7:27 AM
Introduction
At first glance, the term “logistics” appears difficult to define. Along with terms such as “systems” it has become a catchall term, which can mean almost anything. From a practical perspective, the term commonly refers to the external transportation of goods, especially in distribution. However, this is really too restrictive an interpretation of the term, as its implications go well beyond transportation. Is there a middle ground? There is.
Logistics implies the co-ordination of activities. This co-ordination may pertain to the movement of industrial goods from suppliers to customers, or to the movement, within the plant, of material while it is being converted from raw material and components into finished products and assemblies, or while the material is in
storage. Certainly since we are referring to the movement of goods, transportation and material handling are significant elements of logistics, but there are others as well. Other elements include purchasing, scheduling, packaging, and storage and information flow. The impact of logistics on the ability of a company to satisfy its customers cannot be overstated. All other efforts at modernization within a company would not bear fruit until the logistics system is carefully designed to facilitate the smooth and efficient flow of goods in the system.
Why In-Plant Logistics?
We tend not to refer to the activities within the plant as logistics. Why, then, a term such as “in-plant logistics”? There are a few reasons. First, there is a significant similarity between external logistics and what happens to material within the plant. Secondly, unless we visualize the entire process inside the plant in a holistic fashion, we will miss the point. Thirdly, the elements inside the plant need to be integrated with the external system, something that is oftentimes overlooked. Let us consider these three points individually.
First, let us consider the similarity between external and internal logistics. In the external environment we have the transportation of goods over long distances that can take several days. For example, it can take a week to ten days to get material from New York to Chicago. Interestingly, although the distance moved inside the plant is relatively very short, but the time taken to move the material from unloading into storage, ready for use on the line, may be of the order of a week to ten days. This is similar to the time it takes to transport the same material over hundreds of kilometers. The reason is poor in-plant logistics. Let us take another instance. We tend to have relatively higher inventories of incoming material. One of the reasons for this is to reduce transportation cost by using larger trucks and by shipping in full truckloads only. In the case of manufacturing, we tend to find that large batches of material are delivered to the line with larger vehicles in an attempt to reduce the time it takes to deliver the material. The result is the same in both cases. There is excess inventory, which leads to shortage of space for the material that actually needs to be stored.
Let us take the second point, i.e., the need to take a holistic viewpoint of in-plant logistics. It would be instructive to note that several companies have a number of cost reduction exercises that are being conducted at any point in time. Let us take a little test. If these cost reductions, taken individually, are totaled, should they not result in an increase in profit of the same magnitude? I am sure that, in a large number of cases, this does not happen. The reason is that what we often do is to shift the cost from one area to another, not eliminate it from the company. Therefore there is no impact on the bottom line of the organization.
Thirdly, as mentioned earlier, we need to integrate the elements of the internal system with the external system. This is much easier said than done. One example will illustrate the point. One of the leading car manufacturers in the world was attempting to implement Just In Time at one of its plants in the US in the 1980s. The suppliers had been given detailed daily schedules with specific delivery time windows, during the day, in which the material was to be delivered to the plant. Now here is the kicker. The plant itself was being scheduled on a weekly basis and not on a daily basis. The result was, as expected, that some of the material had to be returned as there was no space. Also, significant expediting was used to get the material that was really needed at the plant, something not reflected in the schedules given to the suppliers.
In-Plant Logistics
Having set the stage for the reason for the use of in-plant logistics let us now consider what it consists of and what ought to be done to create greater value for the customer.
1. Infrastructure
2. Organization
3. Systems
Infrastructure
In the context of in-plant logistics, infrastructure refers to the physical facilities, such as the plant, and the layout. Usually a fair amount of attention is paid to the physical building at the time of plant start-up, as it constitutes the single largest one-time cost to the company. Unfortunately, activities such as layout and material flow planning are typically initiated only after the building is complete. This is already too late. The shape and size of the building then dictates how the material will flow, rather than the other way around. Typically over the life of the plant, the costs incurred as a result of the layout far exceed the initial cost of construction. But this fact is usually overlooked by most management.
