Logistics and supply chain management are secret

weapon of CEOs in time of crisis.

Gaurav Kumar

Internatioanl Business 09-11

 In the light of the ongoing globalization and evolution of today’s
business world logistics has gained significant visibility and is regarded as a
critical link to improved corporate performance. The value of the global
logistics market accounted for $591.1 billion in 2005 and is expected to further
grow by 22.1% until 2010. Apart from a constant pressure to reduce costs and
improve efficiency, logistics increasingly serves as a differentiating feature for
products and an important lever for improving customer satisfaction.
Coordination with other departments also plays a crucial role. The increasing
complexity and dynamics of the business world did not leave logistics
unaffected. Key drivers of uncertainty include globalization of supply and
customer bases, shortening of product life cycles, increasing competition and
more demanding customers. Thus, the challenge for logistics managers
nowadays is to constantly balance a need to perform well on hard measures of
performance, while responding to a constantly changing environment. With
respect to logistics increasing importance for corporate success, reacting to
contingencies by crisis management and firefighting is no longer an option.
Instead, logistics managers must proactively and strategically plan for the future
and prepare for change.

What is Crisis ?
Crisis is more or less can be described as period of uncertainties. Uncertainty as
part of contingency theory is described as a state of the environment in which
more things can happen than will eventually happen. Environment is defined as
the totality of physical and social factors taken into consideration by individuals
during decision-making in organizations. Depending on the location of these
factors relative to the boundaries of the decision-taking organization, they are
part of either the internal or the external environment. Key sources of
uncertainty are lack of clarity of information, insecurity of causal relations,
length of feedback loops before results become apparent and the inability to
assign probabilities to the effect of a distinct factor. Thus, information and its
counterpart uncertainty are driving forces for the effects the external
environment takes on an organization’s internal environment. Duncan suggests
a model of complexity that builds around the two constantly changing
dimensions dynamism and complexity. Dynamism describes the stability and
frequency with which decision factors alter over time and whether new
distinctive factors arise that change the scope of the internal and external
environment relevant for decision taking. The second dimension complexity
refers to the number and similarity of interactive factors considered important
for decision taking. Further, Duncan found evidence that it is more dynamism
than complexity that impacts uncertainty. According to Emery and Trist,
companies that operate in such dynamic and complex environments can no
longer rely on mere tactics. Even though uncertainty can be reduced by
thorough analysis, a residual uncertainty will always remain that companies
need to respond to by strategies to assure survival in their
environment. Noteworthy, residual uncertainty is not binary – assuming there is
a completely certain or completely uncertain future is wrong. As a matter of fact
different levels exist that differ by the amount of possible scenarios. At the
lowest level, a single forecast describes a clear enough future. Advanced levels
contain discrete and distinctive sets of scenarios or a whole range which is
dependent on a limited number of characters. Uncertainty in its most extreme
form does not even allow for identifying potential range of futures since the
influencing variables cannot be adequately captured.

So, the crisis period that has resulted in lower trade volumes for many
companies, actually offers a window of opportunity to implement reforms that
would be substantially harder to execute during heavy trading periods, thus
preparing the ground when the crisis ends so companies are ready to take off
with leaner and more competitive supply chains. Apart from improving
efficiencies in managing exchange of information, employing SCM helps
companies remain flexible and responsive to the demands of the changing
environment, which are key to survival in a recession climate.

Majors to be taken during crisis

For a CEO, crisis is probably the best time for him to go back, look at the
drawing board and see what they need to do." As the fast pace of a good
economy leaves little time for innovation. But in a lean period, without so many
disruptions getting in the way, businesses have more time for research and
development. For example, A small percentage improvement that reduces
operational costs can quickly aggregate up to a major difference in bottom-line
performance, both in the short term and as the business starts to grow again, as
per expectations.

With the current economic situation, it is no surprise that companies are looking
for ways to help cut costs and condense staffing. Many are turning to third-party
logistics (3PL) providers to help them develop an outsourcing strategy. As
experienced solution providers, 3PLs are successful in helping companies fight
through financial burdens and survive the recession. While there are those who
think 3PLs are adjusting their services because of the recession, the reality is
these services are essentially more appealing than ever before.

During tough economic times, the availability of capital comes at a premium

cost; companies in a myriad of industries struggle to maintain their investment
in infrastructure and continuous improvement. Long-term strategies are often
postponed or abandoned in favour of short-term or temporary cost avoidance.
An outsourcing strategy can help mitigate these effects. 3PLs(Third party
logistics) have a sizeable advantage over a "go-it-alone strategy" because their
capital investments are typically leveraged across their entire client base. No
single company needs to build the entire infrastructure necessary to execute
their supply chain. Which adds to the advancement of logistics and supply chain
management and it also leads to carrying out of trade during tough economic
times, which is one of the most important factor in waving off the effects of
recession.The consumer electronics and appliance retail business offers
excellent examples of a 3PL providing software-as-a-service. Major retailers in
this market have purchased end-to-end supply chain execution of service parts
for their in-home repair service offerings from a 3PL. These services include the
buying, forecasting, order management and the entire trading partner order-to-
cash process. However, unlike the traditional model where the service provided
by the 3PL is physical handling of goods, this process happens virtually. The
3PL purchases and executes its ERP application on behalf of its clients. All the
physical handling of parts happens back at the supplier level. The manufacturers
ship their warranty and service parts directly to the retailer's customer. The
value here is that the software application running as the backbone was sold as a
service. There was no need for the retailer to invest in systems or training of
personnel to run those systems. The secondary value, which is by no means
small, is that by enabling the manufacturer to ship direct to the end consumer,
an entire node of the supply chain was eliminated. The 3PL did not have to
physically handle the products. When 3PLs have their own infrastructure
(warehouses, equipment and software), costs for their clients can be moved
from a fixed structure to a variable structure. 3PLs provide the flexibility and
capability that allow their costs to be entirely or mostly transactional. In tough
times, the transactional nature of the fees is far more advantageous because as
sales volumes drop, there are fewer transactions and thus fewer transaction fees.
In other words, their clients pay for what they use and do not have to carry the
burden of the infrastructure costs without the sales volume to support it.

