Executive Briefings

Important Trends in Logistics Support in Asia-Pacific Region

At first glance, Southeast Asia might not appear to be the most fertile soil from which logistics outsourcing would flourish. The outsourcing of such services as warehouse management and order fulfillment is a relatively new phenomenon that requires placing a great deal of trust and responsibility in the hands of outsiders. This runs counter to the Asian business culture, which is bound by centuries of tradition and thrives on generation-spanning relationships within a select circle of business partners.

But a new era spawns new attitudes. In the Asia-Pacific region, there is a broadening interest in innovative logistics solutions developed and executed by third-party specialists.

According to the Singapore Economic Development Board, demand for outsourced supply-chain management services in the region is growing by 15 percent a year. That is twice the growth rate of Europe and one third faster than in North America.

The market for logistics outsourcing in Asia is expected to quadruple over the next eight years. That would make it an $80bn industry by that time.

So how has a region with such a tightly protected culture come to embrace a practice like logistics outsourcing? The answer lies in the world around it.

Globalization has made Asia-Pacific, and especially China, "factory floor" to the planet. Demand there for raw materials is as unquenchable as the world's thirst for the finished goods that are made from them. And the region's increasing wealth and robust consumption patterns make it an attractive end market for goods.

At the same time, globalization has created a surplus of labor and production capacity, not only in Southeast Asia but across the globe. This puts pressure on selling prices and corporate profits. It drives businesses to seek out the most cost-effective production options, regardless of location. Those options, more often than not, are found in Asia.

There is another dynamic at work: The growing influence of the consignee. Increasingly, it is the ultimate customer who sets the agenda. Decisions once made by suppliers are being made by the consignee, in concert with its 3PL. At the same time, the consignee is pushing responsibilities upstream to suppliers, and demanding they maintain strict cost containment policies and operational practices.

Asian-based manufacturers confront burgeoning workloads, frugal and demanding customers with dynamic supply-chain needs, and budget constraints imposed by downsizing or rightsizing. They are being squeezed like never before.

What is their competitive response? They can manage complex logistics processes on their own, a tall order even for those with fairly robust in-house capabilities. Or they can engage the services of outside specialists that view the landscape holistically, and develop solutions that synchronize product, data and capital needs under a single point of accountability.

Increasingly, they are choosing the latter option. They are looking outward, beyond their traditional circles. The modern day strategic imperative demands as much.

Globalization, overcapacity and the growing clout of the consignee are macro-trends impacting logistics operations worldwide. However, there are several unfolding trends unique to Asia-Pacific. These are driven in part by China's emergence as a bona fide economic power. But they are also influenced by dynamics indigenous to the region.

Trend one: Shifting geographies
Asia is not only supplying other continents, but is feeding its own regional countries with goods of wide-ranging value. If we exclude Japan, Hong Kong and Malaysia alone account for more than a third of Asian exports. Not all of those exports are low-valued commodities; a growing percentage consists of high-value goods. And, they are destined for businesses and consumers in the region.

As manufacturers move closer to their Asian-based customers, logistics partners will have to respond to the changing needs of the end user. They must adjust their strategies to respond to continued strong growth in intra-Asian trade.

Trend two: From piecemeal to integrated approach
There is a growing reliance on "integrated" logistics solutions from a single source, and away from the "piecemeal" approach involving a hodge-podge of freight forwarders, brokers, warehousemen and local cartage firms.

End markets are more dependent than ever on China for their consumption. Traditionally, these goods would be waylaid in warehouses or in transit points, slowing delivery. Now, however, we are seeing more goods bypassing the traditional distribution centers and heading directly to the end customer. That saves time and money.

As various components of goods are sourced throughout the region and buyers are scattered around the globe, supply chains in and out of Asia are growing longer and more complex. The stakes are higher. The margin for error is smaller. And, unfortunately, the potential for failure is greater.

In this environment, piecemeal logistics becomes a liability. It invites confusion, lack of visibility, absence of cost transparency, security concerns and unreliable service. This pushes more CEOs to the "integrated logistics" model, where one specialist synchronizes the end-to-end supply-chain symphony. This provider ensures the chain runs in a uniform, seamless fashion. The customer has one point of contact and one point of escalation.

Trend three: A migration toward "shared" distribution facilities
This is perhaps the most intriguing trend because it is just becoming visible. Most Asia-Pacific businesses are small to mid-sized companies. They can't justify the cost of building dedicated distribution centers, or leasing them. But they might consider sharing space in a world-class facility, owned and operated by a third-party, situated near factories and key transportation points to reduce transport costs and delivery times.

