We live in a global economy and that has made the supply chain all the more important – these days partner companies could be anywhere in the world, facing any number of challenges. However, when people refer to supply chains, they often use the terms ‘supply chain’ and ‘logistics’ interchangeably.
But, is there a difference?
The difference between supply chain and logistics
What is the supply chain?
When we refer to the ‘supply chain’, we’re referring to the network of suppliers, manufacturers, producers, shipping companies and more who, when combined, produce, ship and sell products and services to end-users. Supply chain management is the act of planning and managing this network.
Let’s take a look at the coffee supply chain as an example. The life of coffee begins with growers in the likes of Brazil or Vietnam. These growers produce coffee beans, which they sell on to coffee roasters whose job it is to grind and roast the beans for consumption (growers will also have their own supply chain, for farming equipment and such). Roasters may then sell on their beans to a cafe, which of course provides its barista coffee to consumers. So for that cafe, you can see how its supply chain extends all the way back literally to the roots of coffee. If something were to impact growers, it could have ramifications all the way ‘downstream’ to cafe owners who might then struggle to get their hands on their usual stock.
In between those stages you have warehouses, distributors and shipping providers, who look after the movement and storage of the beans at each phase of their existence.
What is logistics?
Logistics is a subset of the wider supply chain that controls the movement and storage of goods between nodes in the wider network. In our example above, it was logistics companies that were transferring coffee beans from growers to roasters, and then on to cafes, and it was logistics companies that were storing the beans between buyers.
Some companies like to control their own logistics operations, and may have warehouses around the country or world as well as in-house shipping functions to transfer goods and information from place to place.
For many more, this would be too expensive or their supply chain simply isn’t complex enough to warrant such an investment, so they outsource to third parties. These may be known as logistics service providers (LSPs) or third-party logistics (3PL) providers, depending on the context for which they are needed. See below for more information on outsourcing logistics functions.
Some basic supply chain and logistics KPIs you should be measuring — or using a Business Intelligene tool to keep track of.
Examining KPIs: Supply chain vs. logistics
You’ll see that the KPIs in both supply chain management and logistics are very similar, in that they often track the movement or storage of inventory. That’s because these two concepts are so intertwined that they are hard to separate! In reality, you would be tracking most of the below all together, even if you were to outsource your logistics function.
Common supply chain management KPIs
1. Cash-to-cash cycle time
A measurement of the time it takes to turn cash that you paid for materials into cash paid to you by customers. A fast cash-to-cash cycle means having better cash flow, while a slow cycle means having cash tied up and unusable. A lean business looking to build efficiencies would do well to try and improve this metric.
How to calculate:
Days of Inventory (number of days inventory on hand) plus Days of Receivables (number of days for customer to pay for orders), then subtract Days Payable Outstanding (number of days it takes you to pay for purchases).
E.g. 35 DOI + 31 DOR = 66. Subtract 20 DPO = 45 days cash-to-cash cycle.
2. Inventory days of supply
A metric to determine how many days it would take to run out of supply if you did not replenish your stock. The more days it would take to run out of supply, the more this metric suggests your organisation may be overstocking – and excess inventory could lead to a higher cash-to-cash cycle.
How to calculate:
Total stock divided by average daily sales
E.g. 6,000 total products / average daily sale of 80 units = 75 days’ supply
3. Perfect order rate
A way to measure error rates, taking into account multiple facets of the supply chain. Perfect order can be broken down into phases (i.e. procurement, production, transportation and warehousing), or could be used to track specific problems, like damaged goods, goods with incorrect documentation, goods that were delivered late, and any other combination. Having a low rate here could indicate inefficiencies at one stage of the supply chain, which may lead to reduced customer satisfaction.
How to calculate:
Total number of orders minus the number of orders containing errors, divided by the total orders. Then turn it into a percentage.
E.g. 60 total orders – 4 late shipments, divided by 60 = 93%
Common logistics KPIs
1. Freight bill accuracy
A metric that does what it says on the tin – measures the accuracy of freight bills. Worked out as a percentage, freight bill accuracy can help you keep a close eye on your efficiency and guess levels of customer satisfaction. Low accuracy can obviously lead to higher costs replacing lost goods as well as reduced levels of customer happiness.
How to calculate:
Number of error-free freight bills divided by total freight bills, represented as a percentage
E.g. 16 error-free bills in a period / 20 total bills = 80%
2. Transportation costs
This measure examines the cost of transporting inventory based on sales revenue and comes out as a percentage. The higher this figure, the more your company is spending on shipping its goods compared to what you’re getting back. Figuring out how to reduce transport costs while maintaining similar levels of revenue could lead to greater profits.