In the wake of a recession or economic downturn, it is common

for individual saving to increase and consumer spending to decrease. As a
result, demand for products and services declines and increased inventories and
prices ensue. This is where it pays to have flexible supply chain management. In
such instances, companies do not want to be caught in fixed distribution and
warehousing costs.

Finally, an outsourcing strategy enables companies to focus on the core

competencies they wish to retain in house. During uncertain economic times,
companies need to concentrate on what will enable them to compete in tough
market conditions. Executives should be spending their time on new product
and service offerings, marketing strategies and competitive concerns. They
should not have to worry about their products reaching their customers or
whether they should invest in new distribution centers or inventory systems. A
good 3PL partner can remove this burden completely.

In a recession, many companies choose outsourcing for its economic advantages

— primarily lower operating costs and the freeing up of capital. However,
outsourcing also enables them to focus on what truly drives their success.
Timeliness is key. Taking advantage of the capabilities a 3PL offers not only
helps companies in difficult times, but enables them to concentrate on company
growth and innovation.
Preparations & responses to Crisis
Part of the problem is that operations leaders often lack the clear,
systematic approaches needed to be able to plan more effectively. What's
needed is a hierarchy of best practices that will help protect your supply chain
against a recession. A simple graphic depicts the impacts of a downturn,
allowing the behaviours of customers and suppliers as well as those of your
company to be broken down and analyzed one at a time. ( see exhibit 2)

For each of the six challenges identified, we can determine what should be
done ahead of time to be prepared, and what companies can do now that
recession is upon them. Granted, not all of the responses we describe apply to
all companies, and probably no company can excel at all of them. But
recessions do find all weaknesses, so the more of these practices you can
embrace, the safer you will be. The key is to determine where you are most at
risk and focus on those weaknesses first.

With these majors in its place during the time of crisis , CEO can rest assured
that with its SCM and logistics intact and recession proof, the company would
prosper and would be better prepared not only during recession but also to reap
the benefits of the boom after the recession , when the business gets back to its
normal functioning.
Conclusion
With its supply chain management in its place , during the recession period,
and its innovations as a counter measure approach , and learning drawn from the
crisis , the company would be in better position to take benefits of the post crisis
crescendo but still these are the majors that needs to be adopted on regular
basis to keep the business successful in competitive market and its logistic
innovations . The suggested steps, improvements and transformations are-

 Determine and differentiate what the company needs from its supply
chain with regards to competitive advantage, market positioning, cycle
time, capital required for inventory and other applications, service,
revenue, profitability and growth.

 Include and incorporate supply chain management into the company

strategy. Recognise the complexities, challenges (including green),
global scope, risks, impact and requirements into plan achievement.
Mitigate risk and complexity, especially where they create waste. Do this
for the three supply chains of product, information and financial.

 Segment and assess present supply chain performance and process as to

customers markets, industries, distribution channels and products.
Analyse the process based on customer and market requirements, and on
competition

 Depending on the assessment results, supply chain redesign from the

customer and market perspectives is preferable to trying to fix the
present operation. Utilise different tactics for higher risk, higher
complexity, high volume, fast moving, profitable products, customer and
markets than for ones that are marginal

 Place responsibility for management of the entire supply chain at the ‘C’
level, under one organisational group and staff it with good people. That
alignment will improve process flow and internal collaboration, limit
organisational barriers and allow for better dealing with other issues.
Make supply chain management part of the corporate culture

 Reflect supply chain management in company-wide efforts. For

example, expand lean to include the international side of the business
and the suppliers and supply chain to identify and remove waste. Or, use
metrics that flow across the company and across the supply chain.
  Blend operations options. That is consistent with differentiating supply
chain approaches to match market and customer segmentation. Analyse a
mix of offshore, near shore and onshore for sourcing that reflects product
lifecycle, product velocity and profitability. Consider a mix of different
types of facilities in your distribution network, depending on the type of
company. The mix approach can be used for the international activities,
for sourcing and manufacturing and sales

 Use technology as a process enabler for visibility across the entire supply
chain, collaboration, exception and event management and operational
control. Supply chain applications and integration with supply chain
management are important reasons for company technology

Supply chain change and redesign is needed for many firms to

break the cycle of inefficiency that limits profits, growth and return. Change is
difficult, but not impossible. Opportunities will come from the new economy.

References:
Duncan, R. B. (1972), pp. 314-317, 320, 325; Downey, K. /Slocum, J. (1975), p.
573; Daft, R. L. (2004), pp. 152-153.

Emery, F. E. /Trist, E. L. (1965), p. 23; Litschert, R. J. /Bonham, T. W. (1978),

p. 217; Courtney, H. (2001), pp. 15-33.

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