A question of priorities

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Priorities change in the fourth quarter of the year. It’s the run-up to Christmas and our Supply Chain Challenges survey highlights the fact that managing Yuletide deliveries dominates the thinking for many supply chain professionals.

Christmas is, of course, a critical time for retailers – good Christmas sales can make the difference between a good and bad year for many.

While this has its impact on supply chain operations, one thing never changes – the focus on costs. Our survey shows that controlling costs remains the number one challenge for more than 70 per cent of the supply chain professionals.

This is also reflected in the external threats identified by our respondents. A combination of rising fuel prices and raw material costs came right at the top of the list.

One respondent said: “Rising fuel prices are playing havoc with transport costs. Raw material prices seem volatile as the emerging economies seem to be buying a lot of raw materials. It is difficult to justify increasing our prices as the consumer will buy something cheaper.”

Other issues that scored highly on our list of critical challenges were optimising inventory levels, managing changing business volumes and improving supply chain visibility.

And a substantial proportion of respondents said that implementing major supply chain projects were either a critical (28 per cent) or important (44 per cent) priority.

The survey was conducted among The Logistics Manager Panel of senior supply chain executives in the last quarter of 2011.

A number of challenges were rated as important, though not necessarily critical, by a large proportion of our respondents. For example, 72 per cent rated improving internal and external collaboration as important, though only 21 per cent said it was critical to their businesses.

Environmental issues also fell into this category with some 62 per cent rating this as important. Similarly, restructuring to meet changing business needs was rated as important by some 68 per cent.

Threats and opportunities

Not surprisingly, the weakness of the economy, both global and domestic, was identified as a critical threat. Many respondents are clearly feeling the impact of cuts in public spending, while changes in government policy are also having an effect.

In the retail sector, the move to online and the consequent effect on the high street is seen as a threat by a number of respondents. The changes to the London Low Emission Zone was also identified by some whose vehicles do not comply.

And one clearly exasperated respondent said his biggest problem was “incompetent staff who won’t change”.

Collaboration came high up the list of opportunities. And respondents saw opportunities to collaborate more effectively not only with existing supply chain partners but also in some cases with competitors.

Expanding into new markets was another notable theme – in particular the opportunities in China and the other BRIC countries are clearly exercising minds. But the possibility for further growth in Europe is also under consideration – although one respondent said the companies was focusing on China “due to Europe being a very mature, saturated market”.

E-commerce was also seen as offering new opportunities by a number of respondents.

Consolidation was another theme, along with looking for ways to reduce transport costs. One said: “Removing premium freight costs, and changing to lower cost freight (sea rather than air).”

Trading conditions

Concerns about the level of debt in some Euro-zone countries has dominated the economic news in recent weeks, creating uncertainty in the markets and warnings of another downturn.

However, our survey reveals a high degree of stoicism in the face of these challenges. Just over half of respondents said the current level of activity in their supply chains was up on the previous quarter – not entirely surprising given that the survey was conducted in the pre-Christmas period. However, 56 per cent also said that supply chain activity was up on a year ago.

Increase in activity

And looking ahead some 62 per cent expected supply chain activity to rise in the next quarter, while 80 per cent are looking for an increase in activity in the next year.

This is highlighted by the fact that at the end of last year supermarket chain Morrisons  announced that it plans to create 7,000 jobs in 2012 as it continues its store expansion programme as well as developing its manufacturing and logistics arms. 

A key element of the development of Morrisons’ supply chain operations is its new Bridgwater regional distribution centre, which will provide food for much of the South West and South Wales. It said that there will be another 300 people employed at the site.

On the down side, it is also apparent that our respondents have been affected by rising costs. Some 42 per cent said costs had gone up in the last quarter. Looking back a year, 58 per cent said costs had risen. Not surprisingly, almost 60 per cent expect costs to rise over the next year.

That reflects the results of a Freight Transport Association study which calculated that on average, vehicle operating costs for rigid, articulated and drawbar vehicles have risen by 6.2 per cent in the year to 1st October to reach an all-time high.

The October 2011 update report of the FTA’s Manager’s Guide to Distribution Costs 2011  found that the largest contribution to the rise came from an increase in the price of diesel, which has risen by 13.9 per cent in the year to 1st October. In addition, tyre costs have risen by 8.3 per cent and overheads by 5.6 per cent in the same period.

And, of course, it is not just in the UK that companies are feeling the impact of rising costs. In November, it was reported that China’s logistics costs had risen by more than  18 per cent year-on-year from Jan to Oct to 6.4 trillion yuan ($1.01 trillion), rising in tandem with rapidly increasing transport costs.

Logistics volume reached 131.7 trillion yuan by October, showing year-on-year growth rate of 13.3  per cent, 3.2 percentage points lower than the same period in 2010, the China Federation of Logistics and Purchasing (CFLP) said in a report on its web site.

The growth rate of total logistics costs was flat when compared with the first three quarters, but maintained a high speed momentum, according to the report.

Meanwhile, transport costs rose 15.6  per cent year-on-year to 3.3 trillion yuan, 0.2 percentage point higher than the increase in the first three quarters of 2011, the CFLP report said.

China Logistics Information Centre attributed high transport expenditures to rising oil prices and labour costs.

It’s a sign of the times that what is happening in China has so much significance for supply chains across Europe.

What is very clear from our Supply Chain Challenges Survey is that there is still a strong appetite to invest in strengthening supply chains. Some 56 per cent said they expected the level of investment to rise next year, while only 14 per cent thought it would fall.

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