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Strategic Assessment
In Supply Chain, the One Constant is Change
Static: It’s one word you don’t hear in supply chain circles very often, and for good reason: Logistics is synonymous with movement, both in goods and information, and in the design and evolution of the supply chains that make that movement possible. Constantly changing economic and political dynamics necessitate continual re-evaluation of supply chain decisions. The job is never dull, challenging supply chain professionals to think creatively and strategically.
Inspired by the findings of this year’s study, this strategic assessment examines several trends spurring yet more change and innovation in the supply chain world. First is the overall rise in outsourcing of logistics, followed by the growing use of supply chain control towers – both indicators of the increasingly complexity of managing today’s supply chains.
Emerging markets are a key factor in that complexity, and a trend to nearshoring is another sign of constantly changing global dynamics. Companies have moved production to emerging markets in pursuit of lower costs, but that decision changed conditions in those very markets, challenging companies to reconsider the economics and in some cases turn to nearshoring. Finally, a change impacting every industry is the emergence of social media, and like others, the supply chain industry is in the early stages of working out how to best leverage its power to enhance day-today business functions while minimizing the risks.
Global Trends in Outsourcing-Insourcing of Logistics Services
Outsourcing of logistics activities is on the rise, according to survey findings reported in the Current State of the Market Chapter. Nearly two-thirds (64%) of shippers report an increase in their use of outsourced logistics services, and 76% of 3PL respondents agree this is what they are seeing from their customers. At the same time, 24% of shippers are returning to insourcing some of their logistics activities, a trend confirmed by 37% of 3PLs. Both are consistent with past Annual 3PL Studies. So overall, there is a greater momentum for shippers to outsource logistics activities and processes than to insource them. Is there a tipping point? The point at which outsourcing reaches saturation? Possibly there is, but it is our belief that this has not yet occurred.
Shippers in Asia-Pacific (76%) and Latin America (73%) are leading the way, with shippers in these regions much more likely to increase their use of outsourcing than those in North America (58%) and Europe (57%). This suggests that shippers in developing regions of the world have a greater inclination to increase their use of outsourcing than those in the more developed economies in North America and Europe.
One possible reason is that 3PLs’ functionality has developed to the point that the 3PL sector is considered a useful alternative for companies in regions that are trying to build out logistics capabilities and infrastructure to support supply chain activities. Or, it may be that shipper decision-makers in more mature markets have become more defensive when making outsourcing-insourcing decisions, opting at times for an insourcing strategy they consider to be less risky. This rationale may also help to explain why many shippers appear to be risk-averse, and generally not very adventuresome, when making decisions as to what activities and processes they are willing to entrust to 3PLs.
Given all that, it might be surprising to hear that shippers in Asia-Pacific and Latin America also report they are returning to insourcing some of their logistics activities to a greater extent than their counterparts in North America and Europe. While this could be viewed as contradictory to the findings above, it also could suggest that shippers in these regions are more likely to make changes to their outsourcing-insourcing strategies (one way or the other, or more often) than shippers in the generally more developed regions.
Overall, these results support the assertion that the markets for outsourced logistics services in Asia-Pacific and Latin America can be very attractive, and are clearly targets for globally focused 3PL operations. Considering the increasing complexity of supply chains and the growing challenges of managing global business activity, there is a strong argument that shippers should be looking carefully at bolstering logistics capabilities with services and processes available from 3PLs and 4PLs.
Creating Supply Chain Control Towers
As addressed throughout this report, supply chain management is becoming ever more complex. Globalization trends such as offshoring, nearshoring and outsourcing of manufacturing and logistics, together with increasing customer demands and competitive pressures, have made visibility even more critical for effective decision making within and across organizations.
A growing number of companies are addressing this need via supply chain control towers. A supply chain control tower is a central hub with the required technology, organization and processes to capture and use supply chain data to provide enhanced visibility for short- and long-term decision making that is well-aligned with strategic objectives. Once this is in place, every product ordered; every shipment shipped; every document created; every cost accrued; and every event generated in the flow of product from order to final delivery is captured, organized and stored in the tower.
A well-designed supply chain control tower enables a company to measure and control the effectiveness of the supply chain in terms of agility, resilience, reliability and responsiveness. This delivers benefits across inbound and outbound logistics processes as well as operational benefits.
One Capgemini electronics customer, for example, leveraged a supply chain control tower to attain quick information retrieval and analysis, faster transactions, in-transit visibility and compressed cash-to-cash cycle times. A pharmaceutical manufacturer used its supply chain control tower to realize increases in transit time consistency, efficiency in handling of insurance claims, customer service levels and increased focus on critical service issues while reducing safety stock.
Such results don’t come without challenges, of course. One common mistake in implementing is underestimating the amount of IT collaboration needed with trading partners to obtain the messaging and data. Companies also tend to want to track movement of goods at a level that is challenging in terms of granularity, resulting in excess cost and over-saturation of information. Inadequate transportation management, such as mismanaged spend and use of non-integrated carriers, means those shipments will not be tracked effectively.
Aside from the need for careful and capable planning and implementation of the control tower concept, this trend should be viewed as a giant step forward in terms of better understanding and managing overall supply chain activities and processes. Correspondingly, it is natural that development of these capabilities will be accompanied by the further emergence of logistics providers who establish a core competency in assisting shipper-customers with refining and implementing capable supply chain control towers. Some 4PLs are already offering such services, as noted in the Electronics chapter. Although this concept may seem to be more applicable to shippers having complex global supply chains, steps in this direction can help to enhance the efficiency, effectiveness, and professionalism of the supply chains of firms of all types.
