In your view should all metrics be routinely shared with customers?

Discuss the concept(s) in the above questions. In your analyses, use some of the terms and theories in the eText to support your argument(s).

this is chapter 14 from the book
all the information needed from the book is here

CHAPTER 14
Measuring and Managing Logistics Performance

Noel McGlynn Microsoft

LEARNING OBJECTIVES
* Understand basic forms of performance measurement used in a logistics context such as tachographs in road haulage and space utilisation in warehousing.
* Illustrate the trend towards measurement of a wider array of activities and the eight driving forces behind this trend.
*Explain why many LSPs now routinely share key performance data with customers.
* Understand the role of benchmarking in the context of logistics performance management.
*Identify how many and which key performance indicators (KPIs) to track, how they are embedded within the organisation, how they fit with wider company objectives, where the requisite data will come from, and who (at what levels within the organisation) should receive the information generated by these KPIs.
*Understand in particular warehouse/inventory metrics and total landed costs.

INTRODUCTION

The traditional practice in logistics service providers (LSPs) and related companies has been that managers in these companies do not spend substantial periods of time on measuring and managing performance. Instead, they tend to focus only on operational execution (i.e. getting the job done), and meeting only the most basic of measureable criteria. As a result they are apt not to spend much time on performance measurement, except only where deemed absolutely necessary. This is changing, however, driven mainly by competition and especially as a result of increasing demands from customers who want to be assured of effective management of their business. This chapter is thus concerned with the measurement and management of performance in the logistics context. As such it endeavours to bring together all of the various logistics nodes, links and flows discussed in Part Two of the book and outline how logistics and supply chain performance can be measured and managed.

Chapter 14 comprises seven core sections:
*Basic measurement
*A contemporary viewpoint Driving forces for performance measurement
*Selecting the best measures
* Commonly used metrics Inventory/warehouse related metrics *Logistics costs performance

BASIC MEASUREMENT
The performance measures that logistics companies traditionally spent some time on are those measures that were either very basic from an operational viewpoint, or imposed on them by law. As such LSPs would have concerned themselves with ensuring that statutory requirements were met and that their financial obligations regarding preparation and filing of annual accounts and so forth were given some time and focus. For many small and larger companies alike, the main focus of this work may have been to ensure that tax affairs were in order and that the correct returns to the relevant government agencies were made. The overall profit margin of the company would also have been recorded and used as a key part of internal reviews, though little of this information would have been shared outside the company. The general exception to this would be the annual report which would have to be filed and, depending on local legislation, be publicly available. LSPs providing transportation have, for a number of years, been required to record their transport operations. A device known as a tachograph is fitted to a truck and is used to record the speed of the truck, distance travelled and any breaks taken by the driver. It is an instrument used by many police forces worldwide to ensure that laws relating to the maximum hours a truck driver can work are recorded. Although there are variations among different countries, the rules are designed to limit continuous driving time and detail minimum breaks and rest periods. For vehicles over a certain payload, often defined as four tonnes or more, the tachograph is considered a legal requirement, and must be regularly tested to ensure that it is in good working order. In certain geographies the results from tachographs must be recorded and filed by the truck operator. The tacho- graph is still in use, though more recently instead of recording the relevant information onto a paper disk, the digital tachograph records the information onto a smart card or digital memory device. Another area that traditionally has been a focus of measurement by LSPs has been around warehouse and other resource utilisation measures. These would typically include total number of pallet or carton spaces consumed versus total available, or simple measures of total space consumed within the warehouse. Some measure of throughput would generally also be looked at, for example the total number of shipments received. At the broader company level the key inventory measure, from a financial perspective, would be to measure inventory turnover (as already described in Chapter 10). For road transport companies, the basic operational measure could include total number of deliveries successfully completed versus dropped deliveries (a term sometimes used to refer to failed deliveries, i.e. the freight that could not be delivered for whatever reason). An important point to note is that such traditional measurements would generally not have been shared with or presented to the customer. These various measurements would have been analysed internally and customers in general would not be overly concerned with them as long as their basic needs had been served.