The result of such oversight can be long distances that material has to travel, meandering lines due to poor flow planning, and congestion due to lack of adequate space to store the material, leading to material being stored in aisles, etc. A further consequence of all of this is poor material flow. In fact it would be inappropriate to use the term flow in the context of what happens to the material. This is perhaps one of the main reasons why a large number of plants have flow patters that resemble a bowl of spaghetti.
In an ideal situation the layout of the plant should be based on the material flow, which should be designed to be simple. The layout, in turn should dictate the building shape and size. In addition, the layout should be planned keeping in mind flexibility due to changing requirements and expansion in the future. In order to be able to change the layout or expand without disrupting the basic material flow pattern, the layout ought to be modular to the extent feasible.
Organization
The way in which the plant is organized can, and does, have a significant impact on the material flow. We have been bombarded by the notion of economy of scale and the result is larger plants and more centralization based on function. This is quite opposite to what it ought to be. In a world where “small is beautiful”, large, centralized plants lead to long lead times, high inventories, poor control, and therefore poor customer satisfaction.
The trend is toward smaller, decentralized plants; in fact, the trend is toward focused factories that are plants within plants. To understand the concept of focused factories, let us consider an automotive assembly plant where there may be a chassis, a body, and drive train and trim lines. The plant could be divided into four or five individual sub-plants, such as a chassis plant, a drive train plant, a body plant etc. These sub-plants could in turn supply a final assembly plant. Most of the functions of a plant would be decentralized into each of the sub-plants. These would be manufacturing, stores, materials, quality, etc. The ordering of material and the responsibility of ensuring that the assembly of that product is done in a timely fashion would be with that individual sub-plant. There would still be some centralized functions such as finance, product design, marketing, etc. In addition, some of the decentralized functions such as materials could also have a central role, i.e., to negotiate prices. But the individual sub-plant would determine the actual schedule.
The advantage of such decentralization is that the decisions would be taken at the point where they have an impact. For example, if the stores, materials and quality functions within each sub-plant form small teams, the paperwork and the movement time required for the incoming material can be reduced very significantly. There would be much better communication between manufacturing and stores in each decentralized sub-plant, leading to greater responsiveness and therefore, significantly shorter lead times.
The evolution from a centralized to a decentralized plant may take several steps. The key term is “evolve”, as people issues will dominate this transition. In large companies that are functionally organized, there is a significant amount of turf protection by individuals. Often, breaking down these functional silos into smaller teams appears to dismantle some of the empires people have built around themselves. People do not give up their turf easily. Therefore, the people aspect needs to be planned appropriately.
Systems
The third element in the description of in-plant logistics is the systems that would be used to operate the plant on a day-to-day basis. These include:
a. Physical Systems
b. Information Systems
c. Procedures
The physical system refers to the storage and handling systems that are used. There is a grave misconception that automation necessarily results in better systems. Automation in storage and handling is very useful, but automation for its own sake can be counter-productive. The equipment required needs to be based on the needs of the activity. A few words of caution are in order with regard to equipment. First, it pays to standardize equipment. It makes for easier maintenance due to familiarity with the equipment and commonization of spares. Second, the equipment should suit the task. Inappropriate equipment selection often leads to accidents, product damage, and poor efficiency. Third, the focus of companies ought to be on equipment availability much more than on equipment utilization. Handling and storage equipment are like fire engines. When you need them, they better be there. This does not imply that equipment utilization should not be considered. But, it should be in the context of the overall approach. For example, if we have decentralized our plant, and therefore the storage function, then it does not make sense to share handling equipment across decentralized units just to increase utilization.
Information systems have been assuming greater importance in the current context than ever before. The reasons are twofold. First, it is the availability of affordable hardware and software, including bar coding devices that have made real-time “real”. Secondly, people have started to understand the importance of a well-structured information system. People now understand that one of the reasons for high inventories is the lack of accurate inventory data. Also, customers are starting to demand better information on the status of their orders. Information systems are not just restricted to computerized systems, as the Japanese have amply demonstrated with their Kan-Ban system. Again, if the systems are broken down into sufficiently small focused factories, a lot of the information requirements can be simplified. But where required, sophisticated technologies from Warehouse Management Systems, ERP bar coding and RF technology has been used successfully to provide almost 100 percent accurate data on inventory, manpower and order location. The value of these systems cannot be undermined.
