Complexity bites as logistics costs rise

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The European Logistics Association and A T Kearney have just completed their fifth quinquennial logistics study entitled: ‘Excellence in Logistics’. The results indicate that the days of falling logistics and transport costs may be drawing to a close as complexity increases.

Increasing product complexity, shorter product life cycles, a global network of suppliers and customers and continuously rising quality requirements are placing heavy demands on supply chain managers. Despite this, the latter have consistently demonstrated the value of focussing on supply chain efficiency. Logistic costs – as a percentage of sales and whether expressed in terms of the cost of transportation, warehousing, inventory or administration – have been cut almost in half since 1987. And this has not been achieved at the cost of reduced quality. The number of incomplete deliveries has been reduced from 11 to six per cent and the number of delayed deliveries halved over the period. Moreover, this has been achieved against a background of customer expectations that have risen dramatically. But the evidence of this report indicates that the this trend of reducing costs may be levelling out or even reversing.

A principal finding of the survey is that those who focus on their customers’ requirements find it pays off. Logistic costs are 22 per cent lower overall when a relationship with the customer sets the standards. Delivery reliability is significantly better too. But only 13 per cent of those responding to the survey were in such a relationship. In terms of customer focus there is clearly scope for improvement.

Nevertheless, since the dotcom boom of the early 1990s, there has been evidence of an increasing belief in the value of collaboration. Since the last survey, this has been a steady trend and the amount of information shared between suppliers and customers has increased accordingly. Tools like vendor managed inventory (VMI), collaborative planning forecasting and replenishment (CPFR) and collaborative capacity planning are widely used. But there is still a gap between the volume of information exchanged and the use that is made of that data. Only two-thirds of the information handled is integrated into business processes.

However, even the leading companies must be careful to avoid complacency. Their goal should be to take collaboration further as a means of managing the total value chain. Value chain management entails optimising the supply chain from product design to sales to increase profitability, and to manage the consequences of increasing complexity. One of the main aspects of value chain management is to gain maximum value from outsourcing to supply chain partners, especially third-party logistics providers and contract manufacturers. Outsourcing is growing continuously as companies come to rely on external providers for expertise in non-core areas. It is more common in operational areas at present but is likely to gain importance in administrative areas like order handling, invoicing and IT. In parallel, the relationships between companies and their outsourcing partners have matured with greater demands placed upon suppliers in terms of capabilities, risk sharing and the assumption of full management responsibility for some tasks.

In the face of growing operational expertise and IT capabilities, the vision of a ‘super-integrated supply chain’ emerged as the last century drew to a close. Performance in terms of cost, quality and time can be improved simultaneously simply by the intelligent aggregation of data that embraces the raw material supplier as well as the end consumer.

Meanwhile we have had to learn that a one-size-fits-all model is no longer appropriate. For example, the lean supply chain to support automotive companies that enjoy predictable production cycles is much less suited to the requirements of industries such as consumer electronics where flexibility is important. Recognising this, industry leaders are developing differentiated supply chains to handle different areas of their business. These are not mutually exclusive but focus on particular requirements.

Companies that excel in supply chain management combine these techniques to manage complexity: they shape their logistic activities to match customer requirements; they collaborate with their suppliers and their customers; and they apply a stringent make-or-buy logic, outsourcing non-core activities and differentiating their supply chain activities. All this contributes to sustainable performance, creating competitive advantages in cost, quality and time.

But the circumstances in which these firms operate are increasingly complex and this sets the challenge for the future.

The survey is available from the ELA website at

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