A CONTEMPORARY VIEWPOINT
Traditional LSPs are finding that, since the 1990s, their business is either undergoing major change in order for them to hold their market position, or they are moving into niche markets. Most successful warehousing companies for example have had to invest significantly in IT, with warehouse management systems (WMS) used to record all movements within a warehouse, often controlled by a radio frequency (RF) handheld computer scanner, now seen in most modern warehouses. Traditional transport companies too have seen significant changes, with many of them moving into providing warehousing services in addition to their transportation offerings. This physical flow of product through the supply chain is now joined by the flow of information, which records details of each transaction every time a pallet or box is touched or altered. Today’s third-party logistics service providers (3PLs) not only have to display expertise in operational management, they must also keep track of each transaction and ensure that they and their customers and agents can have access to information relating to this flow as and when it is required. In fact such is the importance of monitoring this information that many 3PLs now have dedicated staff whose job it is to record data that can be used in the development of metrics. Metric reviews are thus now an important part of all business reviews, not just in logistics. In the past where the management of the company would not have reviewed any performance results, now such information in the form of metrics and key performance indicators (KPIs) 1 are shared with staff at all levels and in all functions, with partners and agents, and most importantly with customers. Indeed most large customers now hold formal business reviews with their 3PLs where the presentation of such KPIs is a key part of the meeting’s focus. Instead of providing performance data on a few select topics, logistics businesses now see measurement of the performance of all operational areas as a common requirement from their customers.

