Significant growth in the supply chain and logistics industry in Saudi Arabia has seen companies increasingly challenged by growing complexity, variations of demand, and increased volumes in their supply chains.
A recent study into the Saudi Arabian supply chain and logistics market, The Saudi Arabian Supply Chain Intelligence Report (SCIR) 2008, has revealed a disconnect between theory and practise when it comes to supply chain management in the oil and fuel industry in Saudi Arabia.
SCIR 2008, an in-depth, pioneering study into the Saudi Arabian supply chain and logistics market, was commissioned by leading supply chain and logistics provider Hala Supply Chain Services (HSCS). Based on a survey in which senior company officials and supply chain management took part, SCIR 2008 revealed the objectives of, and challenges facing companies in the oil and fuel industry. These oil and fuel companies ranged in size from SAR 100 million, to those with a turnover of over SAR 1 billion.
One of the most significant findings of the study into the oil and fuel industry was the disjuncture between these companies recognition of the increasing importance of supply chain management, and their consequent approach to optimising supply chain functionality. Evidence of this disjuncture began to take shape with questions around the importance of supply chain management and what are considered to be most important business activities. While 100% of respondents indicated that the importance of supply chain management is increasing, they went on to list marketing and sales, and human resources as significantly more important business activities than supply chain management, which was only ranked third.
This could be a result of not all CEOs, operations, financial, marketing and IT directors being of the view that supply chain management is very important to a company. The study indicated that while 100% of supply chain and logistics directors considered supply chain management to be very important, only 60% of CEOs, 80% of operations directors, 20% of IT directors and 40% of financial and marketing directors felt the same way. Clearly there are mixed feelings about the importance of supply chain activities across the board of senior management. Until sufficient and widespread recognition of, and support for, efficient supply chain management is achieved it will not be in a position to be optimised.
Insight into this disjuncture between perceptions and actions was revealed when respondents were asked to rank supply chain objectives. The most important objectives given by respondents included improving co-operation and collaboration, visibility, flexibility and agility of the supply chain. Considering the low percentages of IT directors (only 20%) who view supply chain management as very important, it is not surprising that such objectives were listed for improvement. While high levels of collaboration, visibility, flexibility and agility are vital components in optimising supply chain functionality, without sufficient IT support they simply cannot be achieved.
Respondents were then asked to list the challenges faced in achieving their supply chain objectives. Increasing volumes of business and a staff skills shortage were given as the greatest challenges, followed by increasing complexities and the distribution network. Such challenges are not unique to Saudi Arabia they are global challenges. International best practise calls for companies to outsource certain functions so as to minimise the impact of such challenges. The practice of outsourcing, except of transport however was revealed to be unusual in Saudi Arabia. This was not a surprise considering that the economy of the region has been relatively closed, self sufficient and independent until the relatively recent change in economic policy promoting broader commercial activity.
The study revealed that the Do It Yourself (DIY) strategy was firmly entrenched despite the opening up and diversification of the Saudi Arabian economy. In the oil and fuel industry inbound and outbound transport are the only two functions which are outsourced to any degree. Only 25% of inbound transport is outsourced, while 50% of outbound transport is outsourced the remainder being either entirely managed in-house, or managed in-house with some external assistance. All other logistics functions are managed almost totally in-house including warehousing, inventory management, information management and administration.
This also goes against international trends which see a wide range of supply chain outsourcing models. These can vary from full outsourcing, through to 4PL or lead logistics arrangements to supply chain consulting in combination with internal management. Such an approach has shown its value in improving service levels as the resources available to, and capabilities of a company are significantly enhanced both regionally and globally.
Further exacerbating the poor outcomes of a DIY strategy is that all self improvement initiatives taken on by companies are almost entirely internally driven. While companies indicated that they had initiated improvements to several functions in their supply chains, improvement to warehousing were 100% internally driven, inventory management 75%, outbound transport 67%, information management 67%, and administrative costs 75% internally driven.
In light of a self-confessed skills shortage, it is reasonable to believe that such initiatives would have little chance of achieving success. This proved to be true when respondents were questioned about the outcomes of such initiatives in terms of cost reduction and service levels. Two thirds of the respondents saw a minimal cost reduction of between 5 10% only, with one third achieving less than a 5% reduction. In terms of service levels a third experience a 5% improvement, a third between 5-10% and a third between 11-15%. Such low levels of success are indicative of the inefficiencies of a DIY strategy, particularly when undertaken during a serious skills shortage, and in a fast changing and globalising world.
Giving further clear indication of the disconnect between simply recognising the increasing importance of supply chain management and actually implementing necessary actions, was the outcome of a question about costing. When asked what the cost of their supply chain was, an unbelievable 25% of companies in the oil and fuel industry did not know. A further 25% of companies believed it to be less than 5% of their turnover, while 50% indicated it to be between 10 and 15%.
These oil and fuel companies then went on to state that the greatest contributors to their supply chain costs were inbound transportation and outbound distribution costs. Considering that these are the only two functions which are outsourced by this industry, it is not surprising they would be considered their highest costs. Since the remainder of their supply chain functions are managed internally the monetary costs of these functions may appear less on the income statement, however the ultimate cost to their service levels, flexibility and visibility by keeping them in-house is likely to be higher than those which are outsourced.
While companies in the oil and fuel industry may recognise the value of supply chain and logistics management strategies to their success, the results of the survey highlight several deficiencies in their actual activities and practices. Support of supply chain management must be given from all of those in senior management positions. Of particular importance is a concerted move away from the current tendency to follow the clearly ineffective DIY strategy. It is only through addressing the issues highlighted by SCIR 2008 that companies in the oil and fuel industry will be able to gain strategic competitive advantage, said HSCS general manager Husam S. Al-Saleh.
About Hala Supply Chain Services:
Hala Supply Chain Services offers services including warehousing, physical distribution and transportation, route optimisation, clearing and forwarding information systems, consulting, supply chain management and insourcing in all the areas of the supply chain, from the manufacturer to the consumer.