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It’s one thing for a manufacturer to determine how many widgets are required to meet the customer’s needs for product. But quantifying a service is quite another matter.
Or is it? Fast Logistics, a logistics service provider headquartered in the Philippines, discovered that it could meet customer demand by treating its offering as a series of discrete products. A certain type of truck needed in a particular lane? That’s a SKU.
The demands of Fast Logistics’ customers are intense. The provider specializes in logistics for fast-moving consumer goods, serving such major brands as Nestlé, Johnson & Johnson, Del Monte, Unilever and even automotive parts on behalf of Mitsubishi. With business units overseeing transportation, warehousing and distribution, it operates around 2,000 trucks and nearly 7 million square feet of warehouse space. Volumes amount to approximately 20,000 twenty-foot equivalent units (TEUs) a year, and annual revenues are $200m.
But even the solidest customer base doesn’t insulate a provider from the vicissitudes of organizational behavior. Like many businesses, Fast Logistics found itself plagued by a lack of direction from management, an inadequate sense of accountability for highly complex processes, and a “siloed” mentality.
On top of that, Fast was dealing with increasing variability and demand fluctuations within its customer base, a problem that becomes intensified for a logistics provider serving multiple clients. The company was increasingly unable to plan for the right number of trucks, containers and warehouse space.
As a result, it was failing to execute on key service points. The numbers were dismal: an on-time pickup performance of 70 percent, delivery record of 40 percent, truck availability at 50 percent, and a planning horizon that stretched no longer than a week (and was sometimes as short as one day). Fast figured it was losing around $3m a year because of these service shortfalls.
With the appointment of Ike C. Castillo as its new president, Fast set out to correct the problems. He sought to close the planning gap through introduction of a two-pronged, integrated system: a weekly tactical meeting for the deployment of resources, coupled with a more strategic, long-range approach – in essence, a sales and operations planning (S&OP) process tailored to a provider of services. Henceforth, each piece of equipment, square foot of warehouse space or distribution service would be treated as a physical part, for purposes of forecasting and fulfilling demand.
A Two-Part Puzzle
The two pieces of the puzzle were dubbed FAST (for Fast Alignment and Synergy Team) and FIRM (for Fast Integrated Resource Management). FAST is the tactical planning process, focusing on the current month and aligning all service aspects through a series of weekly “synergy” meetings. It requires active participation of all business-unit leaders, with a consequent end to the siloed behavior that had frustrated communication up to that point.
FIRM takes a more strategic view of planning. Castillo calls it “the real meat of our S&OP.” It involves the tight integration of five work streams: business development, customer requirements, operations capacity, finance integration and executive. They’re all invoked in Fast’s workings with some 250 transportation providers, and tied to a structured schedule of monthly meetings.
The five streams serve as guides for employees’ day-to-day tasks. Their various responsibilities include:
Business Development focuses on the acquisition of new accounts, generating the best possible offer based on information about volumes and demand submitted by prospective customers.
Customer Requirements, spearheaded by sales and marketing, captures the group’s forecasted output and translates it into units such as container vans, TEUs and fleet characteristics.
Operations Capacity ensures the availability of units dictated by the Customer Requirements group. It also recommends any needed capital expenditures.
Finance Integration compiles figures provided by Operations Capacity and allocates budgets to support revenue growth targets supplied by the Business Development and Customer Requirement functions.
Executive, consisting of the company’s two top executives, analyzes and signs off on the recommendations of Finance Integration.
Fast launched FIRM with the intention of developing a plan that covered a minimum of three months. Eventually, it would stretch the planning horizon to six months. At the same time, FIRM would tackle any incidents of misalignment among various functions. It would require the active participation of senior management, “who hold themselves accountable to execute this consensus operating plan,” Castillo says.
Manufacturers might find familiar the six steps that Fast took to implement the logistics version of S&OP:
--Conduct a thorough assessment of all business processes,
--Train all key supervisors and managers in the reviewed processes,
--Appoint S&OP leads and process owners, with participation from top management,
--Redesign key processes,
--Pilot an S&OP cycle in one of the company’s three service regions, with a three-month planning horizon, and
--Recalibrate processes and metrics, then implement them on a nationwide basis and establish a six-month planning horizon for logistics resources such as trucks and container vans.
Measuring Revenue Achievement
Fast measures the success of the S&OP program through a monthly target for forecast accuracy and budget achievement. The numbers are reflected in a “Total Revenue Achievement” metric issued for the year.
Results to date show steady improvement in key areas. Annual revenue growth has risen from 10 percent to 16 percent. Net income has gone from a 1-percent decline to 10-percent growth. Pickup and delivery performance, previously at 70 percent and 40 percent, respectively, have improved to 99 percent. Truck availability, despite a move away from ownership of vehicles, is up from 50 percent to 100 percent.
That lost-sales calculation of $3m a year has shrunk to $300,000, and Fast is working to improve it further. Says Castillo: “We’ve started converting reds into greens.”
And the most compelling metric, customer satisfaction, is also on the rise, moving from 3.2 to 3.6 on a scale of 5 between the first and second halves of 2012.
Castillo acknowledges that S&OP is tougher to apply to a services environment – especially one involving multiple clients – than a typical consumer manufacturing operation. But careful “tweaking” of the concept, through the combination of short- and long-term planning efforts, allowed Fast to adapt the process to its requirements.
A service-oriented business need not embrace a sophisticated planning or forecasting tool in order to experience a successful transformation in that area, Castillo adds. The trick lies in redefining and tailoring the process to the company’s specific needs – and those of its customers.
What’s really required, however, is a degree of patience. Every new S&OP effort takes time to mature. Fast needed 18 months in which to realize the potential of its FAST and FIRM initiatives. “There is no quick fix in a delicate process such as planning,” Castillo says.
Customers, too, need time in order to realize the benefits of a logistics-based S&OP effort. In the meantime, they must be willing to share detailed information with the service provider.
“The kicker is when customers start seeing the return to them,” says Castillo.
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