Procedures, which form the last but not least of the systems, are concerned with how the material will actually move. In the context of focused factories, the movement of material will be extremely simple as the distance it has to move is greatly reduced. In some of the world-class companies, the storage is directly at the point of use. Maruti is one example where the incoming material does not pass through any receiving or inspection, but is delivered directly by the supplier to the line. This is only possible in the case of self-certified suppliers, whose material needs no inspection. But in the case of companies where incoming material needs to be inspected, the unloading of materials would ideally be done next to the focused factory. The receiving and inspection will be done by a team and should be finished within one day and the material is ready for use on the line. The issue or supply of the material should be on the basis of “Pull” where the emptying of a pallet or bin or container on the line is a signal to supply another one from storage. This simplifies the paperwork and communication between manufacturing and stores. Ideally the process should start from the distribution system, which should pull material from the finished goods store based on actual sales. The finished goods store should, in turn, pull material from the line and the entire process should continue in this fashion until the supplier’s end.
Value and Cost
It would be inappropriate to end this paper without touching on the concept of value and cost. Most companies are concerned with cost cutting exercises, as mentioned earlier. But few have paid adequate attention to the concept of value of a certain activity. For example, several people refer to storage and handling as a non-value adding activity. But, if there is no value added, one ought to be able to totally eliminate it. The fact of the matter is that these functions offer a different type of value Instead of “form utility” provided by manufacturing, these activities provide “time and place utility.” Quite simply, eliminating these activities would bring the entire plant to a halt very quickly. By understanding why we cannot do without these activities, we begin to understand the value of these activities. Certainly there can be significant improvements in these activities, as has been shown by a large number of companies worldwide. However, treating them as non-value adding activities has often been misinterpreted by a fairly large number of professionals. This misinterpretation has resulted in a total lack of focus in this area. In fact, proper attention and constant improvement in this area can yield some very significant benefits to the manufacturing community.
At first glance, the term “logistics” appears difficult to define. Along with terms such as “systems” it has become a catchall term, which can mean almost anything. From a practical perspective, the term commonly refers to the external transportation of goods, especially in distribution. However, this is really too restrictive an interpretation of the term, as its implications go well beyond transportation. Is there a middle ground? There is.
Logistics implies the co-ordination of activities. This co-ordination may pertain to the movement of industrial goods from suppliers to customers, or to the movement, within the plant, of material while it is being converted from raw material and components into finished products and assemblies, or while the material is in
storage. Certainly since we are referring to the movement of goods, transportation and material handling are significant elements of logistics, but there are others as well. Other elements include purchasing, scheduling, packaging, and storage and information flow. The impact of logistics on the ability of a company to satisfy its customers cannot be overstated. All other efforts at modernization within a company would not bear fruit until the logistics system is carefully designed to facilitate the smooth and efficient flow of goods in the system.
Why In-Plant Logistics?
We tend not to refer to the activities within the plant as logistics. Why, then, a term such as “in-plant logistics”? There are a few reasons. First, there is a significant similarity between external logistics and what happens to material within the plant. Secondly, unless we visualize the entire process inside the plant in a holistic fashion, we will miss the point. Thirdly, the elements inside the plant need to be integrated with the external system, something that is oftentimes overlooked. Let us consider these three points individually.
First, let us consider the similarity between external and internal logistics. In the external environment we have the transportation of goods over long distances that can take several days. For example, it can take a week to ten days to get material from New York to Chicago. Interestingly, although the distance moved inside the plant is relatively very short, but the time taken to move the material from unloading into storage, ready for use on the line, may be of the order of a week to ten days. This is similar to the time it takes to transport the same material over hundreds of kilometers. The reason is poor in-plant logistics. Let us take another instance. We tend to have relatively higher inventories of incoming material. One of the reasons for this is to reduce transportation cost by using larger trucks and by shipping in full truckloads only. In the case of manufacturing, we tend to find that large batches of material are delivered to the line with larger vehicles in an attempt to reduce the time it takes to deliver the material. The result is the same in both cases. There is excess inventory, which leads to shortage of space for the material that actually needs to be stored.