DRIVING FORCES FOR PERFORMANCE MEASUREMENT
At least eight driving forces behind the increased use of performance measurement in a logistics context can be identified.
1. Increased reliance on contract manufacturers Outsourcing by manufacturing companies keen to focus on their core competencies has seen them outsource more supply chain activities. Many of the large electronics companies for example have long since stopped manufacturing their own products and instead for a number of years have been outsourcing their manufacturing to contract manufacturers (we discussed the distinction between contract manufacturers and OEMs in Chapter 3). Companies such as Flextronics Inc and Foxconn are now responsible for manufacturing numerous electronics items from mobile phones and electronic organisers for Apple, to computers and printers for OEM customers such as Hewlett-Packard, Dell, and games consoles for companies such as Microsoft and Sony. By outsourcing manufacturing and logistics, these companies can spend more time focusing on their key competencies such as research and development, sales and marketing, and indeed SCM. As these companies outsource more and more elements of their business including logistics, they tend to rely more on tools that can help measure the performance of their suppliers.
2. Strategic importance of LSPs to supply chain success The strategic importance of LSPs cannot be underestimated, as it is often these companies that have a direct impact on the end customer. In an era of online purchasing and marketing through the various media channels, certain businesses do not ‘touch’ their customers until the point of product delivery, and this latter activity is often sub- contracted to an LSP. A late delivery, or indeed a negative service encounter at point of delivery, could affect the consumer’s impression of the product or the retailer. And this could be the fault not of the seller, but of its LSP.
3. Adoption of manufacturing management principles In the recent past 3PLs were increasingly being asked by their customers to adopt more and more world-class manufacturing based principles such as just-in-time (JIT), total quality management, six sigma, and more recently lean principles among others. Quality assurance management too is often a prerequisite, with most progressive 3PLs ensuring that they have been accredited with ISO certification. Motorola, for example, works very closely with its logistics providers to implement sixsigma quality throughout the supply chain. This push for mainstream LSPs to become familiar with such practices has forced them to ensure that they are better positioned to measure key areas of performance.
4. Impact on customer experience Customer satisfaction is seen as an important business philosophy. Today’s consumer is much better informed and often has much more available choice. To ensure that customers (in both the B2B and B2C contexts) are satisfied is a key requirement for any business looking to be successful in the long term. As such this requires companies to better understand performance through quality programmes, customer polls and customer service metrics.
5. Increased competition A focus on commercial goals is never more important than in a market with high levels of competition. Today’s LSPs compete not only against local competitors, but in more and more areas the presence of a multinational or global 3PL is almost always also seen. In recent years the merger of a large number of LSPs into multinational players has started to change the face of the logistics industry. For example DHL’s mergers and acquisitions have allowed it to grow not only into one of the largest logistics companies globally, but also one of the largest employers in the world for any industry. The larger 3PLs generally bring financial stability that may allow them to take certain risks in order to gain market share. Thus for all smaller competitors, it is important that they better understand and control their costs. Although the amount of work outsourced to 3PLs continues to increase, the profit margin of most companies operating in this industry is being eroded, and most now operate in a low-margin business that requires significant capital investment. Measures need to be available to give management good visibility of resource utilisation, and importantly reports should be detailed to show in what specific areas of the business profits or losses are being recorded.
6. Information technology improvements Improvements in the IT employed both in warehouses and to control and track shipments have led to a greater availability of data. These data can now importantly be accessed and presented as useful information without significant employee input as many reports can be run from systems electronically. As these systems become more and more advanced, data are often available in real time in the form of automatic emails, via electronic data interchange (EDI) onto vendors’ and customers’ systems, or via web reporting tools. The information reported should also be less prone to error and so can be better used for important decision-making.
7. Empowerment practices Empowerment of lower level employees with tasks and responsibilities that were once reserved for managers has been a tool used by many successful companies to improve employee productivity. Within the logistics industry this has been used to good effect with employees allowed to make decisions quickly so as not to hold up receipt of freight or an important customer shipment. However, it is important that management is more conscious of the potential negative impact of mistakes made by those employees who are empowered with more task. As such, management needs to make better use of KPIs to monitor their employees’ performance.
8. Employee motivation Use of performance metrics as a motivation tool was initially seen in advanced manufacturing operations, but is now also common within logistics operations. In order to motivate employees to ‘beat’ the previous number of pallets received or orders executed, for example, some companies put more and more effort into communicating such metrics to all employees. Sometimes public recognition within the workplace for the best performing team is enough to drive the whole operation to higher levels of productivity; in other operations these metrics may need to be linked to employees’ rewards to generate the same results. If metrics are used in this manner it is important to stress, however, that they must be designed to reflect employees’ controllable actions.
Selecting the best measures
In the area of performance measurement a useful maxim is to ‘measure results, not activities’. This is valuable advice, as it is all too easy to focus on simply assimilating data without necessarily understanding how these data may be used. When first trying to design a set of indicators, the focus should not as such be directed towards what data may be easily avail- able, but rather towards what benefit one hopes to gain as a result of having these measures in place. For example, within a warehousing environment, one may measure the number of trucks that arrive to collect goods rather than measuring the number of pallets loaded onto trucks, the latter being a more useful result rather than simply an indication of activity occurring. In practice many metrics are developed without much thought put into what the company can do with the information collected, so as part of the process to develop the right measures one should attempt to focus on how they may impact the operation. The majority of measures should be focused on quantitative results; namely measures that have their basis in numerical data. Although it is always good to add some qualitative measures to a set of KPIs, it is very important to stress that measures based on raw data can often be better for accurately comparing performance over time, and indeed for predicting future results. Also quantitative measures should in general be more reliable when comparing over time, as long as the data used to generate them can be replicated without error.
Benchmarking costs and other variables
When deciding on which measures to use, a company should always ensure that bench- marking against other competing companies is not made impossible by its choice of metrics. Companies should always look to emulate best in class; however, without benchmarking, it can be very difficult to do this. Some larger logistics companies use their marketing budgets to try to convince not only their potential customers that they are among the best within their industry, but also attempt to persuade their competitors that this is also the case!
The logistics industry is one that relies on referrals from not just customers, but also from competing firms, where the referring company may not have the required capacity (in terms of warehouse space, transport capacity or other capabilities) but wants to fulfill its customer’s requirement. For one firm to give business to another in this manner, it is very important that some benchmarking of performance can first take place, and that both parties can see through the marketing and sales pitch put forward. In order to benchmark against the industry, the company needs to use a similar set of measures in order to map performance against the companies being benchmarked. Thus the time to first consider benchmarking is when a company is initially putting together a set of performance measures. Benchmarking should be seen as a continuous process, and not as a one-off project. Today’s logistics industry is very dynamic and benchmark levels of performance can constantly change. Benchmarking logistics costs from one supplier to another can be a complicated task as there are almost no standard cost templates used by different firms. It also can be quite difficult for the 3PL’s customers to estimate their specific business requirement at the request for quotation (RFQ) stage. As such the 3PL might quote a price against a given scope of work, only to find that, once it starts the business, the scope of work does not represent all of its customers’ requirements.

