Winning entry of the nationwide competition “Piórem Logistyka” – 2nd edition, organized by the portal www.logistyka.net.pl
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INTRODUCTION
Recent years have been characterized by increased competitive pressure, the pursuit of cost reduction, as well as the search for all possible synergies. All these activities are aimed at improving and increasing competitiveness, thereby ensuring a better market position and often simply the survival of the company. Sources of savings, ways to increase efficiency, as well as shortening the path a product travels from supplier to recipient, are sought in logistics. It has become the field with which the greatest hopes for achieving market success are currently associated. It is seen as the engine and driving force of most processes taking place in the enterprise, related to the physical flow of goods and the accompanying flow of information.
It is recognized that the primary goal of logistics activities in an enterprise is the best possible satisfaction of customer needs (appropriate level of customer service) at the most rational level of costs. Of course, a situation is also possible where, given pre-determined resources, an attempt is made to maximize the level of customer service as well as the level of costs. I would like to add that this second situation is most frequently encountered in practice.
We can only manage what we can measure. Measuring and examining certain quantities in the absence of a point or points of reference has limited utilitarian value in management. We arrive here at another key plane in the entire logistics management process, namely planning. We are therefore dealing with a plan, a process, and a measurement. To close the cycle, feedback must be introduced, i.e., corrective actions – modifying the plan or merely explaining and informing.
Of course, goals and tasks depend on the adopted strategy of action. However, the process itself looks the same regardless of the adopted goals, i.e.:
1. Plan.
2. Action.
3. Measurement.
4. Corrective action.
5. Modified plan.
It seems that logistics management itself is very strongly associated with controlling and its philosophy. Considering logistics management and the use of controlling concepts in it, indicators that unambiguously determine the level of achievement of the set goal must be introduced. In the logistics management process, it is very useful to introduce indicators that allow the application of the same evaluation criteria and, through repeatability, the ability to compare values over a longer period of time.
The efficiency and effectiveness of processes themselves, as well as their structure, must be measured. Describing the logistics management process, we will have to bear in mind that it takes place in a company operating in the medical and pharmaceutical sector. The current financial and organizational situation of the Polish health care system sometimes forces actions contrary to all known theories and short-term economic calculation. Logistics management in a company operating in the market of life-saving products or significantly improving the quality of existence is governed by its own rules. This is related, among other things, to issues concerning the organizational structure, predefined level of customer service, as well as the work system.
This paper will consist of several clearly distinct parts.
In the first part of the paper, I will try to present the theoretical foundations of controlling in logistics, issues related to inventory management, types of costs associated with or directly resulting from logistics activities, as well as the principles of building and using indicators in logistics. The second part will present the organization of logistics and customer service departments, structure, functional and process division. The next part of the paper will present the implemented controlling system within the logistics and customer service department. A brief justification for this, and not another, choice of indicators and the method of presenting the information resource will be presented. This includes the information resource needed at the input to the system, the tools by which these data turn into information, the method of their presentation and interpretation, or the early warning system. The last part of the paper will be an attempt to outline the directions for the development of the logistics management system based on the controlling concept.
Costs
Costs are supposedly the only thing generated by logistics and marketing. Due to the industry in which we operate and the specificity of operations on the Polish market, as well as the fact that we are a purely commercial branch, logistics cost management is a very important matter. Costs in FMC Polska SA are recorded by nature, so separating individual types of costs from them presents no difficulties. Difficulties begin to arise when, for example, it is necessary to precisely separate the costs related to own transport, where we cannot forget about the driver’s salary, other benefits, insurance, depreciation, holiday and social benefits, among other things. This requires manual separation of these costs from other natural ones and assigning them to this cost object. In the case of our company, it turned out that internal transport is not the most optimal from an economic point of view. This resulted in a reduction of our fleet by one car and the reassignment of the driver to warehouse work. Of course, external transport costs increased, but the global cost decreased significantly.
When managing costs, we must be prepared for trade-off decisions, and then an accurate estimation of the global impact of our decision on the process is essential. The three main components of logistics costs in FMC Polska SA are: transport, warehouse, and wages with overheads. Of course, depreciation, e.g., of a forklift or software, energy – included in warehouse costs, VAT, representation, and travel are also booked on separate accounts, among others.
