Cost Savings Efficiency Through the Supply Chain Management Model
By Paul William Bradley, General Manager ASEAN for BDP Asia Pacific
Published in Transport, Distribution & Logistics magazine
4th Quarter 1998
As the Asian economic crisis becomes global, and companies are forced to reduce fixed costs while streamlining operations, supply chain management outsourcing becomes a viable solution. Supply chain management allows corporate managers to have just-in-time information control on a global basis while outsourcing non-core activities to a strategic logistics services partner who can tangibly streamline efficiency throughout the supply chain. Fixed costs can be converted to variable costs, while information access can be simultaneously enhanced, resulting in competitive advantage.
The Supply Chain Management Concept
International marketing requires new creative skills in order to successfully compete in the global business environment. This includes new forms of multi-media advertisement and multicultural sales tactics. At the same time, global competition is placing enormous pressure on the internal manufacturing process and all aspects of the product distributions mode.
However, a key area that can provide a critical marketing advantage is the effective utilization of Supply Chain Management to significantly enhance global logistics capabilities. The resulting logistics enhancements can provide competitive sales advantages in terms of reduced product costs, more lead time of product delivery, faster delivery of the product to the market, and ultimately maximum flexibility to support the sales effort globally.
The concept of 'Supply Chain Management' has been derived in order to create dynamic new opportunities to enhance the distribution process, provide tangible financial savings, while ultimately creating more value to the customer. Fixed costs can be converted to variable costs, virtual inventories can be created, and inventory velocity can be maximized.
The most important component in the Supply Chain Management concept is to utilize technological innovations to directly identify, and positively impact, the direct relationship between time and costs throughout the entire product life cycle. Current and future trends in Supply Chain Management can play a key role in supporting the marketing objectives of senior management and ultimately in determining the future growth and ultimate success of each company.
Traditional Logistics vs Supply Chain Management
The traditional logistics model is based on the concept where product is 'pushed to the market' based on long term sales forecasts and corresponding cyclical production patterns. As a product is manufactured, the logistics department would coordinate the shipment to a warehouse holding area until customer orders can absorb the product at the retail level.
This system can result in major gaps in communication, unnecessary inventory build-ups, and significant revenue losses undetected by the individual departments in the company.
In direct contrast, the Supply Chain Management model ideally outsources to a neutral third party entity, which provides a single Supply Chain Logistics information and control umbrella in order to integrate all areas of critical information throughout the product life cycle. The primary objective is to ensure that competitive advantage is achieved by meeting the expectations of the end customer through 'just-in-time' delivery reliability created by cost effective time compression management.
The Supply Chain Model distributes information to all departments within the company simultaneously, and creates a mechanism where the customer 'pulls the product' based on real-time demand. The information umbrella combined with physical product can create a pro-active logistics process which can flexibly adapt to changing global business realities.
The Globalization of the Logistics Process
Initially, a product would be manufactured almost exclusively in one country and then exported overseas. However, with the changes in labor costs, currency exchange exposure, and information technology, many manufactured products have moved to a logistics process of multiple sourcing points.
The complexity of this evolutionary process encompasses new materials being sourced from different continents focused to various geographical production hubs, and finally concluding in assembly of the manufactured components into the final end product. The final end product is then shipped to various global destinations depending on market demand. Multiple sourcing points require complete technological integration of logistics information in order to support a fluid manufacturing capability and 'just-n-time' delivery mode.
Within the past few decades, the dynamism of the Asian economies, combined with extremely competitive labor costs and growing consumer demand resulted in a major shift of manufacturing resources to the Asia-Pacific region. Starting initially with Japan and the four tiger economies, this trend has expanded to cover most of the countries throughout Asia.
