Operations and logistics are frequently viewed as secondary functions that can be handled by someone else. However, in reality, they present a huge opportunity for a business to become more efficient and differentiate itself. A simple definition of this function is:
The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of meeting customer requirements and expectations.
The process starts with determining key issues, understanding tradeoffs and developing goals and standards:
- In service businesses, scheduling staff, services, and supplies correctly to meet customer needs without incurring excess expense is critical. We hear about the challenges of pizza parlors planning Super Bowl halftime deliveries but every business faces those issues on a lesser basis every day.
- On the internet, many retailers have integrated 1-3 day direct ship from suppliers to consumers to reduce both their inventory investment and risk. Suppliers reap the benefit of consolidating inventory and expanding their customer base.
- Customers who wait or walk out of a business because of delays generate the most complaints and represent huge lost opportunities for increased sales.
- Balancing and managing inventory to serve demand and reduce closeouts can be critical to success. Reducing lead times, improving flexibility and planning can all improve effectiveness and lower costs.
- Consider the 80-20 rule. Many operations experts have shown that 80% of sales are derived from 20% of your products or services. However, suppliers continue to proliferate styles, colors, sizes, models and features presumably to better serve more customers and provide more features. A Harvard Business Review article analyzed numerous business examples and found that businesses seldom increase profits by increasing offerings beyond a certain point. We waste time, money, and frequently add confusion by adding too much complexity.
To better manage your inventory and improve delivery to your customers, the following are critical steps:
The first step is to develop a merchandising product or service plan.
- This plan details each product or stock keeping unit (SKU) in a description. It allows both buyers and sellers to understand the parameters and limitations of a program.
- The description then requires detailed spec sheets that become a bill of materials for suppliers and shippers. In a service business this would be a description of training, services and requirements for every function. The spec sheet will tell the scope of the project and the expertise necessary to carry out the project. The most important aspect of the spec sheets is to be very detailed to ensure all components are accounted for so you don’t miss a component and your costs are accurate.
You must also develop an inventory forecast:
- The product/service plan also drives and interfaces with a forecast. While planning and forecasting are like the proverbial chicken and egg, startups need a forecast model to consider all the parameters of their business. In the beginning, this includes an estimate of potential volume, pricing resources required to meet that volume and potential constraints.
- It is critical to develop a forecast with the attendant resources required because businesses can fail if they can’t afford the necessary inventory or don’t have the time to perform the services necessary to survive. We frequently see business owners who expect to drive their revenue through personal sales calls but when you add up their time they would be required to spend, there aren’t enough hours in the week to generate the income they need.
Supply chain and timing considerations can be critical performance and cost saving factors. There are multiple considerations in making distribution decisions such as shipping and receiving points; lot sizes and shipping quantities; reducing lead times; using similar part components; scheduling components to reduce bottle necks; shipping and warehouse charges. Optimizing these factors can improve service and reduce inventory shortages, requirements and risk. The decisions you make must balance customer fulfillment needs, inventory risk, terms, ownership, and replenishment.
All of these functions are essential to excellent service. Service goals start with a total commitment to providing consumers with a great quality product and making the experience enjoyable. Remember:
“Let’s face it, anyone can put product in a store or pictures on the internet and attempt to sell it. It is the differences in service that frequently differentiate.”
Modern operations are becoming increasing complex and integrated. Two processes help develop excellence in addition to all the technical tools that are available:
- Open Systems have been around for a long time but have become the norm for success. Open systems, in general, reject bureaucracy, authority, hierarchy, and closed decision processes. An open system is a management system that is capable of self-maintenance on the basis of throughput of resources from the environment. Open systems encourage participation, diversity, new rules and to some extent chaos.
- One requirement of open systems is the collaborative decision model. As decisions become more complex, the need for diversity, internalization, innovation, and expertise are expanded. Again rigidity, hierarchy, and bureaucracy become liabilities. Collaborative decision making is not the old group-think, consensus building or “we have always done it that way” mentality. It requires reaching out to the organization, its suppliers, customers and outsiders to develop exciting energy and new solutions. It is linked here to the open system process.
In summary, operations and logistics, and other operations should be viewed as a critical opportunity to improve sales, profit and competitive positioning. While there are some technical aspects to its proper implementation, it is the thinking and integration of the components that can lead to success.