What is controlling in logistics? Does stock management come down to minimizing the stock? What are the methods used in stock management?
Let's start from the beginning, i.e. the definition. According to CLM (The Council of Logistics Management, USA), logistics is the part of a supply chain process that plans, implements and controls the efficient and effective flow and storage of goods, services and relevant information from the place of manufacture to the place of usage in order to meet customers’ requirements. It is worth noting the two elements of this definition. Mainly that it refers to the popular and capacious concept of the supply chain process, suggesting a wide range of logistics’ interests, and that logistics has very specific tasks: to plan, implement, and control, i.e. simply to manage the supply chain for its optimization.
Controlling in logistics
Detailed tasks of controlling in logistics depend very much on the nature of the company's business, in particular, on what logistics processes take place in the company and to what extent. Nevertheless, it must always contribute to improving the effectiveness of the implementation of plans and increasing the coordination of activities by facilitating the achievement of the strategic objectives of the enterprise and at the same time avoiding the occurrence of the phenomenon of suboptimization, which will be discussed later.
What is important, implementation of procedures and controlling tools in logistics is possible and advisable also in companies where logistics functions are not fully realized. Also in such companies, it is worthwhile to distinguish logistics as an important area of the company's activity and to implement in this area the analysis of costs and effects of particular logistic functions. On the other hand, enterprises that base their business on logistic processes often use controlling both for monitoring the typical logistics costs (storage, transport, shipping) and for the process-oriented management of production costs or waste management costs.
Costs in logistics
A very important feature of logistics costs is their complexity. The basis of a well-kept cost accounting is their strict and unambiguous separation, which in the case of logistics cost accounting is extremely difficult to achieve due to the aforementioned feature – logistics costs appear virtually in the entire area of the company’s business. Additionally, accounting of logistics costs should also determine where they originate and it is difficult for some logistics costs.
This overall nature of logistics costs is described by three concepts:
Concept of global logistics costs
Concept of interdependence of costs
Concept of avoiding costs of suboptimization.
Global (total) logistics costs
The concept of global logistics costs is that all the enterprise's activities related to the entire supply chain should be treated as a whole. Within the global costs, the following listed partial costs are distinguished:
This type of costs covers all costs associated with stockpiling, but also costs of quality control, sorting, transport within storage locations and to shipping locations,
Flow management costs (of planning, steering and controlling the flow of materials and goods)
Production management costs (in companies with production profile) or order processing (in commercial companies)
Costs of shipping preparation
Costs of information systems, including collection of order information
Costs of maintaining (shaping) of stocks
Management of stock costs is one of the most important tasks of controlling. More on this later in this article.
According to the concept of global logistics costs, examination of each cost position determined by partial costs requires reference to the entire material flow process.
Concept of interdependence of costs
This concept is closely associated with the concept of global costs and, according to it, any change in logistics activity (especially any introduction of organizational optimization changes) can cause a decrease in costs in one business area and a simultaneous increase of costs in another. Optimization of logistics processes should aim at reducing total costs while maintaining a constant level of customer service.
This concept touches on a very common problem in logistics processes: cost conflicts of various kinds, and it affects, i.a.:
Transport issues (selection of route, means of transport, volume of shipment, etc.)
Decisions on stocks (ordering frequency, ordered batch size)
Storage (number, type, form of ownership of warehouses)
Supply (selection of supplier)
The impact of one type of costs on another can be very different and depends on the nature of the business. A good example of this phenomenon takes place in the food industry. Reducing transport costs may result in a longer delivery of products to customers and further negatively affect the conditions of shipping these products. Consequently, manufacturing costs will increase due to the need to ensure longer shelf life or to accept more returns (complaints).
Concept of avoiding suboptimization.
Suboptimization is when the efforts of one division in the enterprise lead to positive effects in the area of optimization, but have negative effects in the context of the entire enterprise's business. In the example above, reduction of transport costs may lead to a sudden drop in customer satisfaction, which can translate into a sudden drop in sales. This is usually the case when decisions on optimization of costs or logistics processes are taken bottom-up without coordinating with other departments of the enterprise or in the case of centralized control that involves making top-down decisions that do not take into account the specificity of the individual departments of the enterprise. You can read about the importance of coordinating the enterprise's activities in the articles on the Balanced Scorecard.
Regardless of how extensive the concept of logistics, the most commonly perceived function of controlling in logistics is stock optimization. We will look at this issue first and foremost.
Costs of stock maintenance actions may be divided into:
Costs of stock creation. These include, among others, the costs of materials, work in progress and finished goods, but also, for example, the costs of maintaining the purchasing department.
Costs of stock maintenance. This is a basic part of the enterprise's logistics costs which includes:
Capital costs determining losses incurred by an enterprise as a result of freezing capital in stocks (otherwise known as unused capacity costs).
Costs of stock servicing, i.e. all types of taxes or insurance related to the value of stored stocks.
Risk costs related in particular to the decreasing value of long-stored goods (shortening shelf life, lowering demand).
Delivery costs. They are associated with the process of product stock replenishment and obtainment of materials for production and include, among others, the costs of ordering and executing orders at suppliers’ or costs of production adjustments (changes in production lines).
Costs of depletion of stocks. These costs are associated with the enterprise’s losses when it does not have the stocks suitable to continue production, to execute placed orders or to conduct current commercial processes.
As it can be seen, the issue of cost management in logistics is very extensive. In further articles, we will deal with stock management methods using the concept of EPD (economic supply chain), i.e. optimum supply volume. We will also discuss the issue of Frozen Assets Account.