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INTRODUCTION
Recent years have been characterized by increased competitive pressure, the pursuit of cost reduction, as well as the search for all possible synergies. All these activities are aimed at improving and increasing competitiveness, thereby ensuring a better market position and often simply the survival of the company. Sources of savings, ways to increase efficiency, as well as shortening the path a product travels from supplier to recipient, are sought in logistics. It has become the field with which the greatest hopes for achieving market success are currently associated. It is seen as the engine and driving force of most processes taking place in the enterprise, related to the physical flow of goods and the accompanying flow of information.
It is recognized that the primary goal of logistics activities in an enterprise is the best possible satisfaction of customer needs (appropriate level of customer service) at the most rational level of costs. Of course, a situation is also possible where, given pre-determined resources, an attempt is made to maximize the level of customer service as well as the level of costs. I would like to add that this second situation is most frequently encountered in practice.
We can only manage what we can measure. Measuring and examining certain quantities in the absence of a point or points of reference has limited utilitarian value in management. We arrive here at another key plane in the entire logistics management process, namely planning. We are therefore dealing with a plan, a process, and a measurement. To close the cycle, feedback must be introduced, i.e., corrective actions – modifying the plan or merely explaining and informing.
Of course, goals and tasks depend on the adopted strategy of action. However, the process itself looks the same regardless of the adopted goals, i.e.:
1. Plan.
2. Action.
3. Measurement.
4. Corrective action.
5. Modified plan.
It seems that logistics management itself is very strongly associated with controlling and its philosophy. Considering logistics management and the use of controlling concepts in it, indicators that unambiguously determine the level of achievement of the set goal must be introduced. In the logistics management process, it is very useful to introduce indicators that allow the application of the same evaluation criteria and, through repeatability, the ability to compare values over a longer period of time.
The efficiency and effectiveness of processes themselves, as well as their structure, must be measured. Describing the logistics management process, we will have to bear in mind that it takes place in a company operating in the medical and pharmaceutical sector. The current financial and organizational situation of the Polish health care system sometimes forces actions contrary to all known theories and short-term economic calculation. Logistics management in a company operating in the market of life-saving products or significantly improving the quality of existence is governed by its own rules. This is related, among other things, to issues concerning the organizational structure, predefined level of customer service, as well as the work system.
This paper will consist of several clearly distinct parts.
In the first part of the paper, I will try to present the theoretical foundations of controlling in logistics, issues related to inventory management, types of costs associated with or directly resulting from logistics activities, as well as the principles of building and using indicators in logistics. The second part will present the organization of logistics and customer service departments, structure, functional and process division. The next part of the paper will present the implemented controlling system within the logistics and customer service department. A brief justification for this, and not another, choice of indicators and the method of presenting the information resource will be presented. This includes the information resource needed at the input to the system, the tools by which these data turn into information, the method of their presentation and interpretation, or the early warning system. The last part of the paper will be an attempt to outline the directions for the development of the logistics management system based on the controlling concept.
Costs
Costs are supposedly the only thing generated by logistics and marketing. Due to the industry in which we operate and the specificity of operations on the Polish market, as well as the fact that we are a purely commercial branch, logistics cost management is a very important matter. Costs in FMC Polska SA are recorded by nature, so separating individual types of costs from them presents no difficulties. Difficulties begin to arise when, for example, it is necessary to precisely separate the costs related to own transport, where we cannot forget about the driver’s salary, other benefits, insurance, depreciation, holiday and social benefits, among other things. This requires manual separation of these costs from other natural ones and assigning them to this cost object. In the case of our company, it turned out that internal transport is not the most optimal from an economic point of view. This resulted in a reduction of our fleet by one car and the reassignment of the driver to warehouse work. Of course, external transport costs increased, but the global cost decreased significantly.
When managing costs, we must be prepared for trade-off decisions, and then an accurate estimation of the global impact of our decision on the process is essential. The three main components of logistics costs in FMC Polska SA are: transport, warehouse, and wages with overheads. Of course, depreciation, e.g., of a forklift or software, energy – included in warehouse costs, VAT, representation, and travel are also booked on separate accounts, among others.