Number of metrics to report
Evaluating the optimum number of measures is always a difficult task but is one that should be given some thought. Too many metrics will result in an unnecessarily large scorecard, with measures of lesser importance having the effect of adding just ‘back- ground noise’ while simultaneously making it an arduous task to actually identify the critical ones. The optimum scorecard will highlight the vital indicators needed to monitor the health of the organisation’s key organs. With logistics companies being so process focused, the measures used will need to ensure that they can measure the performance of these processes. As such it will be important to tailor measures to reflect the actual work performed in the operation. Prior to putting together a set of measures, the company must first ensure that its processes and procedures are documented, as often it is only after completing this exercise that management will fully understand all of the different processes employed. If a new process is introduced, for example to meet exacting customer requirements, then a new performance measure should be developed in tandem.
Designing key performance indicators
Once a company understands the need for performance indicators, and also has an understanding of what the right measures may encompass, the design of a set of KPIs is the next step. Before KPIs are introduced, the company itself must be clear about its own aspirations (i.e. what it regards as ‘success’) and how performance can be measured against this.
As we noted above, globalisation of the logistics industry has been seen in recent times with the acquisition and mergers market for LSPs being increasingly busy. As some of the largest 3PLs strive to have a footprint globally to support international customers, measurement of the performance of different entities takes on an additional dimension. 3PLs now have to compare sites in completely different geographies against each other as they may be serving the same or similar customers. Geodis for example provides ware- housing solutions to IBM across Europe using common metrics where possible. Such common sets of metrics between distant sites is most important, and might be required as part of contractual obligations. Indeed as companies grow into differing markets, so too is there often an increase in the distance or boundary between senior management in headquarters and the local operations. In order to close this apparent gap, management at headquarters can use the timely flow of information and performance indicators to allow them to see what is happening. Drafting of metrics is a task that needs to be approached with some degree of patience. Typically many measures will be reported and tracked before a key set will emerge. It is important to consider at first a large range of potential measures, and not to shortlist too many until an attempt is made to trial them. Expectations of how a metric may perform often change quickly once results start to be seen. During this period of testing new metrics, it can be useful to see if a baseline, against which future performance may be measured, can be determined. Imposing metrics on the shop floor is often not a good idea. Resistance from warehouse and transport operations can often result in incomplete or incorrect data being recorded. In the same way in which it is important to communicate the company’s objectives with all employees, so too is it important to ensure that shop-floor employees are in agreement with any metrics introduced. Employees must understand the measures, take ownership of the data and also stand by the results. Instead of senior management dictating the format of metrics, employees should be asked for their own ideas of what areas need measurement. Very often the most knowledge about the operation lies with the shop floor, and management, without realising it, can often be out of touch with the reality of problems faced daily within the operation.
Sources of data
As part of the activity to develop a set of metrics, a company should look at what resource it has available to contribute to the data needed. Information technology is an area of key investment for most logistics companies. It is also an area where companies need to first look for data that will allow them to generate metrics. A system controlling processes and managing the huge number of transactions is also a system that could potentially be able to generate automated reports. System-generated data should help reduce the possibility of errors in data collection, increase reporting time by having the ability to operate day and night, and, most importantly, limit direct employee involvement and control the costs of metric development. Operational employees can also make a valuable contribution towards providing certain data, which is otherwise difficult to source. Logbooks for shipments and warehouse capacity reports, for example, are traditionally the type of reports that employees may measure manually, though advances in warehouse systems mean that the majority of measures no longer need to be manually derived.

