According to recent reports, 2006 will be the year of price management and profit optimisation (PMPO). This signals that the mood of the market has shifted away from pure cost cutting and that executives are focussing their attention on revenue and margin growth.
For many, this may not be news. PMPO as a label already exists for retailers in terms of store-level category and promotions management. But what is important to Logistics Europe readers is how these strategies can impact supply chain performance for 3PLs and lead logistics providers by delivering top line benefits while simultaneously addressing bottom line inefficiencies. And interest in PMPO comes at a time when interest in logistics and supply chain optimisation is allied to the growing adoption of collaborative, on-demand software technologies which highlight the same issues a PMPO strategy seeks to resolve.
Put simply, PMPO in third party logistics equates to how well the business balances buy-side costs and sell-side margin. Process improvement within and collaboration outside the organisation is key, with the aim being to add value to existing client relationships as well as differentiate from the competition to acquire new clients.
So, how do you implement a successful PMPO strategy? First, you need a mechanism to visualise your costs. For a 3PL working with major retailers and manufacturers, most supply chain spend will be channelled through freight costs. Notoriously volatile, freight rates vary between trade lane, carrier and commodity, and the requirement to continually monitor, distribute and prepare quotes against fluctuating charges and amendments is costly in time and effort, as well as in the bottom line impact of misquoting rates and failure to spot invoicing errors. Automating the freight procurement, invoicing and contract management process online can therefore deliver significant benefits in terms of buy-side cost control and front line productivity as well as offer clients more choice, faster response times and a complete audit trail of freight costs.
Second, you need to manage margin. Sell-side margin is a function of sourcing and is largely determined by the enterprise’s ability to balance tactical necessity (ie a hot product that has to be expedited by air due to unexpected demand) with strategic objective (ie to shift manufacturing offshore or to consolidate the number of vendors involved in a given supply chain).
Global sourcing is gathering momentum and complexity, and global logistics must rise to the challenge. To ensure effective margin management, each trading partner in the supply chain needs to invest in the outcome – in other words, collaborate.
In my experience, the best way to start collaborating is to share pieces of logistics data, usually time-sensitive milestones such as purchase orders and advance shipment notices, that can be inputted into a central database and accessed by stakeholders in the extended network – which in many cases now means across continents, time zones and modes of transport. In this way, logistics providers can help manufacturers monitor cycle times by identifying when the goods left the port or warehouse and enable retailers to improve inbound inventory management by allocating stock on the water according to demand. Such visibility offers clients flexibility and control as well as the end-user experience of a connected, seamless supply chain.
Thirdly, you need a way to measure performance – both yours and your trading partners’ – in order to demonstrate compliance and accountability, learn from experience and continually improve. Analytics and scorecarding are important in supply chain management because they promise a degree of financial forensics in a nebulous field. For example, until recently, it wasn’t possible to chart how long each shipment took between Hamburg and Long Beach because the carrier didn’t send through the paperwork until weeks later. There was no easy way to compare or aggregate the numbers and the black hole of three days when the container sat at the port remained a mystery.
By contrast, sophisticated analysis and data mining tools are now available that offer a comprehensive set of reports based on real-time alerts and events, accessible at any time via the internet. Collating disparate sources and types of information into a unified picture also allows service providers to identify logistics strengths and weaknesses, set exception criteria on future shipments and give client senior management the ability to assess overall supply chain efficiency against forecast planning, inventory levels and order-to-cash fulfilment cycles.
Jim Preuninger is CEO of Management Dynamics Inc.