Increasing Supply Chain Flexibility and
Cost Effectiveness
In today's supply chain and logistics
systems, it is crucial to consider customers' specific needs through supply
chain analytics. Different markets have different priorities, with some being
driven primarily by cost and others by the quality of products or
services.
For cost-driven markets, the focus is on
minimising expenses while ensuring the quality of a specific product or
service. On the other hand, quality-driven markets prioritise the excellence of
the products or services, with costs being a secondary concern.
One crucial aspect to consider is space.
Manufacturing facilities are often located away from the areas where the final
product is consumed. This spatial separation necessitates efficient
transportation and distribution networks to ensure products promptly reach
their destinations. By optimising space utilisation, organisations can minimise
costs and maximise efficiency in their supply chain operations.
Another key consideration is time.
Organisations rely on inventory management to bridge the gap between supply and
demand. By strategically managing inventory levels, organisations can
manufacture products at the lowest possible cost and take advantage of reduced
transportation expenses.
This is achieved by consolidating
finished goods into larger shipments, thereby increasing the utilisation of
transportation facilities. Organisations can optimise their supply chain
processes by effectively managing time and enhancing overall operational
efficiency.
Supply Chain Partners
As products or services move along the
supply chain, the quantities of products or services that are dealt with tend
to decrease, but the unit price tends to increase. Different parties within the
supply chain have the ability within their logistics systems to deal with
variances in order size and value:
Producers: Producers may prioritise various
aspects such as price, quality, availability, and product/service choices.
However, independent producers' collective skills, knowledge, and experience
enable them to adapt quickly to the evolving demands of their markets. This
adaptability is crucial for their sustained profitability in the business
landscape.
The primary organisational reason for
independent producers typically includes wholesalers, retailers, and
manufacturers. End users are often excluded from direct distributor dealings to
safeguard existing market relationships. Moreover, end users' low purchase
volumes make it economically unviable to manage their orders due to the
associated operational costs.
By understanding the distinct needs and
dynamics of their target markets, independent producers can effectively
navigate the complexities of the business environment. Their ability to balance
factors like pricing, quality, and customer base segmentation is instrumental
in ensuring long-term success and profitability in the competitive industry.
Distributors/Wholesalers: The primary role of distributors is to
purchase products in enormous quantities and then distribute them in smaller
amounts to wholesalers. These wholesalers specialise in specific market sectors
and use their expertise to introduce innovative products or services to their
customer base. These customers can include wholesalers, retailers,
manufacturers, and occasionally end users.
Distributors may also engage in sales
and marketing campaigns on behalf of their suppliers. However, the extent of
their involvement depends on the characteristics of the market sectors in which
they operate. On the other hand, wholesalers primarily cater to smaller
retailers and end users who purchase in quantities that justify the
wholesaler's order processing. Offering a wider variety of products or services
than distributors, wholesalers may provide their customers with specialised
sales and marketing services.
End users like retailers and sole
traders can combine wholesalers' products or services with other offerings.
Alternatively, the public can be considered an end user if they make bulk
purchases that meet the wholesaler's order requirements. Wholesalers aim to
serve as a comprehensive source for their customer base, providing a convenient
"one-stop shop" for various products or services.
Retailers: Typically, retailers specialise in
offering various products and services to end users, who are often members of
the public. They strategically place their stores in locations that provide
convenience to the public, such as town centres or retail parks with ample
parking facilities. This approach makes it easier for customers to access their
offerings and enhances their shopping experience.
Retailers usually procure products and
services in bulk to meet their customers' weekly demand patterns. While
assembling orders may be expensive for the supply base, retailers benefit from
the frequent orders they place. This helps offset the costs incurred in order
assembly and ensures a steady supply of products and services to effectively
meet customer demands.
High-end retail outlets are often
situated in areas with high foot traffic to capitalise on increased sales
opportunities. By being in places with a high concentration of potential
customers, retailers can maximise their sales through the availability of
passing trade. However, the price of land and buildings in such prime locations
tends to be higher due to the heightened demand for these properties.
Mid-range retailers, wholesalers, and
distributors tend to be located in retail or industrial parks, where the price
of land and buildings is lower than in a town centre or within areas with the
highest demand for and, consequently, values of land and buildings.
The Benefits of Outsourcing Supply Chain
Operations
Historically, major manufacturing
organisations like Ford and Unilever operated with vertically integrated supply
chains, where the parent company owned most suppliers, service providers, and
associated facilities.
It was believed that this approach
provided complete control over quality and costs. However, as time has
progressed and markets have become more diverse, meeting the demands of these
varied markets has become increasingly challenging. The slow pace of change
management in large corporate organisations has often hindered market
innovation, sales, and profitability.
Recently, there has been a shift towards
outsourcing functions that are traditionally considered internal areas of
expertise. Rising costs and advancements in IT, ERP, and e-commerce systems
have driven this change.
As a result, organisations are now
questioning whether logistics, once seen as a core area of expertise, should
still be managed internally. This shift reflects a growing recognition that
external partners may possess specialised knowledge and resources that can
enhance efficiency and effectiveness in the supply chain.
