Logistical diagnosis with a focus on truck transport

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Logistical diagnosis with a

focus on truck transport

Simon Horjus

Rijksuniversiteit Groningen Faculty of Economics and Business

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"Time lost cannot be found again”

Title: Logistical diagnosis with a focus on truck transport

University: Rijksuniversiteit Groningen

Faculty: Faculty of Economics and Business

Study program: Master of Science in Business Administration (MScBA)

Specialization: Operations & Supply Chain Management

Date: 9th of March 2009

Author: Simon Horjus

Student number: 1288768

E-mail address: s.e.horjus@gmail.com

Telephone number: +31(0)6 1887 3072

1st supervisor: Prof. dr. G. Sierksma

2nd supervisor: Prof. dr. J. de Vries

Organisation: TNT Post

Department: Staff Operations – Process Management

Address: Prinses Beatrixlaan 23

2595 AK ‘s-Gravenhage

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PREFACE

For the completion of my Master Operation & Supply Chain Management, I have written this research report. This research was executed at TNT Post, a fascinating company operating in a market that becomes more dynamic by the day. The last seven months have been a great learning experience, as it has given me insight in how a complex supply chain as TNT Post has, is managed.

The opportunity to do this internship was given to me by the colleagues of the section Transport, Eildert Panman, Albertine van Waes, and Gijsbert van Loopik. Therefore I am first using this opportunity to thank them. Also, I want to thank all colleagues of the department process management, as they could always make some time to answer the many questions I had about the processes within the supply chain. It is their contribution that has helped me to understand the complexity of TNT Post’s supply chain.

Furthermore, I want to thank my supervisors from the University of Groningen, prof. dr. G. Sierksma and prof. dr. J. de Vries, as they have given guidance to the research, and through their useful feedback I am now able to present the report that lies in front of you.

I hope you will enjoy reading this report. Amsterdam, 9th of March 2009,

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ABSTRACT

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SUMMARY

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What was found when the internal goals where described was that the internal performance measurement framework held two indicators, which did not capture the performance delivered very well. Especially the current cost measure does not reflect the performance delivered well, as it is based on historical values. The system is designed in such a way that the cost target for a certain year is based on the budget of the previous year minus a certain percentage. The effect of this is that people will only try to meet the target set, as doing better will lead to a harder to fulfil target the following year.

The goal of the logistical diagnosis that has been made is to examine why the internal performance measurement framework has been designed this way. First, a comparison has been made between the goals of a traditional transportation function and the transportation function within TNT Post. Here it was found that the focus on cost reduction and therefore the goal within the supply chain was not on the transport function. As transport costs take up a relative small part of the total supply chain costs (around x%), optimizing the transport cost will very likely lead to sub-optimization, when the cost of other processes within the supply chain is not taken into account. Following this, an analysis was made of the transport flows, where it was found that there is a lack of information and that the current information is not categorized well. From this analysis, it was concluded that four main categories could be distinguished in which transport had different characteristics, namely: the collection, delivery and inter-sorting network and empty trolley transport.

For transport within the collection and delivery network, it was found that many traditional transport performance measures were not applicable, mainly due to network constraints. The conclusion made here is that the optimal solution can be found within these networks by solving a scheduling problem, whereby the goal of the goal of the function is to minimize transport cost within network constraints.

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§ 3.1 Introduction ... 19 § 3.2 Corporate strategy ... 19 § 3.3 Logistical goals ... 21 § 3.3.1 External goals... 22 § 3.3.2 Internal goals ... 24 § 3.4 Areas of attention ... 26 § 3.4.1 Physical design... 26 § 3.4.2 Control concept ... 32 § 3.4.3 Organization ... 35 § 3.4.4 Information systems ... 37

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CHAPTER 4: LOGISTICAL DIAGNOSIS ... 39

§ 4.1 Introduction ... 39

§ 4.2 Analysis of the goal of the transportation function ... 41

§ 4.3 Analysis of the transport flows... 42

§ 4.3.1 Supply chain design ... 43

§ 4.3.2 Truck transport costs ... 44

§ 4.3.3 Transport flows ... 46

§ 4.4 Analysis of the relationships and constraints within the supply chain... 50

§ 4.5 Analysis of the improvement of the performance of truck transport ... 56

§ 4.6 Conclusion of the logistical diagnosis... 58

CHAPTER 5: LOGISTICAL REDESIGN ... 60

§ 5.1 Performance measurement framework... 60

§ 5.2 Evaluation of the performance measurement framework ... 64

CHAPTER 6: CONCLUSION... 66

BIBLIOGRAPHY ... 69

ATTACHMENT A: TARIFF CHART OS 98... 71

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CHAPTER 1: INTRODUCTION

§ 1.1 The company

TNT N.V. is a company with a long history, which can be dated back to 1752. Nowadays, through two divisions (Express and Mail), TNT is in the business of transferring goods and documents around the world. With over 200 countries served and 161.500 people employed, TNT is one of the larger companies in the industry. The Express division provides door-to-door express delivery services for customers sending documents, parcels and freight, where the Mail division provides services for collecting, sorting, transporting and distributing domestic and international mail1. TNT’s mission is to exceed its customers’ expectations in the transfer of their goods and documents around the world. TNT delivers value to its clients by providing the most reliable and efficient solutions through delivery networks2.

§ 1.2 Research domain

This research is executed within the section Transport, which is part of the department Staff Operations. The department Staff Operations is found within the business unit Production, which is part of the entity TNT Post Netherlands. TNT Post Netherlands is one of the four entities of the Mail division3. Within the organization, the section Transport is responsible for the physical distribution of products between the different units that make part of the postal network. In figure 1.1, the postal network is given, which shows the main transport flows throughout the network. The first part of the network is given in the left box, which is the collection part. Here, by van transport, mail is collected from customers, mail boxes and outlets and transported to business counters (BuBas in Dutch) throughout the country. From these business counters, the mail in transported by trucks to one the six sorting centres, where

Figure 1.1: Postal Network of TNT Netherlands

1_{http://group.tnt.com/aboutus/tntataglance/index.asp} 2_{http://group.tnt.com/aboutus/missionandstrategy/index.asp}

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it will undergo the first sorting. This is shown in the middle box of figure 1.1. After the first sorting has taken place, the mail is exchanged between the six sorting centres, using truck transport. Here the second sorting takes place, after which the mail is transported by trucks to one of the preparation centres throughout the country, as shown in the right box of figure 1.1. From these preparation centres the mail is either delivered through a delivery network by postman, or through a delivery service by van transport.

