The Drive Towards Outsourcing

By Paul W Bradley
Published in Economic Bulletin magazine
September 1998

As the full impact of international trade expands throughout the globe, and the information age unleashes new tools for communication, the trend toward 'Supply chain Management' integration has become a vital component in creating competitive advantage.

With the advent of the current Asian economic crisis placing further pressure on corporations to reduce their costs in all business segments, outsourcing of logistics services has become a strategic tool in achieving tangible cost reductions while gaining operational efficiency.

The 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, internet web page exposure, and multicultural sales tactics.

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 in the global arena.

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.

Pro-active logistics process 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.

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.

Towards a seamless process
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 compartmentalization of each individual logistics component has now been forced to overlap, 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.

Logistics in the 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' shipment information to be available to production 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, while simultaneously converting the information management systems into a single unified source from which to control the entire logistics process.

Another component affecting this process is the role of various shipping lines in a multi-dimensional distribution system. In the past, the carrier equation was clear. A few key carriers could be designated to handle shipments from the US or Europe to key customer destinations in Asia.

However, under the new path, regional distribution centres or dispersed production plants in Asia require a more complicated equation with the carriers. In the new environment, a wider network of carriers may be needed to complement transpacific service strengths and pricing with regional carrier service strengths. Another option is to encourage strategic carrier alliances on a global basis.

Logistics in the food industry
With rising income levels comes a wider diversity in food tastes from the consumer. Major restaurant chains have identified a growing market demand beyond their national borders based on quality, price, 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.

Logistics in the chemical industry
Shortening the chemical supply line for distribution: 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' 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.

Shortening the supply line for chemical production: 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. This requires a highly automated port facility, strong warehousing and trucking capabilities, and the obvious government incentive scheme for establishing the facility.

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.

Supply chain chemicals management: 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 assumes 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.

Logistics in 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.

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.

Conclusion
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.

The traditional logistics structure may be best described as a series of disconnected individually managed and uncoordinated service functions. This process in essence represents an inefficient and wasteful paper-oriented inventory and distribution coordination system. However, with creative vision these obstacles can be turned into opportunities.

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. Those companies which can successfully introduce the same concept into the China market will gain a major strategic opportunity.

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.