Logistics Planning Process

To match the changing environment in the logistics due to the changes in the markets, competitors, suppliers and technology, there is a need for a systematic planning and design methodology to formally include the relevant consideration and effectively evaluate the alternatives.

Read More: The Concept of Logistics Planning

The logistics relational and operating environment is constantly changing. Even for the established industries, a firm’s markets, demands, costs and service requirements change rapidly in response to the customer and competitive behavior. Just as no ideal logistical system is suitable for all enterprises the method for identifying and evaluating alternative logistics strategies can vary extensively. However there is a general process applicable to most logistics design and analysis situations. The logistics planning process can be segmented into three phases: problem definition and planning, data collection and analysis, and recommendations and implementation.The following discussion describes each phase and illustrates the types of issues encountered.

Phase 1: Problem Definition and Planning

Phase 1 of logistics planning process provides the foundation for the entire project. A thorough and well-documented problem definition and plan are essential to all that follows.

1. Feasibility Assessment

The process of evaluating the need and desirability for change is referred to as feasibility assessment and it includes the activities of situational analysis, supporting logic development, and cost benefit estimation. The objective of doing so is to understand the environment, process, and performance characteristics of the current system and to determine future estimation.

a) Situational analysis: The purpose of the situational analysis is to provide senior management with the best possible understanding of the strengths and weaknesses of the existing logistics capabilities for both current and future environment. The situational analysis is the performance of measures and characteristics that describe the current logistics environment through:

  1. Internal review: Internal review is necessary to develop a clear understanding of existing logistics by covering the overall logistics process as well as each logistics function with respect to its stated objectives and its capabilities to meet those objectives. It profiles historical performance, data availability, strategies, operation and tactical policies and practices. All major resources such as workforce, equipment, facilities, relationships and information are examined. The comprehensive review attempts to identify the opportunities that might motivate or justify logistics system redesign or refinement. Assessment must consider the process (physical and information flows through the value – added chain), decisions (logic and criteria currently used for value chain management), and key measures for each major logistics activity. These measurements focus on the key performance indicators and the firm’s ability to measure them.
  2. Market assessment & competitive evaluation: The objective is to document and formalize customer perceptions and desires with regard to the changes in the firm’s logistical capabilities. It’s the review of the trends and service demands required by customers by the use of interviews with the selected customers or through customer surveys. The assessment focuses on the external relationships with the suppliers, customers (wholesalers and retailers) and consumers (final consumer). The assessment not only considers trends in requirements and processes but also the enterprise and the competitor’s capabilities.
  3. Technology Assessment: It focuses on the application and capabilities of the key logistics technologies, including transportation, storage, material handling, packaging, and information processing. The assessment considers the firm’s capabilities in terms of current technologies and the potential for applying new technologies. The objective of the assessment is to identify advancements that can provide effective trade – offs with other logistics resources such as transportation and inventory.

b) Supporting logic development: The second feasibility assessment task is development of a supporting logic to integrate the findings of the internal review, external assessment and technology study. Supporting logic development builds on this comprehensive review in three ways

  1. First – supporting logic development forces a critical review of the potential opportunities for logistics improvements and a determination of whether additional investigation is justified, using logistics principles such as tapering principle, principle of inventory aggregation. The resulting benefits or costs should be clearly identified.
  2. Second – it critically evaluates current procedures and practices using comprehensive, factual analysis and evaluation that isn’t influenced by opinion and thus help in identifying areas with improvement potential which in turn provides a foundation to determine the need for strategic adjustment. The deliverables of this evaluation process include classification of planning and evaluation issues prioritized into primary and secondary categories across short and long range planning horizons.
  3. Third – the process of developing supporting logic should include clear statements of potential redesign alternatives such as:
    • Definition of current procedures and systems
    • Identification of the most likely system design alternatives based on leading industry and competitive practices
    • Suggestion of innovative approaches based on new theory and technologies

The alternatives along with being practical should also challenge the existing practices. Flow diagrams and /or outline illustrating the basic concepts associated with each alternative are constructed, which frame opportunities for flexible logistics practices, clearly outline value added and information flow requirements and provide a comprehensive overview of the options. A recommended procedure requires the manager responsible for evaluating the logistical strategy to develop a logical strategy to develop a logical statement and justification of potential benefits. Using customer service concept and logistics integration logic and methodology, the manager should commit to paper the most attractive strategy alternatives.

c) Cost benefit estimate: The final feasibility assessment is a preplanning estimate of the potential benefits of performing a logistics analysis and implementing the recommendation. Benefits should be categorized in terms of:

  • Service improvements – It includes results that enhance availability, quality or capability. Improved sciences increase loyalty of existing customers and may also attract business.
  • Cost reduction  – Cost reduction benefits may be observed in two forms:
    1. First, they may occur as a result of a one time reduction in financial or managerial resources required to operate the existing system for e.g. Reduction in capital deployed for inventory and other distribution related assets
    2. Second, cost reductions may be found in the form of out – of – pocket or variable expenses. For e.g. new technologies for material handling and information processing often reduce variable cost by allowing more efficient procedures and operations.
  • Cost prevention – Cost prevention reduces involvement in programs and operations experiencing cost increases.  Any cost prevention justification is based on an estimate of future conditions and therefore is vulnerable to some error for e.g. many material – handling and information technology upgrades are at least partially justified through financial analysis of the implications of future labor availability and wage levels.

In the final analysis, the decision to undertake in – depth planning will depend on how convincing the supporting logic is, how believable estimated benefits are, and whether estimated benefits offer sufficient return on investment to justify organizational and operational change. These potential benefits must be balances against the out 0- of pocket cost required to complete the process.

2. Project Planning:

Logistics system complexity requires that any effort to identify and evaluate strategic or tactical alternatives must be planned thoroughly to provide a sound basis for change. Project planning involves five specific items:

  1. Statement of objectives: The statement of objectives documents the cost and service expectations for the logistics systems revisions. It’s essential that they be stated specifically and in terms of measurable factors. The objective fine market or industry segments, the time frame for revisions, and specific service levels. For e.g., desired delivery of 98 percent of all orders within 48 hours after the order is placed, minimal customer shipments from secondary distribution centers, back – orders held for a maximum of five days, etc. specific definitions of these objectives direct system design efforts to ache9ice explicit performance levels. Total system cost can then be determined.
  2. Statement of constraints: The second project planning consideration concerns design constraints. On the basis of the situational analysis, it’s expected that senior management will place restrictions on the scope of permissible system modifications depending on the specific circumstances of individual firms. But constraints can affect the overall planning process for e.g. one restriction common to distribution system design concerns the network of manufacturing facilities and their product mix assortment which the management often holds constant for logistical system redesign as there are large financial investments in existing production facilities. The purpose of developing a statement of constraints is to have a well-defined starting point and overall perspective for the planning effort. The statement of constraints defines specific organizational elements, buildings, systems, procedures, and/or practices to be retained from the existing logistical system.
  3. Measurement standards: Such standards direct the project by identifying the cost structures and performance penalties and by providing a means to ass’s success. Management must stipulate guidelines for each category as a prerequisite to formulation of a plan. It is important that the standards adequately reflect total system performance rather than a limited, sub optimal focus on logistics functions. Once formulated, such standards must be held constant throughout system development. An important measurement requirement is to quantify a list of assumptions that underlie or provide the logic supporting the standards. Measurement standards should include definitions of how cost components such as transportation are calculated and also relevant customer service measures and method of calculation must also be included.
  4. Analysis procedures: Analysis techniques range from simple manual methods to elaborate computerized decision support tools. For e.g., models incorporating optimization or simulation algorithms for evaluating and comparing alternative logistics warehouse networks. Once the project objectives and constraints are defined, planning must identify alternative solution techniques and select the best approach. Selection an analysis technique must consider the information necessary to evaluate the project issues and options
  5. Project work plan: On the basis of feasibility assessment, objectives, constraints and analysis technique, a project work plan must be determined and the resources and time required for completion identified. The alternatives and opportunities specified during the feasibility assessment provide the basis for determining the scope of the study. In turn the scope determines the completion time. One of the most common errors in strategic planning is to under estimate the time required to complete a specific assignment. Overruns require financial expenditures and reduce project credibility. There are a number of PC – based software packages available to structure projects, guide resource allocation, and measure progress.

Phase 2: Data Collection And Analysis

Once the feasibility assessment and project plan are completed, phase 2 of logistics planning process focuses on data collection and analysis. This includes activities to (1) define assumptions and collect data, and (2) analyze alternatives

1) Assumptions And Data Collection: This activity builds on the feasibility assessment and project plan to develop detailed planning assumptions and identify data collection requirements. Specific tasks are as follows

a) Define analysis approach and techniques: The most common techniques are analytical, simulation and optimization

