Logistics Cost and Service - Supply Chain Consulting

LOGISTICS COST AND SERVICE 

2004 

ESTABLISH, INC. 

HERBERT W. DAVIS AND COMPANY

Mid 1960s 

Introduction – The Concept 

Logistics – The Modern Era 

Peter Drucker – The “Dark Continent in American 

Industry.” 

Logistics functions not coordinated: 

– Warehousing in Manufacturing 

– Transportation in Purchasing 

– Order Entry in Sales or Production 

– Inventory in Finance 

Reorganization to achieve a unified logistics 

function. 

Establish, Inc./Herbert W. Davis and Company www.establishinc.com 

Copyright © 2004, Herbert W. Davis and Company/Establish, Inc.

To complete the transformation required: 

New Chart of Accounts. 

Redefinition of the cost build-up in the 

corporation to support the budgets, 

benchmarking and reporting. 

Means to measure corporate progress 

in cost and service improvement. 

Benchmarking to other companies. 



The Herbert W. Davis and Company Distribution 

Cost Database was established in 1975 to provide 

a means for companies to compare performance 

to a peer group. 

Prepare data internally using prescribed 

definitions. 

Submit data in confidence. 

Receive comparisons by: 

– Product group 

– Product value ($/lb.) 

– Company size in sales dollars 

– Total weight shipped 





Initial Industries – 1978 

Pharmaceuticals, Medical and Healthcare 

Consumer Durables 

Chemicals, Plastics and Glass 

Consumer Non-Durables 

Food and Kindred Products 

Industrial Non-Durables 



Significant Participants (1970s) 

Coleman Company 

Department of Defense 

E. I. du Pont de Nemours 

Eight-Four Stores 

Ingersoll-Rand 

Kay-Bee Toy & Hobby Shops 

Lever Brothers Company 

Lifesavers, Ltd. 

Moore-Handley 

Nissan Motors 

Pitney-Bowes 

Schering-Plough 

Stanley Home Products 

Sterling Drug 

Travenol Laboratories 



Over the Years 

An Evolving Concept of Distribution 

Physical distribution became logistics 

and then supply chain management. 

– Increased interest in inbound 

materials, sourcing and procurement 

management 

– Cross-docking 

– Pooling 

– Export/import activities 



Globalization of sourcing and markets 

complicated what had been mostly 

domestic activities. 

The need for more detailed cost 

information complicated forms and the 

processing of data. 

A new Workbook for an International 

Logistics Audit was written in 1992. 

– Expanded forms 

– New processing software 

– More formal coding of information 



1974 

1982 

1983 

1985 

Timeline 

1987 

1992 

First private Database for FIEI 

Set up Database 

Completed first Workbook 

1999 

2001 

Restructured Database for 

globalization of logistics 

New European 

Database 

European Database expanded, 10 Countries 

First European Database, France 

Chemical Manufacturers 

of America Database 

Private benchmarking system for GE’s 72 divisions 

GMA - Grocery Manufacturers of America Database 

PMA - Pharmaceutical Manufacturers of America Database 

DTPA - Drug and Toilet Preparations Association Database 



Today – 2004 

North American Status 

Database of Logistics Cost and Service maintained and 

opened to all shippers to participate since 1974. 

Participation is achieved by completing a one-page 

questionnaire via mail, fax or on-line entry. 

Entries are processed within five to ten days. 

Participant is sent a customized benchmark comparing cost 

and service performance to four peer groups: 

– Product category 

– Product value 

– Company size – sales revenue 

– Company size – shipped weight 

Database is summarized annually and results reported at this 

conference. 

Presentation has been made to the Annual Conference every 

year since 1977. 



European Status 

Current version of European Database of 

Logistics Cost and Service in place for three 

years. 

Using the same definitions as the North 

American version. 

Great interest from companies and trade 

press. Many participants in fast-moving 

consumer goods. 

The growth in this Database will be in 

regional companies as well as Pan-European 

companies. 









