Planning a Global Logistics Strategy  (January 2006)

Outsourcing your Supply Chain Execution, or more simply the Logistics side of the business, is becoming the norm - particularly for the multi nationals - but how do you formulate a strategy for outsourcing, and how do you select the best Logistics Partners? Here David Warrilow, Managing Director of Audax Software, a company specialising in logistics solutions, sets out the issues that need to be addressed and proposes some criteria for a successful international logistics strategy.

With globalisation come ever-demanding supply chain problems. Production is moving further and further away from the customer market, bringing increased transport costs and longer delivery times. At the same time customers are demanding time-defined deliveries, which need to be met without the risk of building up potentially redundant buffer stocks in each Region of distribution. Most multi nationals, particularly in the high tech sectors, have made giant strides in terms of "just in time" manufacturing, but can the same be said of their logistics operation?

What are the issues that need to be addressed? In house versus outsourcing is a fundamental one, but for a multi national operating globally, using a 3rd party for at least a part of the distribution cycle is a given. However, the degree of outsourcing, and hence the degree of control delegated, is certainly a major issue that needs careful thought.

Then there is price. With so many companies offering seemingly the same service, historically price has been the determinant factor in most 3rd party selection. Of course it's of major importance, but if you ignore the other criteria you are heading for major problems.

The global logistics market is renowned for its high turnover of customers. Most logistics suppliers think keeping a customer for 3 years is par for the course, while most customers consider signing up to a long-term contract unacceptable. Lets look at what actually happens.

Company X, fed up with the poor service it is receiving from its current logistics supplier, and worried about the climbing number of customer complaints it is receiving, goes out to tender for alternative suppliers. Armed with the best of intentions they produce a Request for Tender (RFQ) document, loaded with service level measures and targets. Suppliers, eager to win the business, signify compliance with every item, leaving price the only distinguishing factor. Awarding the contract to the lowest tender, company X spends a year winding down their current supplier and moving to the new one - often having totally underestimated the changes needed to bring their systems into line with those of the new 3rd party logistics provider. During this "honeymoon" period senior management on both sides monitor the service intently and the logistics supply team is given the resources it needs (even though the supplier is probably losing 10 cents on every shipment!). Year 2 and the dedicated resources allocated to maintain the service are eroded, and some creative reporting of the service measures is discovered; the acrimony sets in. The logistics provider's Senior Management promise to make amends but they know it will take a year to move the business away to another supplier and they will have had their 3 years!

Of course the multi-nationals want a competitive price but they also want a high service level, and perhaps most important of all, they need control. Paying a higher rate per kilo doesn't automatically translate into a higher overall cost. Not if it allows the company to invest and achieve cost benefits elsewhere, and certainly not when you factor in the cost of customer dissatisfaction and of changing supplier - the RFQ process, changes to your systems and processes, etc.

The key to achieving control is total pipeline visibility. If you think of the supply chain as a process then it can be measured, managed and improved. Process improvement can only happen if you have the monitoring of the process in place. In terms of quality, the logistics industry is where manufacturing was 50 years ago - i.e. build the goods and inspect the finished article, rejecting it if its no good. Measuring service failures is the norm in the logistics industry. This is the old fashion "quality control" model and its now widely accepted that this is expensive and non productive. Focusing on the process, identifying inefficiencies, and eliminating these before they lead to a service failure, is "process improvement" and this is where the heavy logistics industry needs to move.

Why is it so difficult for heavy logistics suppliers to match the service that they claim to be able to provide? You first have to appreciate the fundamental differences between the handling of parcels, or light freight, and that of general cargo, or heavy freight. The Integrators (UPS, TNT, etc.) use a high level of automation - conveyor systems, sortation machines - to speed items through their hubs. Each item passes below a fixed barcode scanner, enabling routing instructions to be encoded on the label and tracking systems to be fed with milestone events. More importantly they often operate the fleet themselves (e.g. road and air) offering a one-stop logistics solution. This is why they are called Integrators. The downside, as far as the customer is concerned, is high cost and the limits placed on weight and gauge (dimensions). The Integrator will also claim to offer a "heavy" service - but make no mistake, this is not their strength.

The heavy logistics supplier must handle everything - ranging from packets to heavy machinery. While they might operate some transport of their own, they are obliged to rely on others, mainly airlines, to carry the freight on at least part of its journey. Handling is all manual and the use of technology severely limited. A typical international shipment might pass through 6 or more hubs and travel on at least 8 separate journeys, each potentially operated by a different company. The total number of events (milestones) that need to be monitored can easily extend to more than 20.

The problem of tracking in this environment is the lack of definition of the events to be monitored and the criteria for meeting them. "Your shipment has arrived at our Import Hub" might mean that the paperwork has arrived in the suppliers "back office", but has the freight actually been received, and most important, is the shipment complete? Different carriers use different criteria. Equally worrying, the event is recorded by manual data entry, often hours or even days after the event. Nothing engenders mistrust as much as seeing a date and time being entered retrospectively when you are reviewing service performance.

The lack of use of technology means service failures occur due to mislabelling and misrouting, leading to pieces ending up in the wrong location or lost. It also means that shipments are managed at a logical (i.e. paperwork) level and not at the physical (individual piece) level. It is an unfortunate fact that "bumping" - the process whereby the airline decides to remove (or not even load) one or more containers (ULDs) - is inevitable on occasion. Some routes - due to heavy loads or adverse weather conditions - are renowned for this. Customers accept these things happen but it's important that when they do it is quickly flagged and the missing items identified.

Knowing that you have lost 10 boxes is no use if you don't know which 10 are missing. A decision to send a replacement part or accept the delay is only possible if you have piece level tracking.

So a successful strategy needs to include a method of monitoring the process - basically software and systems. This monitoring needs to be at the piece level to be absolutely effective. Agreed message standards for passing this data exist (EDIFACT, IATA, etc.) but this is only part of the solution. The first problem is the different definition of events and the criteria by which these are met. The second one is the lack of piece level tracking.

There is a solution however. The multinationals should ask potential suppliers to agree to their definition of events, their criteria for meeting each event, and then ask how the logistics supplier proposes to record each of these milestones - automatically and at piece level. If the logistics supplier can do this already the customer has everything they need to monitor and manage the process. If, as is likely, they can't satisfy this request, the multi-nationals need to be in a position to offer the logistics suppliers a system that can and which they can operate as part of the outsourced service. . Logistics providers may complain at the overhead of operating such a system, but there are benefits that can be received by both parties, including considerable cost savings - one logistics provider estimates a 75% reduction in labour costs and greatly improved service levels.

In summary, a successful outsourcing strategy needs to recognise and address the needs of all parties. Price must be competitive but must not be achieved at the cost of the level of service. Process monitoring is a prerequisite to process improvement. Be prepared to invest, both in terms of time and money, to put in place the infrastructure that will allow the logistics suppliers to succeed on your behalf. People are doing this with great results. It doesn't have to be the way it always was - but remember change requires momentum and the customers have to provide this.

Finally, both parties should be prepared to enter into this with a long term view, agreeing a longer term contract, which can only be terminated early if the logistics provider fails to meet agreed service levels (which the system is going to be monitoring). Multi-nationals need to treat their logistics suppliers as true partners. This gives the logistics provider the incentive to invest (introducing such systems is not trivial) and the customers the protection of knowing that if they do have to change suppliers, their systems and processes will be unaffected.