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Posts Tagged ‘risk mitigation’


Globalisation 4

In my opinion Logistics industry can be described as wheels of Globalization and key to the market expansion and competitive product availability to the growing global consumers. Dynamic business conditions and confronting economic conditions are driving globalization. Globalization is resulting due to expanding markets, exploding retail market, product proliferation, ever changing needs of customers, economic downturn, cost pressures, technology, cultural integration and government policies around the world. It would be wrong to assume that globalization influences economy and trade only; we are seeing integration in the areas of culture, media, education, research and development, tourism and even climate change.  On political front, we see collaboration and collective approach in addressing daunting challenges we face today.   Globalization will make our societies more creative and prosperous, but also more vulnerable and in transforms economies more competitive.

Let us review some vital statistics (Source: Armstrong & Associates Inc.).  First let us review the region wise Logistics spend vs. 3PL revenue (2012):

Globalisation 1

Obviously Asia Pacific Region heads the chart in all categories if we exclude remaining other countries which were consolidated under other countries.  It would be worth looking into Asia Pacific region by country in order to identify the growth countries.  Top five are highlighted here under:

Globalisation 2

If we look globally, it would be interesting to compare the numbers and easy to identify the globalization impact on different countries:

Globalisation 3

It would be very interesting to analyse 2013 numbers as the world trade is not promising.  World trade is expected to grow by 2.5 percent this year and 4.5 percent in 2014 (source: The World Trade Organisation).  More and more companies are developing agile supply chains and compressing product supply lead time and at the same time reduce the cost of production.  In order  to achieve all these goals, outsourcing supply chains is one of the solutions.  According to CAPGEMINI Consulting 2014 report 72% of the shippers are planning to increase use of outsourced logistics services and whereas the 3PL companies believe that 78% increase in business.  Let us hope economy responds well in 2014!

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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.

Outsourcing 2

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.

outsourcing 3

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%).

outsourcing 4

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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on behalf of a third party

Image by Lєaтнєянєaят via Flickr

At the outset I would like to clarify that this article is not going to deal with outsourcing risks.  The focus is on Supply Chain risks in an outsourced environment.  Risk in managing supply chains is high due to several reasons such as Terrorism, Shrinkage, Quality, Natural disasters, IP Thefts, and Vandalism etc.  The risk magnifies if the some or total operations are outsourced. Twenty five percent CAPGEMINI 2010 outsourcing survey participants have indicated that loss of control as one of the reasons for not outsourcing.

In order to outsource and to mitigate the supply chain risks collaboration becomes very critical in an outsourced environment.  According to CAPGEMINI 2007 report practitioners reveal a gap between the desire to work collaboratively with 3PLs and how to go about it. Collaboration means equal participation whereas 35% of the CAPGEMINI 2005 survey participants have indicated that the time and effort spent on managing Logistics functions not reduced.  This could mean practitioners believe that outsourcing means total responsibility transfer to 3PLs and no participation or minimal participation from their side.  Outsourcing means handing over the control over operations to a third party but the ownership rests with the outsourcing companies and they cannot disown the responsibility. One should clearly understand that the outsourcing is confined to activity but not the function.  The functional responsibility rests with the outsourcing company and they may have to execute the activity in collaboration with the service provider.

Time and again shippers (outsourcing companies) repeatedly pointed out that 3PL (third party logistics) companies do not have the project management capabilities and they fail during the transition due to lack of industry specific knowledge and also due to lack of process integration capability across supply chain. These teething issues if not addressed properly could lead to relationship failures.  Hence, the problem is not supply chain risks but the lack of collaboration in tackling the issues.  In order to highlight the seriousness of the issue, I reviewed the last five CAPGEMINI outsourcing surveys and the trend indicates consistency.

In my opinion, top three reasons that could lead to supply chain risks in an outsourced environment would be lack of project management skills, unsatisfactory transition and lack of knowledge based skills.  Surprisingly the feedback over the last five years was consistent and we see 20% improvement in case of knowledge based skills.  This could be due to more skilled force joining 3PL companies and we have seen recently 3PL companies recruiting practitioners as subject matter experts and to manage the projects.  What is disturbing is that on an average 15% survey respondents have indicated that 3PLs are unable to form meaningful and trusting relationships.  In my opinion this is a cause of concern.  The recent survey conducted by CAPGEMINI (2009) indicated that only 25% of the shippers felt that the outsourcing is “extremely successful” and further 64% participants felt that outsourcing is “somewhat successful”.   If the outsourcing community is not totally happy with the outsourcing outcomes or performance, managing risks through collaboration could become a serious issue.

How secure are the shippers about the security provided by 3PL companies?