Consumer Electronics 

High-Value Industrial Durable 

Computers 

Peripherals 

Telecommunications 

Industrial Replacement Parts 

Chemicals 

Industrial Supplies 

Consumer Replacement Parts 

Small Appliances 

Large Appliances 

Publishers 

Tires 

Consumer Packaged Goods 

Building Supplies/Hardware Products 

Low-Value Consumer Packaged Goods 

Recent Industries 

High-Value Consumer Packaged Goods 

Grocery 

Produce and Fresh Foods 

Meat and Fish Products 

Frozen Food 

Beverages 

Consumer Household Products 

Health and Beauty Aids 

High-Value Pharmaceuticals 

Low-Value Pharmaceuticals 

Industrial and Consumer 

Wholesalers/Distributors 

Apparel Retailers 

Drug Chains 

Mass Merchandisers 

Low-Value Industrial Durable 



Key Findings – 2004 

For the average company in our trend group, 

total logistics cost in 2004 was about level with 

2003. This is unusual—it occurred only once 

before (1992 to 1995): 

Cost as a percent of sales is down only 0.4% 

Cost per hundredweight is down 4.2% 

About 46% of companies were able to reduce 

their costs this year—significantly fewer than in 

recent years. 



Taking our trend group as a total: 

Sales are up 5.75% 

Costs are down 2.27% 

Weight is down 0.91% 

Product value is up 6.73% 



Interpretation for the Typical Company 

Sales prices were increased as shown by 

the product value increase. Sales revenue 

increased while the weight shipped 

declined. 

Since the shipping load was decreased, we 

should have expected costs to go down. 

They did, but by a lower amount than the 

sales price increase—probably because of 

higher wages, energy, taxes. etc. 

In summary, the environment aided logistics 

management’s cost reduction efforts. 



Several Database Trends are Evident 

Logistics costs which had been declining 

since 2001 for most companies seem to 

have leveled off. 

Logistics costs vary greatly between 

industrial groups. 

Customer service levels are still not 

improving. 

Overall, the past year has not been a good 

one for logistics costs and service 

improvement. 



Average Company—2004 Database 

Cost In 

% of Sales $/CWT 

Transportation 3.28% $22.90 

Warehousing 1.93 16.78 

Order Entry/Customer Service 0.47 5.36 

Administration 0.38 4.04 

Inventory Carrying 2.30 26.67 

Total Logistics Costs 8.37% $75.54 



Customer Service/ 

Order Entry 

23% 

Warehousing 

6% 

Cost Breakdown 

Percent of Sales 

Inventory Carrying 

27% 

39% 

Transportation 

Administration 


Copyright © 2004, Herbert W. Davis and Company/Establish, Inc. 

5%

Administration 

5% 

35% 

Inventory Carrying 

Cost Breakdown 

$/CWT 


31% 

Warehousing 

7% 

Customer Service/ 

Order Entry 



22%

Cost as a 

% of Sales 

12 

10 

8 

6 

4 

2 

0 

10.75 

Product Value 

Average Company 

Cost declines with higher value 

9.90 

8.17 

$15 

Product Value in $/Pound 

4.59 



Cost as a 

% of Sales 

12 

10 

8 

6 

4 

2 

0 

11.03 

Company Size 

Small companies pay more 

9.80 

8.33 

5.38 

$1,250 

Annual Sales ($ MM) 



Logistics Cost—Percent of Sales 

0 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 



9.0 

8.5 

8.0 

7.5 

7.0 

6.5 

Logistics Cost—Percent of Sales 

Last Five Years 

2000 2001 2002 2003 2004 



Percent 

50 

25 

0 

-25 

-50 

Annual Total Cost Change in Percent 

80 82 84 86 88 90 92 94 96 98 00 02 04 

$/CWT 

% of Sales 



Logistics Cost Change 

2004 versus 2003 

% of Sales $/CWT 

Transportation - 2.6% - 4.3% 

Warehousing + 0.7 - 3.5 

Order Entry/Customer Service - 9.0 - 12.3 

Administration - 5.0 - 5.9 

Inventory + 0.2 - 3.0 

Total - 0.4% - 4.2% 



75 

50 

25 

0 

-25 

-50 

Annual Functional Cost Change 

(Percent of Sales) 

