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For most businesses, the words "small" and "global" don't go together. A company the size of Adept Technology, with fewer than 200 employees, can't be expected to have a seamless supply chain that effectively manages product flow the world over.
Or can it? Adept, a maker of industrial robots, has to be able to see all of its inventory around the globe. Its devices, consisting of up to 300,000 parts from an army of suppliers, are critical to customers. When they fail, assembly lines grind to a halt. Adept must respond quickly no matter where the trouble lies.
To achieve global visibility of its supply chain, Adept sought the help of a logistics service provider, Pleasanton, Calif.-based D.W. Morgan Co. Inc. Using routers supplied by Cisco Systems, Morgan set up a worldwide communications network via the internet, linking Adept's various supply chain partners and allowing it to view inventory at every stage. For the first time, the company knew exactly where its parts were, and how to get them to destination in the best way possible. A customer in China could talk to a service rep in Germany, while Adept was rushing a critical part from Singapore.
Morgan also stepped up with consulting, logistics outsourcing and transportation management services on Adept's behalf. In recent years, such arrangements have become common, as logistics service providers (LSPs) help companies to forge global supply chains. In the scramble for low-cost sources of product, manufacturers find themselves relying more and more on outside logistics experts.
It's not just the small companies who need help. In fact, logistics outsourcing is a phenomenon that was triggered by some of the world's largest companies. They found themselves with operations all over the globe, hampered by disparate systems, departmental silos and local practices that could not be replicated elsewhere. As a result, even the biggest businesses were unable to take advantage of their size to get the best deals from carriers, forwarders, warehousers and other types of logistics providers.
A business might be international-with discrete operations in multiple countries-but it isn't necessarily global. Yet worldwide control of product and information is fast becoming an indispensable source of competitive advantage, says David Morgan, president and chief executive officer of D.W. Morgan. When it comes to dealing with suppliers, carriers and other partners, fax and phone are no longer enough. Either a company must have one central repository of information, or the ability to access data instantly from multiple sources.
The chief stumbling block is the interdependency of most supply chains. "Most of the people with the ability to bring down your supply chain don't even work for you," says Morgan. Each supplier of goods or services has its own means of storing and transmitting information. And the likelihood that all of those systems will work in harmony, without the help of a unifying entity, is pretty slim.
The price of failure is high. Morgan cites the case of one client, a $5.1bn chemical company in Brazil, that was sourcing all of its customized pallets from a single provider. Rising demand, coupled with a lack of communication, caused the company to run out of pallets. As a result, it had to shut down production for four days-and lost $100m in market share.
According to Morgan, global manufacturers often fail to account for all five types of inventory: raw materials, work in progress, finished goods, items in transit and service parts and returns. A company might have strong control over two or three areas, but fall short in the rest. For example, one Fortune 50 company lacked good visibility of in-transit inventory, so it didn't know that a delivery had been rejected because the customer's receiving docks were closed. The result: the shipment came back on the last day of the quarter, and a $10m sale was wiped off the books.
"If you can't see all of [the five inventories]," Morgan says, "you're not doing justice to your supply chain."
LSPs can play an important role in tearing down the walls that prevent communication within a company as well. Technology alone won't accomplish that; expensive enterprise resource planning packages are merely transactional systems that don't cross corporate boundaries. Too often, says Morgan, the same information is still being manually inputted over and over.
One piece of technology does offer hope, if it's coupled with process change. Service-oriented architecture (SOAs) is essentially middleware that allows managers to retrieve information from different databases, both inside and outside the organization. That's another service that Morgan, and other LSPs, can provide to would-be global businesses. In one instance, Morgan combined 27 separate databases for a global view of inventory through an internet portal.
The push for a global supply chain, with or without the help of an LSP, can pay off handsomely. Morgan has seen companies cut costs by 30 percent to 50 percent, while improving their buying power by 5 percent to 15 percent. But the real benefit lies in tighter controls, which can lead to better customer service and higher market share.
Despite the lure of big savings, relatively few organizations have managed to put together a truly global supply chain, says Bill Read, senior executive of supply chain strategy with Accenture in Cleveland. Many continue to run their businesses on a country-by-country basis.
The exception is big multinationals with worldwide brand identity. The need to protect that brand in all markets forces companies into a global mindset, says Read. But even the largest and most sophisticated among them can still use a hand from expert outsiders.