- depreciation, e.g., of a forklift or software,<\/li>
- energy – included in warehouse costs,<\/li>
- VAT,<\/li>
- representation,<\/li>
- travel.<\/li><\/ul>
The fundamental issue in the cost management process is planning their amount. As for storage costs, they are fixed. Our company operates on the basis of a license to run a pharmaceutical wholesaler. This entails certain requirements regarding warehouse premises, standards, and issues related to pharmaceutical supervision.
The practice is that the costs and the rent itself are negotiated once a year. A separate issue is the cost of energy, telephones, and cleaning. It must be remembered that standards strictly define the storage conditions of medicinal products and medical devices – there is no room for optimization here. One could wonder about telephone calls, but this has almost no impact on the global level of costs, although they are also subject to the rigor of planning and are monitored. The situation is similar in the case of payroll costs with overheads – these costs are set in the budget for the whole year and we do not observe fluctuations here, although there is a possibility of differentiating remuneration according to achieved goals and efficiency.
The last issue, which was emphasized in the process of controlling management of logistics costs, is transport – both internal and external. Transport costs are determined in the budgeting process at fixed prices, mainly as a percentage of sales. They are monitored on an ongoing basis, i.e., no less frequently than once a month. Of course, when analyzing transport costs that unexpectedly dropped below the planned ones, we must each time ask ourselves about the reasons. Is it perhaps a lack of assumed sales or a delay in invoicing? These and many other matters must be taken into account in the cost management process. One more issue regarding transport. It should be checked whether external transport costs are sometimes being reduced by increasing internal transport costs.
Controlling global costs is important from the point of view of the company’s global image. From the perspective of the logistics director, issues related to the cost efficiency of processes, which ultimately lead to global costs, are no less important. It is often not easy to determine whether the fact that a given cost is at a certain global level is a positive phenomenon or an alarm signal. Properly constructed indicator models, which allow determining the amount of cost in relation to the carrier, i.e., in our case e.g., a pallet, turn out to be very helpful. Below I will try to present the system of indicators that is constructed and used by me in the process of controlling logistics management in FMC Polska SA.
Indicators
Indicators are a very useful tool supporting the logistics management process in the company I represent. The key issue in constructing an indicator system in a company is the goal. One must answer several questions, among others, what they will serve, what they are to monitor, in what phase of development the examined process is, in what phase the examined organization is, and many others. For the desired layout and information resource of indicators will be different for an organization operating for a few months, and different for a company functioning on the market for a long time. Indicators for a logistics process in the process of restructuring will be different, and different for a newly reorganized logistics. When choosing indicators or constructing our own, we are exposed to many dangers. It is easy to be misled by short-term trends, which seemingly positive, in fact, are sometimes an alarm signal. Below I will present a set of indicators chosen by me supporting logistics management at the national level in the corporation. Indicators related to deliveries from the headquarters will be purposely omitted. The functioning of a local company in a corporation is a topic for a separate paper, not necessarily in the field of logistics, but rather sociology.
I will add that indicators are monitored at monthly intervals, i.e., data from the financial controller are provided on the fifth day of the month following the reported month. This allows for a fairly quick reaction to disturbing phenomena and, if necessary, the application of corrective actions. Of course, some of the indicators are compared to the assumed value and, using such a point of reference, the processes behind them are managed. In the case of some, the natural tendency is, depending on the nature of the indicator, to strive for maximization or minimization (e.g., transport cost per pallet). Although, as I wrote earlier, one must be cautious and especially careful not to fall into the trap of suboptimization.
Inventory turnover ratios for hemodialysis and peritoneal dialysis in relation to sales from individual warehouses.
Calculation method (sales of the appropriate warehouse at the end of the month \/ value state of the appropriate warehouse at the end of the month)*12
The indicator calculated in this way informs about how many times a year we will “exchange” individual warehouses. The justification for separating the warehouses will be presented later in the study, in the subsection discussing inventory management. I will only mention here that the safety stock, the level of customer service, as well as the customers themselves are features that distinguish these warehouses from each other. The assumed value is an indicator for hemodialysis at the level of 12 – i.e., 1 month’s stock at the end of the period. The stock for peritoneal dialysis should shape this indicator at the level of 9 – i.e., roughly one and a half month’s stock. This is a rather conservative and cautious approach to inventory management issues. The reasons for shaping these issues in this way will be presented in the section concerning inventory management.