The 2008 CAPGEMINI survey did indicate that majority of the respondents are comfortable with the security arrangements.  Around 22% have indicated somewhat secure and 2% indicated that not secure.  Supply Chain security is paramount and even if 2% were unhappy, it needs immediate attention.  These risks could lead to major customer satisfaction issues.  That could be the reason why 25% non-outsourcing respondents (2009 survey) indicated that they do not outsource due to loss of control over operations.  Some of the serious security breaches indicated in the 2008 survey included the following:

  1. In one case, 2GB branded USB sticks were replaced with 1GB but appeared as 2GB to users.
  2. Another case involved falsified Italian airplane parts that were later rumoured to have contributed to accidents.

Supply Chain security is critical to all industries but it is vital for some specific industries where any security breach could be life and death question and the example could be food contamination.  58% Food and beverages industry respondents in 2008 survey indicated that spoilage of food products creating a health risk as the biggest risk. The above mentioned survey did indicate that 3% Food and Beverage industry respondents were not secure about the arrangement, which is really a cause of concern.  Tampering was reported as the second biggest threat (45%) for life sciences and pharmaceutical companies.  This is also a life threatening risk.

Type of Supply Chain Risks:

One can divide the risks into two categories, the first one dealing with 3PL operational efficiency related risks and the second one dealing with generic supply chain risks. The trends reveal some interesting facts.

The top three risks, theft of material, material tampering and theft intellectual capital were predominant in Asia compared to global trends.  The risk of terrorist attacks and the disruptions due to natural disasters are the two top risks in North America.  Whereas Latin America faces serious supply chain risks from, smuggling of other material with the shipments, Vandalism and Spoilage of food products leading to health risks.  Europe is a mixed bag, it also faces all risks but the thefts and thefts of Intellectual capital are over and above the average global percentage.

The first three supply chain risks identified as 3PL operational efficiency related risks are quite common even in insourced operations.  As warehousing and distribution function is a non-core activity for many organizations, organizations should work in collaboration with the service provider to minimize the risks and operational disruptions.

Enhance Supply Chain Security:

Risks are inevitable and outsourcing is unavoidable (encouraged due to various benefits of outsourcing).  Hence, it is necessary to enhance the supply chain security with the help of service providers.  CAPGEMINI 2008 survey identified 12 enhancements and the participants have identified gaps in enhancing the security.  The below given chart is developed based on the data published in the above mentioned survey:

If we review top three gaps, any one would understand that it is not a challenging task to improve security.  What is lacking is proactive approach from both the shipper and the service provider.  Lack of proactive reporting with regard to thefts or any other risks is the biggest complaint by the outsourcing community and this continues to haunt the 3PL industry even today.  In most of the cases, the customer (shipper) gets to know first about the incident.  This is really frustrating for the practitioners.

RFID tags are virtually impossible to copy, making them suitable to security applications. According to “The pros and cons of RFID in supply chain management” article the cost of goods lost within supply chains among the European companies was 50 Million euros a day and the same report indicated that up to US$30 billion worth of goods are being lost each year within supply chain.  However, recent development are encouraging, one of the biggest retailer (Wal-Mart) introduced mandates for RFID adoption.

Providing alternative routing for shipments is a possibility.  However, in the peak seasons such as Christmas and Chinese New Year time it would be next to impossible for rerouting keeping in view of very limited options.

Collaboration:

Collaboration is all about working together.  The CAPGEMINI 2008 survey published how the shipper and service provider are collaborating by industry.  What is heartening to note is that 48% shippers are willing to collaborate with the service provider to enhance the supply chain security to a limited extent.  Retail dominates this segment (57%), followed by Life Science (51%) and Chemical (50%).  Thefts are very high in retail whether the operations are outsourced or insourced and life science and chemical industries face more risks if they fail to collaborate with the service providers to achieve selected security improvements.  The 2008 CAPGEMINI report indicates that the higher the company’s revenue, the more likely they are collaborating beef up security measures.

Supply chain efficiency is the back bone of organizational excellence.  According to one estimate supply chain disruptions could result in 40 percent decline in share price.  Prof. Vinod Singhal of DuPree College of Management, Georgia Institute of Technology indicated that material shortages could contribute 7.5% reduction in share value on a given day.

Today’s business success to great extent depends on logistics and supply chain performance and the role of Supply chain has never been as critical as it is today. Supply Chain speed and flexibility have become two key levers for competitive differentiation and increased profitability. In order to compete effectively in the market place Supply Chain managers drive cost improvements and that could lead to some supply chain risks.

“Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement,” says William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich.

Today’s supply chain professionals recognize the risk as part and parcel of supply chain management and at the same time outsourcing is also inevitable.  Hence, the trick lies in identifying the risk and mitigating the same with the help of supply chain partner.  Proactive approach and collaboration minimizes the risk element in Supply Chain.

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