79 81 83 85 87 89 91 93 95 97 99 01 03 

Warehousing 

Inventory 




Logistics Expense Change—2004/2003 

As a Percent of Sales 

All 100 % - 0.4% 

Reduced Costs 46 - 7.4 

No Change ±2% 8 

Increased Costs 46 + 7.0 

In Dollars per Hundredweight 

% of % Average 

Companies Difference 

All 100 % - 4.2% 

Reduced Costs 77 - 9.0 

No Change ±2% 0 

Increased Costs 23 + 11.2 



Definition 

Customer Service Levels 

The prompt and complete delivery of goods 

ordered 

Measurements 

Prompt = 8.4 days total order cycle time 

Complete 

Orders 91% 

Lines 94% 

Units 93% 



Average Performance Reported 

STANDARD PRODUCT MEASURES 

FULL DATABASE 

94 95 96 97 98 99 00 01 02 03 04 

Total Cycle Time (Days) 7 6 9 8 7 8 8 7 8 7 8 

Product Availability (% Orders) 86 87 87 87 85 85 86 87 88 85 91 

(% Lines) 92 92 94 94 93 90 92 92 95 91 94 

(% Cases) 96 96 93 95 95 92 90 93 93 91 93 



Critical Issues in Logistics and 

Supply Chain Management 



Davis Insights 

1. Strongest forces driving decisions in logistics. 

2. Most pressing issue in managing a logistics 

organization. 

3. Most pressing issue in operating logistics functions. 

4. Most difficult customer service requirement. 

5. Most recent changes in logistics network. 

6. Most recent change in systems that support logistics. 



In our survey of database participants and CLM members, 

the strongest forces driving decisions in logistics are: 

% of 

Responses 

50 

40 

30 

20 

10 

0 

Service Cost Cost and 

Service 

Hours of 

Service 

Scaling for 

Future 

Growth 

Supply 

Chain 

Strategy 

Other 



What is the most pressing issue in managing 

logistics? 

Visibility 

Integrating supply chain components 

Meeting service requirements 

Personnel 

Costs and service 

Selling the value of logistics 

Excess capacity in manufacturing and 

distribution 

Decentralized company and logistics 

functions 



What is the most pressing issue in operating 

logistics functions? 

Reducing costs 

Problems in the physical process 

Supply chain coordination 

Personnel problems 

3PL capabilities and roles 

IT solutions 

Carrier capacity 



What is your most difficult customer service 

requirement? 

Shortening cycle times 

Special customer requirements 

Fill rates/availability 

On-time delivery 

Next-day delivery 

Visibility 

Value-added processing 



What are the most recent changes in your 

logistics network? 

23% 

Other 

Downsizing 

20% 13% 

6% 

3% 

None DOT 

Change 



7% 

New 

Carriers 

New DCs 

7% 

Strategy 

Change 

Increasing 

3PLs 

7% 

7% 

Offshoring 

7% 

Software

What is the most recent change in your 

support systems? 

% of 

Responses 

50 

40 

30 

20 

10 

0 

TMS WMS ERP Planning None Visibility Other 



What It Means 

Costs are second only to service as the 

most important driver of logistics. 

Average logistics costs are level from 2003 

to 2004, a non-typical average. 

Half of companies have reduced their costs. 

Half of companies have experienced higher 

costs. 

The difference of 14% is logistics costs or >1 

percent of sales. 



Two Different Strategies for 

Two Different Situations 

#1 – Typified by Consumer Companies 

Out of any slump in sales and volume. 

Sales and volume up and growing. 

Rising logistics costs covered by these 

higher revenues. 

License to work on new initiatives. 

Capital expenditures possible. 



Two Different Strategies for 

Two Different Situations 

#2 – Typified by Industrial Companies 

Not out of the slump in sales and volume. 

Steady or declining sales and volume. 

Not able to cover rising logistics costs. 

Trying to keep logistics costs low through 

spending limits. 

New initiatives cannot be funded. 

Very limited capital expenditures possible. 



The Balanced Strategy 

Know your costs and service levels. 

Understand where your company places 

in comparison to your industry and other 

industries. 

Tightly control logistics independent of 

rising or falling sales. 

Improvement – and capitalization – need 

to be accomplished on a constant basis. 



How to Participate 

There is no charge, and confidentiality of your data is assured. 

For your participation, you will receive two computer analysis 

reports. 

The first compares your cost as a percent of annual sales and 

cost per hundredweight with your industry group’s average for 

the five major cost categories: transportation, warehousing, 

customer service/order entry, inventory carrying, and 

administration. 

Twenty-fifth and seventy-fifth percentiles are also provided to 

establish a range around the average. 

Also included in this report are comparisons based on product 

value, weight and revenue from the overall group of Database 

participants. 