Let us take the second point, i.e., the need to take a holistic viewpoint of in-plant logistics. It would be instructive to note that several companies have a number of cost reduction exercises that are being conducted at any point in time. Let us take a little test. If these cost reductions, taken individually, are totaled, should they not result in an increase in profit of the same magnitude? I am sure that, in a large number of cases, this does not happen. The reason is that what we often do is to shift the cost from one area to another, not eliminate it from the company. Therefore there is no impact on the bottom line of the organization.
Thirdly, as mentioned earlier, we need to integrate the elements of the internal system with the external system. This is much easier said than done. One example will illustrate the point. One of the leading car manufacturers in the world was attempting to implement Just In Time at one of its plants in the US in the 1980s. The suppliers had been given detailed daily schedules with specific delivery time windows, during the day, in which the material was to be delivered to the plant. Now here is the kicker. The plant itself was being scheduled on a weekly basis and not on a daily basis. The result was, as expected, that some of the material had to be returned as there was no space. Also, significant expediting was used to get the material that was really needed at the plant, something not reflected in the schedules given to the suppliers.
In-Plant Logistics
Having set the stage for the reason for the use of in-plant logistics let us now consider what it consists of and what ought to be done to create greater value for the customer.
1. Infrastructure
2. Organization
3. Systems
Infrastructure
In the context of in-plant logistics, infrastructure refers to the physical facilities, such as the plant, and the layout. Usually a fair amount of attention is paid to the physical building at the time of plant start-up, as it constitutes the single largest one-time cost to the company. Unfortunately, activities such as layout and material flow planning are typically initiated only after the building is complete. This is already too late. The shape and size of the building then dictates how the material will flow, rather than the other way around. Typically over the life of the plant, the costs incurred as a result of the layout far exceed the initial cost of construction. But this fact is usually overlooked by most management.
The result of such oversight can be long distances that material has to travel, meandering lines due to poor flow planning, and congestion due to lack of adequate space to store the material, leading to material being stored in aisles, etc. A further consequence of all of this is poor material flow. In fact it would be inappropriate to use the term flow in the context of what happens to the material. This is perhaps one of the main reasons why a large number of plants have flow patters that resemble a bowl of spaghetti.
In an ideal situation the layout of the plant should be based on the material flow, which should be designed to be simple. The layout, in turn should dictate the building shape and size. In addition, the layout should be planned keeping in mind flexibility due to changing requirements and expansion in the future. In order to be able to change the layout or expand without disrupting the basic material flow pattern, the layout ought to be modular to the extent feasible.
Organization
The way in which the plant is organized can, and does, have a significant impact on the material flow. We have been bombarded by the notion of economy of scale and the result is larger plants and more centralization based on function. This is quite opposite to what it ought to be. In a world where “small is beautiful”, large, centralized plants lead to long lead times, high inventories, poor control, and therefore poor customer satisfaction.
The trend is toward smaller, decentralized plants; in fact, the trend is toward focused factories that are plants within plants. To understand the concept of focused factories, let us consider an automotive assembly plant where there may be a chassis, a body, and drive train and trim lines. The plant could be divided into four or five individual sub-plants, such as a chassis plant, a drive train plant, a body plant etc. These sub-plants could in turn supply a final assembly plant. Most of the functions of a plant would be decentralized into each of the sub-plants. These would be manufacturing, stores, materials, quality, etc. The ordering of material and the responsibility of ensuring that the assembly of that product is done in a timely fashion would be with that individual sub-plant. There would still be some centralized functions such as finance, product design, marketing, etc. In addition, some of the decentralized functions such as materials could also have a central role, i.e., to negotiate prices. But the individual sub-plant would determine the actual schedule.
The advantage of such decentralization is that the decisions would be taken at the point where they have an impact. For example, if the stores, materials and quality functions within each sub-plant form small teams, the paperwork and the movement time required for the incoming material can be reduced very significantly. There would be much better communication between manufacturing and stores in each decentralized sub-plant, leading to greater responsiveness and therefore, significantly shorter lead times.
