About cost……

…. in transport and distribution. In this post I want to discuss about the cost in transport and distribution. It is the most important thing to control this cost, otherwise you can loose a lot of money.
The basic parameter that you must calculate is 
cost per km (mile) or cost per hour (for some machinery or vehicle). I am from Europe and i refer to cost per km because we use km here, but all this principle can be easy transfer  to cost per mile.

When you calculate the cost per km you must can take in consideration as many parameter as you have at the time because when you use more parameter the value become more accurate. I made a web application (http://www.logistic-specialist.com/costpekm/index.php) who may help you to calculate cost per km (unfortunately it is in Romanian language, but i hope to have time to translate it, in the meantime you may use Google translate) and this application take in consideration more than 20 parameters. Also here the rule 20-80 may be apply because only 3 parameter influence 70% of the cost, and this parameter is: fuel cost, drivers salary and maintenance. In this order, fuel may influence between 35 to 65% of the cost per km (depends on the car type and also of the transport activities that you have), driver salary may influence between 20 to 35 % (can be more in certain country and less  in other country) and maintenance between 8 to 17% (can be more or less depends on the conditions).

In my consultancy project i have case where fuel cost is 25% of this cost, but that car is used in small area distribution.

Cost per km is a (let’s say) technical value and it cannot be correlate easy with the other business parameter. In most of the case the management want to transfer this value into other value which can be connected with the products and profitability. They want to have a cost per products or cost per kg (ton) etc.

Cost per kg or cost per ton is easy to calculate if you have cost per km. For example: if you cost per km is 0.4 euro and the car made 400 km with 2,5 ton result a cost per ton: (0.4X400)/2.5 = 65 euro/ton. It is easy, but you must take care because in most of the time the number of km must be the total km of the route.

In some cases cost per ton is not relevant for the business. Cost per ton it is use for products who is sell in ton or kilo (food for example), but if you have computers or television the cost per ton is not relevant, but it is relevant cost per products or per pallet, box etc.

Cost per product it is more complicate to calculate than cost per kg in case of distribution, if you have only one products in the car the calculation is simple, also if you have 2 products the calculation can be simple (if you have products with similar dimension) because you can assimilate percentage of the cost related with the percentage that each products represent from total number of the products. Even if you have 2 products, but with different dimension (for example laptop with washing machine) the calculation become more difficult. Laptop it is small and easy, with similar value like washing machine witch is heavy and larger than laptop and it is very difficult to have some clear criteria how you associate the percentage with the products.

This calculation become more complicate if you have 20 products with different dimension and weight. In this case is easy to calculate an average and consider this value for further calculation.

If you distribute your products to clients the same product do not have the same cost for different client because each client is in other geographical location. In this case it is necessary to calculate cost/product/client or cost/ton/client witch become more complicate to calculate. I will made an example of this calculation in the future posts.

Also it is possible to use average in this case, but in this case (when you use average) you consider that all the client from a route have the same costs and all it is profitable witch is not real all the time: for example a client witch is close by the distribution center will have a smaller cost that a client witch is far from distribution center (close or far means the distance considering the way that you made the route, not the geographical distance). In most of the case the client witch s far from distribution center order small value and in this case that client it is very possible to be unprofitable. If you use average you cannot see unprofitable client and this unprofitable client “eat” profit from profitable client. For my point of view it is very important to identify the unprofitable clients and find war to made them profitable (in most of the case this will involve the sales department). We will discuss in the future posts about the way to made clients profitable.

Days of stock

When we discuss of stock we can have multiple approach: we can discuss about quantity of goods (how many products we have on stock), we can discuss about value (what is the value of the products that we keep on stock), but more often we discuss about day of stock.
Days of stock mean if i sell all the products that i have it in the stock in how many days all the stock is finish. This therms is relative to sales. But why we use this instead of quantity or value of the stock?
One of the reason is that this parameter days of stock it is constant for all the period of the year, and it is not affected by the sales fluctuation, it remains constant even if sales fluctuated in different period of the year or in different period of the month. For example 3 days of stock for product X is 3 days of stock in August(worst month in the year) and 3 days of stock in December (best month in the year). What is the difference between those 2 months? Even if i have 3 days of stock in August and in December the quantity will not be the same and we adjust the quantity of products X in those different months related to the sales. How we correlate this? It is a simple relation days of stock = (total quantity of product x) / (ADS) where ADS means average daily sales and means how many product X do we sale average per day. So, days of stock is constant but we adjust the quantities related to the daily sales.
Days of stock is calculated using input like: difference between payment term that we can obtain from customers and from suppliers, lead time between order and delivery, transport time, avoid out of stock etc. After we calculate the days of stock we can calculate the quantity of goods related to the average daily sales.
Another reason that days of stock is used is the ease of use. This parameter it is very important and a less value of this parameter can save a lot of the company money. One days of stock for every products that you have in portfolio will block important financial resources. On the other hand less days of stock increase the risk of out of stock and you will loose sales.
Always you must have a optimum value to not have out of stock or block a lot of money in stock.
If you have problem with stock we can help you to find the optimum.