LSPs have an important role to play, Read says, especially if they are themselves global in nature. Big players such as DHL (owned by Germany's Deutsche Post World Net), UPS and FedEx are well positioned to match, if not surpass, the global capabilities of their biggest customers. "Manufacturers can't do it on their own," he says. "They need experts. And LSPs are definitely moving in that direction."
The need for skilled LSPs becomes even greater as companies adopt more creative strategies for serving their own customers. One such innovation is direct-to-store delivery, whereby product flows from the manufacturing plant straight to the retailer, bypassing the supplier's distribution center. The idea is to be more responsive to changing customer demands, while eliminating unnecessary costs. But few manufacturers have the expertise to make such a delicate system work. Getting it wrong means stuffing the pipeline with unneeded goods and jacking up carrier costs.
Global LSPs, unfortunately, are no more plentiful than global manufacturers or distributors. The problem, says Read, lies in the extremely thin margins of outsourced logistics. Few LSPs have the resources to invest in the systems required to manage complex supply chains. Yet, in a time of demanding retailers, cost-cutting mandates and heightened security concerns, the free flow of information becomes more important than ever before.
Logistics providers are fully aware of the risks. In a recent survey of LSP users of Provia Software, their number-one distribution challenge was lower profit margins. More than 60 percent of respondents said shrinking margins, along with the reduced lead-time needed to set up new customers, were limiting their success. Half believe that a lack of the resources needed to set up new systems was an additional barrier.
To build a global network, LSPs must find trusted partners of their own. Software vendors provide the planning and execution systems needed to manage the flow of product throughout the supply chain. As the number of off-the-shelf applications grows, LSPs have less of a need to build expensive systems in-house. System integrators such as Accenture can help install that software on behalf of LSPs' clients. Other vendors can perform basic back-office functions such as the payment of bills.
Having a global view of inventory is vital, says Read, especially for companies with short manufacturing lead-times. So is a common set of metrics for the whole organization. Initiatives such as the Supply Chain Operations Reference (SCOR) model of the Supply-Chain Council can serve as the basis for measuring key processes and achieving the right inventory levels, fill rates and cycle times. Again, a qualified LSP or system integrator can help to monitor those processes and decide which are the most important to profitability and customer care.
A large multinational should allow an LSP to manage as much of its supply chain as possible, Read says. But smaller companies with global operations can benefit from logistics outsourcing as well. In fact, their business might be even more attractive to LSPs, who are constantly being pressured by the biggest clients for discounts and additional services. It's no surprise that LSPs view the mid-market as their greatest opportunity for growth, says Read.
The path to a global supply chain is actually a four-step process, says Chris Holt, vice president of consulting services with UPS Supply Chain Solutions in Atlanta. It starts with a purely domestic company, then graduates to international, when the entity does business in other countries; multinational, when it runs core operations in those countries on a localized basis, and global, when its supply chain becomes truly unified. Only a "very small subset" of companies qualify for the last category, Holt says.
Automotive is one area where global supply chains have taken hold. A Japanese automaker becomes multinational when it starts producing in Korea or Taiwan, Holt says, then turns global when operations spread into the U.S., Canada and Brazil, and the whole system must be centrally controlled. But the first step into international isn't usually related to the supply chain, Holt says. More often, it involves the placement of a sales and marketing office in a foreign country. Distribution is next, followed by manufacturing. Then comes the need for an LSP to manage the whole setup.
Actually, a third party can be involved at any stage of a company's process of maturing, Holt says. For international companies, UPS can provide basic transportation. For multinational or global companies, it can broaden the offering to include distribution centers, forward positioning of inventory, and other value-added services. In particular, an LSP can help to winnow down the number of underlying vendors and get better deals based on volume. It can also help companies to implement standard business practices for data capture and reporting, among other things. What's crucial, says Holt, is that the client's global scope is matched by the global capabilities of an LSP.
The number of candidates among the LSP community is shrinking fast. Recent months have seen a spate of acquisitions by industry giants such as UPS and Deutsche Post (the latter of which recently snapped up U.K.-based Exel plc). UPS SCS sells itself as a vendor that can offer both high-level logistics management and underlying transportation, drawing on the parent company's fleet of trucks and planes as well as the assets of other vendors. Holt questions whether the so-called 4PL model, in which a provider without any hard transportation or distribution assets of its own contracts out for everything, then takes a fee for managing the network. "Several years ago, the model was catching on," he says. "Less so now."
