The global economy is witnessing significant and rapid change, thanks to major technological advances over the last decade. The German news portal Spiegel Online noted a societal transformation “that can only be compared with 19th century industrialisation, but it is happening much faster this time . . . the digital revolution isn’t just altering specific sectors of the economy, it is changing the way we think and live.”
It’s also changing the way we think about logistics.
Indeed, this digital revolution has led to huge growth in areas such as e-commerce, global collaborative research, development and manufacturing, as well as in logistics.
There will be more to come – ubiquitous mobile connectivity combined with data gathering and analytics will drive the emergence of new services, products and business models in all industries – including healthcare, energy, finance and government.
Dozens of companies are even trying to invent the future too, looking at how to use drones, for data collection, for last mile deliveries, or for other purposes.
When it comes to supply chain management, such rapid advances are forcing organisations to constantly re-evaluate their networks, and use digital technology to significantly enhance their services. One driver of this demand for supply chain re-design is e-commerce. In order to meet customers’ growing appetites for online purchasing, retailers look for ways to support e-commerce growth. Customers expect top-class service levels, with same day or next day delivery services, so online retailing always needs to look at improving the customer experience.
Strategic changes can also trigger the need to review the entire supply chain infrastructure – for example with new company acquisitions or mergers, or market expansion. In some cases, financial and operational demands drive the need for change – if efficiency and cost savings are being sought, or the network might have become too complex, or parts of it become redundant, due to growth or consolidation.
Whatever the case, the organisation needs to analyse its supply chain and move it to an efficient cost versus service level trade-off – often to reduce or optimise total logistics cost, comprising transportation, service, inventory and facilities. Effective supply chain management can reduce total logistics cost by up to five percent – and also impact profit to the equivalent of up to 30 percent increase in sales, according to a UPS analysis.
Criteria for building an optimized network
When a company decides to undergo a complete network redesign or an optimisation, the tried and tested approach is to first determine the project scope, with requirements, resources, project plan, and importantly, a timeline. The plan should evaluate the pros and cons between having an owned network versus using a 3PL provider. An in-house network might provide complete freedom and flexibility, but has complexity, cost and risk associated with it; meanwhile a 3PL might help bring scale which one’s own network might never be able to provide, at lower cost and potentially greater service levels.
In designing and building an optimised network, the key criteria to consider include sourcing, manufacturing, distribution, delivery, fulfilment and returns. For example, this would include the number of site locations, transportation and alternative modes, warehouse design, route optimisation and business processes. Sustainability and visibility are also important – particularly factors like carbon footprints, carbon neutral shipping, and end-to-end supply chain visibility, web integration and billing solutions.
The next step is to analyse the parties that touch the network – the suppliers, the manufacturers, the distribution centres and the customers:
- Suppliers – how many raw material suppliers are there? Where are they located? What products are sourced?
- Manufacturing and distribution – how many manufacturing and distribution facilities are there? Where are they located? Which products are manufactured, in what quantities?
- Customers – how many customers are there? Where are they located? How are they served and where should they be served from? How do you handle the returns process with high levels of customer satisfaction?
Let’s look at one specific example. A pharmaceutical company with 19 distribution centres (DC’s), primarily in Western Europe, experienced significant network redundancies as it grew through acquisitions. Additionally, some key markets were underserved and had a high cost to serve.
Teaming up with a logistics expert, its network baseline parameters were calculated — looking at service levels, total weight shipped per zone, average distance shipped, operating costs, inventory levels and costs, and total shipping costs for all modes. As part of the network design process and “what if” planning, multiple scenarios were developed. In a three DC scenario, total supply chain cost would be reduced by 42 percent, while a seven DC scenario the total supply chain cost would be reduced by 39 percent.
While one appeared to offer greater cost savings overall, there were trade-offs – in the three DC scenario, 1-day service decreased 22 percent, but 2-day service increased 131 percent; in the seven DC model, 1-day service increased 44 percent and 2-day service increased 42 percent.
Both scenarios were better than the baseline in terms of service and cost, but involved trade-offs. In the end, this customer prioritized the tree DC scenario as a 2-day shipping service satisfied the company’s customers service level commitments.
Summary: the importance of adapting to rapid change
The dynamics of the modern digital age mean that businesses need to adapt quickly. Logistics and supply chain networks are increasingly being put under pressure to deliver to more complex networks due to globalisation and higher expectations regarding service levels. In order to achieve this cost-effectively, digital technology, smart network design, and optimisation are key to a company’s success in a rapidly changing world.
Mark Jackson is Vice President, Contract Logistics Solutions, UPS Europe
Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.