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Posts Tagged ‘Latin America’


Third-Party Logistics Study 2013 on the Logistics Outsourcing Trends was released.  I would be focusing on some of the elements outsourcing-1of the findings to add my perspective to Logistics outsourcing. Outsourcing is a magical word that pretends to address many complex issues of reaching the product to the end user.  The reason I am using the word pretends due to mixed responses received from the end users known as shippers over a period of time.

In spite of financial downturn, the global revenue of 3PL operators is growing and in my opinion the downturn could also be one of the reasons.  In these difficult days, shippers would aim for cost savings and look for a partner to share risk and avoid capital deployment. And this action could trigger outsourcing. However, organisations that have successfully developed and implemented effective supply chain risk mitigation plans often apply new thinking to traditional risk mitigation strategies. About 65% shippers have indicated that they are increasing their use of 3PL services than returning to insourcing (22%) some 3PL services. Nearly three in five (58%) shippers are reducing or consolidating the number of 3PLs they use.

According to Armstrong & Associates 2012 study the global revenues of 3PL operators have risen by 13.7%.  The gains are mostly recorded in Asia Pacific Region (21.2%) and followed by North America (7.2%).  Whereas regions such as Latin America recorded impressive growth of (43.6%) but on a low revenue level and this indicates increasing trends of outsourcing in Latin America and Other Regions.

When we take a critical look at the logistics spend by the shippers.  Predominantly, the logistics spend is heavy on transactional activities such as Transportation and to an extent on warehousing operations.  The outsourced logistics spend is consistent around 30 to 40% except in in NA.  The logistics expenditure as a percentage to sales revenue seems to be reasonably consistent across all the regions around 10 to 15%.

Outsourcing 1

When we look at the return or benefits to the shippers again the focus is on economic factors.  The cost savings was around 15%, Inventory Cost Reduction around 8% and Asset deployment reduction at 26%.  Not to forget a modest productivity improvement in the form of 7% improvements in order fill rate and 5% improvement in order accuracy.  Again the focus is very much on transactional outsourcing.

Supply Chain Innovation

Innovation could be defined as creation of improved product, process, technology or human resources (improved skills) that could eventually deliver gains to the consumer.  Supply Chain is a work in progress in my opinion.  Continuous improvements in the areas of process, technology and people (skills) are delivering the supply chain innovation.  Apart from the three I have mentioned, the new improvement area is outsourcing.  However, it was noticed that innovation is becoming a challenging as the global economy is becoming volatile and 3PLs becoming more conservative and whereas the shippers becoming more aggressive.  The key to the innovation through outsourcing is collaboration.  The relationship between the shipper and the 3PL should be transparent and behave as true stakeholders in the business.  Lack of openness could kill the relationship and thus innovation.

According to 2013 Third Party Logistics Study, “the openness of some shippers to more innovative 3PL-shipper arrangements appears to be declining somewhat; “gain-sharing” between 3PLs and shippers is down and interest in collaborating with other companies, even competitors, to achieve logistics cost and service improvements has also declined slightly since last year”.

What drives innovation in an outsourced environment?  As mentioned earlier, Relationship and Trust plays a big role, People who create innovative ideas and deliver them, Technology which enables innovation, certainly collaboration between the shipper and 3PL, transparency and effective communication and last but not least is the financial incentives.

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The above study concluded that, “Shippers and 3PLs can facilitate supply chain innovation by leveraging organizational drivers such as fostering collaboration through structure, relationship governance, and embedding innovation into the organizations as well as technology focused drivers: advanced IT and mobile solutions, data and analytics, and social media.”

What calls for innovation?

Volatile economy, Increasing Competition, Uncertain Demand due to product proliferation and Supply Chain Disruptions are the main reasons organisations looking for continuous improvements in order to survive in the business and excel.  If we review the above mentioned factors some of them are controllable and some are not.  Economy behaviour cannot be influenced; Competition will continue to grow due to increasing globalisation; and Product proliferation is driving the product mix challenges resulting in uncertain demand to some extent.  Whereas, supply chain disruptions could be avoided if we plan well and innovate.  According above mentioned study, Spirit AEROSYSTEMS, Kansas saved millions of dollars inventory and avoided injury to workforce due to F3 tornado hitting their facility (2012) due to proactive thinking and that is nothing but some sort of innovation.

What is driving the Supply Chain Disruptions?

Supply chain complexity and “interconnectedness” to address the globalisation is increasing rapidly at a time when the risk of disruption caused by extremes such as geophysical disasters, increasing terrorism attacks is mounting. The above study reveals that natural disasters the top reason followed by Commodity Volatility, Labour availability, Energy prices and supply of raw material at the required time.  No doubt, Transportation infrastructure plays a vital role in disruption by not making a product available at the right time.  Governing rules in countries like India and China making the supply chain vulnerable. The political system is also causing disruptions and Terrorism and Piracy is low on agenda but high on complexity.