LSPs allow mid-sized companies with global aspirations "to create a supply chain without having to build anything," Holt says. He agrees that the margins for that type of account are more attractive from an LSP's perspective. The vendor offers a density that the client could not otherwise achieve, and gets a better return on its investment.
There is always the danger that a business might rely too heavily on one LSP, whose failure to perform could have disastrous consequences for a global supply chain. But Holt says companies should be comfortable handing over the preponderance of their logistics business to a single trusted vendor, leaving the rest to local experts. "If you give us 90 percent," he says, "it's enough to make the pricing attractive."
Advantage of Youth
Well-managed global supply chains are more likely to be found in younger industries, says David Vernon, vice president of supply solutions with Oakland, Calif.-based APL Logistics. Some of the biggest success stories are in high-tech, where players such as Cisco Systems Inc. and Dell Inc. have crafted responsive systems that tap into both supply and demand on a worldwide basis. Older industries can be mired in established ways of doing business, where standardized processes are lacking and legacy systems abound.
Regardless of industry, a true global company will have deep relationships with suppliers, says Vernon. Such ties can prove valuable in everything from corporate quality initiatives to everyday tasks such as order configuration, packaging, kitting and labeling. A manufacturer who knows exactly where the next batch is in the production cycle can state with confidence what's available and when. And it can make last-minute changes that correlate with actual need. Customers place high value in suppliers who operate "capable-to-promise" systems, supported by accurate, real-time data.
A global view puts all key decisions in perspective. "Companies that do it well are able to make the tradeoff between cost at origin and the amount saved at destination," Vernon says. Their actions will be based on all of the elements affecting a product's landed cost, such as transportation, duty, order lead-time and inventory holding expense. But such a view isn't possible without a high level of cooperation from supply chain partners outside the company's home country.
Competent LSPs can make the changes that are needed to ensure that product is flowing to the right place at all times, says Vernon. But he, too, believes that such entities are not common. The key question is how they manage information. From purchase order to freight forwarding, from warehouse to final distribution, each link of the chain generates data that must be coordinated and relayed just as smoothly as physical goods.
Vendors specializing in forwarding and transportation tend not to be well coordinated with those who provide contract logistics, Vernon says. The ideal LSP is one who can handle all those tasks. And, with an integrated suite of options, the provider stands a better chance of making a decent return. "If you can align services for a customer," he says, "you can probably make a bit more margin than with an a la carte menu that any customer can pick from."
But can one LSP do it all? While Vernon touts the wisdom of doing business with a multi-tasking entity like APL Logistics, he admits that local regional expertise, perhaps at the distribution-center level, could be required. At such times, he says, a company might be better off with a "best-of-breed" player.
Risks of Outsourcing
The outsourcing of global supply chains is something of a two-edged sword, says Claude Germain, executive vice president and chief executive officer of Schenker Canada in Toronto, Ont. Companies can benefit greatly from reliance on a single vendor with heightened control over inventory. But unless the customer has instant access to data, it risks adding costs by creating an extra layer of management. In addition, he says, local entities are often the lowest-cost vendors in their respective markets-a fact that may be overlooked by supply chain managers based thousands of miles away.
Nevertheless, LSPs can be valuable partners in coordinating data from multiple sources. An importer from East Asia, for example, might be dealing with 10 ocean lanes and five carriers, whose quality of data varies tremendously, Germain says. And the weakest links of a chain can affect the entire network.
That's where a good LSP steps in. It can focus on such details as event notification, revealing any supply chain glitches early enough to take remedial action. The problem isn't lack of adequate software, says Germain. "It's all about the execution-getting the originating office of a carrier to input information."
Schenker's role is that of a global information broker. "We take ownership of data integrity," Germain says, citing such elements as supply chain event management, inventory in transit, lead-time forecasting and advance ship notices. With the right information in hand, companies can begin to make intelligent decisions about mode, shipping lanes, and freight consolidation. In the process, they can reduce their logistics cost as a percentage of gross sales.
Reliance on an LSP for physical services alone won't necessarily save the customer money, says Germain. In fact, it might cost extra. He questions the need for LSPs by the biggest manufacturers or distributors, who have enough freight volumes to qualify for discounts. "If you have a large client, they will almost invariably be better at doing it themselves. If a company has any scale, you're just a booking agent."
That's not the case with mid-sized companies. "The true value of an [LSP] exists in the mid-market, where your purchasing power overwhelms that of the client," says Germain.
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