The focus of this research is at the truck transport movements within the total postal network of TNT Post Netherlands (middle box of figure 1.1). From these, the focus will be on the

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§ 1.3 Research motivation

With a foresight of loosing the monopoly on mail under 50 grams as well as increasing competition and digitalization, extensive cost reduction programs have been set up within TNT Post. TNT believes it will experience a volume decline of up to x% by 2015, compared to 2006 in the Netherlands, when no measures are undertaken. On every aspect within the entire supply chain as well as on all other business functions, cost reduction projects are run. As over x% of the total costs within TNT Post’s supply chain are made within Sorting and Delivery, the focus has always been on these processes. In recent years opportunities have been identified to cut costs in transport (which take up to x% of the total costs), which is why the section Transport has been established. The section Transport has been given the target to save in between x to y million Euros before 2015 on both truck and van transport, where x million Euros need to be saved on truck transport at the end of 2011.

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§ 1.4 Research blueprint

The research blueprint is the basis of this research. In the following sub-paragraphs, the research objectives, the problem statement and sub questions as well as the research model will be laid out. From now on, ‘postal network’ is replaced by ‘supply chain’, as these are synonyms of each other. From the research motivation given in the previous paragraph, the following research objectives have been derived:

 Identify what the current performance of truck transport within the supply chain is.  Identify areas to improve the performance truck transport within the supply chain.

Problem statement

In accordance with the company supervisors and derived from the research objectives, the following problem statement has been set, which will be answered in this report:

“How can the performance of truck transport within TNT Post’s supply chain be improved?”

From this problem statement sub questions will be derived in order to give guidance to the research. The following sub questions have been derived from the problem statement:

Sub questions

First definitions need to be given of two words where within the scientific literature no generally agreed definition could be found. Sub questions 1 and 2 have been set up, to give the definitions that will be used in this research.

1. What is the definition of supply chain?

2. How can performance within a transportation context be defined?

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3. How is the current logistical concept of TNT Post filled in?

4. Which strengths and weaknesses are identified within the logistical concept of TNT Post?

From the perspective of this bigger picture onwards, the logistical diagnosis will be made. Of the identified weaknesses given in chapter 3, the effects and causes will be analyzed. Following this, an attempt will be made to answer the problem statement. Sub question 5 is created, to give guidance to this part of the research.

5. What are the effects and causes of the weaknesses that have been identified? When these questions are answered, the problem statement can be answered.

Research model

The research model is given in figure 1.3. This model is based on the logistical concept that will be used in this research. The model shows how the relationship between the factors that influence the performance of transportation, namely the logistical goals and the areas of attention4. According to the theory behind the logistical concept, logistical performance can be improved by focusing of the reconciliation of the logistical goals with the areas of attention. This theory also gives that a proper analysis starts with the corporate goals, from which the logistical

goals are derived

(external and internal goals). As logistical goals are integral goals, the aim is to optimize the supply chain as a whole and not only individual functions like sales and distribution. Keeping this in mind, the transport goals will

Figure 1.3: Research model be analyzed. The two

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arced arrows in the ‘performance of transportation’ box show the positive relationship of reconciliation of organizational (or transport in this case) goals and the areas of attention. Therefore, the following phase in this research is an analysis of the areas of attention. The performance measurement framework on the left side shows the relationship between this framework and the factors that need to be measured. The outcome of this process is that when the performance is improved, the costs of the system will be lower, which will help to meet the target of saving the section Transport has.

§ 1.5 Research methodology

For the first phase, which is the literature review, desk research is the only research method used. The following phase, the description of the current situation, also desk research is used, but interviews and observations will help here to get more in-depth insight in the processes. The next phase, the logistical diagnosis, is primarily done by desk research, as the data that is available needs to be analyzed thoroughly in order to be able to make well founded conclusions. In the analysis of the constraints in the different processes, which is also part of this phase, interviews will also be used to find out how the different processes relate to transport. The final phase exists of writing the conclusions, which is done behind a desk. As within this report research is performed at a large and complex network, it is necessary describe the limitations of this research, as there is not enough time to do research at each aspect within the supply chain. The following limitations have been set for this research:

 Research has not been performed at the structure of the network (routings), which are taken as given.

 Research has not been performed at norm values for the performance measurement framework that has been presented.

 Research has not been performed at how to implement the recommendations that have been made, as time is the main restriction for this.

§ 1.6 Research outcome

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reality problems, two types can be distinguished; functional and instrumental. The problem that will be analyzed in this report has a functional nature, as the section Transport will not be able to meet its target if the performance of transportation is not improved.

Now that the type of problem is known, it is necessary to decide what type of research needs to be performed, to be able to decide what kind of knowledge is required (De Leeuw, 2001). De Leeuw (2001) separates two types of research, ‘practical’ and ‘scientific’ research, where practical research delivers a product that can be used for specific management problems, whereas scientific research delivers findings that can be generalized.

This research is practical in its nature, meaning a problem has been defined. First appropriate scientific literature will need to be found to help solving the problem and the outcome will be that a specific management problem is solved, by means of a structured analysis of all the problems.

§ 1.7 Research outline

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CHAPTER 2: LITERATURE REVIEW

§ 2.1 Introduction

In this chapter, the literature review will be presented. The objective of this chapter is to present literature that helps to solve the problem statement. The main contribution of this chapter to the research will be:

 Definitions of supply chain and performance within a transportation context.

 Description of the logistical concept of Ribbers and Verstegen (1992) extended with literature for operationalisation.

First, in paragraph 2.2 the definition of supply chain will be given. This definition determines the scope of the research, as definitions of the scope of a supply chain differ among different authors. Next, a definition of performance within a transportation context will be presented in paragraph 2.3. This definition clarifies how performance will be interpreted in this research. In paragraph 2.4 a description of the logistical concept of Ribbers and Verstegen (1992) will be given. The logistical concept is the basis of this research, as it presents a structure for the description of the current situation in chapter 3. Finally, in paragraph 2.5 a conclusion of the literature review will be given, in which the main outcomes of the review will be presented.