How to calculate:
Total transportation costs (i.e. equipment, fuel, driver wages, insurance, etc.) divided by sales revenue for a set time period.
E.g. $10,000 transport costs / revenue of $100,000 = 10% of revenue
3. Inventory turnover
One of the most commonly referred to warehousing metrics. Inventory turnover is a figure that tells you how many times you have sold through your entire stocked inventory in a given time period. A high turnover could suggest strong customer demand for your products, while a low turnover may suggest that sales have dropped, or else you are overstocking goods.
How to calculate:
Cost of goods sold divided by average inventory
E.g. $1 million COGS / $100,000 average inventory = 10 times inventory turnover
Read more: How to Calculate Inventory Turnover
You can outsource some of your logistics functions by using third-party logisitcs but it will depend on your unique business needs.
Should an SME outsource their supply chain management or logistics functions?
The short answer to this is that it depends on the business, but in our experience, we’d suggest no to the former, and a maybe to the latter.
Supply chain management should generally be kept in house
We would encourage most SMEs to manage the majority of their supply chain elements in-house, given the logistical problems that could accrue by outsourcing too many operations. Of course it does depend on the company and costs are definitely always a factor, but many supply chain related cash flow problems can be solved – or at least helped – by upgrading your existing infrastructure rather than outsourcing.
Make managing your supply chain a little easier
A lot can go wrong in the supply chain up and downstream of your business – losing track of shipments, shrinkage, stockouts, picking errors, and so on. It’s unlikely you’ll be able to outsource many of the operations causing these problems, but you can increase your visibility over them, and therefore your ability to control them.
This is where better inventory management and supply chain software comes in. With modern inventory management software, your company gains control over its entire chain and is therefore able to make optimisation adjustments as a result.
Imagine being able to track – in real-time – each and every product coming into and leaving your premises, down to its location, expiry date, time on shelf, cost, revenue generated, and still more. By examining these analytics, you’ll be better prepared to forecast based on real-time customer demand, automate certain functions (i.e. automatic ordering of low stock), and make strategic decisions to continue or discontinue certain products based on real sales data, all without tedious spreadsheeting.
But then we come to logistics – shipping in particular. SMEs could outsource some of these functions in order to cut costs or complexities. But there are advantages and disadvantages.
Advantages of outsourcing logistics
1. Reduce focus on shipping
One less operation is one less thing to worry about. By outsourcing some of your logistics functions, your staff can focus on critical value-adding activities related to other parts of the business, such as product innovation, marketing or sales.
2. Gain access to better tech
Companies that own their own logistics operations need to maintain said operations, and that often means businesses end up with an ageing fleet of vehicles and tired old facilities. But these things are bread and butter to a 3PL provider, and that means many of them are at the cutting edge of logistics technology – potentially enabling your business to access more advanced tech (i.e. a fleet of green vehicles, if sustainability is part of your company mission) than it would otherwise be able to afford.
3. Improve flexibility
Again, one less operation is one less thing to think about. As your business swells and shrinks with the economy, the more you have to manage is the more you have to either upgrade or downgrade. More functions can be constraining, whereas agile businesses with outsourced partners can often rapidly expand and contract based on economic or strategic requirements.
This could even be the key your company needs to access new markets, as you won’t need to invest in upgrading your fleet sufficiently to service new areas. For instance, you want to service a city on the other end of the country so you hire warehousing and shipping functions there to get started. Over time you may open a small regional office, and grow from there based on success. You can incorporate logistics back into your company over time, if appropriate.
Disadvantages of outsourcing logistics
1. Lose control over customer satisfaction (to a degree)
When you put your products in the hands of another party, you have to trust that they will fulfill their end of the deal to the same level that you promise your customers. Any hiccup at the vendor end could impact your customers, which may have a knock-on effect on your revenue even though it wasn’t ‘your fault’ as such.
This makes choosing a logistics provider a very important decision that absolutely cannot be taken lightly (i.e. choosing the least expensive option is not always the best strategic decision).
2. Potentially sacrifice elements of your strategy or mission
A lack of alignment between your company and your logistics provider could create bumps at the customer level. For example, your customers might have certain expectations of your shipping and handling times based on your company’s advertised values and goals, but if these aren’t communicated to the third-party then they may not deliver on the promise.
For this reason, it’s vital to view third-party providers as strategic partners and not a cost-cutting centre. Your goals must align with theirs and theirs to yours in order for you to work effectively together and deliver better results.
3. Fight for access to the same level of data
Data is the lifeblood of the modern enterprise, large or small. When you take on board such a vital partner as a logistics provider, you need to be able to access some of their business intelligence in order to keep your own systems up to date. Otherwise you may have a harder time accurately calculating some of your metrics and, thus, making efficiency improvements.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.