COMMONLY USED METRICS
When designing a set of KPIs, the logistics company must take into account any requirements that its customers may have for specific reporting. This does not necessarily mean that the metrics should simply be what the customer demands, however, as the customer may not understand the full business offering. Companies should appreciate that there is a need to differentiate between the measures reported to different levels within the organisation. KPIs that may be very important to the warehouse manager, for example, may not prove useful for senior management. When creating a set of metrics it is sometimes useful to split the metrics into three differ- ent categories, catering for senior management, operational management and functional operations. Figure 14.1 illustrates metrics for each of these three categories. Many of these metrics will be discussed in more detail in the next section.

Level 1 Senior Management
• Warehouse utilisation %
• Weeks of stock
• Receiving OTD
• Profitability/Net revenue

Level 2 Operational Management
• Warehouse utilisation %
• Aged stock reporting
• Picking effieciency %
• Labour and resources employed
• Receiving OTD
• System downtime

Level 3 Functional Management
• Number of receipts processes same day/next day
• Pick requests by unit, carton and pallet
• Order backlog opening, mid-day and close of business
• Number of pallets/cartons stored/days of product in storage
• FTE and temporary labour employed by functional area

Figure 14.1 Category of metric reporting (OTD � on-time delivery; FTE � full-time equivalent, i.e. the equivalent of one employee)

In practice, most LSPs tend to have a generic set of metrics, and also additional customer- specific metrics, which would include measures relevant only to that customer. If this approach is taken, then it can result in customers thinking that they have been handed a complete set of customised metrics, while at the same time requiring the company only to add a small number of specific metrics for each customer, with the remainder being generic to the complete business (in effect this is a form of mass customisation). In certain situations, for example where a 3PL is managing an onsite warehouse within the customer’s manufacturing plant, one can find that almost all of the metrics are tailored to the operation. This in many situations is a result of the onsite operation often using the customer’s IT systems rather than the warehouse management system (WMS) used in other sites operated by the 3PL.

INVENTORY/WAREHOUSE RELATED METRICS
External metrics for a warehousing-based operation need to be specific to the activities carried out. The following sections give a taste of the type of measures that a typical warehouse operation may employ.

Receiving
Receiving metrics are generally the first to be recorded, because receiving of product into the warehouse is often the most important transaction. If the receiving process is well thought out and implemented, then one would find that stock accuracy and prod- uct integrity should also be managed well. Indeed if product is received into the correct location, and in the correct quantity, then the subsequent picking process too has a good chance of being problem free. Receiving time acts as a key metric in this area. Most WMSs can track the time between a shipment arriving into the warehouse through to it being formally received onto the WMS. Depending on how well developed the WMS is, advance notification of inbound shipment from the freight system can automatically initiate the inbound process prior to the shipment arriving. This advanced shipment notification (ASN) is used by the warehouse manager to determine workload and space requirements. Once the shipment arrives, the receiving process will generally include a physical inspection before the formal system receipt can be completed. The specific metric can vary by facility but should always try to measure the effectiveness of receiving processes, which will include the following:
* Delivery paperwork detail is correct, ensuring exact delivery location, business unit and company delivering the product are mentioned.
*Part numbers, lot numbers and purchase order numbers match those on the paperwork and the ASN.
* Product is physically inspected with unit/carton or pallet count completed, product inspected for any signs of in-transit damage, repackaging, etc.

Adherence to the processes listed above is a basic requirement before one would measure the core metric in receiving, namely ‘receiving on-time delivery’. This metric refers to the ability to receive both systematically and physically product that has been shipped to the warehouse within a set time, generally same day or next day.

