The Logistics Audit

The primary objective of Logistics Audit is to match the logistic requirements and customer service expectations, taking the market dynamics into consideration, and to identify  areas for improvement to achieve customer service excellence.

Key Steps in conducting Logistics Audit:

An effective logistics control system requires accurate, relevant, and timely information about activities and performance. A major source of this information is a logistics assessment, otherwise known as a logistics audit. The periodic assessment of logistics should be an integral part of the process of logistics strategy development. The logistics audit serves three main functions for any organization:

• Identification of key data required to manage costs, service, cycle times, response and quality.
• It allows for a better understanding of the current environment.
• It determines how well the system is meeting current business needs in a cost-effective, flexible and responsive manner, and how it is adapting to the changing marketplace.

The logistics audit can be framed by asking below given basic questions to any organization.

1. Are current logistics objectives consistent with current corporate, marketing and production strategies?
2. How is the company performing with respect to customer requirements and preferences?
3. What is the true total cost of the Logistics function? And how do those costs compare with others in the same industry or market segments?
4. Is the company using its Logistics resources and capacity effectively?
5. Is the company managing its material flow effectively through the supply chain?
6. Are the information systems and technologies meeting the needs of the users, the business, and the consumers?
7. How should the company plan proactive measures in reducing the cost by optimizing the supply chains and by reducing the inventories?
8. How the present order cycle time is addressing the customer satisfaction as far as lead time is concerned?
9. How to optimize the manufacturing operations?
10. How can we switch over to pull process from the present push process?
11. How to develop component vendors to avoid long distance buying?
12. How to react to the competition as far as innovative distribution strategies?
13. How can one optimize the resources and reduce the administrative costs?
14. What are the areas one can look into outsourcing to reduce the cost and increase the efficiency levels?

Data is power in an organization, and a lack of relevant data is a key impediment to the achievement of an information-integrated company. Often companies collect the data but store it in a diverse range of locations from mainframe to notebook computers. Accessibility of data is essential throughout the firm in order to leverage its usefulness effectively. The first thing a logistics audit will discover is how accessible data is, for without data, the audit process will be significantly handicapped.

The process itself comprises eight major steps:

1. Determine consistency of strategic objectives
2. Determine customer requirements and preferences and obtain performance targets
3. Detail current logistics operations and practices
4. Analyze logistics data
5. Identify programs and initiatives
6. Prioritize projects
7. Develop and implementation plan
8. Implement and measure performance and improvement

Once we have identified key questions for the Logistics Audit, it is time now to establish Critical variables.  We can classify the variables into two categories and they are:

1. Quantitative Variables
2. Qualitative Variables 

1. Quantitative Variables:

The objective of quantitative variables is to establish bench marks or norms to conduct the audit for the existing operations and also simulate situations to understand the capabilities to meet the future demands of the market place.  As the name suggests, these variables can be measured in terms of numbers and compared with the present or future operations to understand the progress.  Further, these quantitative variables can be classified into four broad categories and they are:

1. Demand Throughput
2. Service
3. Cost
4. Utilization.

• Demand Throughput:

This analysis is conducted to analyze the capability of the system (i.e. Production plants and Distribution centers) keeping in view of the strategic objectives of the business.  To conduct this analysis, we need the future forecasts and data related to customer geographic locations of the future periods.

• Service:

The primary value of logistics is to accommodate customer requirements in a cost effective manner.  Philosophically, customer service presents logistics’ role in fulfilling the marketing concept.  A Customer service program must identify and prioritize all activities required to accommodate customers’ logistical requirements as well as, or better than, competitors.  In establishing a customer service program, it is imperative to identify clear standards of performance for each of the activities and measurements relative to those standards.  In basic customer service programs, the focus is typically on the operational aspects of logistics and ensuring that the organization is capable of providing the seven rights to its customer: the right amount of the right product at the right time at the right place in the right condition at the right price with the right information.

As discussed earlier the customer satisfaction is measurable through the below given measures:

1. Order Fill Rate;
2. Line Item Fill Rate;
3. Quality Fill Rate;
4. Back orders / Stock-outs;
5. Customer satisfaction;
6. % of Resolution on first Customer Call;
7. Customer returns;
8. Order track and trace performance;
9. Customer Disputes;
10. Order entry accuracy;
11. Order entry times.

• Cost Analysis:

In order to establish or identify costs involved in servicing the customer. By Analysing the foremost challenge is to interpret and understand the variation in the margins.  The gap between the lowest and the highest cost analysis is very critical and it is necessary to understand elements of cost escalation and low cost elements.

• Utilization Analysis:

This analysis would give us the Resources utilization indication.  However, to work out the utilization %, we need Installed capacity of the production plants, Human resources employed; Equipment employed details; Product stacking norms etc.  The basic principle to arrive the Utilization rate is:

Capacity Utilisation/Installed Capacity

2. Qualitative Variables:

Qualitative variables are undertaken to give a shape to the strategic thinking of the organization.  These interviews basically should be done with the heads of the departments and also few strategic personnel in the department to understand the scope for improvement of productivity and reduction of costs.  The following Qualitative Variables should be subjected to the Logistics Audit.

• 1. Distribution Strategy;
  2. Warehousing Strategy;
  3. Outsourcing Strategy;
  4. Vendor Development from local areas;
  5. Marketing Strategy;
  6. Production Strategy;
  7. Product mix strategy.

Cartoon Source: http://independentaudit.com