 Nissan Motor Parts 119–25
low level order pickers 50 non-disclosure agreements (NDAs) 340–43
non-mover items 220, 227, 230
machine learning 318
macro environment 63 obsolete items 227
maintenance, repair and overhaul Ocado 54
activity 231, 374 office chair inventory orders 209–11
man down VNA trucks 50 office space costs 292
man up VNA trucks 50 offsetting 208
manual order picking 35, 56, 96, 120, 196 ‘on consignment’ stock 179–82
manufacturing sector 251–52, 253–55 on-time delivery KPI 370, 371
market factors 63, 306 on-time dispatch KPI 375
Marketing function 309 on time in full first time KPI 375
Marks & Spencer 278 1D bar codes 104, 105
material requirements planning (MRP) 186, operating expense 279
208–11, 251, 252, 267 operating profit 410
see also demand-driven MRP (DDMRP) operation symbol 116
matrix codes 105, 108 operational KPIs 372–73
maturity models 253–55 operator clearance 51–52
mean absolute deviation (MAD) 188, 189, operator hours KPIs 376
190 Opex 54
mechanical handling equipment (MHE) 295, Oracle 76
376 ‘orange’ decisions 110
medium level order pickers 50 order accuracy KPI 376

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Index 437

order assembly 114 people (personnel) processes 265, 295, 308

order cycle time KPI 376 see also training
order fill rate KPI 375 PepsiCo 223–24
order picking 17–20, 21–32, 50, 52–57, percentage empty running total KPI 373
119–25 percentage of damaged items KPI 373
manual 35, 96, 196 percentage of late deliveries KPI 373
pick locations 36–37 perfect order completion KPI 376
S-shape 47 performance measurement (metrics) 78, 156,
order quantity calculation 193, 194, 264, 349, 364–93, 408–11
198, 199 see also KPIs (key performance
ordering cost calculation 291–93 indicators)
orders picked per hour KPI 375 Performetrix 378
OSHA 103, 426 periodic review inventory management
outbound activities see dispatch (delivery) 191–94
activities permanent corrective action 422
outsourcing 155–57, 252, 327–63 permits 111
outsourcing decision matrix 328 perpetual inventory (cycle) counting 18,
outsourcing process 330 183–85, 216
outsourcing questionnaire 328–29, 331, photographs 10, 118
343–50 pick by label 28
over-production 10, 12 pick by line 22, 25
overall stock turn 220, 222 pick locations 36–37
overhead costs 396 pick to light 31, 54
overloading KPI 373 pick to zero 22, 25
picker utilization KPI 376
packaging 100–04, 294 pilot projects 86–87
pallet jacks 50 Plan A 278
pallet locations KPI 376 Plan Do Check Act (PDCA) tool 15, 117,
pallets 36, 375, 376 119–25
configuration of 141–43 Plan LM 64
optimization software 141–42 platform powered pallet stackers 50
sizes 145–46 pocket sorters 55
storage calculation 58–61 postal services 392–93
suppliers of 146 postponement 256–58
see also racking systems powered pallet trucks 50
pallets picked per hour KPI 375 predictive analytics 314
Palmark 387 preferred (principal) suppliers 266
paper bags 101 prescriptive analytics 314
paper pick lists 27, 28 prescriptive outsourcing 336, 337
paperwork (documentation) 80–81, 85, 96, presentations 123, 124
137, 275, 367, 373, 376, 389, 390 price buyers 338–39
see also bill of lading; bill of materials problem-solving tools 389, 390, 412–23
Pareto, Vilfredo 17 process management 12, 16, 80, 152, 264,
Pareto analysis 17–21, 54, 173–75, 183–85, 265, 280–81, 308
200, 205–07, 293, 306 see also ‘checking’ stage (PDCA); 5S (5C)
partnerships 266–68, 339, 340 process mapping 93
pavement robots 166, 167, 168 Procurement function 250, 291–93, 304–07,
pay 95 336, 362
see also bonus payments; incentive product affinity 35
systems product flow path design 258–62
payback period 401–02 product lines picked per hour KPI 375
PDCA (Plan, Do, Check, Act) tool 15, 117, product portfolios 308, 310
119–25 productivity 39, 69, 375
PDF 417 108 professional services 70
pedestrian powered pallet trucks 50 see also consultancy services