Imagine the cost and time savings if multiple suppliers aggregated their shipments into a simple transaction for customs clearance and release.

Imagine inventory levels being monitored in real time, with replenishment and invoicing triggered automatically.

Imagine having all suppliers under one roof, only minutes from a manufacturing center, so that when parts are needed a single order is shuttled to the factory floor every hour.

It may seem far-fetched, especially in a post- 9/11 world, to have all competitors in such close proximity to each other, with vital information exposed. But such facilities, shared by multiple companies, already exist. Companies have expressed confidence that a provider's physical and IT systems can safeguard the integrity of their operations. Even the very largest of companies have expressed a willingness to share a facility with a competitor if it would spread the company's fixed costs across a broader user base.

Take it to the next level: What if the same could be done for all transportation?

Trend four: Speed-to-market and distribution center bypass
A fourth trend is a completely different supply-chain option that speeds goods to market by bypassing distribution centers altogether. As the name implies, a DC bypass model skips distribution centers to keep inventory in motion. Businesses benefit-costs can be significantly reduced, return on invested capital improved, market demand met-all because the model allows product to move quickly with delivery directly to retail stores or even the final consumer.

Ultimately, DC bypass services can be used to at least shorten the delivery cycle and take some of the delay out of ocean transport.

Trend five: Growing demand for visibility
A fifth trend is the increasing need for supply-chain visibility. In these days of instant tracking, suppliers may be expected to know where goods are in real time. Visibility is not just about tracking shipments on the ground, water, rail or in the air but also about how much inventory is on hand in a warehouse, where it is stored, and when it has been allocated to fulfill an order-in other words, all the activities involved in getting goods from maker to seller to buyer. This type of insight can give a company the ability to respond quickly to unforeseen circumstances, cut costs and speed delivery.

Information is critical for management to make financial decisions, along with serving customers superbly and quickly responding to competitive threats.

The message coming from Asia is clear and powerful: The region's ascent as a manufacturing power is rewriting the rules of trade and commerce.

What is also coming into focus is the notion that the benefits of logistics outsourcing are well worth the investment, even if it means reaching out to bring outsiders in.

John Hafferty is the UPS Supply Chain Solutions vice president for Europe and Asia, with responsibility for operations in Europe, Asia, the Middle East and Africa. Prior to this John served as the company's vice president of the transportation group in the U.S., Canada and Latin America.

At first glance, Southeast Asia might not appear to be the most fertile soil from which logistics outsourcing would flourish. The outsourcing of such services as warehouse management and order fulfillment is a relatively new phenomenon that requires placing a great deal of trust and responsibility in the hands of outsiders. This runs counter to the Asian business culture, which is bound by centuries of tradition and thrives on generation-spanning relationships within a select circle of business partners.

But a new era spawns new attitudes. In the Asia-Pacific region, there is a broadening interest in innovative logistics solutions developed and executed by third-party specialists.

According to the Singapore Economic Development Board, demand for outsourced supply-chain management services in the region is growing by 15 percent a year. That is twice the growth rate of Europe and one third faster than in North America.

The market for logistics outsourcing in Asia is expected to quadruple over the next eight years. That would make it an $80bn industry by that time.

So how has a region with such a tightly protected culture come to embrace a practice like logistics outsourcing? The answer lies in the world around it.

Globalization has made Asia-Pacific, and especially China, "factory floor" to the planet. Demand there for raw materials is as unquenchable as the world's thirst for the finished goods that are made from them. And the region's increasing wealth and robust consumption patterns make it an attractive end market for goods.

At the same time, globalization has created a surplus of labor and production capacity, not only in Southeast Asia but across the globe. This puts pressure on selling prices and corporate profits. It drives businesses to seek out the most cost-effective production options, regardless of location. Those options, more often than not, are found in Asia.

There is another dynamic at work: The growing influence of the consignee. Increasingly, it is the ultimate customer who sets the agenda. Decisions once made by suppliers are being made by the consignee, in concert with its 3PL. At the same time, the consignee is pushing responsibilities upstream to suppliers, and demanding they maintain strict cost containment policies and operational practices.

Asian-based manufacturers confront burgeoning workloads, frugal and demanding customers with dynamic supply-chain needs, and budget constraints imposed by downsizing or rightsizing. They are being squeezed like never before.

What is their competitive response? They can manage complex logistics processes on their own, a tall order even for those with fairly robust in-house capabilities. Or they can engage the services of outside specialists that view the landscape holistically, and develop solutions that synchronize product, data and capital needs under a single point of accountability.

Increasingly, they are choosing the latter option. They are looking outward, beyond their traditional circles. The modern day strategic imperative demands as much.

