Concept of Logistic Audit
Logistics is the process/chain management of transport/flow and the storage of goods and services from its origin to its consumption. Logistics, by definition is coordinating complex operations involved in the moving of people, equipment, and supplies.
The primary objective of Logistics Audit is to match the logistic requirements and customer service expectations, taking the market dynamics into consideration, and to identify areas for improvement to achieve customer service excellence.
Table of Contents
In a logistic audit (potential analysis / logistic due-diligence) the current logistic system and its services are compared with the requirements. In particular, the performance of the processes and structures are checked. The purpose is to identify possible routes of failure and spheres of action for improving the quality and performance of the logistics system in general, and the logistic processes in particular. The procedure is done in five steps: requirements analysis; performance analysis; process analysis; structural analysis and benchmarking.
A freight logistics audit will generally cover both inbound and outbound transportation as well as other logistics related activities such as stock management, warehousing or trade compliance.
A Logistics audit will invariably start with gathering quantitative and qualitative data from key stakeholders and with analyzing and interpreting this information. The main departments collaborating in data collection and interviews will typically be Logistics and Transportation as well as Warehousing, Purchasing, Production, Trade Compliance, Customer service and IT departments. All these departments are involved directly or indirectly in the supply chain and can provide a valuable insight on the situation as well as benefit from the outcomes of the audit.
Objectives of a Logistic Audit
The objectives of a logistic audit are:
- To point out the weaknesses of the logistic system and/or its subsystems.
- To estimate the impact and potential for performance improvements.
- To identify and demarcate the largest potential areas for improvement.
Procedure of Logistic Audit
The potential analysis consists of five individual steps, which together cover all relevant aspects for auditing a logistic system.
Step 1 – Requirements Analysis
Collection of logistic service requirements of all customers (end customers, market, sales, etc.) and the critical assessment of these requirements.
Do these requirements correspond with the company strategy?
Is there an appropriate ratio of the costs for meeting the requirements and its benefits?
Are there any articles which cause higher costs than benefits and are not required by the customer? Are there any key customers which should be given delivery preference?
What are the service levels and the agreed delivery time for different customer groups? If value-added services are offered, what would the financial and customer side effects be of a reduction or improvement of those services?
The requirements collected as a result of this analysis must be critically examined, because in surveys individuals may exaggerate or overemphasize their requirements. For example, customers may demand a 24 hour service or express deliveries, but if the customer is charged for this service (e.g. express surcharge, packaging surcharge) many will prefer to waive the services. In addition, not all services actually fit with the corporate strategy.
Step 2 – Performance Analysis
The performance analysis examines at what cost, with what efficiency and with what quality the logistical services are provided. For this purpose, by means of an input-output analysis, the cost (direct and indirect) for each logistic service is determined.
In general, the performance and quality of individual logistic processes are raised and evaluated on the basis of key performance indicators (KPIs). In detail, performance analysis consists of:
Analysis of bottlenecks
The bottlenecks in the supply chain are unveiled by analyzing the average waiting times or capacity times. There are also areas in which utilization ratio may never rise above 70-80% for example, and thus these areas may be overstaffed.
Analysis of residence and processing times
Logistic functions differ in practice, often in relation to availability or speed of service provision. In particular, there is often a mismatch with regards to the mean residence time and actual processing time of an order. For example, the warehouse is staffed 24/7, because the products must be delivered the next morning.
Analysis of redundancies
Most positions in companies are staffed by two or more employees to ensure the service delivery, in case of failures caused by illness, etc. This should be carefully checked: Is a complete redundancy on technical systems really necessary or would it be enough to keep the redundancy only for certain subsystems? Furthermore, is a single member of staff sufficient with a better coordination of the process flows?
Analysis of lead times and completion dates
Which business units exceed the defined lead times and completion dates more often? Why is that happening and what extra costs arise by exceeding the lead and completion times? Error Analysis Are there any working stations where a disproportionate number of errors occur? What costs are caused by error handling?
Analysis of cost centers and logistic cost
What are the main and relevant logistic costs? Depending on the kind of business, the transportation, warehousing or packaging can be the main cost drivers. Have they been identified? The cost reduction programs should start here.
Step 3 – Process Analysis
The process analysis examines all the logistics processes, from the customer to the supplier. This may reveal differences between customer expectations and actual logistic performance. The following ten potential fields should be taken into account:
- Logistics units – Which loading equipment is in use, and what costs are assigned to these loading units? Is the use of loading units appropriate for each case?
- Master Data – Is there an adequate logistics database? Who is responsible for master data maintenance? What quality is the master data?
- Times – Are the times coordinated within the company? Are the defined times meeting the market requirements? Are there any bottlenecks and points of failure?
- Costs – Can cost rates be assigned to the services? Who is responsible for ensuring the prices per service are appropriate? How do you validate whether prices are appropriate according to the market requirements?
- Stocks – Where are the stocks maintained and why? How do you control the stocks from a strategic point of view, but also on the operational level? Which stock keeping procedures and policies are available?
