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In Logistics services, the management of capacity plays a significant part in the overall cost profile of the logistics operation. The Logistics CPU (Cost per unit) is often under-scrutinized, and the proportionate relationship between customer demand and actual cost isn’t adequately managed. This article focuses on defining a working/operating model for a client and its logistics partners to keep the expenses reduced and to adopt a dynamic capacity profile to the changing demand situations.
Traditionally a Lead Logistics 3PL (3rd Party Logistics) company will generate the capacity plan for the fixed assets that it operates and for the variable resources it needs to execute the operations in line with demand profile from a B2B or a B2C operation. This serves to successfully satisfy the required service level agreements (SLA’s) that a client requests. A secondary result of this process is to provide the client with a budgetary profile for the Logistics Company to run processes to satisfy the SLA’s. However, there is often a miss-alignment in the business drivers between the client and 3PLs, and this can lead to certain behaviors and business rules that prohibit true efficiency realization.
"Clients will re-visit what is core to their business and focus on service partners that can build cognitive solutions that can monetize the data"
A discussion on “Open Book versus Closed Book” contracts may naturally occur when raising this observation, but my experience has shown that inefficiency is inherent to both commercial models. On one hand, an open book means that resources must be produced as a tangible cost to run the SLA’s. It does not say that the modeling and business rules applied delivers a truly efficient workforce. Time & attendance systems (T&A) can help to calibrate behavior, but proportionate overhead rules will still see an overpricing element to the cost of the Logistics. A closed book may incentivize a Logistics company to pursue continuous improvement naturally, but why should that benefit be solely redeemed by the 3PL? And think of this – how does the baseline cost get modeled before agreeing to the fixed rate or volume based price? Through an inefficient modeling activity. The result is that the 3PL easily delivers its annual cost down requirement (usually 5%) without having to do too much and operates to a significantly higher margin than what would be expected by the client. In some instances on both models, I have seen as much as 25% over pricing for service. Either though operating higher FTE’s (full-time employee’s that are not truly needed) or a sales profile that is higher than it should be to maintain fair and reasonable margins. In this space that would be 7% - 10% typically. Reality is that some Logistics organizations are returning significantly higher profits.
Utilization and container fill (Inbound & Outbound) is another area that follows a similar problem. In some instances, the 3PL is also the transportation contractor and suffers from the same challenges drive genuinely efficient planning solutions. The 3PL merely focuses on the execution, and this again creates an adverse cost profile – assigned to the Logistics organization’s footprint. My market research has shown manufacturing is performing at 65% - 80% fill, whereas retail is returning a higher level of 90% - 95%.
I am sure that some of you may be thinking automation? Of course, it can factor in, but often the investment is very high. In a time of where complexity is increasing through diverse product lines and types – by no means, it is solely the answer. True efficiency comes from using a mixture of automation, robust business processes and advanced information technology. Data is our friend when it is managed in the correct way and at the right time.
Over recent years in automotive supply chain, I have found that there is a gap in the market for independent Logistics management services. In similar benchmarking studies I discovered that Industries such as Retail and manufacturing are not taking full advantage of technology in this field. To this date, the subject of cost is mainly dependent on the effectiveness of a procurement department with a lack of KPI’s to guide them on spend management. Going forward it is critical to balance supply chain core capabilities with technology, but not forgetting the cross-party processes and collaboration. By approaching this differently, clients will open up opportunities through the use of IoT, AI, and data which is connected, collaborative and cognitive. The aim of being insight driven versus hindsight driven. As we move forward, I believe there will be a shift in the thinking of outsourcing logistics services. “Clients will re-visit what is core to their business and focus on service partners that can build cognitive solutions that can monetize the data.” This will not necessarily be the traditional 3PL, but technology partners that will deliver the business processes that influence the cost profile of the extended value chain. Let us not forget that Logistics is part of the value chain and this is very much an area to focus on.