COULD LOGISTICS CONTROLLING FULFIL ITS FUNCTION IN CASE OF COST APPRAISE OF LEAN SUPPLY CHAIN PROCESSES? David HOLMAN, Petr JIRSÁK

Transcription

1 COULD LOGISTICS CONTROLLING FULFIL ITS FUNCTION IN CASE OF COST APPRAISE OF LEAN SUPPLY CHAIN PROCESSES? David HOLMAN, Petr JIRSÁK University of Economics, Prague, Czech Republic, EU, Abstract: Measuring logistics process performances in Automotive, logistics controlling Automotive logistics processes have to be adjusted to market changes and so as to modifications of production systems which have to be able to deal with a high production complexity, a pressure for substantial car production lead time reduction and also to tackle with tough competition. This production system changes are commonly related with principles and tool of a lean production and logistics. Logistic controlling has an indispensable role in measuring logistics process performances, however, its effectiveness is dependent on a way of their measuring. Complete process of logistics controlling encompasses the following steps: setting of operational targets, identification and detection of a real state, analysis of discrepancies and variability, identification and implementation of improvements leading to reduction or elimination of detected variability and defects, reporting of achieved benefits. Changes of production and logistics systems lead not only to application of new principles and tools but also to a new approach of productivity assessment. So the maximisation of resource utilisation and the minimisation of unit costs cannot be at the forefront but the main concern is on waste minimisation and reduction of production and logistics lead times. No or at least inadequate change in productivity assessment involved in logistics controlling process provides highly inaccurate cost assessment of lean logistic principles and tools. The main cause lays in misidentification of their real benefits generated by elimination of waste and lead time reduction. Understanding the difference between measuring of productivity in mass and lean production and logistics systems is inevitable for calculation of real process productivity. Keywords: Logistics controlling, cost assessment of lean system, logistics controlling process. 1. INTRODUCTION Logistic controlling based on LEAN productivity logic could provide to a management valuable sources for effective decision making process and for achievement of stable and cost effective logistics processes in a long term. Briefly described case from automotive industry should help more deeply express the difference between analyses of existing supply chain process by traditional cost evaluation and projection of cost evaluation regarding benefits of LEAN processes. 2. CONTROLING Short definition and specification of logistics controlling, as it is perceived in this article, is provided here as there is no single definition of it neither in a corporate area nor in an academic field. The aim of logistics controlling is to provide continuous audit of process efficiency by comparison of plans with actual logistics performances and costs. Moreover, acquiring and consolidation of information for logistics managers is involved. Expression of logistics performances and costs is carried out by pertinent and carefully selected set of performance indicators. The core of the logistics controlling should be target setting

2 and planning, management, supervision and coordination of particular parts of a logistics system [1]. Logistics performance indicators of controlling are usually related to a product or an output of a logistics process. Controlling performance indicators are measured in a particular supply chain elements either in a whole organization or in particular departments which are responsible for logistic processes. These indicators could be of structural or framework nature or focused on productivity, cost efficiency and quality [2]. 3. KEY WAYS OF PRODUCTIVITY IMPROVEMENT 1) Increase of production factor capacity (capacity of machineries, better work conditions of workers, etc.) 2) Elimination of waste in transformation process of resources to final products and its provision to a customer (7 sources of waste). Considering a case of production process in which 10 workers produce 100 products. Firstly, imagine, that the productivity is increased without no extra non material inputs and so the 10 workers manage to provide 120 products. However, what are the consequences when a product demand is declined due to change in global competition and set at 90 products per a certain time bucket? Productivity based on maximization of transformed products inevitably involves cost associated with overproduction accounting for up to 60% of wasting in logistics processes. Such wasting is in today processes hardly identified and measured, so they cannot be reduced or eliminated at all. Then, counting with the fact, that the productivity of the same process is elevated by elimination of non-value added and so non-productive activities in a way that number of workers could be lowered from 10 to 8 without changing expected output of 100 products. The process would be improved, wasting would be reduced and the productivity would be increased even if the transformation process output would have to be cut down because of demand fall to 90 products as number of worker might be lowered from 8 to 7 [3]. Source: Own visualization Fig. 1 Wasting in today production and logistics processes

3 Process waste reduction could be gained when its real source or sat of sources are identified and the intensity of wasting is accurately mapped. Thus, by the controlling which is encompassing competences defined above, especially the comparison of actual and planed performances, could achieve measurable and quantifiable results only when waste and its elimination in today supply chains is properly cost appraised. Such cost analyses of waste and variants of possible solutions should be carried out always before some lean optimization project is gone life. 4. COST ASSESMENT OF WASTE REDUCTION IN AUTOMOTIVE SUPPLY CHAIN CASE The calculation of unit wasting costs as well as the scope and the rate of wasting and its further application in projects of LEAN principles and tools in supply chains is shown on a particular case involving optimization of a supply chain in automotive. The presented case describes optimization of inbound logistics, particularly of transportation cost associated with transportation of components from suppliers warehouse to the one of a car maker. Initially, components were supplied by direct deliveries of 100 cbm full truck loads ( suppliers warehouse car maker warehouse and back) once a day. Back hauls were utilised by returnable packages of which amounts were equally corresponding to delivered components on weekly basis. However, empty packages destined to suppliers were neither allocated at a single place nor at the place of unloading components from a particular truck. A truck had to carry out number of picks to be fully utilised. If low number of packaging was available, collecting service provided by external company had to be used and so additional costs were caused. Initiated solution designed during the optimisation project is based on delivery of components by using Milk run system. The concept is built on two milk run deliveries per day by 120cbm truck and on back hauls returnable packaging are transported back to suppliers. Some changes on information system enable balancing amounts of forward and return flows on daily basis and synchronization of unloading and loading places to avoid additional transportation costs. Furthermore, accurate time windows for the suppliers and car maker warehouses has to be formulated and certainly followed in contrast to the previous system of delivery in which such time window were just vague and not respected. Tab. 1 provides data which are necessary for evaluation of a supply chain optimization in the case from automotive sector. Tab. 1 Data of lean supply chain optimisation Source: Survey conducted by the Department of Logistics, University of Economic, Prague, sponsored by IGA FPH, ID IGA [4] Identified benefits of this supply chain optimisation reache 20% reduction of transportation costs. Above cited data in tab.1 are used in a following analysis of supply chain process cost appraise regarding LEAN productivity..