§ 2.2 Definition of supply chain

A condensed review of the literature about supply chains showed that there is no generally agreed definition of supply chain. First of all, differences in the scope have identified. Hoogewegen (1997) distinguishes between five possible levels of analysis:

 Single organisation e.g. a manufacturer;

 Dyad, which refers to the relationship between two organisations, a buyer and a seller;  Entire supply chain, which incorporates the seller’s supplier and/or the buyer’s customer;  Industry level; e.g. all manufacturers.

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“A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system. It spans procurement, manufacturing, and distribution”.

As TNT Post does not transform raw material into final products, the definition used in this report needs to be altered. Basically, what TNT Post is doing is transporting products from A to B, through a network, as given in the last sentence of paragraph 1.1: “TNT delivers value to its clients by providing the most reliable and efficient solutions through delivery networks”. A network can be defined as: “any interconnected group or system” 5. Given this definition of a network, it can be concluded that transport is the interconnecting element between a system of collection, sorting and delivery facilities. The function of transport is the value adding part, as the service is to move products from A to B. The function of the system is to create economies of scale, which make that it is cheaper for a customer to get a product transported to its end location via TNT Post than doing it self. Therefore, combining the definition of Lee and Billington and the explanation given here, the following definition of a supply chain will be used in this report:

“A supply chain is a network of facilities that are interconnected by transport flows, where the

end goal is to deliver products to customers through a network.. The design of the network gives the required economies of scale, which allow for cost competitiveness”.

§ 2.3 Definition of performance of transportation

In this paragraph performance is defined in the context of transportation. This is necessary, as there is a great variety in ways in which performance has been defined in the literature (Chow et.al, 1994). Some authors use productivity and performance interchangeably, while others suggest a number of criteria for evaluation (Mentzer and Konrad, 1991). The definition of performance used in this report, is the extent to which goals set are achieved (Chow et.al, 1994). In order to be able to answer the problem statement properly, there needs to be defined what ‘improving the performance of transportation’ is. As said above, performance is the extent to which goals set are achieved. In general, the overall goal of managers is to maximize output while minimizing the input, within the boundaries of a pre-defined quality / service level. In the transportation function, this means that the typical input (labour, equipment and

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other resources) needs to be converted into tonnes / volume per kilometre, with the lowest possible costs against a satisfactory service level (Caplice and Sheffi, 1994). In this report, improvement of the performance of transportation is therefore defined as saving on transport costs made, whereby the restrictions of maintaining a pre-defined service level and quality level are met.

§ 2.4 The logistical concept

The logistical diagnosis that will be made in this research will be based on the logistical model of Verstegen (figure 2.1). According to Ribbers and Verstegen (1992) this model implicitly answers the question what logistics is. In the following sub paragraphs a description will be given of how the logistical goals (external and internal) and the areas of attention will be interpreted in this report. Ribbers and Verstegen (1992) mention that an improved coherence of the areas of attention with the logistical goals will improve the performance of a company.

Figure 2.1: Logistical model

§ 2.4.1 External goals

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Verstegen (1992), the internal goals are aimed at realising the external goals against the lowest possible costs. According to Slack and Lewis (2002) the demands of the market can be characterized by five performance goals that the operation (read logistical operation) needs to pursue in order to meet these demands. The goals are:

 Dependability (defined as due delivery time – actual delivery time)

 Speed (defined as the time between the beginning of an operations process and its end)  Flexibility (defined as the response of the system to changes)

 Quality (defined as accordance to specification or conformance)

 Cost (defined as a financial input to the operation that enables it to produce its products and services)

According to Slack and Lewis (2002) trade-offs need to made between these performance goals, in order for an organization to serve its market effectively. These trade-offs are found in all types of operation and at all levels, as they describe the relationship between different aspects of operational performance. Therefore they give a typology of trade-offs, where the above mentioned performance goals are the starting point. The performance goals Quality,

Speed, Dependability and

Flexibility fall in the category Service which an operation delivers to its customers. On the other hand there is Cost of

providing the service.

Furthermore, Slack and Lewis (2002) have identified working capital and capital expenditure as trade-off categories. In figure Figure 2.2: Trade-off categories6 _{2.2 the relationship of these} trade-off categories to each other can be found. What Ribbers and Verstegen (1992) implicitly and Slack and Lewis (2002) explicitly mention is the trade-off between Service and Cost. In Ribbers and Verstegen (1992) this is mentioned by the fact that internal goals are aimed at realising the external goals (which can be interpreted with what Slack and Lewis (2002) have named Quality, Speed, Dependability and Flexibility) against the lowest possible costs.

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Therefore, when in this report external goals are mentioned, this can also be read as the performance goals Quality, Speed, Dependability and Flexibility.

§ 2.4.2 Internal goals

As mentioned in sub paragraph 2.4.1, Ribbers and Verstegen (1992) have defined that the internal goals are aimed at realising the external goals against the lowest possible costs. Cost is defined as ‘operating expenditure’, as these costs can be influenced by the operations and logistics. In order to be able to define what the lowest possible costs are for transportation, performance measurement criteria need to be set. Performance measurement in logistics, as also in other business functions, begins at the individual variables level, where variables capture the critical elements of logistics: time, distance and money (Caplice and Sheffi, 1994). Operations, like transportation, conform to a general input – transformation – output model (Slack et.al, 2001). According to Caplice and Sheffi (1994), “three primary forms of measurement can be used to capture the performance of a transformational process; utilization, productivity, and effectiveness”. Gleason and Barnum (1982) distinguish performance between effectiveness and efficiency, where effectiveness is defined as “doing the right thing” and efficiency as “doing things right”. As the definition of these dimensions differs among authors, the definitions of Caplice and Sheffi (1994) will be used in this thesis, where productivity is changed into efficiency, as this is recommended in the paper of Gleason and Barnum (1982) and because this is a more familiar term within TNT Post. Caplice and Sheffi (1994) have given the following definitions of utilization, productivity and effectiveness, which will also be used in this report:

 Utilization is a measure of input usage and is typically presented as a percentage or

ratio of the actual amount of an input used to a certain norm value.

 Productivity (further called efficiency) is a measure of transformational efficiency and

is usually reported as the ratio of actual outputs produced to actual inputs consumed.

 Effectiveness is a measure of the quality of process output and usually reported as a

ratio of actual output to a norm output.

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Figure 2.3: Performance measurement framework

Above, the three dimensions of performance have been defined. These dimensions divide the input –transformation – output model in three parts, which allows for a better distinction in identifying performance improvement opportunities, as well as benchmarking internal units, which allows for a good determination of normal values. Under the following headings, individual variables will be defined which will be used in this report to measure the performance of transportation within the different processes.

