History of outsourcing
To master the modern supply chain environment, we must first understand the concepts of speed and agility.
Outsourcing the transportation function was the first real step in the modern evolution of supply chains. It helped reduce manufacturers' capital costs but problems were rife, as communication problems countered the advantage of lower costs and lower capital expenditure. Customers became unhappy. Outsourcing represented one step forward and two backward.
Poor communication between outsourced transporters and warehouse operators all but demanded integration of these outsourced functionality components and supply chain management.
Integration of all logistics functions - from freight forwarding and warehousing to inventory management and transportation has been the focus for sophisticated supply chain practitioners for the last decade or so.
Today, outsourcing some or all of the logistics functions and then optimising them, has had a good impact on the income statement and balance sheet of many companies. It has also fundamentally decreased risk profiles for many distributors and marketers. A logistics partner, with the expertise to re-engineer and take the supply chain off balance sheet, can substantially reduce the amount of capital required to sustain operations, improve profitability and service levels and mitigate business risk for producers and marketers of products.
It has been said that 85% of potential logistics cost savings come from integrating the supply chain, but optimisation also positively affects cash-to-cash cycles, customer service, loyalty and sales. Moreover, while logistics outsourcing may have had cost reduction as its original objective, globalisation and shortening life cycles have brought lead-time reduction and reactivity to the fore. While the savings can be dramatic, the ability to react quickly to demand is fast becoming the Holy Grail.
Fixed overheads become variable costs and fixed assets become cash. As importantly, the ability to scale or reduce logistics operations in order to react to changes of demand becomes possible with the right outsource partner.
In 'Supply Chain Visions', agility is described as "the ability to successfully manufacture and market a broad range of low-cost, high-quality products and services with short lead times and varying volumes." Flexibility is defined as "the ability to respond quickly and efficiently to changing customer and consumer demands."
Wherever agility and flexibility are critical, one needs quick information from the marketplace that is reliable and accurate. Visibility helps to identify problems such as availability, stock shortages and excess stock. Creating integrated visibility enables supply chain managers to assess customer demand in time to satisfy it. Their market share possibilities increasingly depend on it. The hitherto academic view that information management systems provide, along with demand planning and inventory optimisation, make it possible to drive effectiveness through agility and flexibility has come home to roost in reality.
Only by getting the right goods to the right place at the right time, can one give a product a chance to compete and to succeed. Being able to respond timeously and effectively to fluctuating demand helps to prevent lost sales and to reduce write offs of excess stock.
On the other hand, a lack of speed or agility can lead to excess stock as trends and fashion change, or an out of stock situation and the sure knowledge that an organisation never knew the potential of a product.
Being able to move goods quickly to high-demand areas and withdraw stock from low-demand areas is vital. Monitoring demand patterns and the efficiency of reverse logistics systems also contributes to agility and flexibility.
The level of inventory cover and turnover is a good indicator of the agility, flexibility and responsiveness of a supply chain, and can be used as a reliable measure of efficiencies and effectiveness.
For most supply chain managers, the biggest challenges remain planning and forecasting. In the context of a continually evolving supply chain, the inventory models and business prediction instruments still in use today are less and less likely to work accurately as demand becomes more driven by innovation and availability of supply. However, while we are becoming less and less able to predict demand, we can react to it... and those who react fastest will be able to corner markets better than their competitors will. Reactivity and supply chain agility will begin to rival innovation as the primary driver of competitive companies.
Supply chain services provider can design, adapt and evolve bundled sets of high-quality but cost-effective solutions. The aim is to help clients leverage competitive advantage through their supply chains and to have a positive impact on their balance sheets, their bottom lines and their sustainability.
As the market continues to change at pace, an agile, flexible and responsive supply chain can open the way to clear competitive advantage. Collaborating with a logistics expert who understands this - and has the capital and capability to continue to improve the supply chain on an ongoing basis - is clearly the only way to ensure and sustain success.
