Posted by Pack Secure to
Business Logistics
Compartmentalization is one of the biggest hurdles to
saving money and increasing efficiency throughout an
organization. There’s a naïve belief in organizations
that if each department operates efficiently, the overall
organization will be efficient too. While this is true to a
degree, it overlooks the ways decisions in one business
unit affect outcomes in another.
Damage is a good example. Managers outside logistics
and packaging are largely oblivious to damage unless it
directly affects their own cost centers. Therefore, they may
not try to prevent damage if they pay the cost of prevention
but don’t also benefit from the savings that result from
these actions.
For example, researchers at the University of Tennessee¹ found that although every supply chain executive
acknowledged the role of insurance in risk mitigation, it
wasn’t within their area of responsibility or among their
concerns. What else are they overlooking?
Damage’s Ripple Effect
Unit managers don’t always understand the wider
repercussions of damaged items, but CFO’s know the
total cost of damaged goods extends beyond any single
department or budget. The costs of damage ripple
throughout the organization in the form of both direct and
indirect expenses. Filing a freight claims, for example,
typically takes about two hours. That’s two hours of lost
productivity.
Damaged items also must be inspected and stored, taking
more time and space. When prorating the total costs of
damaged goods storage, including property taxes, utilities,
and rent or mortgage, the costs escalate.
Sales also may be affected. For example, if damaged items
can be salvaged and sold at a discount, they compete with
full-price items. If many damaged items are available, they
may subtly damage the company’s reputation.
Reshipping items increases logistics costs, especially if
overnight shipping is required. It also can cause delays
that may affect a customer’s current and future buying
decisions. For example, if an item was needed by a specific
date, customers may be unwilling or unable to wait for
reshipping and may go elsewhere. They may lose faith in
the company’s commitment to quality. For future orders,
customers may favor its competitors.
Damaged freight also must be measured in terms of lost
opportunity. This nebulous notions measures what a
company’s personnel and capital could do if it isn’t held up
while freight claims are resolved or items are repaired.
For example, rather than placating customers who
experienced damage, sales reps could be calling on potential
new customers. Packaging designers could concentrate on
developing more resilient, cost effective materials rather
than troubleshooting existing packaging. Companies could
be paid sooner and use that capital to fund additional staff,
expanded facilities, or marketing campaigns to attract new
business
The Cost of Downtime
When considering the total cost of damaged goods, be sure
to also consider the cost of downtime for customers, and
your own company’s exposure to their losses. While the cost
of downtime varies greatly among industries, Information
Technology Intelligence Consulting Research reports that
a single hour of downtime costs nearly all businesses (98
percent) with more than 1,000 employees more than
$100,000, and 81 percent of respondents more than
$300,000. One third said 60 minutes of downtime costs
between $1 and $5 million
In looking at some key industries, the average cost of a data
center outage³ is $740,357, according to Vertiv. While 22
percent of outages are linked to cybercrime, others result
from faulty cooling, weak batteries, poor maintenance,
and similar failings. Monitoring could alert IT professionals
to many of these potential problems, allowing them to be
proactive.
In the energy industry, unplanned downtime costs offshore
oil and gas producers an average of $38 million each year,
although some experience losses as high as $88 million.
While repairs account for the bulk of the expense, the
hidden costs of lost or delayed production cost companies
an average of $20,000 per day. Monitoring could reduce
that downtime.
Depending on the cause of the downtime, the shipper or
carrier may be held partially responsible. As a supplier,
you can be penalized financially for your role in causing or
prolonging the downtime.
Monitoring
Many of the events that cause damage and downtime can
be prevented by discovering what conditions items actually
experience during shipping and storage. Shipping damage indicators which provide the real time location of impact, tilt, and
temperature excursions increase a logistics managers’
visibility into the supply chain so they can take actions to
reduce damage. Increasing supply chain visibility is the thirdmost preferred risk mitigation strategy¹ among logistics
managers (behind compressing cycling time and choosing
strong suppliers), according to University of Tennessee
research.
The key is not just in learning that a particular shipment was
dropped, became too hot, or was transported on its side,
but in spotting trends and determining how to prevent
future occurrences.
For example, if a temperature-sensitive shipment containing
pharmaceuticals or chemicals was left on a hot tarmac too
long, the item’s properties may change. The items may
become dangerous or, in the case of medications, even
deadly. The solution may be to use packaging with better
thermal protection, use cooler routes during the warmest
months, or select carriers that guarantee minimal tarmac
time.
Likewise, if fragile objects like glass and mirrors (and
products that incorporate them, like TVs) are transported
at the wrong angle, they are more likely to break. Knowing
this, managers can adjust standard operating procedures,
train staff, and reinforce the packaging. If equipment was
dropped or hit during transit, the company may need to
revise handling procedures, retrain handlers, and inspect
the item for hidden damage.
First, however, managers need to be aware goods were
mishandled. The return on investment can be significant.
SpotSee customers report that in-transit monitoring
has dropped their damage rates an average of 60%. One
international online retailer says monitoring shipments for
impacts, tilts, and temperature excursions helped it reduce
damage by 90%, while another large online retailer says
damage rates fell from 10% to about 2%
Calculating ROI
There’s an adage that “One ‘uh-oh’ can wipe out a thousand
‘atta-boys’.” If you value happy customers, preventing that
one ‘uh-oh’ can be reason enough to invest a few dollars
in monitoring shipments for impacts, tilts, and temperature
excursions The return on investment comes sooner than you
may expect. For example, although the most sophisticated
recorders may cost a couple thousand dollars, they can be
used many times per year for several years. Therefore, a
monitor that costs $2,000 that’s used six times per year for
five years has an annual usage cost of $67 per shipment.
When shipping high dollar items like medical imaging
equipment, electrical transformers, or computers, investing
an extra $67 can save significantly more money by signaling
the potential for hidden damage and by eliminating the
finger-pointing that occurs once damage is determined..
And, importantly, monitoring provides data that can help
prevent damage in the future.
Sharing this device with other departments further defrays
its cost. This may mean working with other departments
that are responsible for similar items, as well as with
packaging and logistics business units. For example, the
same monitors that record events during transit also can
be used to analyze the robustness of new packaging and internal warehousing handling, as well as product testing.
With each new application the cost per use decreases.
An Option for Every Need
A variety of SpotSee monitoring options are available with
differing capabilities. For example, while some monitors
provide multiple uses and detailed information about
the time, geographic location, others focus tightly on the
impacts themselves, only providing information about the
dates and times certain impact thresholds were exceeded.
A range of even simpler, single-use devices indicate impacts
above predetermined limits.
That’s true for temperature excursions, too. Some indicators
record the fact that an excursion occurred, while others
have report-generating capabilities, and document the
extent and duration of the excursion so managers can make
informed decisions regarding product disposition.
Conclusion
While the direct costs of damage may be associated with the logistics or packaging
departments, the true cost of damage accrues to the entire organization, indirectly affecting many departments and
many decisions.
Taking steps to reduce the costs of damage – regardless of department -- therefore, makes sense.
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