By Dominic Regan (pictured), EMEA Business Development Director, Oracle Transportation Management
Twenty years ago, multinational companies in the automotive, retail and consumer packaged goods industries typically took responsibility for managing the transport of goods from the factory floor to the consumer, often owning the assets to actually make it happen. Today, the situation is very different. Logistics operations are often outsourced and production has become increasingly specialised and geographically dispersed, frequently offshore. As a result, the modern-day supply chain consists of a network of producers, logistics providers, customs agents, warehouses, cross-dock operations and retail outlets. While this change has in many cases brought about improved operational performance, with the cost of logistics in the European Union (EU) estimated at 710bn or 8 percent of GDP there is still much that could be done to iron out inefficiencies, better manage risk and ensure the timely delivery of goods to the end customer.
The cost of transportation
Analysis suggests that the cost of a firms supply chain can typically be estimated at between 3.5 percent and 6 percent of sales revenue. Of these costs, logistics bear the lions share, constituting approximately 60 percent of the total supply chain cost.[1] External factors, such as fuel prices and congestion, and internal factors, such as a companys operational and IT capabilities, both play a role in the disproportionate cost of transportation.
Increased demand from the economic powerhouses of India and China, as well as uncertainty with regard to supply, are just two of the factors driving the rising cost of oil, and its impact is being felt acutely by global transportation operations. Congestion too, particularly in theEU, plays its part in high transportation costs, with the most recent study showing the cost of congestion to the economy amounting to 0.5 percent of GDP. By 2010 this is estimated to rise by 142 percent, reaching 80b a year, or approximately 1 percent of GDP. Capacity is another factor: the UK, for instance, estimates that a current shortfall in drivers of LGVs could cost the economy up to 1bn a year.[2]
While it is almost impossible to control these external influences on the high cost of transportation, their effects can certainly be mitigated if the business has in place the systems to ensure that its transportation network is operating as efficiently as possible, and has implemented the necessary measures to minimise risk. Surprisingly enough, particularly in these days of increasingly global supply chains, this is often far from being the case.
While the geographical expansion of the supply chain has driven down costs through outsourcing and the relocation of labour to more cost-effective territories, it has also introduced additional layers of complexity and cost to the transportation of goods. Mergers and acquisitions have further complicated the picture by introducing both disparate supply chains within the same organisation, as well as additional parties who have different ways of working and different ways of sharing operational information.
The logistics functions of many supply chains are still frequently managed as a series of distinct steps. For instance, an order is placed, setting in motion the transport of goods from the factory to the freight company for process at customs and the port of loading. The goods are then shipped to be collected at the other end of the journey where another chain of events is initiated before the goods finally reach their respective destinations.
Each member of this logistics process often has their own systems to monitor and manage the transit of the goods, making it increasingly difficult to exchange information between producers, partners and customers. Furthermore, the latency in processing of data between these different applications all too often means the first time someone knows what is being shipped is when they open up the back of the container on the receiving dock. Indeed, some businesses remain reliant on spreadsheets and faxes to manage this coordination, which may have been sustainable when your supplier was located 100 miles down the road, but cannot be justified when your supplier can be located on an entirely different continent. Moreover, companies these days increasingly wish to view inventory in transit as mobile warehousing, allowing them to delay stock allocation decisions until the shipment is closer to the point of receipt in the destination country. These types of operational efficiency can only be supported when accurate, timely data of sufficient granularity is available. This lack of synchronisation across disparate time zones and absence of the opportunity to exercise proactive control is therefore completely out of step with the current demands of global logistics operations.
What is needed is a logistics management system capable of bringing together information in real-time and from all parties, to provide visibility and control of the entire transportation network. Furthermore, given the exponential increase in the data both generated by, and necessary for the support of, the modern supply chain, as a pre-requisite such systems have to allow companies to manage by exception. People no longer have the time to sign in to different systems to go and look to see if there is a problem, they want to be told about it before it becomes a problem and be provided with the information necessary to mitigate the issue.