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438 Index

project management 80–81, 82, Research and Development function 154, 309
108–09, 362 residual risk 269
project plans 81, 82–86 resource planning (labour management)
project reviews 86 38–42, 63, 65, 67, 94, 112, 298, 395
project scope 80–81 response strategies 93
project sponsors (champions) 80, 361, 362 ‘responsible’ stakeholders 360, 361
project teams 152 responsive warehouse maturity 88
purchase orders 306 retail sector 141, 142–43, 180, 200, 223–24,
purchasing management 251, 252, 267 315–16
push-back racking 45 return on assets 408
put-away activities 40–41, 43, 54, 113, 398 return on capital employed 409
put to light 31, 54 return on investment (ROI) 68, 69–70, 153,
311–13, 400–08
QR codes 108 returns processes 348
quality improvement 364–93 RFID (radio frequency identification)
see also 8-D approach tags 32, 33, 104–05
quantity sold 37 rigid trucks 129
questioning 15 Risilience 321
see also 5 Whys risk 90, 269
quick response see Lean production risk assessments 89–93, 268–74, 306
Quicktron 54 risk-based outsourcing 335–37
risk mitigation 269, 271–76
RACI matrix 359–63 risk response teams 274
racking systems 44–46, 51–52 road freight 126–27, 128–30, 145
carton flow 35, 37 transport charges 147–51
drive-in 33, 34 Road Haulage Association (RHA) 130, 131,
VNA 49 149–50, 427
radar charts 157, 382–83 road robots 167, 168
radio data terminals (RDTs) 81, 86 robotics 53–55, 56, 318
radio frequency identification (RFID) AMRs 22, 57
tags 32, 33, 104–05 ARRs 167, 168
rail freight 130 legged 166, 167, 168
random variations 241 pavement 166, 167, 168
raw materials 185, 187, 283–84 see also drones; road robots
re-slotting runs 38 ROI 68, 69–70, 153, 311–13, 400–08
re-work 12, 219 role responsibilities 93
reach trucks 50, 52, 53 RoRo ferries 130
reactive warehouse maturity 88 route planning 134
Reckitt 321 rules of origin 161
recruitment 112, 114 runners (fast movers) 18, 35, 37, 220, 246
red buffer inventory 287–90
‘red’ decisions 110 S&OP (sales and operations planning)
Red Prairie (JDA) 64, 65 296–303
reference site visits 73, 153, 305 S&OP information packs 299
regulations 158–59 S&OP result positioning matrix 302–03
remote working 95 S&OP self-assessments 300–03
reorder point (level) inventory S-shape picking 47
management 194–97 SaaS 67, 72–73, 86
repeaters (medium mover items) 18, 246 safety checks 135
replenishment order quantities 43, see also health and safety
198–200 Safety of Life at Sea 145
reporting 156, 349 safety stock (security stock) 191, 194–95,
requests for information (RFIs) 71–73, 81, 211–15
351, 352 see also buffer inventory
requests for proposals (RFPs) 76, 351–53 Sage 76, 152

