An agile approach
Global inflationary pressures are forcing many companies to look afresh at how much real value outsourcing can create for them. New markets mean new opportunities - but also new investments and additional complexity08/12/2008 | By TNE
How do you balance investment in new warehouses or product marketing with the need to invest in your supply chain? It’s an increasingly tricky conundrum when global inflationary pressures tighten and the price of oil soars. Companies are always trying to enter new markets and often, says Beat Simon, CEO Europe for global logistics player Agility, trying to be as clever as possible with it too.
“Logistics plays a big role in this. It’s sometimes difficult for customers to find the right balance between investments and outsourcing parts of their supply chain – they have to think carefully about whether they will get more return from capital investments in their supply chain, or from investments in developing and marketing their core products.”
Agility increasingly not only helps clients find this investment balance, but also invests in solutions often not readily available. There are, says Beat Simon, a couple of key drivers at work globally leading companies to carefully measure their logistics investment - and the pay-off it brings. “First, companies are getting more nuanced in terms of how they look at the cost of delivering a product. Instead of just thinking about the cost to produce a good, they look at the full landed cost of delivering goods including its entire supply chain, quality costs, and the overage and underage costs which are increased by distance. This more nuanced view is causing managers to question the production map of some products where previous decisions were made mostly around labour costs.”
The second effect, says Beat Simon, is that input costs have changed drastically. “For example, labour costs on the Chinese seaboard are on the rise, and with those increases, the benefits of off-shoring start to decrease – unless you decide to move to the interior of China and increase the complexity of your supply chain further. However, the most important change in input goods is in the price of oil. Many of the supply chains in place today were designed ten years ago during the time of $12–per-barrel oil. There was a real push to get the largest returns to scale and specialisation possible, and then cover the world with transport that was inexpensive due to low fuel costs. Today with oil close to $150 per barrel, that whole story changes.”
Keeping a lid on costs
The costs story is certainly complex. It isn’t just about whether one tranche of a supply chain is on another continent, but also how many production points you have on one continent, and how many distribution hubs you need. The one lesson that smart companies are taking away from the current environment says Beat Simon, is not only that they will need to change supply chains to adjust to current oil prices, but that it is important to build in flexibility so that one can adapt to future changes quickly and at a reasonable cost.
Predicting the future of transport, logistics, and overall supply chain costs is more difficult. However, humans are smart and over time Beat Simon is confident we will find ways to do things more efficiently. ”In the long-term, for non-scarce products where there is competition, costs will always go down. We will continue to innovate, and we will find ways of decreasing the overall supply chain costs of delivering goods to consumers.
While that is the case for the long-term, certainly in the mid-term, transportation costs will rise due mainly to increased energy prices and companies should certainly take that into account when they plan.” In addition to energy costs, another caveat to planning for supply chain costs is that today we are not yet paying for the full price of transport warns Beat Simon. “The larger public good of the environment has not yet been accounted for, and as we start to address those costs more directly, we will see an increase in transportation costs.”
What’s ahead?
In the coming years customers will be looking for more flexible suppliers who are willing to take on both the upside and downside risk of managing a supply chain rather than for simply being a leg of transportation from A to B. Agility will, says Beat Simon, be a healthy, profitable and growing logistics leader with an even broader industrial expertise and geographical reach by 2013. “We think that despite the current economic headwinds, the case for globalised trade is a clear one, and our core products of air, sea and road freight are set to grow in step with world trade.”
Further information: www.agilitylogistics.com
