Use of IT Brings 'Net' ProfitsTo Logistics Management

Use of IT Brings 'Net' ProfitsTo Logistics Management<@VM>Logistics as Information<@VM>Assets in Perpetual View<@VM>A Netcentric Future?<@VM>An Internet Start-Up Says It'll Deliver

By James Schultz

In today's abundant economy, staying in business is less about supply and more about demand: Managers must move already cached goods as rapidly and cost effectively as possible.

To do so, practitioners of logistics management in the public and private sectors are applying Information Age techniques as never before to improve internal efficiencies, external deliveries and customer satisfaction. At stake are billions of dollars worth of business.

Overall, 1999 logistics expenditures in the United States amounted to 9.9 percent of the nation's gross domestic product, or $921 billion, as estimated in the latest "State of Logistics Report," issued jointly June 5 by the Bridgeton, Mo.-based Cass Information Systems Inc. and ProLogis of Denver.

Of that figure, 'third-party' logistics service providers — those that bundle together a variety of logistics offerings for clients in government and industry — amassed an estimated $45 billion in gross revenue.

If expected market growth continues, logistics services revenue in 2000 should increase by roughly 10 percent to $50 billion. Even that figure may be conservative, with perhaps another $4 billion possible before the end of the year.

Robert Delaney, co-author of the logistics report and a Cass vice president and ProLogis consultant, estimated that at least 100,000 companies nationwide are involved in one or more aspects of logistics.

He credited a series of congressional bills in the late 1970s and in 1980 deregulating the transportation industry as an essential, early motivator in a steady, 18-year-long logistics-industry expansion that, like the rest of the U.S. economy, continues. More recently, logistics profits can be directly tied to inventory-control innovations that depend on the blossoming and sophistication of Internet-related technologies.

"In a nutshell, inventory carrying costs have improved 50 percent since 1981," Delaney said. "We knew how to do just-in-time inventory, but we didn't have a decontrolled transportation industry to make it happen. Now we need less inventory on hand to support sales. Most of that is due to information technology."

Delaney credits the explosion of e-commerce in 1999 as helping logisticians dramatically ramp up managerial effectiveness. In the aftermath, he said, "people are able to see where their inventory is and when they'll receive it. Manufacturers can hold a lot more inventory without running out of anything."While logistics management, or LM, mastery continues to demand effective action in the three-dimensional world — including reliable transportation systems, capacious warehouses and aggressive inventory control-and-access systems — LM increasingly involves acquiring and applying real-time information in e-space.

Companies are using the Internet and their own intranets to establish and track repositories of available product. They use e-nets to order from suppliers, customize product lines, recruit low-cost shippers, track response times and communicate with customers.

In many, perhaps most, cases, time from order to delivery has been cut from weeks to days, and in the case of those willing to pay premium dollar, from days to hours.

"There's a saying now in the business: Information is logistics," said William Tuttle, president and chief executive officer of the nonprofit Logistics Management Institute (LMI) in McLean, Va. "In the last few years, companies have discovered the mother lode. The whole process, which used to be paper-based, now can be handled rapidly over the Internet. You can achieve great reductions in the amount of inventory on hand and the number of people handling that inventory. Information technology has been the big catalyst."

LMI, a $62-million, 417-person organization originally created in the early 1960s to help the Defense Department overhaul its logistics practices, now aids civilian and defense agencies in boosting logistics performance and reducing operating costs. Among the organization's national security clients are the Joint Chiefs of Staff, the Defense Advanced Research Projects Agency, NATO and the Israeli air force.

On the civilian side, LMI has identified for the General Services Administration critical supply-chain links, evaluated relationships between GSA customers and suppliers and pointed out ways of better integrating third-party logistics providers and purchase cards with GSA procurement programs. Similar efforts have been undertaken for the Federal Aviation Administration and the Labor Department.

The institute also assisted the Environmental Protection Agency and several U.S. states in automating the submission and processing of compliance reports required for the EPA's air emissions, waste water management and emergency response programs. Internationally, in a series of logistics information exchange seminars, LMI conveyed the finer points of NATO's logistic doctrines, policies and procedures to Romania, Slovakia and the Ukraine.

