Is this the future?

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The problem with crystal ball gazing is that you can look pretty silly if you look too far into the future, as for sure, things never quite turn out as expected. Fortunately, few of us succumbed to the sartorial elegance of the silver foil zip-up suit, or the epicureandelights of a meal in a single pill. And, without going too far back, whatever happened to all that extra leisure time we were told we would have – the Blackberry put paid to that.

However, that’s not to say that truths can’t be gleaned from a pragmatic understanding of current trends and extrapolating them to estimate their possible midterm outcomes and influences, say over the next five years. So, Logistics Europe set this task to our ‘Supply Chain Vision Group’ (panellists listed below).

According to our visionaries, one of the top five issues set to influence supply chain in the next few years is ‘risk’. Longer supply chains coming out of China and the Far- East are increasing risk across the chain and as Mogens Bak of DHL Exel Supply Chain emphasised, ‘at the same time there is a drive to de-stock or take stock out of the supply chain… they [manufacturers/retailers] try to consolidate their warehouse distribution, so they are sitting in one or two DCs for their whole distribution, and that could have very big ramifications on their customer servicing capabilities if something goes wrong.’

Risks such as oil price, security, storms, political stability, as well as ethical and ecological issues were listed. But, is supply chain risk on the boardroom radar? Consensus around the table pointed to a view that the boardroom was aware of the increased risks, but not all agreed on the degree of understanding here. Phil Streatfield of Woolworths pointed out that ‘boards are aware of the risks, but as more is sourced from the Far-East, do they realise a terrorist attack on a port could stop everything in its track.’ Even far less dramatic events can paralyse a supply chain, as evidenced by last year’s ‘Bra-wars’ quotas conflict between China and the EU.

‘We are conscious of these intangibles,’ says Sigi Osagi of Bombardier, ‘but the language of business is financial and this is the language we have to speak’ if the supply chain professional is to be understood by the board.

Peter Ulber of Kuehne & Nagel, illustrated the point, ‘for every physical supply chain you also have the financial supply chain – what you often forget is that, it would make it easier in the boardroom if these two were closer connected. Whenever you move, say, from one country to another, there is always a financial impact – you go to another currency, change terms of delivery, you tie up the money or free up the money’. Perhaps what would help is if supply chains were more clearly understood across the enterprise as ‘value chains’, rather than, as Streatfield rightly pointed out, ‘cost centres’. Clearly, the interconnection between finance and supply chain will play a significant part in future chain strategies. No doubt, the big banks will become far more active in the supply chain arena.

Supply chain practitioners will need to adopt a leading role in creating a holistic view of where value lies in getting a product to market. Streatfield brought home this point: ‘The challenge of retail is how to integrate the thinking – all the way from product that might be coming in from the Far-East, the technicalities of moving it into the UK through distribution out to stores, but also to understand the impact on inventories, the waythings flow, the impact on margins and how much product gets to the right place at the right time… There needs to be effective range plans from the commercial teams that can feed through to supply chain decision making.

‘From a finance perspective, if we understand the cost to serve we can get into net margin management and net profit management rather than looking at gross profit. So buyers need models that make them understand that we are in the net profit game not the gross profit game.’

A ‘new’ business model
For a great number of companies business models have significantly changed over the last five years and, believes George Hadley of Direct Access International, will continue to change. ‘How many companies have a supply chain director on the board?’ he asked, making the point that there is confusion over the titles ‘supply chain director’ and ‘logistics director’ and their respective roles. ‘Managing the supply chain is managing your business’ and should not be seen as just managing trucks and warehouses. ‘I would throw a challenge down to companies and ask, “Do you know the cost of your supply chain, front to back?” and I would say that 99.9 per cent would say no. They know this bit and that bit, but knowing the overall cost to serve, they have no idea.

‘There is so much opportunity for savings, rationalisation, efficiency improvements and cost reduction… Many companies have got rid of a lot of infrastructure and have moved to using shared services – as they see what the cost of their supply chain is they will make savings by changing their strategic business model into something where shared services are involved.’

