Logistics myths and misconceptions

Inventory is evil, information is replacing inventory, time-definite delivery raises logistics costs ... these and other aphorisms have long been taken for granted in the logistics industry. But are they true?

By Staff -- Logistics Management, 5/1/1999

Corporate America, like most institutions throughout history, has created myths to explain its customs, beliefs, and phenomena. The myth "the customer is always right," for example, explains why some companies cripple themselves by trying to serve an unprofitable customer base.

Logisticians have conjured up their share of myths as well. Like other mythmakers, they typically take one truth and project it across a set of broad and not necessarily comparable circumstances.

Numerous buzz phrases have gained popularity in the late 1990s. Some contain a grain of truth. Others should be taken with a grain of salt. Here are some of the more prominent misstatements, along with a few cautionary notes:

* Information replaces inventory. Information may help businesses reduce inventory levels across their supply chains. If a manufacturer knows exactly how many orders it must fill, for example, it does not have to purchase a buffer supply of raw materials. When a company does not receive an urgent delivery on time, however, the consignee "can gather all the information in the world, and it won't replace inventory," says Clifford F. Lynch, executive vice president, Continental Traffic Service Inc.

In some supply chains, the inefficient handling of large amounts of information has increased inventory. "We used to send our information to the carrier electronically by 10 a.m. every day," says one shipper. "Now we send it to a third-party vendor at 10 a.m., and the carrier doesn't get our information until 2 p.m. or later. We can't risk getting caught short, so we padded our inventories just in case the carrier doesn't receive our shipment orders in time for that day's deliveries."

* Long-term contracts ensure stability of service. Kenneth B. Ackerman, president of K.B. Ackerman Co., says there are two things wrong with long-term contracts. "The first problem is these contracts contain escape clauses that allow the buyer to exit the contract early if service goes south," he says. "So, in essence, they're really not long term."

The second problem is that "you can't legislate good service," says Ackerman. So how do you get good, reliable service? Good question, answers Ackerman. "In the days of common carriers, you could pick up the phone and call another trucker if you didn't like the service you received," he says. "There were no contracts. And public warehouses had standard 30-day agreements so you could change warehouses easily. Back then, you kept your customers by keeping them happy every day."

* Logistics outsourcing is the way to go. Ackerman hears this frequently, but he says certain conditions can ruin any outsourcing agreement: "The first is attitude," he says. "If a middle manager wants an outsourcing arrangement to fail, it will fail." Ackerman also notes that the customer's bid specifications don't always depict the job accurately, so the third party must adjust the price. Conversely, the 3PL may not describe its qualifications in exact terms, so it accepts a job it can't accomplish.

* Direct-to-customer delivery will curtail the need for warehousing. Should companies pay to store goods in a warehouse when they can deliver the goods directly to their customers? Of course they shouldn't, say the experts, but the role of the warehouse long ago expanded beyond the storage of goods. Warehouses add value by consolidating or breaking down shipments. They often perform manufacturing tasks. Hewlett-Packard, for example, builds its personal computers in its warehouses.

* Logistics best practices depend on technology. No one would argue that logistics owes an enormous debt to advances in information and communications systems, except when it comes to customer service. "How many times have you called an airline to purchase a ticket, called a bank about a mistake on a statement, or called a trucking company to track a shipment, only to hear a recorded voice on the other end of the line?" asks Leo H. Suggs, chairman and chief executive officer of Overnite Transportation Co.

Overnite's solution to this customer disservice was to replace the automated voice response systems with human operators, who don't require customers to use a keypad menu. "Technology doesn't work when it comes before the customer's needs," says Suggs.

Technology also doesn't work when it is implemented over a bad process (what experts call the "garbage in, garbage out" syndrome). It also fails when the corporate culture resists change. Just count the number of failed implementations in WMS, TMS, and ERP systems.

* The E-commerce revolution will benefit small-package carriers. The argument is that consumers will make more and more purchases over the Internet, creating an explosion in residential deliveries, all best handled by small-package carriers. Such logic is responsible for a recent 42-percent increase in the value of shares of FDX Corp., the parent of FedEx.

In fact, FedEx generates an average revenue of $28 per delivery in commercial areas, where it often delivers and picks up packages at the same spot, reports Forbes magazine. In suburban areas where deliveries are spread farther apart and pickups are rare, however, the revenue is a mere $10.40. That's no benefit; it's barely breaking even.

Analysts agree that E-commerce will reshape the carrier landscape, but just how is not yet clear. The early beneficiaries are United Parcel Service and the U.S. Postal Service, but too many questions have yet to be answered: How often will consumers pay a premium price for special delivery options? Would E-consumers pick up product at the retailer location in exchange for free shipping? Will competition among E-retailers affect their demands on carriers? How will carriers react to exponential increases in E-commerce deliveries?

* The Internet will replace EDI. When companies send information via electronic data interchange (EDI), they pay an EDI vendor for each transaction. When they transmit information over the Internet, the transaction is free. So it would seem the days of EDI are coming to a close.

Not so fast, say the experts. Most large companies have built a large EDI infrastructure that is tied to many internal functions, including manufacturing, transportation, order processing, and finance. Aside from these interfaces, some say EDI offers a level of security that is hard to beat on the Internet. And EDI provides communications standards through its transaction sets.

True, some cutting-edge companies have cut their transaction costs by communicating over the Internet. But they are communicating messages using EDI standards.

* Time-definite delivery services raise logistics costs. Time-definite services almost always raise transportation costs, but their effect on total logistics costs is another story, say the experts at Emery Worldwide. Most immediately, time-definite delivery can reduce the expense of buffer stocks as managers become more confident that shipments will arrive when needed.

Time-definite services allow managers to reduce labor costs. By scheduling shipments at a specific time, these managers can optimize the use of hourly labor or avoid a second shift at the receiving dock. Time-definite services also help alleviate the cost of lost sales by guaranteeing delivery when the customer requests it. And when parts arrive via time-definite delivery, they may reduce production downtimes.

* Low unemployment rates make it a job-seeker's market. This applies less and less to logistics executives. Why? Most corporations find their executives through search firms, and corporations are like any other customer--they continually demand more and more.

"Three years ago, I would consider a candidate if that person met seven of 10 criteria set by the employer," says Gayle S. Gorfinkle, principal in the executive search firm of Gorfinkle & Dane in Braintree, Mass. "Today, a candidate needs to meet all 10 before I arrange an interview."

Gorfinkle says her searches amount to two to three months of independent, original research. "You can't just open up a drawer and dust off an old résumé," she says.

As these examples have shown, virtually any tried-and-true concept may actually be a myth. "You have to be careful," says Lynch. "There's no shortage of these [myths] out there."