The decision to outsource certain
functions has its challenges. While it may offer potential benefits such as
cost savings and access to specialised expertise, it also introduces new risks
and complexities.
Organisations must carefully evaluate
the trade-offs and consider factors such as the impact on quality control,
customer satisfaction, and overall supply chain visibility. The goal is to
balance maintaining control over critical aspects of the supply chain while
leveraging external capabilities to drive innovation and meet the evolving
needs of diverse markets.
Many organisations focus on enhancing
their product or service portfolio, leading them to outsource their logistics
functions to third-party logistics (3pl) providers. Outsourcing logistics can
include any combination of these tasks:
- Inbound logistics.
- Outbound distribution.
- Warehousing.
- Inventory management.
- Sales order processing (SOP).
- Purchase order processing (POP).
- Returns logistics.
- Marketing services requirements.
- IT Services (SOP, POP, MRP I & II and Inventory
Management).
- Credit collection of sales invoices (Factoring).
By leveraging the operational
efficiencies of these 3PL operators, organisations can achieve a superior level
of service while simultaneously cutting costs through economies of scale,
minimising their overall logistics costs.
Degrees of Logistics Outsourcing
Fully integrated logistics is called
5PL, whilst partial integration is called 3PL. The outsourcing of logistics can
have the following meanings:
- 1PL: First-party logistics refers to
an organisation that owns its shipment and freight and can move goods and
products from one location to another. They function as the shipper of
myriad items and coordinate the delivery of goods to their intended
locations. This arrangement primarily benefits the producer or supplier
and the purchaser. There are no intermediaries participating in the entire
operation.
- 2PL: The second party logistics model
involves an organisation subcontracting a carrier or warehouse manager to
manage the operational execution of a specific transportation or logistics
task. However, the organisation retains the responsibility for organising
and overseeing the process. In this model, the relationship between the
organisation and the 2PL service provider is typically focused on cost and
short-term objectives, with the 2PL service provider following the
organisation's instructions and receiving payment accordingly.
- 3PL: In a third party logistics model,
an organisation maintains management control while delegating transport
and logistics operations to an external supplier who may further
subcontract the tasks. A 3PL provider offers a valuable service that
allows an organisation to concentrate on other business aspects by
overseeing the outsourcing of operational logistics, ranging from
warehousing to delivery. 3PL providers offer various supply chain
logistics services, such as transportation, warehousing, picking, packing,
inventory forecasting, order fulfilment, packaging, and freight
forwarding. Given these factors, it is evident that 3PL service providers
play a crucial role in ensuring the efficient operation of an
organisation.
- 4PL: In the fourth party logistics
model, an organisation delegates the management of logistics activities
and their implementation across the entire supply chain to external
parties. The 4PL service involves more than just outsourcing the
coordination of logistical tasks to third parties. It also includes the
management of these tasks. 4PL service providers oversee the supply chain,
while other parties often delegate administrative and operational
activities. These providers usually do not own transportation or warehouse
assets, operating as non-asset-based logistics entities. The role of a 4PL
logistic provider requires an elevated level of involvement in the
organisation's business activities. In addition to outsourcing logistics
processes, an organisation expects the service provider to monitor them.
Instead of short-term collaboration agreements based solely on cost
considerations, the focus shifts to long-term partnerships that prioritise
service quality and involve shared risks and benefits. A 4PL service
provider acts as a supply chain integrator, bringing together and managing
all the resources, capabilities, and technology required for an
organisation's supply chain, including its network of providers.
- 5PL: Fifth party logistics services
can strengthen demand. Furthermore, a 5PL service provider engages in rate
negotiations with various other service providers, including trucks and
airlines. A 5PL operator is a logistics service provider that effectively
plans, organises, and executes logistics solutions for different
commercial organisations. The 5PL service provider can fortify demand by
negotiating rates with other service providers, like trucks, airlines,
etc. Organisations that delegate logistics management functions to
external parties are a prime example of this solution. The concept of 5PL
has gained significant attention recently, particularly with the rise of
e-commerce. In addition to integrating and managing the supply chain, 5PL
organisations may offer other valuable services such as call centres and
online payment systems.
Critics of outsourcing logistics to a
3PL, 4PL or 5PL service operator often need clarification on whether the
promised cost savings are achieved. They argue that the need for more control
over the logistics process is a significant reason organisations should not opt
for outsourcing. In the logistics industry, larger organisations manage their
logistics needs internally. In comparison, smaller and medium organisations are
more inclined to outsource to cut costs.
Outsourcing some or all aspects of
logistics can give organisations access to the expertise, knowledge, and
experience of third-party service providers. This can result in cost reductions
while improving service levels beyond what the organisation could achieve.
Additionally, cash flow may see a positive impact as logistics service
providers typically charge based on the number of consignments, ensuring they
cover their costs and make a reasonable profit.
The decision to outsource logistics
functions should be carefully considered based on each organisation's specific
needs and circumstances. While there are valid concerns about control and cost
savings, outsourcing can offer valuable benefits regarding expertise and
service quality. Organisations can determine the best approach to managing
their logistics operations effectively by weighing the pros and cons.
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