Human Resource could cause multiple problems that could result in supply chain disruptions.  The first one on top of my head is the skills shortage.  According to the world economic forum study on Outlook on the Logistics & Supply Chain Industry 2012, Logistics companies and trade associations around the world are reporting problems in obtaining enough qualified staff. Over the past year, studies done in India, Korea, China and the United Kingdom have confirmed that there is a skill shortage in logistics.  The other side of the coin is the disgruntled human resources could cause phenomenal financial damage to the supply chain and the business. On November 27, 2012, approximately 800 clerical workers at the Los Angeles and Long Beach ports went on strike.  At first glance, it doesn’t seem as though a clerical strike should have a significant impact on port operations, but the 10,000 unionized dockworkers who also work there refused to cross their picket lines.  And thus the largest port operation in the United States, representing approximately 40% of the value of imports brought into the U.S., ground to a halt.  The economic cost of the strike was estimated at $1 Billion per day.

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Risk Mitigation

We should be able to mitigate every risk if we understand the problem and source that is causing the problem. In order to avoid any supply chain risk it is very essential to have visibility to your supply chain.  According to a report roughly 30% of manufacturers still lack Tier 1 visibility, while over 70% lack Tier 2 or Tier 3 visibility.  According to Aberdeen Group 2011 Supply Chain Visibility Report, best-in-class companies are likely to have online visibility into supply chain disruptions.  Further, the same report revealed some of the actions taken by the supply chain leaders due to visibility includes, Streamlined Processes for Easier Monitoring, Usability & Efficiency (66%); Integrated Supply Chain Transactions & Costs into their Operations (60%); Took Steps to Improve the Timeliness & Accuracy of Supplier Data Exchanges (46%); and Have Increased B2B Connectivity & Visibility into Supply-side Processes (31%).

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Collaborative partnership such as outsourcing is another step towards supply chain risk mitigation.  It pays to invest on training and development of human resources.  In my opinion it is a worthy investment as long as one could retain the workforce to reap the benefits of the skills upgrading.  In order to address risks arising out of suppliers, supplier scorecard and collaboration goes a long way addressing quality and velocity disruptions to supply chain.  As mentioned earlier, one should understand the end to end supply chain and that is possible through business process mapping and developing standard work to address process related uncertainties.

Summary:

Outsourcing 5

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Dwindling global economy is a big cause of concern for 3PL industry.  I remember a saying, “When the going gets tough, tough get going.”  How relevant it is for today’s situation?  Well, what I am trying to say is that we need effective human resources to tackle complex issues resulting due to melting global economy.  Unfortunately, Supply Chaintalent shortage is almost threatening  the existence of Logistics Industry.  We did hear about Inventory shortages, it is strange to learn about Supply Chain talent shortage.  My objective of this article is to review 3PL business trends, impact of global economy and how Supply Chain Talent shortage will have impact on Industry.

The global markets for 3PL (Third Party Logistics) services registered a growth rate of 6.8% in 2010 compared to 2009, according to Armstrong Associates. Asia Pacific region is only second to Europe in the areas of supply chain outsourcing 3PL revenues.  The below pie graph indicates that Asia Pacific region contributes 29% of the global revenue.  Asia Pacific registered a growth rate of 15% compared to 2009.

Logistics Spend:

On an average the logistics spend as percentage to sales revenue is estimated to be 12%.  Whereas US, Europe and Asia Pacific are at 11%, Latin America stands at 14%.  This only indicates that Asia Pacific market is mature in offering 3PL services to their clients while Latin America is still emerging as a 3PL market.  The general perception is that only Transportation activities are outsourced.  To certain extent that is true.  In Asia Pacific Region, 61% of the total logistics spend is directed towards transportation and 42% is incurred on Warehouse and other value added services.  The global average stands at 56% on transportation and 39% towards warehousing and other activities.

It would be interesting to note that only 42% of the logistics spend is outsourced globally and in Asia Pacific it stands at 47% which is highest compared to US and Europe.  This indicates that Asia Pacific can be considered as matured 3PL market.

Factors Fuelling the Growth:

  1. Pressure on Corporates to cut costs;
  2. Low Cost Country Sourcing;
  3. Off-Shoring and outsourced manufacturing arrangements;
  4. Focus on Core Competencies;
  5. Ability to expand rapidly and establish business in local markets;
  6. Complex global supply chains.

