Neal Williams, Group Managing Director of Priority Freight examines the trend in the use of Expedited Contingency Logistics
The faces and characters of globalised supply chains have undergone profound change over the last five years as a succession of factors have conspired to fundamentally alter the relationship between manufacturers and their logistics service suppliers.
The world has become an incredibly more complex place, in what seems like an intensely short period, previously the data on outsourcing large swathes of production to lower cost regions spoke for itself, but the input values have changed, and quickly.
Labour and land costs in the manufacturing clusters of China have shot up; as have fuel costs; freight rates have swung violently; the world economy has been hit by several waves of financial crises; and lastly, the world itself has suffered a series of dreadful natural disasters; tsunamis, floods and volcanic ash, that have at times brought supply chains to a shuddering halt and exacerbated the already tough economic operating environment.
Corporations have responded to these multiple disruptions to their supply chains in a number of ways, most obviously by increasing their spend on express freight. Shipments of goods and parts, the lack of which potentially could shut down production lines, suddenly had to be sent around the world at short notice.
Express shipments have always represented a percentage of spend in any large organisation’s supply chain, but that spend, by its very nature, was unpredictable. Our services represent an expenditure that often results from failure, perhaps because of a weak supplier base or poor geographical coverage by a logistics provider.
In recent years there has been an astonishing number of events that have had a disruptive impact on global supply chains. These events have demonstrated to manufacturers that, if previously their budgets for material supply had been factored as cost A and their logistics as cost B, then the spend on expedited services would be represented by cost C; whereas now manufacturers are entering cost C as part of their regular budget calculations. A and B and C are now all combined to make a total cost consideration. This has effectively created a new sector of supply chain provision: what we have come to call Expedited Contingency Logistics, or XCL.
The process of XCL becoming a defined part of supply chain operations; as much a defined part as freight forwarding, modal freight transport and contract logistics, has been underway for about the last five years. Over the past six to twelve months multiple OEMs have come out and publically tendered for XCL contracts as part of their overall logistics spend, thereby aligning part of their budgetary component to us and companies like us.
Manufacturers have realised that there is a trade-off in outsourcing to lower cost regions. There are longer lead times, but by taking the benefits of lower production costs they also accept that they run the risk of occasionally having to use XCL services. Equally, services like ours are an essential cost if you are not carrying any stock and are outsourcing large parts of your storage requirements.
So there is a trend to lock-in expedited freight on a contractual basis, because shippers have realised that the need to use premium freight products is inevitable. While this is an enormous opportunity for us, it also presents substantial challenges, such as developing a strong, long-term relationship with our shippers.
Because some customers are now giving XCL its own budget, such services are being tendered by procurement departments that are commoditising XCL in the same way as they source materials and that means applying commodity-type pricing. This is not an easy thing to do: how does a shipper prescribe a value to something that is largely unpredictable and equally, how do you sensibly bid for something like that?
Shippers’ procurement departments are trying to commoditise our services while we are trying to turn that commodity into a relationship. Unfortunately many prefer the impersonal process of tendering through web-based platforms, which naturally leads to commoditisation.
Developing this process to its logical conclusion, there is a real danger that customers will not appreciate the true value XCL services deliver beyond that of transporting an item from A to B as quickly as possible.
That said, there are signs of a demand for XCL services on a 4PL management fee, cost-plus basis; rather than a transport fee-plus-profit margin. We know that the largest shippers are moving along that line because they see it as the only way to build a mutually satisfactory relationship with their service providers.
This model creates the grounds for longevity of relationships; it provides the opportunity to study customers’ operational needs and understand where the risks and potential for failure lies. The consequences of failure are what we deal with on a day-to-day basis. For many OEMs, such as automotive manufacturers, these risks may not exist in their own supply chains, but in the supply chains of their tier one suppliers and below, the tier two, three and four suppliers. The sphere of XCL is wide-reaching.
Some of the OEMs are already encouraging their suppliers to use the same XCL provider as themselves to enhance the holistic view of the subsidiary supply chains that contribute to their own. Issues at the tier two or three stage can be identified and feedback provided to the OEM. If a tier one supplier to the OEM has a problem with a tier two supplier that is going to impact the production line of the OEM.
A major component is information, as the ability to execute is also of paramount importance. If the tools provided are good enough to show where problems occur, then the supply chain can be made more robust. But being able to use those tools effectively requires the existence of a strong relationship. Is it the expedited freight company’s business to profit from moving as much time critical cargo as possible or should its aim be to work with the customer to reduce that requirement? We firmly believe an XCL provider’s role is the latter.
The XCL approach encourages planning and efficiencies. Having the comfort of a strong relationship with an XCL provider prevents any disruption in a manufacturer’s supply chain from turning into a production disaster.
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