4 5. DIFFERENT APPROACHES AND WAYS OF LOGISTIC COST ANALYSES When considering the above mentioned case and when controlling of a company sets a logistic costs of inbound logistics at 10 CZK/manufactured product (such costs are driven by all activities associated with transportation of material from suppliers facility to a car maker warehouse). Logistic managers have currently two main ways how to proceed supply chain cost optimisation. 1) Setting goal by identification of % logistic cost reduction in comparison to the previous period which is expected to be achieved in the following period by proceeding inbound supply chain cost optimisation. Target is formulated by using reports of logistic costs from controlling. 2) Analysing structure of logistic costs in current system regarding LEAN principle (identification of value added and non value added processes in inbound supply chain and allocation of costs to them) Ad1. In this case, optimisation of logistic costs based on inputs from current controlling system is achieved by reduction of unit costs by increasing transported volumes, like is described in 1. way of productivity elevation cited above. The role of waste in current improper allocation of costs to waste by logistic controlling is expressed in picture 2. When LEAN concepts should be used for increasing of productivity by waste reduction, the current cost appraise leads to 0 CZK/ transformed product reduction of logistic costs. 10 CZK 10 CZK = 0 CZK/transformed products The main reason is, that even if some waste is reduced (if ever it is possible to apply optimisation measures without demonstrated savings) it is not possible to prove positive effects such as cost savings and waste reduction by using data from current logistics controlling. Considering the provided case from automotive sector, application of Milk run deliveries doesn t bring cost advantage regarding the traditional cost assesment. Application of LEAN principles and tools in order to achieve formulated goals, like in the case, has to be supported by cost appraise of LEAN productivity (effect of cost reduction by 20% of logistic costs). This logic is expressed in picture 2. Fig. 2 Graphic expression of cost appraise of today supply chains Source: Own visualization

5 Ad2. Optimisation based on the 2. way. High level of knowledge about LEAN principles enables proper structuring of unit inbound logistics costs set at 10 CZK/transformed product and their allocation to costs of value added processes 8 CZK/transformed product and wasting processes 2 CZK/transformed product (The decrease of logistic costs by 20% gained by waste reduction. The waste is caused by material waiting or its non-optimal manipulation and transportation). Cost Appraise of wasting is a key factor for successful application of LEAN principles and methods. In addition to that, it brings new view on productivity of LEAN as there have been lack of proper cost appraise of waste in logistic processes provided by logistic controlling (see picture 2). When structure of logistic processes (logistic value added and waste) is incorporated into logistics controlling outputs, managers could more accurately identify real impacts of waste elimination on unit inbound logistics costs in current logistic processes. In picture 3 the difference between traditional LEAN cost appraise of logistics processes is expressed. Obviously, LEAN one provides proper structuring of cost drivers for managers decision making process in case of application of lean supply chains. As mentioned in the case above, transport costs could be divided into cost of transport capacity utilisation or rather unit cost of waste caused by not full utilisation of capacity (1,5 CZK) and cost of failures associated with returning of packages back to suppliers in a supply chain including waiting of trucks for being serviced at the facility (0,5 CZK). Fig. 3 Calculation of logistics cost traditionally and by LEAN Source: Own visualization 10 CZK 8 CZK = 2 CZK / transfered product Role of managers is difficult and so received data have to be clear, obvious and transparent. Considering 2 competitors when one of the companies has the current form of logistics controlling and so the managers are not able to identify the real cost advantage of lean. On a contrary, in a second company managers have available proper cost appraise of LEAN effects. Which of them undoubtedly keeps competitive advantage is absolutely clear. 6. CONCLUSION When managers should effectively and efficiently cope with permanently occurring problems it is inevitable to change their thinking and approaches. It is highly important to implement new concepts, methods and tools which would lead to increase of profit and financial situation of a company. Controlling undoubtedly belongs to managerial tools that cross the traditional managerial functions and so managers could more quickly and accurately make decisions. The game rules representing definition and competences of controlling are the same as cited at the beginning. However, the aim of this article is to draw attention to change of pitch (We are no ore present in market conditions of 20 th century in which markets were under saturated most of the time and so mass production was easily absorbed by them. Current pitch could be described as oversaturated global markets to which only individual approach including production could penetrate.) and to different tactic (new tactic of

6 controlling has to be not only cost apprising of value added processes but also of wasting which have not yet been allocated on unit of a product.) If exact costs of wasting and their drivers are not accurately identified in today supply chain processes, logistics controlling could hardly fulfil its function like auditing, measuring and participation on logistic costs management in lean supply chains. Using the opportunity of LEAN is so in hand of accountants and auditors. When they are not capable of appropriate cost assesment of lean supply chain processes there is no surprise that economies of scope are preferred to reduction of waste in processes. LITERATURE: [1] Available on: s.4 [2] The same source p.5 [3] Ohno,T.: Toyota Production System: Beyond Large-Scale Production. Productivity Press ISBN [4] Survey conducted by the Department of Logistics, University of Economic, Prague, sponsored by IGA FPH, ID IGA