Inventory turnover ratio in cycles and days in relation to the value of inventory levels in relation to the whole
Calculation method (FMC sales for a given month \/ value state of warehouses at the end of the month) *12
This is a mutation of the first indicator. Its value informs us about the efficiency of all logistics activities in relation to inventory level management. The optimal indicator in our case is 12 – although assumptions were adopted in the budget that it should be around a value equal to 8.
Another mutation of these indicators are two indicators:
Inventory turnover ratio in relation to hemodialysis, but excluding machines and other equipment that are normally included in the process of calculating the indicators presented above. The reason is simple – the logistics department is only operationally responsible for ordering and bringing machines to the warehouse. This issue is controlled by the hemodialysis sales director. While in the case of the first two indicators, their values are monitored by the headquarters, in the case of this one and the next, the main task they are to fulfill is to show the true picture of the inventory status and the efficiency of individual driving forces. These machines represent a very large value and if they are not excluded from the analysis, they can distort the full picture.
Inventory turnover ratio in relation to the whole excluding machines – a situation similar to the first indicator. The value of this indicator sometimes differs by as much as 30% from the value of the first of the indicators described in this subsection. This is quite important information for the management board both in terms of the management efficiency of responsible persons (Logistics Director and Sales Director) and potential problems with contract execution. It should be added here that these machines are rarely bought for so-called stock.
Logistics costs to turnover
Calculation method (logistics costs \/ sales) due to the fact that in the company’s budget this indicator is calculated together with machine sales, here too it is reference-calculated in the same way. This is a very useful indicator, also monitored monthly, although alarm values should be monitored and checked at two-month intervals due to the rhythm of deliveries and hospital orders. The model value for the group is 3.5% (depending on the sales structure, i.e., the number of patients, this indicator differs in different countries). In the case of a country where Fresenius serves a relatively large number of peritoneal dialysis patients, transport and storage costs are higher than when it concentrates on the hemodialysis assortment, which is relatively expensive and, due to transport and storage, friendly (high, light pallets).
This results in significant differences and troubles with comparisons against the background of the group, although it is feasible. Storage costs as fixed in the case of FMC, as well as transport, which does not succumb to any analysis and behaves like quasi-fixed, mean that the structure and value of sales have a decisive impact on the magnitude of this indicator.
Logistics costs to turnover without machines – a situation similar to the calculation of inventory turnover. Goal – cleaning the image of logistics from values that distort the image. Of course, the percentage-expressed indicator mostly takes a higher value in the case of machine sales in a given month. It is noteworthy that despite this, FMC POLSKA still ranks in a good position compared to other companies in the concern.
Transport costs \/ turnover
Calculation method – transport costs are divided by sales. In the process of defining the indicator and calculating transport costs, the problem of separating the cost of own transport arose (since we use both own and external transport). As a result of the conducted accounting analysis, the costs of own transport were separated, which constitute about 15% of the costs incurred by the company for transport. If only economic issues were at stake, there would be a need to optimize this part of the company’s logistics activity.
To sum up, transport costs include the costs of own and external transport, and only this sum is divided by sales. This indicator results from the budget (external transport \/ sales) and is subject to monthly analysis.
Transport costs to turnover without machines – a situation similar to the inventory turnover indicators, cleaning the image from potential distortions.
Cost of pallet delivery
Calculation method – the amount of transport costs \/ number of delivered pallets
Goal: monitoring transport efficiency. Generally, the lower the indicator, the better, but this indicator cannot be analyzed in isolation from global transport costs or the average value of the transported pallet (another indicator calculated as the quotient of sales without machines to the number of delivered pallets), because it may turn out that we sell very little goods on one pallet, and additionally in each car, despite there being 14 pallets, the goods could realistically fit on 10. The ideal situation is one in which the transport cost per pallet decreases, and the value of the goods placed on it increases. Such construction of indicators actually allows building something like an early warning system.