The scope of products being manufactured covers the full spectrum of consumer goods from textiles and footwear to computers and wafer fabrication plants. Equally important, as the labor costs changed and distribution capabilities improved, manufacturing began to shift to a dynamic pace within Asia and to a lesser extent to developing countries in other areas of the world. Overall, as key commodity production continues to shift between origin sourcing countries based on competitive advantage, China is increasing its role as the dominant manufacturing centre in Asia.
Horizontal / Vertical Integration
Traditionally, the logistics pattern has been horizontal in structure, with shipments usually following an Eastbound or Westbound trend. The new trend has created a more complex pattern which can be described as horizontal/vertical integration. In this sense, the logistics process is becoming multi-dimensional as a consequence of global competitive factors, and new pressures arising from information technology expectations.
Cargo not only moves Eastbound or Westbound, but also North to South and South to North, reflecting new distribution patterns especially in Asia. More importantly, the previous component has now been forced to develop, as expectations towards a global just-in-time delivery mode and instant real-time information access become services criteria in the new environment. AS the logistics process is further accelerated, services that were handled by separate entities are now encouraged to integrate in order to form a more seamless process.
The Logistics Challenge in a Global Business Environment
As the trend of manufacturing continues to disperse production facilities over a wider area, and the concept of regional distribution centers expands in the market, a growing challenge for senior management will be how to maintain control of specific cargo locations and transport movements. This is especially true within the context of China’s vast geographic range and complex infrastructure. Maintaining information control will prove to be a great challenge as changes in the distribution channel disperses products over a wider geographic area, while simultaneously requiring 'just-in-time' planners and more quality conscious customers.
Within the new framework, weaknesses in the logistics process become far more visible to the customer. In contrast, enhancements will make the logistics process transparent to the customer and the tangible savings visible to the corporate budget. The ultimate solution is to strategically encourage dispersion of the distribution channel to gain competitive advantage in the market where needed, at the same time converting the information management systems into a single unified source from which to control the entire logistics process.
Singapore as an Optimization Hub
The Singapore government’s long term vision has focused on Singapore as a major hub for multifaceted innovation, including electronics manufacturing and software development, strategically targeted chemical production, global financial services, and regional logistics distribution.
With the vast majority of ocean carriers utilizing Singapore as a gateway hub for Asia and the Middle East, Singapore is in an ideal vantage point. The aggressive efforts of Singapore’s Economic Development Board to encourage wider foreign investment into Singapore have met with great success. Through globally integrated logistics information systems and new supply chain management capabilities in physical distribution, Singapore can play a key role as a new frontier innovator for Asia. Whether Singapore is used as a base for regional production or as a regional distribution hub for product delivery (by ocean or air), there are many new ways to leverage there internal synergies.
Impact Points for Cost Reduction
The full spectrum of Supply Chain Management services can impact a wide range of areas resulting in tangible cost reductions. However, supply chain efficiencies cannot be adequately measured by traditional means. All components of the corporate organization must be included in the analysis.
As an example, in unique circumstances, a company may actually 'save more money' when paying a higher ocean carrier freight rate on a long transit route. The traditional traffic manager would only see the cost increase of the ocean carrier, but the finance manager would see the higher savings in the form of interest savings on the cost of capital of the product for each day delivery time could be reduced. Thus, a significantly faster delivery time could justify a slightly higher ocean cost if the financial savings on interest expense was far greater than the freight rate difference. There may also be direct benefits to the production plant when awaiting raw materials and components.
In other circumstances, the opposite scenario maybe viable, where a cheaper ocean rate and longer delivery time could provide more cost savings if production requirements and cargo tracking were uniquely integrated. In this scenario, the slower vessel could be leveraged as a floating warehouse reducing on-site warehouse storage costs. The key point is that various functional entities within the organization should be able to view the powerful benefits of the logistics decision from their individual perspectives, while also benefiting the company as a whole.
Supply Chain Management, linking a globally integrated information technology system with a diverse network of third party physical assets and specially trained personnel, can provide numerous benefits in terms of cost savings, and various forms of competitive advantage.