Jan Steenberg of Dentsply was more of the opinion that it’s a matter of adopting the right supply chain for the right location. ‘Within our company we have a manufacturing facility just outside Rio in Brazil. The operations director there had a conversation about the planning systems and integration. He said, “I don’t need that [technology]”, it’s a balance between process, people and systems. Labour is very cheap and systems are very expensive in Brazil, “I just need another 10 more  people, because it’s cheaper”. We need to operate in different ways in different areas, we need to optimise processes and understand that local markets have very different needs.’

Hadley agreed that one size does not fit all. ‘Lots of western companies failed when they went to China, they just took the Western way and tried to transplant it into an alien culture. And it doesn’t work. You have to get local people involved in your business, they have to own the process – it has to be tailored and developed.’ What’s needed is ‘local knowledge and global expertise’.

So what will be the challenges for supply chain leaders? Osagi sees that the reality for the supply chains of tomorrow will be significantly different from today. ‘Companies will leave all the non core areas, including procurement and after sales service to third parties’ resulting in virtually no infrastructure. Hadley takes this further by speculating that companies will own the concept of the product and the channels to market, but everything else will be outsourced ‘it’s flexible, it’s fully moveable, it’s up-scaleable or down-scalable, depending on market conditions.’

Getting back to the real world
However, there are always constraints, ‘lets get back to the real world’ remarks Steenberg. ‘I have never seen anything that was fully scaleable. There is capital and time associated with that statement that needs to be quantified… manufacturing has a certain scaleability up and down, distribution, transportation etc… you need to understand those boundaries.’

Bak calls on the example of one of the icons of the fashion sector, Zara, praising their short lead time to store. ‘They manufacture most of the clothing themselves, they control their factories themselves. How many fashion retailers would be able to work vertically like a Zara? Not many. So they would need another kind of supply chain.’ Streatfield is quick to add, ‘Which is why it’s not necessarily a given that
companies will outsource.’

Zara may work close to its market, running short supply chains, but will risk over sourcing from longer distances lead to increased inventory levels? With oil hovering at the $60 a barrel level, what will be the impact on how supply chains are structured? Ulber sees that overall, supply chains will get more expensive as manufacturing, oil, security, regulations, etc all add to the costs. And that’s why ‘it [supply chain]will have a much bigger influence over whether a company is successful or not.’ The question is, is the price of oil high enough to change the equation? But then what happens in a hundred years time when there isn’t anything left? Undoubtedly, green logistics will play a bigger part in future sourcing policy and the ‘carbon footprint’ of a product will be the means by which green efficiency will be measured.

‘For me now it’s more cost effective to have a little more stock closer to the customer, within the branch network and a little less trucks moving up and down the country’, says Stefano Perego of Rexel Senate. ‘It’s a holistic approach I take with my job. Estimating risk in terms of lost sales’. He believes raw materials costs will have a greater influence on supply chain decisions in the future.

Of course, the subject of RFID, featured in the discussion. Streatfield, who had direct experience of trialing the technology, believed ‘it was a solution looking for a problem to solve’, but conceded that, although it didn’t stack up for him, ‘you have to look at every application… its part of the portfolio of ways of solving problems.’

Mogens Bak understood that there were still some issues with the business case, but through his company’s work with the likes of Metro in Germany, Wal-Mart and other retailers, he sees that RFID has been identified as something which can improve supply chain performance, ‘It is dependent on how fast they want to move this forward’. However, the consensus was that this technology still has some way to go before adoption becomes widespread. Whether we will have it within five years – who knows? Perhaps we’ll all be wearing silver foil suits by then.

Supply Chain Vision Group

Session Chair

  • Nick Allen, Editor, Logistics Europe

Visionaries:

  • Phil Streatfield, Business Systems & Inventory Director, Woolworths Group plc
  • Sigi Osagi, Director Global Logistics, Bombardier
  • Stefano Perego, Logistics Director, Rexel Senate
  • George Hadley, Managing Director, Direct Access International
  • Peter Ulber, Chief Executive NW Europe Region, Kuehne & Nagel
  • Jan Steenberg, Corporate Director European Supply Chain (planning), Dentsply
  • Mogens Bak, VP Global Sector Development, Retail, DHL Exel Supply Chain
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