"On the consumer side, logistics management is getting goods and services from the manufacturer to the consumer," Tuttle said. "It's organizing the acquisition of materials and the distribution of products. In military logistics, it's getting the product from the vendors to the soldiers, airmen and sailors."To make its huge number of assets 'visible,' or carefully cataloged and easily identifiable, the Defense Department has developed what it calls automatic identification technology (AIT), essentially a suite of enabling technologies that allows for rapid and accurate computerized capture of source data.

A generation ago, AIT began as a series of bar codes, like those routinely affixed to present-day consumer goods. Now, AIT devices have evolved to include not only the bar codes, but embedded-microchip smart cards, optical memory cards, passive and active radio-frequency tags and satellite tracking capability.

These various technologies are physically incorporated on or within munitions containers, food and medical supplies and spare parts, even as part of troop gear, so that unit commanders can track the minute-by-minute movement of equipment and personnel. AIT is viewed by the Pentagon as the key means to keep in perpetual view all assets in the logistics pipeline, whether on order, in storage or in transit.

The ultimate goal, said Ed Coyle, head of the AIT Office at the Defense Department, is to cut costs, reduce infrastructure, reduce order- and product-cycle times and dramatically improve combat support of U.S. armed forces.

"Simple, linear bar codes are what we consider the universal application of AIT. We apply these other technologies when the particular logistics function demands them," Coyle said.

"Although we do have visibility now of our assets, including individuals, that information is not currently shared in detail among the services," he said. "We're moving toward a total Web-based system, a combination of intranets and the Internet, in a shared-data environment with seamless interoperability and real-time logistics information."

In 1998, the department enlisted Fairfax, Va.-based SRA International Inc., which has 1,900 employees and $292 million in annual revenue, to validate and refine the AIT concept by determining which AIT devices work best at which locations.

That year, a $15 million European-theater study was conducted, involving 70 different supply-and-transportation nodes and logistics facilities to test four scenarios: shipment by air, shipment by sea, movement of ammunition and the redeployment of the 2nd Armored Cavalry Regiment from Bosnia back to home base in Fort Polk, La. In the latter case, soldiers were issued smart cards that cut processing times from three minutes to three seconds.

In 1999, a similar, $20 million project was conducted in the Pacific theater, this time vetting the framework of a worldwide AIT architecture to be used by all military branches. In the final stages of the project, currently under way, AIT architecture will be incorporated within U.S. commands operating in the Persian Gulf and Middle East regions, as well as in the Caribbean and South America.No matter the reach or scope of LM projects and whether for government or in the private sector, efficiency is the mantra that logistics managers live by. But despite a booming economy, organizations do not appear to be beefing up logistics as a budget line item.

"The overriding trend is we are all doing more with less," said George Gecowets, executive director of the 14,000-member Council of Logistics Management in Oak Brook, Ill. "Everyone involved in logistics faces a budget that declines by a few percentage points every year.

"On the other hand, we have increasing demands put on us. How do we react? By becoming more efficient. We have to be ingenious. And we are always on a continuous improvement track," he said.

"State of Logistics" co-author Delaney pointed to e-tailing giant Amazon.com as an example of improvement in action. According to Delaney, the company has concentrated on building excellent relationships with customers and following through on promises. Regular shoppers number around 20 million per year, with a 72 percent reorder rate.

It helps that products can be shipped quickly, Delaney noted: Amazon operates its own warehouses and runs proprietary fulfillment services.

Delaney's figures indicate the company has five years of cash on hand, and it expects to be profitable in 2002 with annual revenue of $6 billion. Profitability may or may not be just around the corner, but Amazon continues to expand its product range and availability, having added patio furniture, health and beauty aids and kitchenware to its established fare of books, compact discs, videos and toys.

Delaney believes that as an example of Web-based connectivity in action, Amazon demonstrates that savvy use of the Internet can strengthen the bonds between providers and customers. Savings from automation and logistics efficiencies are shared with the customer base, because the cost of acquiring and moving goods is reduced.

On the other hand, in a darker, future view of Internet-driven logistics efficiencies offered by Delaney, a relentless and accelerating emphasis on price and cost cutting could eventually dissolve manufacturer-customer bonds.

Customer satisfaction may be the most important imperative driving the growing automation of the U.S. Postal Service. With annual operating revenue of $63 billion, the Postal Service faces the gargantuan task of delivering on time, and without misplacing or losing a single letter or magazine, more than 200 billion pieces of mail a year to an estimated 134 million addresses.