A few brief examples include:
- Converting fixed costs to variable costs, resulting in a more flexible operating structure.
- Providing instant access to information on product movement and documentation from anywhere in the world.
- Creating an opportunity for the customer to focus internal talents within the organization’s core business competency.
- Leveraging from the outsourced supply chain management company’s large global shipping volume to gain preferential pricing for various services including transportation.
- Having the option to either outsource the physical management or staffing of a production plant’s own internally operated warehouse or shifting entirely to a third party warehouse under the umbrella of the Supply Chain Management service provider. In either scenario, fixed costs are converted to variable costs, yet information control remains fully integrated.
- Streamlining the invoicing/payment process into a single source (regionally or globally) through the Supply Chain Manager.
- Creating the opportunity to outsource service leverage capabilities such as customer service order processing, bank negotiations, low end production packaging, etc.
- Allow internal management and staff to focus more energy on changing and enhancing internal processes through powerful management reports which provide a fully-linked view of the entire logistics process locally, regionally, or globally.
In all these scenarios, core competencies of the customer and Supply Chain Management services provided allow maximum synergistic leveraging and tangibly enhance the overall product development and distribution process. There are even unique opportunities for companies to establish a 'virtual presence' in new country markets through the supply chain manager’s diverse logistics infrastructure.
The Chemical Industry (Shortening the Chain for Distribution and Production)
In response to both growing product demand and competition form Asian manufacturers, U.S. and European chemical companies have initiated efforts to shorten the shipment supply line. In essence, the supply chain is compacted by establishing a regional distribution hub concept. As an example, a direct shipment from the U.S. East Cost to Bangkok can, depending on the carrier, take between 30 and 42 days of transit time. In contrast, if a distribution/warehouse regional hub concept is established in Singapore, the total transit time would be three days based on the perspective of the customer order lead-time. If the customer in Thailand has a choice between suppliers of similar product, the different in lead time especially significant when the choice from order placement is within the same week for supplier B and more than one month from supplier A, the competitive advantage is very clear.
When the same concept is applied for the entire Asia-Pacific region, the competitive advantage of having an Asian distribution hub for U.S. or European produced chemicals is equally clear. However, in order to minimize the costs of the distribution hub, it is essential to have a management information control system to monitor the stock levels and inventory velocity of product in the warehouse, as well as tracking the shipment while on the water.
The creation of Asian regional distribution hubs for chemicals is becoming a major trend in the market, with Singapore and Hong Kong as the primary centres for most multi-national companies advocating this approach. Either one hub can supply the entire Asian region or a North/South combination is applied depending on the market requirements.
After establishing the regional distribution hub concept as the first stage of moving deeper into the Asian market, the second phase entails development of new production capacity in Asia. The plant location is either constructed on a regional production hub concept, or a cluster concept.
The regional production hub concept identifies an ideal location (such as Singapore) in which raw materials from other countries can be brought in easily, and finished chemicals can be easily exported throughout the Asia region. The Singapore government has made a major commitment to this endeavor, and as a consequence, Singapore plays a leading role in chemical distribution throughout the Asia-Pacific region.
In contrast, the cluster concept is geared towards establishing chemical production facilities close to the primary customers such as Shanghai. Over a number of years, this results in the construction of numerous facilities in different areas of Asia or even different regions within China. These facilities may provide the ideal synergistic benefits between the key customer and the plant, but they are also more vulnerable to any weaknesses in the infrastructure and are less flexible to adapt to changing consumption demand patterns.
A new trend in the chemical industry is the outsourcing of key logistics activities to a third party Supply Chain Management company. The supply chain manager can assume responsibility for the entire logistics process, including freight forwarding, warehousing, shipping, L/C bank negotiations, order processing, etc. Additional value added activities can be created such as chemical drumming, packaging, raw material production planning, and other service extensions. All of these physical activities can be linked under one integrated information umbrella, which is globally accessible. Production streamlining and cost efficiencies result.