- Quality – Is there a quality management system in place and what quality standards are used? Who is responsible for quality improvements? How are the failures tracked? Is there a system in place for continuous improvements?
- Interfaces – Is collaboration internally/externally organized, and how is this done? Which entities are processed manually and electronically?
- Planning/Process Control – Are the resources optimally planned? Who decides on the disposition quantities and how? Are standardized programs being used?
- Supply Chain – Which supply chains are in place or can be classified for the company, and which are considered as critical (in terms of cost, time, quality and risk)? Who manages these supply chains, under what procedure and in which institutional form?
- Make or Buy – Which parts are produced internally and what is bought from external providers? Who decides whether to make or buy, and who regularly performs comparative calculations?
Step 4 – Structure Analysis
The structure analysis checks whether the existing system structures meet the requirements and what improvements are possible. On the basis of tree diagrams, the interrelationship between the areas are depicted and possible spheres of action are identified.
The following questions must be clarified:
- Is the site and distribution structure appropriate to the market requirements and company strategy respectively policy? In what regulatory environment is the company involved?
- Are the responsibilities and tasks within and between the sites organized in an optimal manner?
- Is it possible to generate service improvements and cost savings by centralization/ decentralization?
- Is the number of tiers in relation to the plant, the production and procurement correct according to the market demands, service level agreements and quality targets?
Step 5 – Benchmarking
Benchmarking considers the company’s own performance relative to the industry, competitors, other divisions or in relation to a theoretical optimum. This can help highlight weaknesses and strengths in the company’s own structure. These services need to be compared comprehensively.
Only analyzing the service performance, delivery capability, delivery time, and adherence to schedules is not sufficient. If costs are not also considered, you will receive a distorted view. When starting a benchmarking project, it is also important to take the environmental conditions (different regulations, different customer structure, etc.) into account.
Importance of Logistic Audit
The purpose of logistic audit is implementation a comprehensive diagnosis of logistics processes and corporate functions and subsequent determination the program of changes in individual steps. Main goal of logistic audit is description of current state of corporate logistic and determination the specific activities to change and improvement of logistic processes. The result of logistic audit is:
- Description current state of system,
- Identification so-called “constraints or bottleneck” of the system,
- Proposal of measures for elimination of deficiencies,
- Setting of priorities to attain desired state.
The audit provides a basis for the efficient and effective project progression as all processes from goods receipt to goods out are examined. The suggested course of action for the project identifies the key processes with the highest potential for improvement. But the structure within the organization will also be specified and developed.
Improvement measures are checked for maximum profitability and the best solution concepts are integrated into an implementation plan. From our own project experience, we know that the costs for a logistics audit will, in general, pay for itself within 3-4 months.
A logistics audit removes process bottlenecks by means of restructurings. Service levels and the quality of logistics will be increased, and logistics areas can be used optimally. A logistics audit is, therefore, the first step to sustainably improve the location.
Basic Principles of Logistic Audit
The basic principles of logistics audit in any company are:
- Objectivity of processing logistics audit – objectivity reflects objectively facts which are actual in the time of implementation audit,
- Confidentiality of commercial information,
- Commercial independence of the auditor – auditor isn’t bound by a third person who may have the benefit of any audit results,
- Professional independence of the auditor – auditor can´t be an employee of the evaluated company,
- Repeatability – when the audit is repeated the comparability of results must be secured,
- Control of results – final report of executed audit must be checked in terms of content and formal side at least with one other external auditor.
Processing of Logistic Audit
There are a many companies which offer an external elaboration of logistic audit in the company. Each company has already its specific approach to implementation the logistic audit. General procedure of implementation logistic audit can be described based on following steps:
Presentation of methodical of logistic audit
Before starting audit, an auditor has to inform the customer by appropriate form with the basic principles and methodology by which the audit will be carried out.
Preparation of logistic audit
In this step, it is necessary that the auditor to becomes familiar with the company, its departments and focusing. The main task of auditor is to define main and support processes in company i.e. to determine which processes contribution to the fulfillment of the mission of company in the greatest extent.
Setting the goals of audit
Before starting the audit is necessary determine the goals which have to be achieved by audit. Based on these goals will be decided what the main goal of audit is. It can be whole logistic chain or its specific part (selected logistic processes).
Audit processing
In this step, is necessary to identify all relevant processes in the company and describe its course or compile a process map. This step consists from two phases. The first phase is analysis of current state of company. Here are collected all relevant information based on selected goals in order to investigate the factors that influence the achievement of the priorities.
The auditor by means of observation, communication with employees and company management creates objective view about material, financial and information flows, its mutual links. The second phase is evaluation of current state. Auditor prepares and evaluates obtained data on the basis of established qualitative and quantitative indicators.
Results evaluation
After determination so-called “constraints or bottleneck”, auditor suggests measures for its removal. He also may order the activities for application in company. These activities will be carried out according to priorities (necessary mid urgent and recommended activities). The role of auditor is not only to perform the above mentioned steps but also to propose a budget and calendar for application of the proposed changes in practice.