Push back racking system

In some warehouse i saw many times dive in racking systems. It is a good system for those who cannot use, for different reason, FIFO. This system reduce waste space into the warehouse and can be useful for many industries. It have some disadvantages but it is a good racking system. For those who do not not how a drive in racking system works i advise to see this short movie:

Working with this kind of racking systems create some problems in the future because the forklift driver will hit the racking system and in time this will create problems. Even if the forklift driver it is a good one, because the tight space it will hit the racking system in different area. Another disadvantage is that this racking system requires long time to place the pallets into the position. This long time is required because the forklift driver must drive with low speed and very carefully inside the drive in racking system.
To prevent this it is create a new systems call push back racking system. It can replace the traditional drive in racking system, have the same advantage of the drive in system but do not have the disadvantages that i present previously, because the forklift driver it is not necessary to enter with the forklift inside the racking system to place the pallet. He put the pallet like in a traditional raking system and push the pallet in the back. This system will increase the speed and preserve the racking systems in good condition. For those who do not know how this systems works i invite them to see the following movie:

Best Driver

I do not see something like this in my life. This guy deserve to win the: “The best truck driver in the world”, if such a reward exist. For most of the drivers to  turn that truck can be a big challenge, but this guy is fantastic.

See the picture and comment (click on picture to see movie ):

Truck driver

Best truck driver

Cloud and supply chain

Starting 2 or 3 years ago many people discuss about the cloud. Some voice said that many of the company will migrate to this kind of services in the next few years. I try, in this post to explain some of the concepts and also to offer you my opinion about the cloud service.

What cloud represents? Cloud, simply, it is a server when you can stare data, and this server can be anywhere in the world. Cloud is more than a server, because this service will offer you more service than a simple server. For example: Dropbox or Google Drive or Skydrive from Microsoft offer free cloud services witch allows you to share data, collaborate with other colleges and also edit files is some standard formats (excel file, word file, pdf file etc).

Together with cloud a new concept was develop: SaaS. What Saas is? The name is a acronym from “Software as a Service”. What that means? This means that you cannot buy the entire software solution, you can rent the software solution and you can use the software solution based on a monthly fee payment. If you pay the fee you can use  the solution, if you don’t pay you cannot use the solution.

All this things means that the software solution provider start to adapt their solution to new technology. This means that they must code the solution using the web technology and put this solution on a web server.

Also many providers of the supply chain software solution made this step and adapt their solution on web technology.

Why this solution is better than the classical solution, because if they do that they made for a reason and, all the time, the reason is money.

Let’s say that you want to implement a WMS (warehouse management software) solution in your organisation. In a classical approach you must to buy a server and put the software solution on that server. When you think what kind of server do you buy (what processors, how much memory, how big the hard drive can be etc) you always must to think in advance, and think that this server can sustain your business for 5 or more years. So you will buy a server with much more power than you need now and also you think to upgrade this server. Also you must find a room for this server and a guy who manage this. Also you must to think of a security system to secure the room and to secure the information from the server, also you must to buy licence for the software, antivirus software, server management software etc. All this things costs a lot of money and you must pay this money from the beginning, you do not have other choice if you choose the classical way.

What happens if you choose the cloud service? In this way you do not need the hardware, you rent a part of the hardware on a server, you do not pay a IT guy because the provider have a lot of IT guy, so you can rent time for a professional and very experience IT guy, you do not have to thing of a room, a security system or antivirus, or licence and other kind of software because everything it is already there and you just rent part of this service. Very beautiful and very easy if you choose the cloud way, because the hardware, software, database, IT guy, back-up and all this things can make your life a hell if you choose a classical way.

Cloud it is more expansive than classical way?  The answer is: NO, because you share the resources with others and you pay only for the resources that you use it. In this case one server (hardware) can be share for multiple users and also the cost will share, the same situation with the IT guy, room, security etc. SO the cost must be lower in cloud than the classical way. In fact is more cheaper because you do not pay the money from the beginning, you a pay a monthly fee just for the service that you use it. Also you can use more services and resources in the next second if you want and this give you the flexibility of your business.

People ask me about security in cloud and about the access of their data. They said: “my server is here in the room and is very secure, what happens in the cloud?”. You data is more secure in the cloud than in your server for several reason:

– you do not have back-up in other physical location because this cost a lot. Why this is important? Because in case of a fire or earthquake witch affect your building you data can be lost forever or if a hard drive collapse also you data can be partially or totally lost. In cloud the provider made daily back-up in other physical location than the current location. If fact you have the same data on different servers in the world and the probability to loose data is lower than in your case.

– the security of the cloud provider is best than your security thinking of building security and IT security. I saw some buildings where some providers have servers and they have there very hard security procedures. Is like you try to enter in a atomic electrical power generator. The IT security of the cloud provider in better than yours because he have specialist only on that direction, they do not made anything else all day than testing and solve the security problems.

People ask about their data, because the cloud provider have access to their data. Yes, this is true, they can access your data, but in most of the case the software solution provider is also the cloud provider and in this case nothing is different in the cloud than classical situation. Using classical situation your software provider can access your data anytime, actually you give them access and ask him politely to access you data because you need maintenance and you have a contract for this. Even if you do not let them to access your data he can write 3 row of a codes in a software and all the data that you have on the server he can have it on his server and you will never know that.

What’s the catch? Why do not all the people use cloud? The answer is simple: they are not informed and it is a new technology and must take some time to become popular.

It is also another aspect: if you work in a cloud you data can be compromises indirectly because if the hackers are not interested till now of your data, if you are in the cloud and they brake the server they will take also your data even if you are not the target of attack, The risk will increase.

Another important aspect is that in time you will become dependent of the cloud service provider and they will rise you price and the price will become higher than now. Think of the fuel supplier, you are dependent of them and they control everything and you do not have really a choice even if you want to change something. But this will happens in many years from now on.

So, if you plan to implement a software solution in your supply chain, consider cloud services like a viable solution. Know, after you read this article, i think you are more informed and more prepared for the new technology.