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Index 439

sales forecasts 37 sponsors (champions) 76, 80, 361, 362

Sales function 309, 362 SSI Schaefer 54
SAP 76, 320 stacked codes 105, 108
satellite matrix (supply chain) 338–40 stainless steel packages 101
satellite racking 45, 46 stakeholder analysis 121, 123, 359–63
saw tooth inventory model 198 standard deviation (SD) 188–89, 190,
SCM Globe 64 212–14, 215
SCOR® model 262–65 standardization 10, 11, 14
SD (standard deviation) 188–89, 190, Starship 166
212–14, 215 start symbols 116
sea freight 130, 138, 145 static automated storage and retrieval
seasonality 241, 290 systems (AS/RS) 54, 56, 57
second Industrial Revolution 317 steering committees 110, 111, 360, 361
7 Muda (TIMWOOD) 10, 12 stock counting 215–19
Seiketsu (standardization) 10, 11, 14 stock cover 226–27
Seiri (sorting) 8, 11, 13 stock data accuracy 218–19
Seiso (shining) 9–10, 11, 13 stock disposal 226, 227–29
Seiton (straightening) 9, 11, 13 stock identification 226–27
sequencing centres 33 stock keeping units (SKUs) 36
services costs 292, 295, 396 stock location data 218
shadow boards 9 stock losses costs 295
shared function costs 292, 295 stock turn 220–22, 377
shared inventory costs 295 stock turn for item 220, 221–22
shelving 35, 37 stockholding cost 293–96
shining 9–10, 11, 13 stockouts 212
shipping accuracy 65, 66, 67 storage 36, 44–46, 113, 346–47
see also advanced shipping notifications costs 294, 396
Shitsuke (sustainability) 10, 12, 14 frequent orders 35
shrinkage costs 66, 67 see also automated storage and retrieval
sickness management 114 systems (AS/RS)
Siemens Medical Solutions 265 straightening 9, 11, 13
simulation 319, 405 strangers (slow mover items) 18, 37, 220
single version of the truth 325 strategic inventory positioning 185–88,
Six Sigma 389 286–87
6S audit tool 13–14 strategic partners 339, 340
SKUs 36 strategic procurement 304–07
SLD risk matrix 269, 270 stringers see pallets
slotting 34–38, 54 supermarket sector 192, 200
slow mover items (strangers) 18, 37, 220 suppliers 266–68, 305, 307
small and medium-sized enterprises audits 155–57
(SMEs) 73, 77 collection by 243–44, 245
smallest order quantity 198, 199 and consignment stock 180
smart contracts 324 contracts 81
SMART KPIs 370–71 pallet 146
snake path picking 47 reference site visits 73, 153
soft orders 291 selection of 73–74, 75, 153–54
software 70, 141–42, 242, 260 see also Ex-Works (EXW) Agreements;
warehouse control (execution) 54, outsourcing; requests for information
77, 111 (RFIs); requests for proposals (RFPs)
see also SaaS supply chain 235–326
sorting 8, 11, 13 added value 338
sourcing management 251, 252, 267 complexity 338
spare parts inventory 227, 228, 229–34 metrics 408–11
specificity (KPIs) 370 outsourcing 338–40
splitter gearboxes 135 satellite matrix 338–40

