The graphic illustration of any global logistics operation, with
its complex web of vendors, warehouses, distribution centers, service
operations, transportation routes and hubs, can reveal an intricate map where
individual costs are difficult to separate and understand. In a world where
logistical expenses typically comprise up to four to five percent of total
costs for a manufacturing firm, the increasing complexity of the global supply
chain applies increased pressure on margins.
Enterprises usually implement
transformation technology solutions or partner with a third-party provider to
manage costs. Yet, many organizations find themselves falling short of their
savings goals. Why?
Growth is Good, But...
As supply chains have
become more global, the logistics network has been augmented with new routes
and locations. Each new link in the supply chain brings its own local
complexities regarding the availability of logistics assets, local laws and
regulations, and infrastructure, among others.
Other factors offer
increased challenges. Finding appropriate service providers, for example, is a
more complicated process than it used to be. Plus, manufacturers need to
conduct periodic risk assessments to ensure that natural disasters, political
developments and other factors beyond their control are not looming as an
incipient threat to production and fulfillment.
A Three-Pronged Weapon
Against Complexity
Most organizations try to
tame complex supply chains by deploying expensive technology tools, hiring
consultants for business process re-engineering, or, more recently, deploying
exotic analytics frameworks.
Alone, none of these
solutions can produce the type of savings needed to outcompete in this new,
more complex and more competitive economy. What is required is a smart mix of process,
analytics and technology to simplify the logistics
networks, mitigate logistics risk and optimize the associated costs. We call
this a three-pronged holistic approach
1.
Process Design and Development
“Smarter”
processes are the key to more cost-effective operations. This means that
organizations serious about creating more streamlined and more effective
networks need to look at their operations in detail before beginning any
redesign of logistics processes. This involves deep analysis to:
·
Develop a granular view of the process activities (carrier
identification, logistics spend analysis, etc.);
·
Define key performance indicators such as asset
utilization and median loading time and then link
them to the business outcome of particular costs;
·
Identify the drivers of outstanding cost performance; for
instance, building multiple “what if” scenarios for networks to estimate impact
on costs;
·
Benchmark against industry standards for cost management in
order to understand current performance gaps;
·
Implement best practices to improve costs and sustain process
performance.
Businesses
that take the time to do a detailed and thorough analysis of operations from
end-to-end and across the global footprint can yield deep insights that will
support a new, more effective—and less costly—logistics network. By analyzing
current processes, organizations can identify process steps where cost leakages
occur. Some process steps may add little or no value; others may need enabling
technology tools in order to maximize efficiency and increase cost
effectiveness.
Here
are a few real-world examples from deep analysis:
·
After a pharmaceutical major conducted a thorough analysis of
logistics processes for an acquired company and standardized processes, it was
able to identify cost optimization opportunities of 25 percent.
·
A chemicals leader achieved five to seven percent cost savings
through revisiting processes related to shipping frequency, reassignment of
supplier-warehouse combinations and set up of ‘milk-runs.’
·
A life sciences major identified 13 percent potential baseline
freight cost savings by analyzing logistics management processes and finding
opportunities to increase consolidation of shipments.
2. Analytics
Leveraging analytics frameworks for analyzing cost performance
is a powerful driver for lowering overall costs. Network design analysis,
route/mode selection, and logistics spend analysis are a few of the areas where
analytics can be leveraged. For businesses to be most effective, they should
use tools that can simulate different scenarios of various parameters such as
lanes, routes, infrastructure constraints, customs clearance practices,
logistics modes and asset utilization. With this data in hand, the logistics
organization can better understand the impact of costs from various
combinations and design their networks accordingly.
A number of tools are currently available to analyze costs,
including network optimization, carrier sourcing and freight lane analysis.
Selection of a logistics analytics tool should be based on: 1) its ability to
rapidly study various “what if” scenarios in order to make processes more
effective in achieving the business outcomes of cost, and 2) its ability to
identify risks and assess the cost impact of such risks on logistics networks.
For instance, one chemical manufacturer created and analyzed
multiple scenarios for distribution centers, an optimization effort that
generated savings of 17 percent. Another manufacturer leveraged analysis to
identify recoverable costs from suppliers, then set up detailed reports and
dashboards to increase visibility into various logistics costs components.
3.
Enabling Technology
Technology
in the absence of deep understanding of processes may not be effective in
optimizing logistics costs. Simply upgrading the software, without better
processes, may actually make the problem worse as employees try to make old
processes work with new tools rather than using the tools to support more
effective standardized global processes. The selection of technology therefore
must be driven by the tool’s potential to:
·
Simplify processes (reduce hand-offs, approvals, automate
process steps);
·
Expedite exception handling (reduce the number of exceptions,
auto-resolve commonly occurring exceptions);
·
Reduce systems/applications complexity (standard interface,
fewer middleware applications required, better workflows).
New
Challenges, New Approach
Global
logistics networks are an integrated, evolving creation. If a business wants to
create a best-in-class network, it needs to develop a deep understanding of the
risks and costs associated with multiple logistics partners, geographies,
products and technology tools. At the same time, an organization cannot depend
on process or technology alone to provide the end-to-end improvements that
drive true cost savings.
Consistently
reducing and optimizing costs without increasing logistics risk can only be achieved
by intelligently combining industry-specific analytics frameworks, the right
technology tools and logistics processes engineered for effectiveness as well
as greater efficiency.
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