A challenge for supply chain managers in the 21st century is the spectre of increasing logistics costs.
As firms work to increase demand of their products via the efforts of their sales and marketing departments, supply chain managers strive to serve the ever-swelling influx of demand as product lines multiply and grow in quantity.
The two typically largest components of logistics costs are transportation and storage. As firms develop new distribution channels, logistics networks have had to adapt to the changing environment of the marketplace.
For many firms, the cost of logistics has already exceeded the cost of manufacturing. Global and regional players have consolidated manufacturing at fewer sites, with the result being that more countries or territories are served solely by distribution centres.
Thus, companies have shifted their attention from optimizing their production lines to optimizing their logistics networks. Initiatives from this viewpoint can be classified via the following:
Distribution Strategy
Companies find themselves constantly asking whether their logistics networks should consist of depots spread at different sites or that of large centralized facilities in which deliveries are transported long distances to their customers. Distribution strategy starts with executive leadership and should be weighed not only by cost but more so by the company’s foundational principles.
For instance, the global retailer, Inditex Inc., more known by its flagship brand Zara, has more than 6,000 retail stores in 80 countries in which its products are sourced from its central facility in Spain. Despite the geographical distance, Inditex has a straightforward logistics network in which products are delivered within two (2) days to all stores globally. Inditex’s distribution strategy is anchored by two (2) principles laid down by its founder, Mr. Amancio Ortega: “give customers what they want and get it to them faster than anyone else.” (ref:http://management.fortune.cnn.com/2013/01/08/zara-amancio-ortega/)
Storage Optimization
The cost to store product largely depends on two factors: space and productivity. A firm that tries to fill its warehouse by stacking products wall-to-wall or floor-to-ceiling makes full use of space but likely makes it hard for its people to put away or retrieve items productively given the trade-off of locating merchandise or maneuvering through narrow aisles.
Some companies have deployed automated storage & retrieval systems (AS/RS) to maximize space and building height while at the same time putting away and retrieving items quickly. The drawback with AS/RS is that they can be very expensive and the productivity benefits sometimes difficult to justify. Some firms settle for simpler racking systems backed up by packaged warehouse information management systems that track inventories on a per location basis.
Transport Optimization
The cost to transport items is a by-product of a firm’s customer service policy. Freight can be a significant cost to firms, so much so that firms would want to maximize the capacity of delivery vehicles as much as possible. At the same time, firms know that maximizing loads can lead to delays in deliveries which can cause loss of customer goodwill. I was once asked by an employee during one of my consulting engagements if his firm should deliver one shipping case for a customer who badly needs their product. His reason for asking is if it will require one delivery vehicle and one driver for that one case, it certainly does not seem a good way to run a business. Written on the company’s wall is the firm’s vision and mission of providing superior customer service which I pointed out to him; the employee got his answer. Optimizing transport cost is not easy as most companies would preach superior customer service at the same time harp on keeping costs down. Hence, firms need to carefully establish their service policy and study what is the best optimal way to deliver at least cost.
Asset Management
A large part of logistics cost is sometimes not very visible to executive managers. Material handling equipment, utilities (electricity and water), building maintenance, and facilities administration can make up a big chunk of logistics costs. This is especially true if a firm’s product require special handling such as refrigeration.
Logistics cost has become a major expense area for many firms. This is driven by the emergence of new distribution channels to meet growing demand, the rising cost of transportation, and the complexity of storage as products become more sophisticated. It is imperative firms constantly review their logistics network strategies to ensure the competitiveness of storage and freight.