  1. The analytical approach uses standard numerical methods, such as those available through spreadsheets, to evaluate each logistics alternative. For e.g., spreadsheet availability have increases the use of analytical tools for distribution applications
  2. A simulation approach can be likened to a “wind tunnel” for testing logistics alternatives. Simulation is widely used, particularly when significant uncertainty is involved. The testing environment can be physical (a model material handling system that physically illustrates product flow in a scaled down environment) or numerical (such as a computer model of a material handling environment that illustrates product flow on a computer screen) current software makes simulation one of the most cost effective approaches foe dynamically evaluating logistics alternatives
  3. Optimization uses linear or mathematical programming to evaluate alternatives and select the best one. Because of its powerful capabilities, optimization is used extensively for evaluating logistics network alternatives such as the number and location of the distribution centers.

b) Define and review assumptions: Assumptions definition and review build on the situation analysis, project objectives, constraints and measurements standards. For planning purposes, the assumption defines the key operating characteristics, variables and economies of current and alternative systems. Assumptions generally fall into three classes:

  1. Business assumptions – They define the characteristics of the general environment including relevant market, consumer, and product trends and competitive actions, within which an alternative logistics plan must operate. They are generally outside the ability of the firm to change.
  2. Management assumptions define the physical and economic characteristics of the current or alternative logistics environment and are generally within the firm’s ability to change or refine. Typical assumptions include a definition of alternative distribution facilities, transport modes, logistics processes and fixed and variable costs.
  3. Analysis assumption defines the constraints and limitations that must be included to fit the problem to the analysis technique. These assumptions frequently concern problem size, degree of analysis detail and solution methodology.

The elements of assumption categories are as follows

BUSINESS ASSUMPTIONS
  1. Scope: Definition of business units and product lines to be included
  2. Alternatives: Range of options that can be considered
  3. Market Trends: Nature and magnitude of change in market preferences and buying patterns
  4. Product Trends: Nature and magnitude of change in market preferences and buying patterns particularly with respect to package size and packaging.
  5. Competitive actions: Competitive logistics strengths, weaknesses and strategies.
MANAGEMENT ASSUMPTIONS
  1. Markets: Demand patterns by market area, product and shipment size
  2. Distribution Facilities: Locations, operating policies, economic characteristics and performance history of current and potential distribution facilities.
  3. Transportation: Transportation rates for movement between potential and existing distribution facilities and customers
  4. Inventory: Inventory levels and operating policies for each distribution facility
ANALYSIS ASSUMPTIONS
  1. Product Groups: Detailed product information aggregated to fit within the scope of analysis 1. Technique.
  2. Market Areas: Customer demand grouped to aggregate market areas to fit the scope of analysis techniques

c) Identify data resources: The process of data collection begins with a feasibility assessment. A fairly detailed specification of data is required to formulate or fit the analytical technique. For situations when data are extremely difficult to collect or when the necessary level of accuracy is unknown, sensitivity analysis can be used to identify data collection requirements. For e.g. an initial analysis may be completed using transportation costs estimated with distance – based regressions. The types of data required in a logistical design n study can be divided into three classes: business assumptions, management assumptions and analysis assumptions. The majority of data required in a logistical study can be obtained from internal records. Although considerable searching may be needed, most information is generally available.

The first major data category is sales and customer orders. The annual sales forecast and percentage of sales by month, as well as seasonality patterns are necessary for determining logistics volume and activity levels. Historical samples of customer order invoices are also needed to determine shipping patterns by market and shipment size. The combination of aggregate measures of demand and detailed order profiles of projects the requirements that the logistics system must be capable of satisfying. Specific customer data are also required to consider the cost and time associated with moving the products across distance. Customers and markets ate often aggregated by location, type, size, order frequency, growth rate, and special logistical services to reduce analysis complexity.

For integrated channel analysis, its necessary to identify and track the costs associated with manufacturing and purchasing. It’s often necessary to consider the number and location of plants, product mix, production schedules and seasonality. Identification of policies and costs associated with inventory transfer, reordering, and warehouse processing, inventory control rules and product allocation procedures. For each of the current and the potential warehouse, the operating costs, capacities, product mix, storage levels and service capabilities should be established.

Transportation data requirements. Transportation data requirements include the number and type of modes utilized, modal selection criteria, rates and transit times, and shipping rules and policies.

For most logistics analysis applications, a select amount of future market data is useful for evaluating future scenarios. Although the management may be able to prepare a consolidated sales forecast it is difficult to prepare a market-by-market projection of sales. There can be two solutions to this problem.