Put-away
For ease of understanding we will assume that receiving and put-away are distinct tasks, though it is common to find both combined into one process and completed by the same personnel. Put-away involves physically moving product that has just been received onto the IT system to a pallet or carton location where the product will be stored. Within some environments, product may at this stage be brought directly to the point of consumption such as a line-side kanban. Metrics should include activity measures such as number of pallets, cartons or units put away, which in turn could be compared against the resource available to produce a productivity measure. Percentage of product put away within a stated time is another key metric. This is very important, as many warehouses might have good receiving metrics, but may end up having a lot of product sitting on the floor yet to be put away at the close of business.

Inventory accuracy
Cycle counting of product is an activity that customers usually take a keen interest in because the material being counted generally sits on their balance sheet rather than the 3PL’s balance sheet. Inventory metrics really act as a measure of operational performance, and reflect the adherence to processes, rather than the performance of the inventory team who conduct the cycle counts. For example, if the receiving team make mistakes and put product into the incorrect aisle or stocking location, this may only be noticed during cycle counts. System-generated cycle counts, often completed by the inventory team using a hand- held radio frequency (RF) terminal or alternatively a printed stock report, are used as the starting point for compiling inventory metrics. More advanced WMSs have the capability to generate cycle counts automatically, often taking into account any product classification (such as ‘ABC’ classification), which may exist to determine when products of a certain value should be counted. In order to ensure that accurate counting is maintained it is important that count sheets, or counts using the RF terminals, do not give visibility of the system quantity to the counter. Cycle counts can be completed where a complete rack or segment of the warehouse is checked in sequential order. Random counts will require the cycle counter to count all inventory held in certain pallet locations across the warehouse. Part counts may exist to count all locations where a particular product is stored, and empty cycle counts should direct a counter to locations where the system does not show any stock as stored on the assumption that if the counter finds anything then it indicates an inventory accuracy problem. Inventory accuracy may also need to be compared against that stated on the 3PL’s WMS and the customer’s own system. From a financial auditing perspective, there can only be one system of record, but in many environments dual systems without real-time EDI linkage are seen. In some warehouses, dual keying of stock transactions onto two systems can be seen, though every effort should be made to avoid such a system solution, and in these environments more stringent inventory control metrics need to be designed and monitored.
‘Unadjusted inventory accuracy’: inventory metrics should show ‘first count results’, i.e. the initial count results before the inventory team carry out any stock reconciliation.
*‘Adjusted inventory accuracy’: once any required adjustments have been carried out, the inventory should be recounted and the results published.
*‘Net variance’: this is the metric used to compare the total quantity of units for all part numbers on the system versus that counted. *‘Absolute variance’: takes into account the complete variance, i.e. it is arrived at by adding any positive and negative stock discrepancies. If reported absolute variance was high, but net variance was low, it would signal that stock was out of position.
It is important to remember that inventory metrics can often highlight a particular problem within warehouse processes. In order to improve inventory accuracy, improvements need to be made in either the design or execution of the warehouse transactions. Although most inventory metrics will be quantitative in nature, there should be some effort to also record some qualitative measures such as ‘housekeeping’ or ‘completion of cycle counts’. Measures may exist to determine the length of time that inventory is sitting in the ware- house. An aged stock report, detailing by part number the number of weeks that product is in stock, is the easiest of these metrics to report. Alternatively an overall view of stock movements within the warehouse can be given with a report outlining the number of inventory turns (as we saw in Chapter 10 this is the number of times on average the complete stock in the warehouse moves in and out).
LOGISTICS COSTS PERFORMANCE
Total landed costs Financial measures are obviously key metrics for 3PLs, and indeed ones that their share- holders will place ultimate importance on. The customers of 3PLs too are also becoming more focused on analysing their overall logistics costs, and comparing them across different regions and product lines. They are demanding more and more information to allow them to better understand the cost of their logistics activities. We discussed earlier in the book the growth that has taken place in recent years in both outsourcing and offshoring. Once the various strategic issues concerning whether or not to outsource and so forth have been resolved, companies need a tool which will enable them to compare alternative sources while taking account of all of the various costs that will be incurred. This is the concept of total landed costs and takes into account the following costs: ● ● ● ● ● ● ● ● ● Vendor (i.e. material) and packaging costs
Transportation charges
Working capital employed/opportunity costs
Costs associated with risk migration
Broker fees
Insurance costs
Taxes and duties
Management costs
Reverse logistics costs