The evolution from a centralized to a decentralized plant may take several steps. The key term is “evolve”, as people issues will dominate this transition. In large companies that are functionally organized, there is a significant amount of turf protection by individuals. Often, breaking down these functional silos into smaller teams appears to dismantle some of the empires people have built around themselves. People do not give up their turf easily. Therefore, the people aspect needs to be planned appropriately.
Systems
The third element in the description of in-plant logistics is the systems that would be used to operate the plant on a day-to-day basis. These include:
a. Physical Systems
b. Information Systems
c. Procedures
The physical system refers to the storage and handling systems that are used. There is a grave misconception that automation necessarily results in better systems. Automation in storage and handling is very useful, but automation for its own sake can be counter-productive. The equipment required needs to be based on the needs of the activity. A few words of caution are in order with regard to equipment. First, it pays to standardize equipment. It makes for easier maintenance due to familiarity with the equipment and commonization of spares. Second, the equipment should suit the task. Inappropriate equipment selection often leads to accidents, product damage, and poor efficiency. Third, the focus of companies ought to be on equipment availability much more than on equipment utilization. Handling and storage equipment are like fire engines. When you need them, they better be there. This does not imply that equipment utilization should not be considered. But, it should be in the context of the overall approach. For example, if we have decentralized our plant, and therefore the storage function, then it does not make sense to share handling equipment across decentralized units just to increase utilization.
Information systems have been assuming greater importance in the current context than ever before. The reasons are twofold. First, it is the availability of affordable hardware and software, including bar coding devices that have made real-time “real”. Secondly, people have started to understand the importance of a well-structured information system. People now understand that one of the reasons for high inventories is the lack of accurate inventory data. Also, customers are starting to demand better information on the status of their orders. Information systems are not just restricted to computerized systems, as the Japanese have amply demonstrated with their Kan-Ban system. Again, if the systems are broken down into sufficiently small focused factories, a lot of the information requirements can be simplified. But where required, sophisticated technologies from Warehouse Management Systems, ERP bar coding and RF technology has been used successfully to provide almost 100 percent accurate data on inventory, manpower and order location. The value of these systems cannot be undermined.
Procedures, which form the last but not least of the systems, are concerned with how the material will actually move. In the context of focused factories, the movement of material will be extremely simple as the distance it has to move is greatly reduced. In some of the world-class companies, the storage is directly at the point of use. Maruti is one example where the incoming material does not pass through any receiving or inspection, but is delivered directly by the supplier to the line. This is only possible in the case of self-certified suppliers, whose material needs no inspection. But in the case of companies where incoming material needs to be inspected, the unloading of materials would ideally be done next to the focused factory. The receiving and inspection will be done by a team and should be finished within one day and the material is ready for use on the line. The issue or supply of the material should be on the basis of “Pull” where the emptying of a pallet or bin or container on the line is a signal to supply another one from storage. This simplifies the paperwork and communication between manufacturing and stores. Ideally the process should start from the distribution system, which should pull material from the finished goods store based on actual sales. The finished goods store should, in turn, pull material from the line and the entire process should continue in this fashion until the supplier’s end.
Value and Cost
It would be inappropriate to end this paper without touching on the concept of value and cost. Most companies are concerned with cost cutting exercises, as mentioned earlier. But few have paid adequate attention to the concept of value of a certain activity. For example, several people refer to storage and handling as a non-value adding activity. But, if there is no value added, one ought to be able to totally eliminate it. The fact of the matter is that these functions offer a different type of value Instead of “form utility” provided by manufacturing, these activities provide “time and place utility.” Quite simply, eliminating these activities would bring the entire plant to a halt very quickly. By understanding why we cannot do without these activities, we begin to understand the value of these activities. Certainly there can be significant improvements in these activities, as has been shown by a large number of companies worldwide. However, treating them as non-value adding activities has often been misinterpreted by a fairly large number of professionals. This misinterpretation has resulted in a total lack of focus in this area. In fact, proper attention and constant improvement in this area can yield some very significant benefits to the manufacturing community.
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