Variables in the utilization dimension

As given in above, utilization is defined as actual input compared to a norm input. Inputs in logistics can be characterized as financial, non-financial resource, or inventory inputs (Caplice and Sheffi, 1994). Financial inputs are defined as how much is spent on or what the cost is of a part or the entire logistics process. Non-financial resource inputs are defined as the amount of resources (or assets) used to the total amount available or to a norm. As said above, utilization variables are measured in actual compared to a norm input, where the selection of a norm value is typically based on historical, base or budget values. Inventory inputs are not applicable, as they fall out of the scope of this research. Examples of financial variables are:

 Variance of transportation costs from budget  Purchase price variance

Examples of non-financial resource variables are:  Labour hours used / norm hours

 Vehicle hours used / norm hours

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Variables in the efficiency dimension

As given in this paragraph, efficiency is defined as the ratio of actual outputs produced to actual inputs consumed. The output used in defining variables in this dimension is typically the cost driver of the function being measured. The input used is primarily based on what is controllable within a particular function, typically the input resource. Input resources are typically variable costs, direct labour hours or machine hours. Most efficiency variables are composed of the cost drivers divided by the most controllable input (Caplice and Sheffi, 1994). Examples of efficiency variables are:

 Kilometre / vehicle hour

 Transported volume / vehicle hour  Cost / Transported piece

 Unit cost / vehicle hour

Variables in the effectiveness dimension

As given in this paragraph, effectiveness is defined as the quality of actual output compared to a norm output. What is basically measured within the effectiveness dimension is whether the right services are offered according to promise. Examples of effectiveness variables are:

 Number of complaints per order / total number of orders  Orders delivered on-time / total orders delivered

§ 2.4.3 Areas of attention

In order to be able to realise the logistical goals, Ribbers and Verstegen (1992) have distinguished four areas of attention, namely; physical design, control concept, organization and information systems. In this sub paragraph, these four areas will be described.

Physical design

The physical design area is formed by the physical characteristics and facilities, as far as these are of direct influence to the processing, relocating and storing of goods. Among these are:

 machine capacities, with important logistical characteristics like processing speeds, set-up and change-over times and flexibility

 transport types

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According to Ribbers and Verstegen (1992), improvement potential within this area is far stronger company specific than in the other three areas. This makes it an area where scientific literature is least useful in finding improvement potential, compared to the other three areas, literature is due to the company specific situation often not available for a particular case.

Control concept

The control concept area concerns the way the primary business processes are steered and controlled. As this area concerns many tasks, Ribbers and Verstegen (1992) mention several examples of this vast array of tasks, among these are:

 adjust the long term machine capacities to the expected market demand  determine the service level norms

 give lead times to individual customer orders

 coordinate material flows from customer order to delivery  plan the orders to the available capacity

 control the stock

 determine the batch sizes

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Organization

The organization area mainly concerns in what way the control concept is embedded in the organization. The three main elements concerning the organization area are:

 division of the tasks within the organization

 division of the responsibilities and authorities to each task  coordination between the tasks within the organization

In this sub paragraph the first two elements will be treated, as these are of particular interest to the research. First, the division of the tasks in most organizations is achieved through the organizational structure, which attempts to divide the organization into parts that are given responsibilities and authorities to make decisions within their part of the organization (Slack and Lewis (2002). Slack and Lewis (2002) give three basic approaches, to what dimension of specialisation should be used when grouping organisation parts together:

 Grouping resources together according to their functional purpose, for example sales, marketing, operations etc.

 Grouping resources together by the characteristics of the resources themselves, for example similar technologies (extrusion technology, rolling, casting, etc.) or skills (audit, mergers and acquisitions, tax etc.)

 Grouping resources together by the markets which the resources are intended to serve, for example geographical market (Europe, North America, South America etc.) or type of customer (small firms, large national firms, large multinational firms etc.) According to Slack and Lewis (2002), resources can be grouped in several different ways and lines of responsibilities and direct communication linking the resource groups can also be configured in different ways. This makes that there are an infinite number of possible organisational structures possible. Slack and Lewis (2002) present some pure types of organisational structure, to illustrate the different approaches, making the note that in the pure form they are rarely found. The following structures have been presented:

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These structures all have their positive and negative sides, meaning there is not one best way. Depending on the organizational goals, the size, the market and many other factors, the best structure needs to be chosen.

Furthermore, with assigning responsibilities and authorities, Ribbers and Verstegen (1992) mention that three questions can be asked:

 Which responsibility areas need to be defined?  To whom are these areas assigned?

 Which conditions apply?

The first question depends primarily on the organizational structure chosen, as this decides which responsibility and authority areas need to be defined according to which approach is chosen. For the second question Ribbers and Verstegen (1992) mention that responsibilities need to be assigned to a specific person. The third question, which conditions apply, has two elements in it which are of particular interest, namely:

 Logistical performance measurement  Systematical accountability

The interest for the logistical performance measurement is explained by the fact that in sub paragraph 2.4.1 and 2.4.2 this subject has been treated extensively. The other element, systematical accountability, is of interest as with this element management shows the importance of achieving the goals that have been set.

Information systems

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§ 2.5 Conclusion of the literature review

In this chapter definitions of supply chain’ and performance within a transportation context have been given Furthermore, a description of the logistical concept of Ribbers and Verstegen (1992), extended with literature for operationalisation has been made. Due to the definition of supply chain that has been given, it is now clear what the scope of the problem statement is. The definition of performance within a transportation context clarifies how performance is interpreted within this research.

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CHAPTER 3: CURRENT SITUATION

The goal of this chapter is to create a basis for the logistical diagnosis that will be made in chapter 4, by describing the current situation. The outline of this chapter is based on the logistical concept as described in paragraph 2.4 and tries to answer sub questions 3 and 4, given in paragraph 1.5. The main contribution of this chapter to the research will be:

 Description of the corporate strategy and the logistical goals

 Description of TNT Post, structured according to the four areas of attention of the logistical concept

In the next paragraph the corporate strategy is described, which is followed by the logistical goals in paragraph 3.3. Within paragraph 3.3, the current internal performance measurement criteria are discussed, using the framework presented in paragraph 2.4.2. In the paragraph following, the four areas of attention are described, starting with the physical design in sub paragraph 3.4.1. The organization, control concept and information systems are described in respectively sub paragraph 3.4.2, 3.4.3 and 3.4.4. Finally, in paragraph 3.5 a conclusion is made, in which the most important findings of this chapter are given.

