A Canada/United States Perspective

Annex II - Definitions

Collaborative Planning Forecasting and Replenishment (CPFR):  Trademark registered by the VICS (Voluntary Interindustry Commerce Standards) in 1996 designating an approach of collaboration and integration of the forecasting and planning processes between customers and suppliers. A certain number of test operations have been conducted between manufacturers and distributors in the area of mass consumer products, but it is also starting to be used between manufacturing companies. Partner companies (distributors, manufacturers, suppliers, etc.) exchange information on product sales and forecasts in order to synchronize their operational plans. This approach also integrates the downstream information flow to take account of manufacturing constraints.

Fill Rate:  The percentage of order items that the picking operation actually fills within a given period of time.

Forecast:  An estimate of future demand. A forecast can be determined by mathematical means using historical data; it can be created subjectively by using estimates from informal sources; or it can represent a combination of both techniques.

Gross margin:  This value is obtained by calculating: total operating revenue- cost of goods sold.

Total operating revenue:  The sum of sales of goods purchased for resale, commission revenue, sales of goods produced, repair and maintenance revenue, revenue from rental and leasing and other operating revenue.

Cost of goods sold:  This value represents the cost value of goods sold and recognized in revenue, during the reporting period. It is determined by calculating: Opening inventory + Purchases - Closing inventory.

Hub:  A reference for a logistics network as in "hub and spoke", which is common in the airline and the trucking industry.

Input:  The sum of all goods and services purchased by a firm or an industrial sector.

Internal logistics cost: Internal logistics cost encompasses all logistics activities that occur within a firm, such as a manufacturer, wholesaler and retailer. It excludes all outsourced logistics activities and all production process. Individual firms can evaluate their internal logistics cost by adding their respective logistics cost activities and their components as stated in the table below.

Internal Logistics Cost Activities Inbound and outbound transportation Transportation management Warehousing Materials handling Order fulfillment Logistics network design Inventory management Supply/demand planning Management of third party logistics services providers Custom brokerage Logistics and SCM technology management Sourcing and procurement processes (excluding purchase of goods cost)

Internal Logistics Cost Components of Activities Logistics wages cost Logistics infrastructure depreciation Logistics technology investment depreciation Transport equipment depreciation Training cost related to logistics position Logistics management cost

The estimates of internal logistics cost in this report were compiled via that specific methodology: 

1. Estimate the selected occupation share of the compensation for the third-party logistics sectors (the components of transportation and storage) at the most detailed sector level for which GDP is available
   
   
2. Apply this share to sector GDPs to get an aggregate GDP weight for the logistics wage bill
   
   
3. Calculate the logistics wage bill based on selected occupations for total manufacturing, for the selected level of manufacturing detail, for wholesaling and retailing
   
   
4. Apply the GDP weight to the estimated logistics wage bill to get an estimate of own-account in each of the required GDP aggregates

Intermodal Transport:  Use of two or more different carrier modes in the through movement of a shipment.

Inventory Carrying Cost:  One of the elements comprising a company’s total supply chain-management costs. These costs consist of the following:

1. Opportunity Cost: The opportunity costs of holding inventory. This should be based on your company`s own cost of capital standards using the following formula. Calculation: Cost of Capital x Average Net Value of Inventory
   
   
2. Shrinkage: The costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains to the loss of material through handling damage, theft, or neglect.
   
   
3. Insurance and Taxes: The cost of insuring inventories and taxes associated with the holding of inventory.
   
   
4. Total Obsolescence for Raw Material, WIP, and Finished Goods Inventory: Inventory reserves taken due to obsolescence and scrap and includes products exceeding the shelf life, i.e. spoils and is no good for use in its original purpose (do not include reserves taken for Field Service Parts).
   
   
5. Channel Obsolescence: Aging allowances paid to channel partners, provisions for buy-back agreements, etc. Includes all material that goes obsolete while in a distribution channel. Usually, a distributor will demand a refund on material that goes bad (shelf life) or is no longer needed because of changing needs.
   
   
6. Field Service Parts Obsolescence: Reserves taken due to obsolescence and scrap. Field Service Parts are those inventory kept at location outside the four walls of the manufacturing plant i.e., distribution center or warehouse.

Inventory Carrying Cost Rate:  The inventory carrying cost rate is applied on average annual inventory in order to estimate the cost of having inventory into a specific firm or industry. The average industry accepted and used rate is estimated at 20 percent²⁵.

Inventory Turns:  The cost of goods sold divided by the average level of inventory on hand. This ratio measures how many times a company`s inventory has been sold during a period of time. Operationnaly, inventory turns are measures as total throughput divided by average level of inventory for a given period; how many times a year the average inventory for a firm changes, or is sold.

Just-in-Time (JIT):  Lean Manufacturing model developed initially by the engineer Taiichi Ohno at Toyota which consists of monitoring and controlling the production system to eliminate all sources of waste, in particular related to intermediate stocks and poor quality. Production is thus equal to demand at all stages of the process.

Key Performance Indicators (KPI):  A measure which is of strategic importance to a company or department. For example, a supply chain flexibility metric is Supplier-On-time Delivery Performance which indicates the percentage of orders that are fulfilled on or before the original requested date.

Lead Time:  Quantitative indicator measuring the time difference between stimulus and response. This indicator can be applied to different levels of the logistics process, for example to measure the actual time taken between the placing of an order and the delivery of a product.

Lean Logistics:  Characterized by high frequency replenishment and freight consolidation utilizing networks of crossdocks and milkruns. It promotes continuous flow of products from origin to destination by the pull of actual consumption and thereby eliminates wastes. The results are low inventory, high availability, resource smoothing, and improved asset utilization at low costs.

Lean Manufacturing:  A management philosophy focusing on reduction of the 7 wastes (Over-production, Waiting time, Transportation, Processing, Inventory, Motion and Scrap) in manufactured products. By eliminating waste (muda), quality is improved, production time is reduced and cost is reduced. Lean "tools" include constant process analysis (kaizen), "pull" production (by means of kanban) and mistake-proofing (poka yoke).

Outsourcing:  Corporate decision to assign activities, previously performed internally, to a third-party (for example, a Logistics Service Provider). Initially, the shippers (manufacturing or commercial companies) outsourced transport, and then progressively did the same for more value-added logistics services (Co-packing for example).

Radio Frequency Identification (RFID):  RFID is a data collection technology that uses electronic tags to store identification and a wireless transmitter and reader to capture it.

Six Sigma Quality:  A term used generally to indicate that a process is well controlled, i.e. tolerance limits are ±6 sigma (3.4 defects per million events) from the centerline in a control chart.

Supply Chain Management (SCM) Collaboration:  Approach to managing and synchronizing all the processes enabling one or more customer / supplier systems to take into account and respond to expectations of the end customers (from the supplier of the supplier to the customer of the customer).  This approach is designed to increase the value created for the customer and improve the economic performance of the participating companies.

Warehouse Management System (WMS):  Computer application, and component of SCE packages, with the goal of managing and optimizing warehouse operations.