This is the first in a series of three articles on developing a sustainable logistics network strategy and why it is vital to business success.
Is your logistics network coping in this constantly changing environment? Advances in technology, changes in customer behaviour and fluctuating demand all provide the opportunity for a rethink. Even the best-designed networks are struggling with optimising warehouse facilities, inventory levels and managing deliveries. It could be that the time for a review is now. Even well-designed logistics networks start to show their age over time.
The business strategy takes the lead
A logistics network strategy is a set of guidelines that define and direct activities across a supply chain. These guidelines promote the setting of goals, the coordination of actions and drive a common purpose between the many different functions and partners in the supply chain.
A successful logistics network strategy requires a clearly articulated business strategy as a pre-requisite. If the business strategy is to be the low-cost provider, the logistics strategy should support this.
Companies should be able to express their business goals clearly after answering these questions:
• What is the range of products on offer? This may be expressed, for example, in categories, product origin or stock-keeping units (SKUs).
• What is my pricing strategy? It could be low-price/basic service, affordable prices with an efficient standard service or upper-quartile pricing with value-added services.
• What sales channels am I going to use? Options are via a distributor or wholesaler, retail brick-and-mortar stores, e-commerce direct to consumers or any combination of these.
• What level of service do my customers expect? What are acceptable levels of product availability or lead times?
When we have these answers, it is possible to define what needs to be done next.
What are the main considerations flowing from the business strategy?
1. Sourcing of products direct from manufacturers or suppliers. We need to define the correct quantities and delivery frequencies required to fulfil customers’ orders in the agreed timeframes.
2. Warehouse facilities and inventory holding points. Factors to consider are proximity to the customer, stock-holding capacity, the balance of fast vs. slow-moving items.
3. Shipping and transport requirements. Moving goods from source to destination e.g. shipping goods to factory or port; onward transport to distribution centres or depots; delivery to stores or direct to consumers.
Everything in the supply chain leads to trade-offs
The logistics strategy must be led by the overall business strategy and aligned with it. Trade-offs will be inevitable. If the aim is to guarantee 99% stock availability, what is the cost of that over 98% availability? Is it worth the extra cost? Shorter lead times from manufacturers or suppliers can mean lower stockholding, less warehouse space, and fewer resources but this comes at a cost. Changing shipping methods or buying local are trade-offs between cost and availability.
What logistics strategy will effectively support the business strategy?
When developing the strategy, we must consider the trade-off between the level of service we want to achieve and its related cost for each of these areas of activity:
1. Inbound freight for products by road, sea, air, or rail
2. One or more inventory processing points. Warehouses, distribution and fulfilment centres and forward stock locations. How many and where, size, function, and resourcing.
3. Outbound freight by road, sea, air, or rail.
4. Information flows – both forward and reverse.
5. Systems to support the functions of demand forecasting, procurement, warehouse management and transportation
Outsource or in-source or both?
What should we own and / or operate ourselves and what should we outsource? Part of developing a logistics network strategy includes evaluating opportunities to outsource areas that are not your core competency.
Some operations are better suited to outsourcing than others. For example, do you opt for a shared-user warehouse vs. a dedicated facility? If your business is seasonal, your growth is uncertain or your sales are volatile, then a shared-user solution could be appropriate. A combination of both is possible: you might have a dedicated warehouse for core fulfilment activities but use a third-party for overflow storage.
Third-party transporters (3PLs) are set up to handle specialist consignments such as hazardous or perishable goods using a dedicated fleet. They can also handle full or part-loads and returns by combining volumes across multiple users, and parcel companies do the same for small consignments. A hybrid approach is often appropriate e.g. use a core fleet for central areas and sub-contract to regional specialists for outlying areas.
Some organisational challenges may need to be addressed. Remember to include input from interested parties when developing the strategy. This is the time when you can communicate how you prefer to do business. There is always some resistance to change in the adoption of new processes and technologies. Success depends on open lines of communication between supply chain leaders, stakeholders, and external partners.
The second article in this series develops this theme and proposes a methodology to use to define your new strategy.