§ 3.2 Corporate strategy

As given in paragraph 1.1, TNT has two divisions, Express and Mail. Since this research is executed within the Mail division, only the strategy of this division will be discussed. TNT’s strategic intent in Mail is to actively maintain its market share in its home market the Netherlands and to capture growth opportunities outside its home market. Due to competitive pressure, liberalization of the market under 50 grams and substitution, TNT believes it will experience a volume decline of up to x% by 2015, compared to 2006 in the Netherlands7. Due to commercial and cost initiatives, TNT believes it can limit the volume decline to x% by 2015.

When analyzing the strategy of TNT Post by using the 5 forces model of Porter (see figure 3.1), this strategy can be explained. First of all, the bargaining power both suppliers is low. TNT Post delivers a service, which means that the most important resource used is human

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labour. The bargaining power of suppliers is therefore low. The bargaining power of customers on the other hand is average. The top-200 customers (mainly larger companies and government institutions) take care of about x% of the volume, meaning even the largest customers do not constitute for more than x% of the total volume. Furthermore, Small and

Medium Enterprises generate about x% of the volume and the other x% is generated by households, mainly through

mailboxes. These ratios

normally indicate that the bargaining power is low,

however for the larger

customers this is not the case.

Figure 3.1: 5 Forces of Porter Due to the volume they

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mail to every household in the Netherlands daily. The largest costs are made within delivery, as over x% of the x billion Euros of costs made, come solely to the delivery network. TNT Post is, because it holds this concession, also obliged to deliver to every household in the Netherlands daily. This means that, especially in rural area’s, delivery costs are made which are much higher than the revenue the items delivered generate. On the other hand, in larger cities the revenue generated by the items delivered is much higher than the costs made, as the average distance between mail boxes is relatively low. This means that competition will especially concentrate on areas where geographical advantages are high, as soon as the market is liberalized. Currently, this is already happening for mail over 50 grams, as the two most important competitors (Sandd and Selektmail) are only delivering in certain (more densely populated) areas and use TNT Post’s network for the other mail to be delivered. Furthermore, as explained on the previous page, the current volumes Sandd and Selektmail deliver, do not yet allow for capital investments to be made in sorting capacity, as well as setting up a network for daily delivery. As TNT Post does have this capacity, the sorting costs can be kept lower than they are for the competition. This creates an entry barrier, especially for the SME and household market. Finally, the threat of substitution is large, as regular mail is a way of communicating information, which can nowadays also be done by e-mail and other digital sources. This way of communication is often cheaper and more efficient, which means that for more and more information flows, the postal product becomes obsolete, as a digital product substitutes it.

Due to the fact that TNT is obliged to deliver to every household in the Netherlands daily (within 24 hours), the costs of delivery are higher than those of the competitors. This is one of the main reasons why TNT Post has chosen for what Porter (1980) defines as a differentiation strategy, instead of a cost or focus strategy. Furthermore, also the availability of the already installed sorting capacity, as well as the collection and delivery network, allows TNT Post to differentiate from the competition, mainly due to logistical benefits.

§ 3.3 Logistical goals

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Before an analysis of the logistical goals of TNT Post is made, first the last sentence of paragraph 1.1 needs to be highlighted, as in this sentence the external logistical goals of TNT Post are already expressed. The sentence is: “TNT delivers value to its clients by providing the most reliable and efficient solutions through delivery networks”. Two words need to be highlighted here, reliable and efficient. According to this sentence, TNT Post delivers value to its customers through reliable (which is a synonym for dependable) and efficient (which is a synonym for low cost) networks. In the following two sub paragraphs, the external and internal goals will be analyzed, keeping in mind what TNT Post already expresses herself.

§ 3.3.1 External goals

From paragraph 3.2, it becomes clear why TNT Post has chosen for a differentiation strategy. According to the generic strategies theory (figure 3.2), a differentiation strategy aims for a distinction of the product or service by unique characteristics. As given in sub-paragraph 2.4.1, the external goals can be

characterized by five

performance criteria (Quality,

Speed, Dependability,

Flexibility and Cost). In sub-paragraph 2.4.1, these five performance criteria have been divided in two categories, Figure 3.2: Generic strategies model of Porter namely Service and Cost, where it was said that a trade-off needs to be made between these categories. A differentiation strategy can also be explained as making this trade-off in the favour of Service. Therefore, the performance criteria of the Service category will now be analyzed, where the factors will be identified where TNT differentiates.

Dependability

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24 hours after being offered to TNT. Furthermore, x% of the mail is delivered in the right mail box.

Speed

Speed is defined as the time between the beginning of an operations process and its end. In the case of TNT Post this can also be defined as the time between offering an item to TNT Post and the time it is delivered. TNT Post differentiates from its competitors, as customers can have their items delivered six days per week within 24 hours, whereas the competitors only deliver once or twice a week, with a lead-time of two to three days.

Flexibility

Flexibility is defined as the response of the system to changes. Ribbers and Verstegen (1992) distinguish three types of flexibility; volume, product and assortment flexibility. For TNT Post especially volume flexibility, which is aimed at fluctuations of the volume, is a factor in which differentiation is achieved. TNT Post is, compared to its competitors, very flexible in accepting changes in volume the customer wants to send. Furthermore, TNT Post differentiates in product flexibility, as different products (for example delivery times and delivery specifications) can be chosen of.

Quality

Quality is defined as accordance to specification or conformance. In the case of TNT Post, according to specification means according to due date agreed, meaning that quality is in this case a synonym for dependability.

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what the extra price is customers want to pay for these services. It is assumed within the organization that the current costs are too high in order to keep the market volume that TNT Post wants, which is why they have set up extensive cost reduction programs.

§ 3.3.2 Internal goals

According to Ribbers and Verstegen (1992) logistics is an integral concept, meaning in the first place its aim is not an optimization of an individual business function (like sales or distribution), but rather an optimization of the total supply chain, where the interconnection between the different business functions is the fundamental idea. Kaplan (1990) discusses the importance of good measures, as he states: ‘‘No measures, no improvement”. According to Kaplan (1990) it is essential to measure the right things at the right time in a supply chain, so timely action can be taken. Performance metrics and measures are not just measuring the performance. They are also embedded with politics, emotions and several other behavioral issues. Kaplan (1990) furthermore states that good performance measures and metrics will facilitate a more open and transparent communication between people leading to a co-operative supported work and hence improved organizational performance.