Global Volatile Economic Trend impacting SC Outsourcing:

According to one report global growth is likely to slow down and is expected to be approximately 3% per year on an average.  Interestingly this slowdown is attributed to emerging markets slowdown and any recovery in advanced economies will be offset by the emerging markets sluggish growth.  The projected negative growth of emerging markets in 2012 could be mainly due to slowing global trade.  This is not going to be a good sign for Asia Pacific markets and in particular for 3PL industry.  It is anticipated that the emerging economies will grow around 3.3% during 2017-2025 which is greater than 50% reduction compared to 2011 growth recorded by these economies.

What are the activities outsourced today?

According to CAPGEMINI 2012 Survey, the below are the variety of services outsourced to 3PL Service providers globally.

Domestic Transportation 83%; Warehousing 81%; International Transportation 70%; Inventory Management 66%; Order Management and Fulfilment 65%; Customer Service 64%; Transportation Planning and Management 63%; Cross-Docking 62%; Product Labelling, Packaging, Assembly, Kitting 62%; Freight Forwarding 58%; Customs Brokerage 50%; Reverse Logistics (Defective, Repair, Return) 56%; Information Technology (IT) Services 51%; Supply Chain Consultancy Services Provided by 3PLs 51%; LLP (Lead Logistics Provider)/4PL Services 42%; Service Parts Logistics 38%; Freight Bill Auditing and Payment 34%; Sustainability/Green Supply Chain-Related Services 31%; Fleet Management 26%.

What is disheartening to note is that 24% of the respondents to the survey floated by CAPGEMINI indicated that they would be insourcing the logistics activity.  Some of the reasons given for insourcing include cost reductions not realized, some believe that logistics is a very important function and their core competency and not willing to outsource.  Diminishing service levels also could encourage the outsourcing community to think towards insourcing.

What is bothering Logistics Industry?

Logistics industry includes the Corporations (known as shippers) and also 3PL Service Providers.  Generally, we hear about product shortages in the market place due to improper planning, gaps in business process, due to long lead times and raw material shortages.  We are experiencing the TALENT shortage recently.

“ARE YOU PREPARED FOR THE SUPPLY CHAIN TALENT CRISIS?”  This is not the title for my next blog article, this is the white paper published by Massachusetts Institute of Technology, US.  This article identifies the key skills that are missing in Supply Chain talent today.

It is believed that Supply Chain practitioners need a combination of “hard” and “soft” skills to effectively manage in an unpredictable commercial environment. The above article reveals that “Supply chain analytical skills are necessary and important but not sufficient; sufficiency comes with these other skills.” The “other” skills he refers to fall into the “soft” category, which includes thinking creatively and appreciating the big picture.  “Not getting bogged down in the numbers,” is how another supply chain leader describes the blend of skills he looks for. Managers must be able to use not only the analytical tools at their disposal, but also the qualitative output, he explains. This is an important observation in a profession that relies heavily on quantitative analysis.

I strongly believe that in today’s challenging supply chain world, the talent should also focus on managing situations and shortages.  Inventory Shortages in today’s world is a certainty and every Corporation in the world goes through the phase of material shortages at some point of time.  Supply Chain Managers are expected to manage the situations and fulfil empty promise, and that could be reason 64% of the Garner research survey respondents indicated that problem solving skill as the most important.  This applies to 3PL as well.  The shippers (outsourcing companies) expect the 3PLs to solve their problems and problems are resolved by humans and that talent seems to be in short supply.

CAPGEMINI 2012 survey indicated that organization success largely depends upon, “ability to Execute and Drive Operational Efficiency and Improvements” as the third most important driver for organizational success.  This was agreed by both Shippers and 3PL operators equally.  Factors that could affect retaining the talented staff include:

  1. Talent Development;
  2. Succession Planning;
  3. Effective Retention Strategy;
  4. Team Environment (Office Politics plays a vital role in people leaving jobs);
  5. Effective talent review process;
  6. Performance linked rewards.

The above survey reveals that the right people and leadership in place is the number one driver of their companies’ success in the next five years. But the supply chain industry is experiencing supply chain talent shortages.

Even though many shippers and 3PLs share the same concern of talent management and retention is their biggest worry, nothing is being done to save the precious asset of the organization.  According to Australian Human resources institute only 37% of Organizations have plans to attack the employee retention problems whereas the rest have no plan in place and press panic buttons when key employees gives the notice.   Organizations may have to embrace the activities of the talent cycle (source: CAPGEMINI 2012 Survey) have the ability to ensure a continuous supply of experienced, well-rounded logistics talent.

Source: CAPGEMINI 2012 3PL Study.

3PL industry needs talented people to manage today’s crisis world and deliver seamless solutions to the complex supply chain problems.  The outsourcing activity will see tremendous growth when out of the box solutions are offered to the Corporations who are looking for help and solutions in managing their supply chains.

 

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