Reconsidering Emerging Near-Shore Markets
The term emerging markets often brings a list of countries to mind: Russia, India, China, and so on. But what if those emerging countries are not in proximity to the markets where a company intends to sell its goods? As companies begin to reconsider the long, thin supply chains that have chased the lowest prices for key input factors, many are taking a second look at emerging or somewhat-more-developed countries near their target markets whose proximity makes up for somewhat higher factor costs. A case in point: The Boston Consulting Group forecasts net labor costs for manufacturing in the US and China to converge by about 2015, and total landed cost differentials to be in the single digits to zero.
In the 2009 14th Annual Third-Party Logistics Study, a chapter on Supply Chain Optimization noted the trend to reconsider sourcing strategies, fueled by several factors. For one, after an extended period of decline, inventory and transportation as a percent of the US gross domestic product has been growing. Other factors include a rise in labor rates in emerging markets as growth fuels the formation of middle class, rising fuel prices, the impact of government intervention and emerging transport alternatives such as the Panama Canal and intermodal options. Quality and security concerns are also driving the trend.
The chapter reported that a critical consideration in choosing offshoring versus near-shoring is the role 3PLs can play in restructuring the supply chain to better meet current and emerging conditions, as well as serving in a more strategic capacity in the new infrastructure that results. Nearly 60% of shippers said this was the time in which to re-evaluate their relationships with their 3PLs and possibly drive these relationships deeper.
Lower freight costs, improved speed to market and lower in-transit inventory costs are the most attractive advantages shippers expect when they choose near-sourcing, according to Alix Partners’ Low Cost Country (LCC) Analysis, 2010, a survey of companies selling into the US market. That study found 42% of shippers are already near-shoring or will be within three years. In comparison, 37% are taking an offshoring approach in that time period. Despite concerns about security and safety, 63% of those moving to near-shoring and 42% of those moving to offshoring favor Mexico as their number one outsourced production location, driven largely by favorable total landed cost calculations.
What is clear is that when it comes to production outsourcing, the right decisions are growing less and less clear. As the cost differential for factors such as component price and transportation costs narrows among production locations, metrics such as total landed cost become critical information necessary to fuel decision making, alongside factors such as market pressures for agility, speed and increased capability. Another key decision point is the value 3PLs can offer in enabling production in near or offshore markets.
Leveraging Social Media in the Supply Chain
Social media are weaving themselves into our personal and professional lives. As the day progressed at the ASE workshop in Chicago, social media repeatedly emerged as a potentially useful component of logistics, so much so that by day’s end, it became the focus of a special breakout session.
Among the benefits of social media such as LinkedIn and Facebook are a high scalability and ease of use combined with a low level of investment. It allows more self-reliance while providing greater visibility and more real-time information.
Social media has already found an important role in many businesses. A survey by Econsultancy and Adobe found 31% of European businesses believe social media marketing is a highly significant trend for them; 53% rated it as quite significant. According to Gartner, by 2012, spending on social software to support sales, marketing and customer service processes will exceed $1 billion worldwide. ¹ Popular business functions include marketing and advertising (i.e., crowdsourcing), speed to customer feedback (real-time insight) and recruiting.
These concepts can easily be adopted by supply chain managers. For example, crowdsourcing (leveraging the mass collaboration enabled by Web 2.0 technologies) can drive forecasting by amassing insights into purchase intent or price elasticity. Transportation carriers could tap social media for real-time insight into traffic issues. Social media is already serving as a rich venue to locate new talent with the right skills for a particular position, or generate interest in supply chain internship programs.
Those aren’t the only possibilities. Other potential uses of social media include:
- Collaboration to solve problems, innovate solutions and set benchmarks
- Industry focus groups
- Procurement and sourcing
- Personalized product offers from social media sites linked to an order entry page
- Background checks
- On-demand training
Of course, logistics will be heading up a steep learning curve alongside other industries, working out the best ways to leverage social media’s power. Companies will need to develop rules, formats, policies, training programs, case studies and proof of concept cases, and must learn to manage user experimentation and expectations. Issues of concern likely to emerge include liability, inter-generational conflict, pockets of non-users, emerging hacker risks and a tendency to overweight the value of chatter compared with other sources of information.
‘‘Rate negotiations
and contracts are currently being freely discussed
on blogs,” noted eyefortransport participant
Peter Starvaski, Director Product Management,
Kewill, calling attention to one of the trends
occurring in social media. Such struggles are
inevitable with any new paradigm.
In fact, the Annual 3PL Study team is undergoing
similar challenges in discerning the best ways
to leverage social media to enhance data gathering
and analysis as well as create a richer user experience
of the study results. Ideas include use of LinkedIn,
Twitter and Facebook as well as location-based
services, use of QR codes, and formats including
ePubs and Kindle that enable readers to share
and bookmark content and engage in real-time,
interactive feedback. The study team welcomes
your feedback on social media venues you would
find valuable, as well as on any aspects of this
report on which you would like to comment.
1 Gartner, Inc.:
‘‘Predicts 2011: CRM Enters a
Three-Year Shake-Up”, Ed Thompson, et al
22
November 2010
Index:
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