The goal of the logistical diagnosis made in this report is to improve the performance of truck transport, part of an individual business function. Therefore, in chapter 4, the relationship of truck transport with the other processes will be analyzed and trade-offs will be described between costs made. As given in sub paragraph 2.4.2, the internal goals are aimed at realising the external goals against the lowest possible costs. The performance measurement variables utilization, efficiency and effectiveness, as described in sub-paragraph 2.4.2, will be used to give structure in this review of the current internal transport goals. In an interview with the manager Transport, the following internal goals have been identified, divided per measurement variable:

Utilization:

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Efficiency

Within the Efficiency category, no performance measurement variable has been identified.

Effectiveness:

Within the Effectiveness category, one performance measurement variable has been identified; Transport reliability. Transport reliability is defined as orders delivered on time divided by total order delivered. On time is defined as within 15 minutes of the latest unloading time given in an order. The target for transport reliability is divided in two transport flows, namely intra and inter transport. Intra transport is within the area and inter is between the areas. For intra transport the target is currently x% and for inter transport it is x%.

Conclusion of the internal goals

According to Chow et.al (1994), there is not one measure that can capture logistical performance totally. Instead, a set of measures (performance measurement framework) which collectively capture most, if not all, of the performance dimensions is needed, to make sure that what employees do coheres with the external goals of the organisation. As mentioned by Kaplan (1990), “No measures, no improvement”. Kaplan (1990) furthermore mentions that it is essential to measure the right things at the right time in a supply chain, so timely action can be taken.

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§ 3.4 Areas of attention

In this paragraph, the section Transport and its interrelated processes will be analyzed, using the four areas of attention, as described in paragraph 2.4.3. The four areas are presented in the sequence as given in paragraph 2.4.3, where the literature of this paragraph gives a guideline of the factors that will be described and analyzed.

§ 3.4.1 Physical design

In this sub paragraph, the physical design of TNT Post’s network will be described. First the physical lay-out of the postal network is given under the headings overall postal process, collection process, sorting process and delivery process. This physical lay-out is presented together with its machine capacities and other important logistical characteristics. Following the physical lay-out, the product characteristics and transport types will be described. Finally, the philosophy behind the design of the supply chain will be discussed.

Overall postal process

Within the postal network three main processes can be distinguished, namely the collection, sorting and delivery process. In figure 3.3 the overall process of TNT Post can be found. The first part of the network, the collection network is executed by around 3000 vehicles, which collect products from mail boxes, at the customers addresses and from Business Points (BuPo) and Outlets, where customers can bring the mail, daily.

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All products are shipped to x business counters (Business Balie (BuBa) in Dutch), which serve as the cash register for the company. From these BuBas, the products are shipped in about x daily rides to 6 sorting centres. Here the product undergoes a first sorting, after which the 6 sorting centres exchange the products between each other. In the second sorting, each sorting centre sorts the product for its own area according to different delivery routings. A third sorting (only applicable to small (SMK) mail), which makes that the product is sorted according to the route the postman makes, can either take place at the sorting centre or at one of the x preparation centres (VBC in Dutch) that have a House-number Sorting Machine (HSM). From these VBCs the product is distributed to the customer (this can be directly from the VBC or via one of the x BKs (BestelKantoren in Dutch), via x routes to x million households and to x P.O. Box locations with x P.O. Boxes.

Collection process

With the collection process, the postal process of TNT starts. Within the collection process, the major handlings are to collect the mail, registers large amounts and prepare the mail for the sorting centre. At x mail boxes, x pick-up service customers and x Business Points9 mail is collected daily between 15.30 and 19.00 hours. From 17.00 until 22.00 hours the mail is processed at one of the x BuBas throughout the country, after which it is transported to a sorting centre. Of these x BuBas, 6 are located next to a sorting centre. The BuBas function as the cash register, as unpaid mail is invoiced and prepared for sorting. In figure 3.4 the collection process can be found.

Figure 3.4: Collection process

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Sorting process

The sorting process takes place at six different sorting centres, which each serve their own area. For the recorded delivery there is a special sorting centre in Arnhem. In figure 3.5 the locations of the different sorting centres can be found. As can be seen in figure 3.5 the size of the different areas differs, where the area of Zwolle is much bigger than for example the area of the Hague.

Figure 3.5: Sorting centres and their areas

This can also be found back in the number of machines that are positioned in a sorting centre, as can be found in table 3.110_.

Table 3.1: Number of machines and capacity per sorting centre

The sorting process is roughly divided in three steps, the first, second and third sorting. In the first sorting the incoming mail from the business counters (which is already positioned and stamped) and the mail boxes (which first needs to go through the SOSMA, for sorting out,

Confidential

● 6 Sorting Centres Letters

Nieuwegein 3400 AA to 4299 ZZ and 6500 AA to 6999 ZZ Rotterdam 2900 AA to 3399 ZZ and 4300 AA to 4999 ZZ The Hague 2200 AA to 2899 ZZ Amsterdam 1000 AA to 2199 ZZ Den Bosch 5000 AA to 6499 ZZ Zwolle 7000 AA to 9999 ZZ

● 1 Sorting Centre Recorded Delivery Zwolle Den Bosch Amsterdam The Hague Rotterdam Nieuwe-gein Arnhem

● 6 Sorting Centres Letters

Nieuwegein 3400 AA to 4299 ZZ and 6500 AA to 6999 ZZ Rotterdam 2900 AA to 3399 ZZ and 4300 AA to 4999 ZZ The Hague 2200 AA to 2899 ZZ Amsterdam 1000 AA to 2199 ZZ Den Bosch 5000 AA to 6499 ZZ Zwolle 7000 AA to 9999 ZZ

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positioning and stamping) goes to either the SMK, SMG or SMO, depending on their size. About x% of the volume is destined for the SMK, x% for the SMG and x% for the SMO. About x% of the volume is sorted by sorting machines, where the other x% is sorted by hand. In the first sorting, on one of these machines, it is sorted according to the area where the mail is destined to. For the 24-hour, the process starts at around 18.00 hours and is finished around 0.00 hours. The 48-hour mail is processed in the afternoon. The process of the first sorting can be found in figure 3.6.