The concept of landed costs allows managers to make better decisions regarding raw material sourcing, and rather than just going with the lowest possible product cost, companies can compare the overall financial impact from using different potential suppliers in different markets. Software tools are available that allow importers to compare landed costs. OOCL Logistics  for example has launched a software tool called ‘Landed Cost’ which allows such calculations to be made. Costing materials on an ‘ex works’ basis is not adequate to make a purchasing decision and so it is important that all related costs are considered, and compared. For example:
Freight. The further from the intended destination that raw materials are sourced, the greater the freight costs. Even if freight is planned to be moved via ocean, the greater distance will result in longer lead times, and the chance of moving at least some product via air (at up to 10 times the cost) will increase.
*Carrying costs. Longer transit time will often lead to higher inventory in the supply chain, which in turn will increase the working capital employed and the risk of obsolescence, damage and shrinkage. *Duty. Local sourcing is often the only way to minimise potential import duty of raw materials. Although some countries offer certain duty avoidance measures for materials bought overseas, the risk of paying higher rates of duty and inbound taxes, along with charges for more complicated clearance processes, increases.
*Packaging. The longer a product is in transit, the better the packaging needs to be. Also the potential for using re-useable packaging decreases.
*Warehousing. Longer lead time for products may increase buffer inventory storage locally.
* Localisation. Converting product for a local country may be cost prohibitive.

As freight costs can change dramatically over the short term, due to changing fuel and security surcharges and differing demand patterns for cargo along with changing air and ocean timetables, it is important that companies continually review their landed product costs by having metrics to measure these costs on an ongoing basis. Unit-based costing, which often has its basis in management accounting principles such as ‘activity-based costing’ (ABC), is another important measure. Manufacturing and distribution companies need to understand the entire logistics costs on a per SKU (stock-keeping unit) basis because small changes in product specification or packaging can have a dramatic effect on the overall logistics costs. Nokia have for example tried to standardise its mobile phone packaging, so that different models use packing that is the same size and differs only by print. This has given the company an advantage over competitors who appear to have different packaging for each model.
3PL cost models In the highly competitive logistics market, 3PLs are often placed under significant pressure to ensure that their response to requests for quotations (RFQs) are the most competitive, while at the same time ensuring that they do not engage in business that may run losses during the duration of the contract. In order to manage these pressures, many 3PLs use a number of different cost models.

(i) Cost plus margin Cost plus margin is often the preferred model for 3PLs engaging in a new business where the statement of work is not detailed, or where the customer demands complete transparency of all costs. This model is based upon a general assumption that space will be charged at a fixed cost per square or cubic metre, and staff costs will generally be presented as a loaded cost to include base wages and related employer costs including contribution to social taxes, health insurance, pensions and so forth. Material handling equipment (MHE) such as forklift trucks, racking and any other equipment used would generally be charged as a depreciated annual charge. IT charges would usually be the next item to be listed in a schedule of charges and may be split between user licences, IT support and development, in addition to depreciation for equipment used including warehouse management systems and office servers and computers. When all charges are identified, the 3PL will generally then try to negotiate a mark up to cover corporate allocation or management overhead. Finally the required profit margin will be added. The main advantages with this type of model are: ● ● It provides complete transparency for all parties involved. Risk is reduced for both parties – the customer should be better able to budget and the 3PL will also live in the certainty that its costs should be covered. The main disadvantages are: ● ● ● There may often be reluctance for the 3PL to drive continuous improvement in order to reduce cost as the 3PL’s profit margin increases as the total cost increases. Resources may be fixed at a level that meets the peak season demand, thus resulting in excess cost during quieter periods. Also resources employed may not be adequate to meet business requirements. From the 3PL’s perspective there is little opportunity to make high profits as it will be very difficult to negotiate a margin higher than that quoted by competitors. (ii) Transactional pricing Transactional pricing would generally see a 3PL use all its available resources across multiple customers and quote a unit rate for standard warehouse activities: ● ● ● Receiving charged per carton or per pallet.
(ii) Storage charged per carton or pallet on a weekly or monthly basis.
(iii) Picking and handling out at unit, carton or pallet level.