  1. Usage of demographic projections that correlate highly with sales can help the company to estimate future demand levels and hence determine future logistics requirements. Secondary data published by various government agencies can also provide a data bank of environmental information
  2. Keeping a watch on the competitors strategies and capabilities by documenting competitive logistical system designs and flows can be helpful in providing competitive benchmarks that compare customer service capabilities, distribution networks and operating capabilities.

d) Collect Data

Once the data sources have been identified the company can start assembly of required data and conversion of that data to an appropriate format for the analysis tool. To avoid errors like overlooking data that does not reflect major components of logistical activity or collection of data from a mis-representative time period, the data collection process should be properly documented.

e) Collect Validation Data

The objective of validation is to increase management credibility regarding the analysis process and to ensure that the results of the analysis accurately reflect reality. It is important to ensure that a through investigation is conducted into analytical results based on data that might not accurately reflect the past.

2) Analysis

The analyst uses the technique and data from the previous activity to evaluate logistics strategic and tactical alternatives. The process of analysis includes

  1. Define analysis questions: This involves defining specific analysis questions concerning alternatives and the range of acceptable uncertainty. The questions build on research objectives and constraints by identifying specific operating policies and parameters. For e.g.: In the case of inventory analysis questions might focus on alternative service and uncertainty levels.
  2. Complete and validate baseline analysis: The second task completes the baseline analysis of the current logistics environment using the appropriate method or tools. Results are compared with validation data collected previously to determine the degree of fit between historical and analytical findings. The comparison should focus on identifying significant differences, determining sources of possible errors and identifying and correcting them.
  3. Complete alternative analysis: An evaluation of systems alternatives should be accomplished either manually or electronically to determine the relevant performance characteristics of each alternative.
  4. Complete sensitivity analysis: In this phase uncontrollable factors like demand, factor cost or competitive actions are varied to assess the ability of potential alternatives to operate under a variety of conditions. Sensitivity analysis in conjunction with an assessment of potential scenario probabilities is then used in a decision tree to select the best alternative.

Phase 3 – Recommendations & Implementations

Phase 3 of logistics planning process operationalize planning and design efforts by making specific management recommendations and developing implementation plans.

a) Recommendations

Alternative and sensitivity analysis results are reviewed to determine recommendations to management. There are four steps in this part of the phase namely: –

  1. Identify the Best Alternative: Performance characteristics and conditions for each alternative must be compared to identify the two or three best options. The decision tree analysis should identify the best alternative i.e.: The one that meets the desired service objectives at the minimum total cost.
  2. Evaluate Costs and Benefits: A Cost Benefit analysis compares the alternatives for a base period and then projects comparative operations across a particular planning horizon. Potential benefits such as cost reduction; service improvement and cost prevention are identified and quantified. In other words when evaluating the potential of a particular logistical strategy an analysis comparing present cost and service capabilities with projected conditions must be completed for each alternative.
  3. Develop a Risk Appraisal: Risk Appraisal considers the probability that the planning environment will match the assumptions. It also considers the potential hazards related to system changeover. Risk related to adoption of a selected alternative can be quantified using sensitivity analysis. For e.g.: Assumptions can be varied and the resulting influence on system performance for each alternative can be determined. The end result of a risk appraisal provides a financial evaluation of the downside risk if the planning assumptions fail to materialize. Risks related to system changeover such as unanticipated delays, a series of contingency plans etc can also be quantified and a series of contingency plans could be tested to determine their possible impact.
  4. Develop Presentation: The final step in this procedure is a presentation to the management / submission of a report that identifies specific operating and strategic changes, provides qualitative reasons for suggesting these changes and then quantitatively justifies the changes in terms of service, expenses, asset utilization or productivity improvements.

b) Implementation

The actual plan or design implementation is the final stage of logistics planning process activity. An adequate implementation procedure is the only means to obtain a tangible return from the planning process. This broadly includes four phases.

  1. Define Implementation Plan: The implementation plan has to be defined in terms of the individual events, their sequence and their dependencies. The planning process may initially develop at a macro level. But it must ultimately be refined to provide individual assignment responsibility and accountability. Plan dependencies identify the interrelationships between events and thus define the completion sequence.
  2. Schedule Implementation: The implementation plan is scheduled based on the assignments identified in the previous stage. The schedule must allow adequate time for acquiring facilities and equipment, negotiating agreements, developing procedures and training.
  3. Define Acceptance Criteria: The criteria for evaluating the success of the plan are then developed. The Acceptance Criteria should focus on service improvements, cost reduction, improved asset utilization and enhanced quality. Although the acceptance criteria may focus on the area / function which was the main focus for the Plan, it should also take a broad perspective that focuses on total logistics system performance rather than the performance of an individual function.
  4. Implement: The final task is actual implementation of the plan or design. Implementation must include adequate controls to ensure that performance occurs on schedule and that acceptance criteria are carefully monitored.