Figure 3.6: Sorting process – 1st sorting

After the first sorting has taken place, the mail between the different sorting centres is exchanged, where mail which is not destined for the own area is exchanged with the other sorting centres. In the first sorting mail has not only been sorted by area, but also by priority. The first priority (which is the highest priority) includes mail for P.O. boxes (as this type of mail has to be available between 7.30 and 9.00 a.m. for the customer, depending on the location), mail for business areas (as this type of mail has to be delivered before 12.00 p.m.) and mail for special destinations, as for example Terschelling, which has to be at a certain moment in Harlingen for the boat. The second and third priority include all other areas, where the norm is that the mail is delivered before 5.00 p.m.

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(which only takes place for SMK mail), the mail is sorted to house number, meaning the sequence of the different pieces is according to the route the postman has to walk. The third sorting can either take place at the sorting centre (central sorting) or at a preparation centre (decentred sorting), where capacity is one of the main drivers to choose for decentred sorting. Around x percent of the SMK volume is sorted centrally, where the other x percent is sorted decentrally. The process of the second sorting can be found in figure 3.7.

Figure 3.7: Sorting process – 2nd sorting

The machine capacity of the sorting centres is the main bottleneck within the postal process. The capacity that has been installed is based on the volume that needs to be processed for the 24-hours product. This means that during the evening and night, the utilization of this capacity is relatively high, whereas during the morning and especially afternoon there is a lot of spare capacity.

Delivery process

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12.00. This relates to the priorities described under the previous heading. In figure 3.8 the delivery process is found, where the main flows going through a preparation centre have been set out.

Figure 3.8: Delivery process

Product characteristics

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Transport types

In order to connect the three main processes with each other, transport is needed. Four main transport flows have been distinguished within the postal network, that support the three main processes, namely the collection, the inter-sorting, the delivery and the empty trolley flow. In the collection, the delivery and the empty trolley flows, both trucks and vans are used to transport the physical product and trolley’s, whereas in the inter-sorting flow only truck transport is used. Basically all products TNT transports are stored in trolleys. The product as well as the trolleys follow the product flows as given in figure 3.3. The flow of the trolleys is different from the products in the way that the trolleys also need to return to a stage in the process where they are used again. In most cases, this stage will be the collection process. There are two types of trolleys, the roll container and the container trolley, which are used in the process. Both types have different usage patterns within the process. For the transport or the trolleys through the process two types of truck are used; the lorry and the trailer. The type of truck that is used mainly depends on the accessibility of the location. Basically all locations are accessible by lorry, whereas the trailer can only access about x% of the locations. Both truck types have a different capacity, as can be seen in table 3.2.

Table 3.2: Type of trolley and truck with corresponding capacity

§ 3.4.2 Control concept

According to the literature presented in sub paragraph 2.4.3, in the logistical control concept two elements need to be considered: the horizontal and the vertical structure. In this sub paragraph the logistical control concept of the postal process and the transport process within the postal process area analyzed.

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Horizontal structure

As given in sub paragraph 2.4.3, the horizontal structure concerns arranging the production process into different departments and determine where goods are stored. As given in the previous sub paragraph, the production process, which in the case of TNT Post is the postal process, is divided in three main processes; collection, sorting, delivery and a transport process. Following these processes, four departments have been set up, with identical names. Whether goods are stored within the process is determined by the lead-time given to the customer. As given in the previous sub paragraph under the heading product characteristics, there are three different lead-time categories. With the 24-hour product, the lead-time does not allow for any storage of products, as it continuously moving through the process. With the 48-hour product, the product is stored at the sorting centre, as soon as it arrives in the afternoon from the collection process. The following day it is processed during the afternoon. The economy product is an interesting product in this case, as it allows for product to be stored and processed at times when the capacity utilization is lowest.

Vertical structure

The vertical structure, as given in sub paragraph 2.4.3, concerns filling in the different control tasks relating to the horizontal structure, where two operational and a tactical level are distinguished. For the first operational level, the department level, the main control task it to make sure that the dependability target of its process is met against the lowest possible cost. The way the dependability target is controlled is by the norm that at the end of every process the Work In Process (WIP) is zero. Only for the sorting process this norm differs, as due to the 48-hour product and the economy product there is almost always WIP. For transport this means that all products that are available for transportation at a certain location need to be transported at that particular time. Therefore, there has to be enough transport capacity available in order to be able to meet this obligation. This norm should also guarantee that the product flow through the entire supply chain is reliable, meaning from the way this process control has been filled in, the second operational level, the product flow level, is also controlled.

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Price per hour (P) = standard tariff (T) for the chosen OS * p-factor * Q-factor.

translated into an order and placed at the transport unit of Parcel Services, which then will plan and execute this order. The tariff for an order can be calculated on forehand, by a model that has been developed by both Production and Parcel Services, and has been agreed on in a Service Level Agreement (SLA). This model is designed that it should give both parties, Production and Parcel Services, the incentive to achieve the dependability target against the lowest possible cost.

Within this model, tariff charts have been made, which divides different types of transport channels in different order categories (Order Soort in Dutch). Each order category has its own tariff, as well as its own Q- and p-factors. The Q-factor within the tariff charts is a combination of the volume that needs to be transported and the planning time (planning time is the extra time given to an order, to allow the planner for orders to be combined). The volume factor is divided in three categories, namely less than x, x to y and over y trolley equivalents. The spare planning time factor is divided in four categories, namely less than 30 minutes, between 30 and 90 minutes, between 90 and 240 minutes and over 240 minutes. The p-factor is a compensation for more expensive labour during certain hours of a day. Between 8.00 and 18.00, the factor is x, between 18.00 and 22.00 and between 6.00 and 8.00 the p-factor is y and between 22.00 and 6.00 the p-p-factor is z. An example of a tariff chart can be found in attachment B

The result of the above-explained factors and the standard tariff per OS is that the hourly tariff can be calculated by the formula found in formula box 3.1:

Formula box 3.1: Formula to calculate the price per hour for truck transport

The price per trip can be calculated by taking the price per hour and multiply this with the number of hours needed. The number of hours needed is the summation of the driving time and the loading / unloading time. The driving time per trip is extracted from the standardized time – distance table which Parcel Services uses. The loading / unloading time is derived from the SLA, where an agreement has been made about a standard time per order category.