Thanks to the ubiquity of the Internet, this is now possible. By capturing and processing information related to order management, logistics planning, shipment execution and freight payment in one central repository, a web-based transportation management system can significantly improve the efficiency of logistics operations.
For instance, connecting the payment process to accurate information on the actual movement of goods means the whole settlement process can be automated and removes the need for teams of invoice checkers. A single point of control providing a comprehensive view of all freight being moved across the enterprise whether inbound or outbound, by ocean, air, rail or road, and whether international or domestic can eliminate duplication and redundancy. Also, by identifying that a delayed shipment will impact a customer delivery date, the system can direct the relevant products to be broken out and expedited to the customer. Or, by identifying that shipments from two business units within a company, each of which organises its own transportation, could actually be consolidated with a consequent reduction in transport spend. This supports the business maxim you cant manage what you cant measure. Only when you actually have visibility into what is going on in your supply chain can you start to identify the opportunity for process improvement and cost efficiency.
Once the business has this level of detail on the movement of goods across the supply chain, it can then begin to apply the same rigour in analysing the performance of logistics as it does to other operational functions. Exact costs can be allocated to shipments, locations, territories, customers and products, allowing real profitability analysis to take place. The business can begin to develop benchmarks for logistics performance and processes for best practice, and compare different areas across the operation.
Without this necessary level of detail the organisation will certainly be able to move its goods along the supply chain well enough, but it will have no indication on areas of inefficiency or waste, and no clear guidance on where improvements can be made and efficiency improved.
A consistent view of the current status of transportation processes also enables the business to move closer to realising the benefits of the demand-driven supply chain. The traditional product-centric supply chain model has had its day manufacturers can no longer afford to build to stock, store in a warehouse and wait for the customers to buy. With a demand-driven supply chain, manufacturers adapt to make what they sell, rather than sell what they make. For success with this model, businessesmust be able to sense and respond to real-time signals of customer demand across a network of partners, suppliers, retailers and customers.
The benefits of a demand-driven supply chain to a companys bottom line are striking. Analyst firm AMR Research reports that, the most advanced demand-sensing companies have 15 percent less inventory, a 17 percent better perfect order performance, and a 35 percent shorter cash-to-cash cycle time. The research concludes that the demand-driven model, can improve revenue by 10 percent and profitability by 5 to7 percent.
Of course, the demand-driven supply chain consists of more than just transportation. One of the biggest breakthroughs in the emergence of the new supply chain model has been the capturing and sharing of point-of-sale data. Manufacturers with strong links with their retailers can plan their production according to the real-time demands of customers, with data on purchasing feeding directly into their systems.
However, transportation management naturally has a role in ensuring that sufficient supplies for replenishment are delivered in a timely fashion. Ordered merchandise is shipped to requirement, while merchandisers have visibility into purchase orders and shipments and can control direct shipping costs and product allocation.
Moreover, transportation is now recognised as one of the few remaining areas of the supply chain where opportunities for driving out significant cost still exist, perhaps because it has been overlooked in deference to more glamorous areas in the past. With the emergence of geographically extended supply chains, the critical importance of transportation has been increasingly recognised.
In providing a consistent view of the movement of goods along the supply chain, transportation management allows manufacturers, retailers and logistics providers to become proactive rather than reactive in meeting end-user demand.
With a centralised management system in place, logistics operations can capitalise on the next enhancement in transportation management: the combination of data on the movement of goods with RFID, global satellite positioning and web-based mapping tools to provide a graphical representation of the movement of goods.
The contribution of the supply chain to strong business performance is often taken for granted. However in this age of lean supply chains, when problems do arise shareholders and investors, the media and analysts sit up and take notice. Problems in getting goods to stores can see millions wiped off a companys share valuation overnight, as a number of leading high street retailers have discovered to their cost. A logistics management system can provide for the swift identification and resolution of transportation problems, long before the difficulties are worthy of the headlines.
[1] Source: IBM Institute for Business Value, 2005 Value Chain Study & Capgemini 2005 Third-Party Logistics Study
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