As we enter a new year the logistics sector will face a new set of challenges. How will these issues align with an agenda geared for innovative growth? The challenges for 2007 include heightened security, a requirement for further collaboration among suppliers and customers, a continued trend towards globalisation and a drive for ‘green’ initiatives.
Given the events of the last few years, it is hardly surprising that, as we move into 2007, security tops the list of our industry’s concerns. Supply chains are not only becoming longer and more complex, but the opportunities for security breaches are multiplying.
With countries across the globe taking homeland security very seriously, we may well see more regulatory controls being introduced to reduce the risk of terrorist activity on our supply chains. This is an area where technology will play a key role. The wider use of RFID tags and GPS tracking will make it easier to monitor if containers have been opened in transit or if trucks have deviated from a scheduled route.
We are seeing an increasing number of pilot projects in this area. Last November, for example, EPCglobal’s Transportation and Logistics Industry Action Group initiated an RFID trial for cartons and containers being shipped by sea from Hong Kong to Japan. The trial is to be extended to shipments between Shanghai and Los Angeles in coming months. DHL is closely involved with this project and one of its objectives is to enable visibility at critical points across the supply chain, so helping to minimise the risk of unauthorised activity.
There is a real need for supply chain companies to accelerate their use of new technology in order to combat these types of security threats. It will mean monitoring goods at the item level, as well as at pallet and shipment levels, and the logistics service provider community needs to work closely with partners to develop the technology. It’s not a competitive issue: the current Hong Kong/Japan trial involves Maersk, NYK, Schenker and Schneider National, as well as DHL.
Additional security checks can, however, take time and if we are to fulfil the sort of two-day or fourhour delivery promises we make to our customers then we will not only need good technology but also greater collaboration with our customers.
Much has been written over the past few years about the need for manufacturers and retailers to work more closely together – and progressively the spirit of collaboration has started to include logistics service providers. There is a necessity for a greater insight into the planning and forecasting processes of our customers to ensure that we have the capacity and resources available when they are rerquired in order to effect the on time delivery of goods. Our customers, quite rightly, expect rapid, consistent and now more secure deliveries meaning more tracking, tracing, and security monitoring of the supply chain – all of which add extra time. As such, we need to be involved earlier in the forecasting and replenishment process to ensure that goods really do arrive in time, and so prevent empty shelves and stock outs. This would improve retailers’ sales and therefore overall satisfaction with their service providers.
The trend to globalisation
The third major challenge facing our sector is the continuing process of globalisation, a trend which was spotted a few years ago and continues apace. Supply chains are increasingly becoming international – especially for Western European companies. We no longer manufacture many of the goods consumers want to buy in our own countries and much now comes from producers on the other side of the world. International trade is at an all time high as companies broaden their supplier and customer base, with sourcing moving East from domestic and Western European markets to CEE and APAC. For now, this trend is ensuring a healthy future for long distance supply chains.
Whilst labour rates are lower in countries such as China and India, this has to be balanced with the knowledge that infrastructure is often inadequate and that legislation is immature – for example in employee welfare. At a micro level supply and sourcing is still likely to have a domestic focus.
The fourth major challenge in 2007 will be the growing corporate, consumer and legislative interest in environmental issues. This will present new opportunities for our sector.
Much discussion about the environment currently focuses on carbon trading – producing emissions in a country like the UK but buying ‘spare’ emissions capacity from somewhere like Sri Lanka. This hardly solves anything, it is simply a global economic exercise. Rather than offset ‘carbon’ in this very artificial way, logistics service providers, together with customers and partners, need to look at ways of reducing and replacing wasteful practices: reducing our emissions and replacing polluting activities to create a more sustainable environmental model.
For example, at DHL we are starting to replace use of diesel in our transport fleet with biodiesel which does not produce carbon emissions or contribute to air pollution. The transport sector should make greater use of hybrid trucks which offer the option of switching to electrical power in towns to reduce pollution. In the ‘replacement’ category, we can switch to solar heating in our warehouses. Panels on warehouse roofs can help reduce the requirement for carbon-based energy to heat our offices or water.
These activities are comparatively easy to initiate – what will be harder to do is rethink the supplychains of our customers. Air freight from the Far East may only take two days compared with four weeks at sea but is much more polluting, so we should be engineering supply chains to reduce the need for such rapid deliveries – for example we need to rethink the distribution model in Western Europe tomake it leaner, with less stockholding points and less carbon pollution.
Academics often argue the case for bringing production closer to the site of consumption. Over the years, production in Europe has become very centralised with a single CPG manufacturing plant – producing dog food, soap powder, etc – to supply the whole of Europe. If the cost of distribution rises – through green taxes or other constraints – then in the long term we may see this academic argument winning support from industry and there may be a shift to placing new production centres close to consumer markets. This would have a dramatic impact on long-distance transport, thus reducing carbon emission – but this is a very long term view.
Equally, local authorities and governments seeking to control traffic congestion with road pricing and congestion charges, will simply add cost to our services, and will not necessarily achieve the ultimate goal of reducing global gas emission. Temptation would be to find a way of circumventing green taxes and road pricing. A better solution is to look at greater use of consolidation centres, jointly with city councils – such as the development DHL Exel Supply Chain has been involved with in Bristol – where shipments can be merged to reduce traffic flows into town centres. It brings us back to collaboration and the need for closer liaison between everyone involved in the supply chain.
The need for increased security, greener operating methods, and global trading – set against rising fuel prices and economic uncertainty – all combine to raise operating costs and reduce margins, but these costs can not all be passed on to customers. Supply chain companies cannot stand still: a very major challenge is innovation. We are no longer simply transport providers or warehouse operators – we need to move into new areas of collaboration with our customers, to strive for new innovative services to maintain performance.
Today the emphasis of branded manufacturers is less on manufacturing and more on brand. Large multi-national brand owners are becoming marketing operations with outsourced manufacturing and offshore product development. There is a major opportunity here for supply chain service providers in co-manufacturing – packing, assembly, procurement, sourcing and so on. Customers are already asking us to take on many of these roles and they provide an opportunity for us to move into new value-added operations.
A few years ago our customers would not have wanted us to take over these roles, but increasingly they do: it is a win-win opportunity for all. CPG companies can focus on global marketing activities and brand while routine tasks – such as packing products or assembling components – can be outsourced to service providers as a value-added operation that is less commoditised than simply storing or moving goods.
The fifth challenge facing us is the fragmented nature of the market. DHL is market leader yet has only a 5.5 per cent global share. The largest dozen or so firms in the sector collectively account for only around 16 per cent of the world’s market. There are thus a great many small businesses out there who may find survival in 2007 a struggle. They often lack the funds to invest in new or green technologies or to develop value added operations. They face two options: either to become niche market players, or to participate in the consolidation of the sector through a buy-out orchestrated by the financial community.
It will be a challenging year for all of us – but there are plenty of opportunities for innovative growth, enhanced performance, and environmentally friendly initiatives, if we choose to seize them.
Claude Boisselet is head of marketing and major projects for DHL Exel Supply Chain; he can be contacted at email@example.com
- Security: Technology will play a key role, with wider use of RFID and GPS
- Collaboration: There is a greater need for an insight into the planning and forecasting processes of customers
- Environment: A closer look at using consolidation centres to cut carbon emissions