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Third-Party Logistics Study 2013 on the Logistics Outsourcing Trends was released. I would be focusing on some of the elements of the findings to add my perspective to Logistics outsourcing. Outsourcing is a magical word that pretends to address many complex issues of reaching the product to the end user. The reason I am using the word pretends due to mixed responses received from the end users known as shippers over a period of time.
In spite of financial downturn, the global revenue of 3PL operators is growing and in my opinion the downturn could also be one of the reasons. In these difficult days, shippers would aim for cost savings and look for a partner to share risk and avoid capital deployment. And this action could trigger outsourcing. However, organisations that have successfully developed and implemented effective supply chain risk mitigation plans often apply new thinking to traditional risk mitigation strategies. About 65% shippers have indicated that they are increasing their use of 3PL services than returning to insourcing (22%) some 3PL services. Nearly three in five (58%) shippers are reducing or consolidating the number of 3PLs they use.
According to Armstrong & Associates 2012 study the global revenues of 3PL operators have risen by 13.7%. The gains are mostly recorded in Asia Pacific Region (21.2%) and followed by North America (7.2%). Whereas regions such as Latin America recorded impressive growth of (43.6%) but on a low revenue level and this indicates increasing trends of outsourcing in Latin America and Other Regions.
When we take a critical look at the logistics spend by the shippers. Predominantly, the logistics spend is heavy on transactional activities such as Transportation and to an extent on warehousing operations. The outsourced logistics spend is consistent around 30 to 40% except in in NA. The logistics expenditure as a percentage to sales revenue seems to be reasonably consistent across all the regions around 10 to 15%.
When we look at the return or benefits to the shippers again the focus is on economic factors. The cost savings was around 15%, Inventory Cost Reduction around 8% and Asset deployment reduction at 26%. Not to forget a modest productivity improvement in the form of 7% improvements in order fill rate and 5% improvement in order accuracy. Again the focus is very much on transactional outsourcing.
Supply Chain Innovation
Innovation could be defined as creation of improved product, process, technology or human resources (improved skills) that could eventually deliver gains to the consumer. Supply Chain is a work in progress in my opinion. Continuous improvements in the areas of process, technology and people (skills) are delivering the supply chain innovation. Apart from the three I have mentioned, the new improvement area is outsourcing. However, it was noticed that innovation is becoming a challenging as the global economy is becoming volatile and 3PLs becoming more conservative and whereas the shippers becoming more aggressive. The key to the innovation through outsourcing is collaboration. The relationship between the shipper and the 3PL should be transparent and behave as true stakeholders in the business. Lack of openness could kill the relationship and thus innovation.
According to 2013 Third Party Logistics Study, “the openness of some shippers to more innovative 3PL-shipper arrangements appears to be declining somewhat; “gain-sharing” between 3PLs and shippers is down and interest in collaborating with other companies, even competitors, to achieve logistics cost and service improvements has also declined slightly since last year”.
What drives innovation in an outsourced environment? As mentioned earlier, Relationship and Trust plays a big role, People who create innovative ideas and deliver them, Technology which enables innovation, certainly collaboration between the shipper and 3PL, transparency and effective communication and last but not least is the financial incentives.
The above study concluded that, “Shippers and 3PLs can facilitate supply chain innovation by leveraging organizational drivers such as fostering collaboration through structure, relationship governance, and embedding innovation into the organizations as well as technology focused drivers: advanced IT and mobile solutions, data and analytics, and social media.”
What calls for innovation?
Volatile economy, Increasing Competition, Uncertain Demand due to product proliferation and Supply Chain Disruptions are the main reasons organisations looking for continuous improvements in order to survive in the business and excel. If we review the above mentioned factors some of them are controllable and some are not. Economy behaviour cannot be influenced; Competition will continue to grow due to increasing globalisation; and Product proliferation is driving the product mix challenges resulting in uncertain demand to some extent. Whereas, supply chain disruptions could be avoided if we plan well and innovate. According above mentioned study, Spirit AEROSYSTEMS, Kansas saved millions of dollars inventory and avoided injury to workforce due to F3 tornado hitting their facility (2012) due to proactive thinking and that is nothing but some sort of innovation.
What is driving the Supply Chain Disruptions?
Supply chain complexity and “interconnectedness” to address the globalisation is increasing rapidly at a time when the risk of disruption caused by extremes such as geophysical disasters, increasing terrorism attacks is mounting. The above study reveals that natural disasters the top reason followed by Commodity Volatility, Labour availability, Energy prices and supply of raw material at the required time. No doubt, Transportation infrastructure plays a vital role in disruption by not making a product available at the right time. Governing rules in countries like India and China making the supply chain vulnerable. The political system is also causing disruptions and Terrorism and Piracy is low on agenda but high on complexity.
Human Resource could cause multiple problems that could result in supply chain disruptions. The first one on top of my head is the skills shortage. According to the world economic forum study on Outlook on the Logistics & Supply Chain Industry 2012, Logistics companies and trade associations around the world are reporting problems in obtaining enough qualified staff. Over the past year, studies done in India, Korea, China and the United Kingdom have confirmed that there is a skill shortage in logistics. The other side of the coin is the disgruntled human resources could cause phenomenal financial damage to the supply chain and the business. On November 27, 2012, approximately 800 clerical workers at the Los Angeles and Long Beach ports went on strike. At first glance, it doesn’t seem as though a clerical strike should have a significant impact on port operations, but the 10,000 unionized dockworkers who also work there refused to cross their picket lines. And thus the largest port operation in the United States, representing approximately 40% of the value of imports brought into the U.S., ground to a halt. The economic cost of the strike was estimated at $1 Billion per day.
We should be able to mitigate every risk if we understand the problem and source that is causing the problem. In order to avoid any supply chain risk it is very essential to have visibility to your supply chain. According to a report roughly 30% of manufacturers still lack Tier 1 visibility, while over 70% lack Tier 2 or Tier 3 visibility. According to Aberdeen Group 2011 Supply Chain Visibility Report, best-in-class companies are likely to have online visibility into supply chain disruptions. Further, the same report revealed some of the actions taken by the supply chain leaders due to visibility includes, Streamlined Processes for Easier Monitoring, Usability & Efﬁciency (66%); Integrated Supply Chain Transactions & Costs into their Operations (60%); Took Steps to Improve the Timeliness & Accuracy of Supplier Data Exchanges (46%); and Have Increased B2B Connectivity & Visibility into Supply-side Processes (31%).
Collaborative partnership such as outsourcing is another step towards supply chain risk mitigation. It pays to invest on training and development of human resources. In my opinion it is a worthy investment as long as one could retain the workforce to reap the benefits of the skills upgrading. In order to address risks arising out of suppliers, supplier scorecard and collaboration goes a long way addressing quality and velocity disruptions to supply chain. As mentioned earlier, one should understand the end to end supply chain and that is possible through business process mapping and developing standard work to address process related uncertainties.