Solving the Logistics Puzzle for Increased Profitability

As published in Angel Fund (Winter 2012) by Gary Herwitz, Managing Partner
of CoMetrics Partners, LLC and member of the Angel Fund Board of Directors

“The amateurs discuss tactics. The professionals discuss logistics.”
– Napoleon Bonaparte, 1814

After cost of product and payroll, inbound/outbound logistics represent the third largest expense component of most importers’ cost structure. Often CEOs delegate important decisions to middle management who may not possess the requisite knowledge or vision to ask the right questions to drive costs down. Inbound logistics represent the costs incurred to get the product from the origin point to an importer’s warehouse. Outbound logistics represent the cost of receiving and storing the inventory along with the labor costs to process the inventory into a shippable carton (including corrugated).

When asked about outbound costs incurred at a 3PL or company managed warehouse, management inevitably spends a great deal of time discussing what their “pick” or reach cost is along with the carton in/out cost for pre packs programs. Although what  your reach cost is certainly an important factor, the single biggest driver of outbound logistics costs is the packing arrangements with the end user retailer. For example, for an apparel company, replenishing a three piece poly versus a two piece poly reduces the outbound cost by 1/3 in addition to amortizing the corrugated over a higher selling price. Similarly the number of units in a pre pack carton is the biggest single factor in driving down the outbound cost for case pack programs. It’s simple math however how many companies are holding meetings with sales, production, finance, and traffic and reviewing for every customer the existing programs and challenging the team on maximizing the packing arrangements:

• Maximizing the units/inners in a pick pack program
• Maximizing the units in the pre pack cartons
• Demanding and living to a minimum quantity for replenishment orders
• Exploring compound packing

It sounds unrealistic but with the green initiative, retailers really do want to handle fewer cartons and destroy less corrugated. There is an opportunity to meet with senior operations management (not just the buyers) at big box retailers to discuss the packing arrangements. “Compound” packing is the concept of finding the lowest common denominator of assortments for “D” stores and having A-C doors order multiples of that assortment, thereby converting pick pack to case pack programs. Also note the corrugated is a lot cheaper to negotiate into the FOB with the factory (case pack) then paying for it domestically by repackaging for replenishment programs.

Pushing the envelope to maximize the units in both replenishment and case pack programs is by far the biggest opportunity to drive outbound logistics costs down. It requires a coordinated effort of sales/production and senior management to aggressively advocate your position with the retailer. You will be surprised what can be accomplished if this initiative is emphasized by the CEO.