These typical charges would be fully inclusive and include all staffing, space and equipment. IT setup charges would likely be charged as part of the original account project setup costs. The main advantages of this type of model are: ● ● Resources are generally not fixed by the customer. Thus during the off-peak period, the customer does not have to pay for space or labour for which it does not have a requirement. The 3PL will be highly motivated to drive efficiency at all stages of the process as any savings made will result in higher profits. An efficient warehouse operation running to capacity should make it possible for the 3PL to make a larger potential profit with transactional pricing in place with its customers. The main disadvantages are: ● ● ● The customer may not always get the customer service that is required unless it separately pays for fixed office resource. The 3PL needs to ensure that special requests are charged separately as the base rates should in general over cover a minimum level of service. The customer does not have transparency to resources employed supporting its business. (iii) Alternative pricing models As the service offered by 3PLs can involve a range of services, some cost models can be highly complex and may include an element of fixed and variable costs that may be billed on cost plus or transactional basis, or indeed any combination of each. Often it is critical for customers to have certain resources within the 3PL dedicated to them while still ensuring that other resources are only employed as required. For example the customer may decide to pay for a dedicated account manager, but may only pay space on a pallet or carton basis.

SERVICE LEVEL AGREEMENTS (SLA)
As well as negotiating and managing LSPs or other supplier costs, companies need to also ensure that a mutually agreed and understood agreement is in place between both the company buying the service and the company providing the service. The document that covers this area is commonly known as an SLA – a service level agreement. It is typically within the SLA that the selected performance metrics are detailed and elaborated. Typically SLAs will include details of: ● ● ● ● Rollout and duration of the service or process being purchased Scope of services Areas of responsibility Performance metrics

Learning reviews
In this chapter we looked at basic forms of measurement in use in logistics sys- tems, the trend towards measurement of a wider array of activities and the driving forces behind this trend. Customers in particular may attempt to dictate what metrics are used. It is important to remember that although customers may have specific requirements, which should be met, they may be out of touch with the day-to-day operation, and so may not be best positioned to decide how the complete metric set should look. Once the metric set has been decided, we saw that the current practice has evolved to such an extent that metrics are routinely shared with customers. We realised that metrics are never set in stone, and they can and indeed should change as processes alter and the company’s commercial focus changes. Before implementing a set of measures, we must first understand why this task is important, and, to determine what type of measures should be implemented, it is important to get a good understanding of what the driving force behind the overall activity is. Metric development is a complicated activity, but collection of data should nevertheless not be allowed to take too much time. Operational resources must be fi rst prioritised to ensure that operational tasks are completed before data collection and related metrics generation are started. We examined where metric data should come from, which and how many KPIs to track, and importantly who in the organisation should receive the data and reports generated. We also looked in this chapter at benchmarking of logistics costs and other variables. Commonly used metrics were also reviewed, in particular warehouse/ inventory metrics and total landed costs. The various costs associated with using LSPs were also reviewed and the framework for service level agreements outlined. This chapter concludes our series of chapters (Part Two of the book) dealing with how to ‘do’ logistics and emphasising the key flows in supply chains. The next, final part of the book now moves on to deal with strategic issues, for example how to design effective and efficient supply chains and how to deal with important issues such as risk and sustainability.

Mangan, John, Chandra Lalwani, Tim Butcher, and Roya Javadpour. “Global Logistics and Supply Chain Management.” Cengage. John Wiley & Sons, 2014. Web. 08 Apr. 2016.