Globalization, overcapacity and the growing clout of the consignee are macro-trends impacting logistics operations worldwide. However, there are several unfolding trends unique to Asia-Pacific. These are driven in part by China's emergence as a bona fide economic power. But they are also influenced by dynamics indigenous to the region.

Trend one: Shifting geographies
Asia is not only supplying other continents, but is feeding its own regional countries with goods of wide-ranging value. If we exclude Japan, Hong Kong and Malaysia alone account for more than a third of Asian exports. Not all of those exports are low-valued commodities; a growing percentage consists of high-value goods. And, they are destined for businesses and consumers in the region.

As manufacturers move closer to their Asian-based customers, logistics partners will have to respond to the changing needs of the end user. They must adjust their strategies to respond to continued strong growth in intra-Asian trade.

Trend two: From piecemeal to integrated approach
There is a growing reliance on "integrated" logistics solutions from a single source, and away from the "piecemeal" approach involving a hodge-podge of freight forwarders, brokers, warehousemen and local cartage firms.

End markets are more dependent than ever on China for their consumption. Traditionally, these goods would be waylaid in warehouses or in transit points, slowing delivery. Now, however, we are seeing more goods bypassing the traditional distribution centers and heading directly to the end customer. That saves time and money.

As various components of goods are sourced throughout the region and buyers are scattered around the globe, supply chains in and out of Asia are growing longer and more complex. The stakes are higher. The margin for error is smaller. And, unfortunately, the potential for failure is greater.

In this environment, piecemeal logistics becomes a liability. It invites confusion, lack of visibility, absence of cost transparency, security concerns and unreliable service. This pushes more CEOs to the "integrated logistics" model, where one specialist synchronizes the end-to-end supply-chain symphony. This provider ensures the chain runs in a uniform, seamless fashion. The customer has one point of contact and one point of escalation.

Trend three: A migration toward "shared" distribution facilities
This is perhaps the most intriguing trend because it is just becoming visible. Most Asia-Pacific businesses are small to mid-sized companies. They can't justify the cost of building dedicated distribution centers, or leasing them. But they might consider sharing space in a world-class facility, owned and operated by a third-party, situated near factories and key transportation points to reduce transport costs and delivery times.

Imagine the cost and time savings if multiple suppliers aggregated their shipments into a simple transaction for customs clearance and release.

Imagine inventory levels being monitored in real time, with replenishment and invoicing triggered automatically.

Imagine having all suppliers under one roof, only minutes from a manufacturing center, so that when parts are needed a single order is shuttled to the factory floor every hour.

It may seem far-fetched, especially in a post- 9/11 world, to have all competitors in such close proximity to each other, with vital information exposed. But such facilities, shared by multiple companies, already exist. Companies have expressed confidence that a provider's physical and IT systems can safeguard the integrity of their operations. Even the very largest of companies have expressed a willingness to share a facility with a competitor if it would spread the company's fixed costs across a broader user base.

Take it to the next level: What if the same could be done for all transportation?

Trend four: Speed-to-market and distribution center bypass
A fourth trend is a completely different supply-chain option that speeds goods to market by bypassing distribution centers altogether. As the name implies, a DC bypass model skips distribution centers to keep inventory in motion. Businesses benefit-costs can be significantly reduced, return on invested capital improved, market demand met-all because the model allows product to move quickly with delivery directly to retail stores or even the final consumer.

Ultimately, DC bypass services can be used to at least shorten the delivery cycle and take some of the delay out of ocean transport.

Trend five: Growing demand for visibility
A fifth trend is the increasing need for supply-chain visibility. In these days of instant tracking, suppliers may be expected to know where goods are in real time. Visibility is not just about tracking shipments on the ground, water, rail or in the air but also about how much inventory is on hand in a warehouse, where it is stored, and when it has been allocated to fulfill an order-in other words, all the activities involved in getting goods from maker to seller to buyer. This type of insight can give a company the ability to respond quickly to unforeseen circumstances, cut costs and speed delivery.

Information is critical for management to make financial decisions, along with serving customers superbly and quickly responding to competitive threats.

The message coming from Asia is clear and powerful: The region's ascent as a manufacturing power is rewriting the rules of trade and commerce.

What is also coming into focus is the notion that the benefits of logistics outsourcing are well worth the investment, even if it means reaching out to bring outsiders in.

John Hafferty is the UPS Supply Chain Solutions vice president for Europe and Asia, with responsibility for operations in Europe, Asia, the Middle East and Africa. Prior to this John served as the company's vice president of the transportation group in the U.S., Canada and Latin America.