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440 Index

supply chain analytics 299, 313–16 total cost of acquisition 306

supply chain audits 235–37 total CO2 KPI 374, 376
supply chain configuration 263, 308 total empty miles KPI 373
Supply Chain Council 262 total maintenance cost KPI 374
Supply Chain Optimizer 262 total miles KPI 373
supply chain risk assessments 268–74, 306 total order cycle 368
supply chain risk mitigation 271–76 total sales units 18
supply chain strategy 307–11 total whole vehicle cost KPI 372
supply chain visibility 310, 324 Toyota Production System 246, 418
supply management 251, 252, 267 traceability 69, 324
support costs, WMS 70 Trade Tariff tool 160–61
surplus inventory disposal specialists 228 traditional costing model 394, 397
surplus stock disposal 226, 227–29 traditional outsourcing 336
surplus stock identification 226–27 see also 4PL©s; lead logistics providers;
sustainability working party 277–78 3PLs
sustainable sourcing 10, 12, 14, 276–79 traffic infringement KPI 373
see also Kaizen (continuous trailers 148
improvement) training
Swisslog 54 inventory management 218
SWOT analysis 379, 392–93 risk mitigation 275
warehousing 93, 99, 112
‘T’ products 256 WMS 66, 84–85, 87
Takt time 285 transformational outsourcing 336–37
tanker ships 130 transportation 12, 126–68
target setting 369 see also freight transport
target stock level (TSL) 191–94, 222 transportation management system
task interleaving 39, 43–44 selection 151–55
technology 27, 28–32, 94, 308 trend analysis 241
vision-enabled 81, 86 trucks 49–51, 129
voice-enabled 81, 86 articulated 130, 148
see also automation; blockchain; drones; forklift 45, 51–52, 144
Internet of Things (IoT); IT; Logistics reach 52, 53
4.0; robotics; simulation trust 325
telematics 135 TSL 191–94, 222
telephone interviews 73 2D bar codes 54, 104, 105
testing 96, 405 tyre pressure monitoring systems 134, 135
TEU capacity 144
TGW 54 UNCITRAL 136
theory of constraints 279–81 undecided outsourcing approach 339, 340
see also demand-driven MRP Uniform Code Council (GS1) 105, 106,
(DDMRP) 107, 238
third Industrial Revolution 317 United Nations (UN)
3D printing (additive manufacturing) Global Harmonized System 101–02, 103
311–13, 319 Transport of Dangerous Goods
3PLs 244, 331–32, 333, 355 system 101
throughput 279, 282 UN1263 101
TiHi configuration 141, 142 UN1498 101
time-and-motion studies 407 UN1500 101
time-based KPIs 371 unloading activities 40
time buffer method 213, 214, 215 UPC-A 107
time-driven activity-based costing 395, 397, UPC-E 107
399 usage value 173
time series analysis 241 annual 174–75, 176, 206, 207
TIMWOOD (7 Muda) 10, 12 Use Your Head 356
tool, defined 1 user functions 306

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Index 441

utilities (services) costs 292, 295, 396 warehouse management systems

utilization percentage KPIs 376 (WMSs) 35, 36, 38, 43, 47, 397
business case for 64–68, 69–70
value added services 348 champions 76
see also packaging costs 69–70, 74, 75, 87
value added tax (VAT) 159, 182 demonstrations 75
value-adding time 282, 285 go-live stage 85, 87
value stream mapping 281–85 implementation 80–88
vehicle fill efficiency 372 interface with external systems 81, 84, 86
vehicle maintenance 134, 374 reference sites 75
vehicle maintenance downtime KPI 374 selection of 68–79
vendor assurance questionnaires 155–57 warehouse material handling equipment
vendor-managed inventory (VMI) 180, 181, 48–51
222–25 warehouse maturity scans 88–89
vendor product groupings 35 warehouse movement reduction 98–99
vertical lift modules (VLM) 55, 56 warehouse resources management 98, 99
very narrow aisles (VNAs) racking 45, warehouse rules 86
46, 49 warehouse signage 9
vision-enabled technology 27, 32, 81, 86 warehouse space calculations 57–61, 67
vital few (Pareto) analysis 17–21, 54, warehouse storage 44–46
173–75, 183–85, 200, 205–07, warehouse ventilation systems 98
293, 306 warehousing 4–125, 315, 423
voice-enabled technology 30, 81, 86 Balanced Scorecard 380
Voluntary Inter-Industry Commerce costs as percentage of cost of goods sold
Standards Association 238 KPI 375
Voluntary Sustainable Building Award 100 costs as percentage of sales KPI 375
KPIs 374–77
Wacker Polymers 299, 300 see also inventory management
waiting times 10, 12 wave picking 23, 26
Walmart 32 We Supply 262
warehouse air conditioning 98 wearable scanners 29
warehouse aisles 8, 50, 51–52, 53 weight/volume ratios 145
warehouse contingency planning 92–97 WERC 387
warehouse control (execution) software 54, wide aisle pallet racking 46, 47
77, 111 ‘WIIWFE’ outsourcing 336, 337
warehouse control systems 71 work schedule planning 95
warehouse cooling systems 98 workforce turnover KPI 377
warehouse design 33–34, 44 World Customs Organization 163
warehouse energy savings 97–100
warehouse heating 98, 99 yellow buffer inventory 287–90
warehouse lighting 97, 99
warehouse location 61–64, 315 zone picking 22–23, 25, 35

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