The mail goes by truck, train and plane — some 15,000 commercial airline flights daily — and, in the case of the bottom of the Grand Canyon, even by mule.

On its official Web site, which averages 3 million visits per month, the Postal Service describes itself in part as a dot-com. Its eBillPay service offers a secure online site for bill-paying transactions. Other Web-based attractions include an electronic merchandise return service, which provides prepaid mailing labels for the return of catalog and online purchases, and postage that can be downloaded from a personal computer and printed onto an envelope or mailing label.

Another Internet-accessible site, Stamps Online, provides stamps and related products. During the first six months of fiscal 2000, Internet stamp sales totaled $12 million, compared with $5.8 million for the same period in 1999.

"There are really two levels of logistics management for the Postal Service," said Clayton Bonnell, Postal Service manager of international operations. "One is monitoring the physical flow of the product: the mail. The other is infrastructure, how we're performing. Is the right equipment in place? Is the [mail-carrying] contractor showing up on time? Is the contractor using the appropriate mode of transportation?"

According to Bonnell, the Postal Service has developed roughly two dozen major pieces of software that track everything from empty bar-coded mail storage trays to rail-traffic management and route-delivery optimization. A dedicated Postal Service intranet and allied database attempt to track the mail's progress: where it is and what has happened if a flight or truckload or rail car goes astray.

With such tools at their disposal, Bonnell said that Postal Service managers can tell to the pound how much mail is flying to, say, Berlin from New York, as well as from New York to Los Angeles. But the problem, and the continuing 21st century challenge for the Postal Service, is exactly how to integrate internal and external Web-based systems with stand-alone software to further turbocharge productivity through cross-applications communication.

"We're pretty highly automated, but we do want to break down the walls between our various applications," Bonnell said. "They're all legacy systems that have been around for years. They were designed to accomplish specific tasks, which they do well. But if we can make these systems work together, there will a definite multiplier effect."

Whether to deliver better service or cost savings or both, logistics managers will be pressed to apply ingenious uses of information technology, including next-generation intranets and whatever Internet system that succeed current versions. Other techniques, such as warehouse and inventory optimization and 'soft tooling,' or just-in-time manufacturing, are also in the LM pipeline.

What does seem certain is that the precise demarcation of economic responsibilities in logistics, once common in a regulated world, are now a historical artifact.

"Roles are totally blurred," Delaney said. "Everybody is doing a little bit of everything. When we were regulated, everything was defined. Now, anybody can take anything or anybody, anywhere. It's led to a lot of innovation, and will probably lead to a lot more."Will the public sector benefit from private-sector e-business innovation? The founders of Web-based Transplace.com hope to build a broad customer base that includes government departments and agencies.

Transplace is a $1 billion merger of transportation logistics business units from six of the largest publicly held truckload carriers: Covenant Transport Inc., J.B. Hunt Transport Services Inc., M.S. Carriers Inc., Swift Transportation Company Inc., U.S. Xpress Enterprises Inc. and Werner Enterprises Inc.

Its owners intend to keep prices low by offering easy access to truck, rail and air transportation, with operational efficiencies that would otherwise be impossible to match by any single shipper or carrier.

At the operational heart of Transplace is a centralized computer system and database that tracks product category, weight, destination and how deliverables are packed for shipping. Using such information, and communicating over the Internet with suppliers and customers, Transplace.com supervisors expect to be able to economize by consolidating loads according to type and geography.

Packed according to where and when deliveries are made, in theory trucks not only will run at capacity but should be off-loaded from back to front, with no repacking required.

Internet-based scheduling and contracting will enable Transplace's 2,800 carrier-partners to see from minute to minute what loads and destinations are available. Transplace.com also will provide carriers combined purchasing power for fuel, equipment, maintenance and repair parts, insurance and other services. The Internet company initially will serve North America, with plans to develop business in Africa, Asia, Europe and South America.

"There's one key to logistics management, that's visibility. What you see you can manage," said Joel Sutherland, senior vice president for supply chain integration at J.B. Hunt Logistics in Lowell, Ark. "The Internet for the first time is providing visibility for inventory moving through the supply chain.

"We'll be managing thousands of loads per day," he said. "We'll be giving nonstop service from point A to B. You only load and unload [a given delivery] one time. It re-duces transit time and costs to the shipper."

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