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tariffs for volume and planning time that is given in the tariff charts should give the incentive for the section Transport to create orders with the lowest possible cost for Production and Parcel Services as well. Furthermore, the costs are controlled by making that each area has a budget for transport, where the senior advisors transport is responsible for the transport costs within the area.

§ 3.4.3 Organization

According to the literature presented in sub paragraph 2.4.3, the organization area mainly concerns in what way the control concept is embedded in the organization. In this sub paragraph, the literature presented about the organization area in sub paragraph 2.4.3 is used to describe the case of TNT Post. First, the division of the tasks within the organization is given. Furthermore, the assignment of the responsibilities and authorities to the task will be presented, where the focus will lie on the section Transport. The division where this research is executed, TNT Mail, consists of four entities, namely TNT Post Netherlands, European Mail Networks, Cendris and Spring (a joint venture with Royal Mail Group plc and Singapore Post).

This research is executed with the entity TNT Post Netherlands. This entity is divided into

three Business Units, namely

Commerce, Production and Parcel Services. Within the Business Unit Production, four support department Staf Operations, HR&O, Mobility and Business Control) enable the 6 areas to function effectively. This research

is performed in the support

department ‘Staf Operations’, (see figure 3.9)11.

Figure 3.9: Organization chart Mail Netherlands

The organizational structure of the business unit Production is characterized best by the matrix structure (Slack and Lewis, 2002, p329), as two lines of authority exist. First, the business unit (BU) is divided in six areas. These six areas all have their own financial responsibilities and are managed by an area director, who is responsible for all functional

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groups within his / her area. The area director holds a seat in the BU Production board. Furthermore, the functional groups of operations are also managed through Staff Operations. For example, for the section Transport, in all six areas a senior advisor transport is responsible of the correct translation of transport demand within TNT Post’s supply chain into orders. At the head office, the section Transport develops and monitors policies, which have to make sure that the different areas work in a standard “best” way. The budget responsibility for transport lies with the area director, making it a matrix structure.

The department ‘Staf Operations’ has been divided in five departments, where the sub-department ‘Proces Management’ is again divided in six section. This research is performed in the section Transport, which in figure 3.10 (next page) has been given a yellow colour12. Within the section Transport, the manager Transport has two advisors, namely an Advisor Truck Transport and an Advisor Van Transport, who are responsible for the policies. In each of the six area, there are also two advisors (Truck and Van Transport), who are responsible for the execution of the transport.

Figure 3.10: Organizational chart ‘Staf Operations’

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performance that is delivered by member of the section Transport is embedded in the organization by a yearly evaluation round, where each member’s performance is evaluated.

§ 3.4.4 Information systems

As already explained in sub paragraph 2.4.3, the focus of this research is not on the information systems area. The reason for this is that it is believed that first the other areas of attention have to be filled in correctly, before a good information system can be chosen. In this sub paragraph, the current information system will therefore be described shortly.

There are two information system used to get management information from, the eVra system, which is an abbreviation for electronic freight letter (electronische Vrachtbrief) and an excel sheet received from Parcel Services. The eVra system was originally designed only for making freight letters, which is needed to administrate what freight is transported. In the Netherlands, such a freight letter is needed by law when freight is transported. Nowadays the system is also used to get management information from. Currently the system is expanded with a module that allows monitoring the service performance (reliability, as defined in 3.3.2) of intra transport (within the area). At the moment only the delivery reliability of inter transport is monitored, by a transponder measurement system that registers the last truck leaving from a sorting centre. There are plans to start with a SAP TMS (Transport Management System) project, which in the future than needs to replace the current systems. The excel sheet is currently received weekly from Parcel Services. In this sheet all orders that have been executed are found, together with all the information about the orders. At the moment this concerns about x weekly order.

§ 3.5 Conclusion of the current situation

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From the analysis of the external goals, the conclusion is that TNT Post differentiates on both speed and flexibility, due to the current design of its supply chain. Furthermore, differentiation by the performance goal dependability is mainly achieved by having the processes better organized and controlled than the competitors have. Extensive cost reduction programs are currently run, as it is assumed that the current cost price of the extra service TNT Post provides to its customers is too high for keeping the required volumes, which are needed to stay competitive.

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CHAPTER 4: LOGISTICAL DIAGNOSIS

In this chapter, the logistical diagnosis is presented. A diagnosis is the skill, technique or action to find a cause of an effect by its symptoms. The aim of a diagnosis is to determine the cause and effect relationship.

From the description of the logistical goals, given in the previous chapter, it was concluded that the especially the cost performance measure did not capture the real performance of truck transport within an area and that the target was based on nothing more than history. The effect of this is, as described in the previous chapter, that the current system gives incentives for inefficient behaviour, as efficient behaviour leads to harder to fulfil targets in the future. Therefore, in this chapter, an analysis will be made of the internal performance system, as the design is assumed to be the cause of the problem.

The question that arises here is why the internal performance measurement system is not designed in such a way that meaningful targets can be set for the operation. Mentzer and Ponsford Konrad (1991) name that a reason can be that not enough resources are available to undertake a sophisticated and extensive analysis of the operations. In the case of TNT Post this should not be, as several departments exist (e.g. Logistical Strategy and Quantitive Support) which have resources available for analyzing such situations. However, due to the recent establishment of the section Transport and the new organizational design, where transport services are bought from TNT Parcel Services, it can be assumed that the resources have not been made available yet. It might also be that relationships and constraints exist within the supply chain, which prohibits a standard performance measurement framework being used, as this framework might not be able to reflect the situation well enough.

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 The performance measures cohere with the logistical goals

 The performance measures cohere with the responsibilities set for each function In the following paragraphs, several analyses will be made of goals, transport flows, relationships, constraints and how to optimize the performance of transportation. An analysis is the result of a process of dismantling or separating something into constituent elements in order to study the nature, function, or meaning.

From the description given above of the internal performance measurement framework, it can be concluded that first an analysis of the goals for the section Transport, in relation to the logistical goal of the supply chain needs to be made. Here a distinction will be made between the goals of a typical transportation function and the goals of the transport function within TNT Post’s supply chain. This distinction is made, as it is probably one of the causes for the inefficient design of the internal performance measurement system. The second consideration, whether the performance measures cohere with the responsibilities set, has already been explained in sub paragraph 3.4.3.

Logistical diagnosis with a focus on truck transport