Analysis of the Automotive industry
The global automotive industry continues to be a highly competitive area with major competitors from each continent striving for market share. As a consequence, the manufacturing design and production process has been dramatically re-engineered within the past decade. The automotive industry was a major player in the initial implementation of the just-in-time production process, and more recently, the critical move to effectively utilize Supply-Chain consolidation.
An additional step being initiated by the big three U.S. companies is the move to selectively acquire key suppliers to further tighten control of the logistics chain in order to achieve competitive advantage. All of the automotive giants worldwide now source component parts from multiple countries through an impressive logistics control system with final assembly of CKD’s in various targeted countries, including Toyota’s in Kentucky. All of this is possible through an integrated Supply Chain control system, which has taken many years to design and perfect.
The Food Industry
With rising income levels comes a wider diversity in food tasted from the consumer. Major restaurant chains have identified a growing market demand beyond their national borders based on quality, prices, and consistency of product taste. However, in the quick service food industry, logistics costs are significant as a percentage of the product value. With the implementation of supply chain management, savings can result by allowing large volume purchases at one source point with global just-in-time delivery to the individual restaurants via strategic distribution hubs.
At the same time, specific food products may be produced in several similar climates on an alternating seasonal climate pattern and under strict quality controls. By re-engineering the entire shipping and production process linked to information systems controls, the leaders in this field have been able to move globally with dramatic market share expansion and resulting increased profitability. A few visionary food retailers actually link all of their Asia-Pacific restaurants into one regional order processing centre, which then executes the logistics delivery procession in a virtual just-in-time model. This results in increased product quality and lower costs.
Supply Chain Impact: Project Logistics
Through IT integration and supply chain linkage, project logistics can be streamlines. By reconfiguring container, break bulk, and airfreight shipments into individual purchase order components accessible live through the Internet, on-site labor and contractor work can be planned more efficiently based on the actual component arrival date.
Live tracking by individual purchase order combined with creative support options for remote project sites, such as regional hub staging area option, can further enhance on-site labor allocations and provide tangible cost savings.
The Solution: Outsourcing Logistics Activities
Traditionally, each component of the logistics process has been handled by separate entities with information control to initiate and confirm shipment activities within the shippers’ organization. However, as the speed of the logistics process accelerates, and becomes more complex, there are tangible benefits to unifying the entire process into a single structure where all information is sourced through one point of contact, and the various components of the logistics supply chain can be synergized into a virtually seamless and transparent network of activity.
In reality, each activity remains under the organization with the most expertise, but the coordination control and information network is centralized. The benefits of centralized outsourcing are that the logistics process can be streamlines with clean control and uniformity, while the synergies derived as a consequence should also result in significant cost savings.
The trend for the future, which is already underway in many industries, is to develop a single computer system with global applications, combined with a single supply chain manager responsible for aligning the various operational entities into a seamless logistics flow. With the trend towards dispersion of distribution hubs and production facilities, it is essential to monitor inventory velocity through each phase of the process by utilizing a centralized global information database. The database must be able to capture all conceivable aspects of the cargo movement lifecycle.
In recognition of the major changes currently impacting industry worldwide, especially in the Asia-Pacific region, there is a growing need to redefine processes and procedures throughout the production and distribution cycle in order to ensure competitive advantage in meeting new market challenges while also reducing cost inefficiencies within the complex supply chain.
By designating a single coordinator to manage both the physical supply chain activities and global information systems, a unique vantage point can be created to identify process simplification, eliminate overlapping functional activities, and encourage system enhancements which can ultimately reduce operating costs while simultaneously improving service quality.
By launching a Supply Chain Management initiative, direct marketing advantages can be achieved, while also providing tangible cost savings to the company, and simultaneously providing competitive advantage to reinforce the international sales effort. BDP specialized in providing total Logistics services and Supply Chain Management expertise to tangibly achieve this objective.