The second report compares your customer service performance 

with the results reported by others in your industry. 





Herbert W. Davis and Company/Establish, Inc. 

Logistics Cost and Service Database - Cost Comparison Audit Report 

Company Name: Your Company Scope: Domestic 

Company Number: 9999 Date Issued: 9/04 

Percent of Annual Sales 

Transportation 1.96 

Warehousing 1.61 

Order Processing 0.15 

Administration 0.16 

Inventory Carrying 2.67 

Total Costs 

Cost per Hundredweight 

6.55 

Transportation 18.49 

Warehousing 9.02 

Order Processing 1.35 

Administration 0.96 

Inventory Carrying 8.65 

Total Costs 

Volumes 

38.47 

Million Pounds 271 

Million Sales (U.S. $) 532 

Product Value ($/Lb.) 1.96 

Number of Shipping Points 21 

Delivery Paid by Customer (%) 19 

Your Industry Category Similar Product Value Similar Weight Companies Similar Revenue Companies 

Your Lower Upper Lower Upper Lower Upper Lower Upper 

Company Quartile Average Quartile Quartile Average Quartile Quartile Average Quartile Quartile Average Quartile 

Sample 

2.25 

1.91 

0.14 

0.14 

1.21 

7.41 

8.84 

3.25 

0.73 

0.32 

4.74 

18.56 

98 

174 

1.03 

4 

4 

2.88 

2.52 

0.65 

0.82 

2.39 

9.02 

14.48 

6.99 

1.58 

0.55 

6.68 

30.18 

266 

553 

2.70 

11 

28 

3.52 

3.16 

1.22 

1.79 

3.30 

11.79 

21.14 

10.09 

2.58 

0.78 

9.06 

42.84 

384 

978 

5.09 

21 

60 

3.02 

1.85 

0.24 

0.13 

1.05 

7.93 

5.70 

2.88 

0.58 

0.32 

2.88 

13.40 

165 

198 

0.76 

5 

8 



5.01 

2.78 

0.36 

0.24 

2.13 

10.51 

10.61 

7.91 

2.39 

1.93 

7.30 

29.91 

587 

630 

1.19 

13 

38 

5.52 

3.71 

0.49 

0.34 

2.54 

14.55 

Sample 

Your Costs 

Transportation $10,406,546 

Order Processing $796,336 Inventory Carrying 

Warehousing $8,545,006 

Administration $862,900 Total Costs 

13.25 

9.87 

3.27 

2.00 

9.81 

41.70 

594 

682 

1.59 

18 

71 

2.77 

1.26 

0.21 

0.13 

1.07 

6.17 

3.60 

2.07 

0.19 

0.18 

1.47 

8.07 

356 

336 

0.80 

5 

5 

4.60 

2.47 

0.41 

0.29 

2.05 

9.79 

7.70 

5.37 

1.28 

1.04 

5.00 

20.24 

476 

774 

1.76 

14 

34 

5.23 

3.33 

0.53 

0.43 

2.55 

14.55 

10.10 

6.16 

1.62 

1.01 

5.47 

24.09 

583 

963 

1.94 

18 

67 

1.44 

1.12 

0.22 

0.16 

1.11 

5.20 

3.83 

1.58 

0.13 

0.12 

1.19 

6.44 

33 

226 

1.48 

2 

10 

3.37 

2.20 

0.52 

0.33 

2.05 

8.36 

11.87 

9.59 

3.02 

2.05 

16.93 

42.86 

193 

393 

7.38 

10 

41 

$14,228,760 

$34,839,548 

4.49 

3.22 

0.68 

0.44 

2.51 

11.18 

14.00 

10.89 

3.55 

2.70 

20.91 

57.40 

305 

519 

10.49 

15 

62

Company Name: Sample Scope: Domestic 

Company Number: 9999 Date Issued: 9/04 

Standard Measures Your Company Your Industry Category 

Total Order Cycle Time (calendar days) 8.25 6.26 

Product Availability % Orders 61% 95.30% 

Additional Measures 

Herbert W. Davis and Company/Establish, Inc. 

Logistics Cost and Service Database - Service Comparison Audit 

% Lines 75% 97.80% 

% Cases 82% 99.10% 

Perfect Orders 72% 75% 

Percent Delivered On-Time 88% 92%

Logistics Cost and Service - Supply Chain Consulting

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