Tuesday 22nd Aug 2017 - Logistics & Supply Chain

Challenge of change for SC strategies

Nothing stays the same. And that is certainly true for supply chain strategies. Omni-channel retailing, 3D printing, city logistics and the changing dynamics of efficient fulfilment are all set to have a dramatic impact on the way supply chains operate – turning the current model on its head. By Nick Allen.

 

First published in Supply Chain Standard, February 2015.

First published in Supply Chain Standard, February 2015.

What are our supply chains likely to look like in the not too distant future? Will we be living in a fragile world where disruption and risk shape the fabric of our global supply networks? In its Global Risks 2015 report The World Economic Forum predicts inter-state conflict to be the biggest threat to global stability over the next decade.

Then there are the disruptive influences of technology. Having given us the internet, with its radical impact on the entertainment industry and retailing, could technology throw us another ‘curved ball’ in the shape of 3D printing? Last year analysts, Canalys, outlined expectations that the market for 3D printers will expand from a value of $2.5 billion in 2013 to $16.2 billion in 2018. Is it really that far-fetched to consider a competitor impacting your business by making highly individual products close to market using 3D printers?

What about The Cloud? How might cutting-edge, globally accessible software that is made available to small companies through SaaS, change the competitive landscape in which your business operates? Research from Marketandmarket.com predicts The Cloud market to grow to $121 billion in 2015, a 26 per cent compound annual growth rate from $37 billion in 2010.

Perhaps a little outlandish, but how might drones delivering packages to the individual change the shape of distribution? Are we likely to see the skies cluttered with Internet orders finding their own way to online customers?

Prof Alan Braithwaite, executive chairman of LCP Consulting and visiting professor at Cranfield School of Management, sees only a limited scope for drones: “It’s probably going to be a great thing for places like the Australian Outback where you need to get pharma supplies out there. However, if the skies over London are filled with drones, it may get a bit chaotic,” he says.

Where he does see major strategic change taking place is in the retail sector. The growth of portals and the explosion in additional product variety made available through direct fulfilment from suppliers “is going to impact almost everybody in the next five to ten years”, he says. “But it’s not just delivering variety, it’s delivering cost effectiveness as well.”

Braithwaite believes new systems-based capabilities, such as merge in transit, will be used for direct deliveries to create a completely new model. He says the question will be widely asked: “Why do we need to move stuff to large central warehouses, just to move it back past where it came from?”

In particular, Braithwaite sees this new model emerging to cater for demands made on logistics infrastructure by a growth in internet shopping – “that could rise to 40 per cent of retail in six to eight years” – and the rise in environmental restrictions on vehicles operating in urban areas.

 

Conceptual models

“We did a project last year with the Transport Systems Catapult, looking at conceptual models and underlying economics for urban logistics centres,” he says. “These are going to be super-efficient, automated centres that will take product from suppliers and reconfigure loads, placing them onto electric trucks and vans for delivery.” These “switching hubs” are likely to be positioned on the periphery of a city – around the M25 in the case of London.

“If you are nearer the marketplace with these centres and you have a bit of staging capacity you can start to operate counter-cyclically to the commuting traffic. So a lot of vans and lorries would be taken off the roads.

“The implications of this is, almost everything we have spent the last thirty years perfecting will be rendered inappropriate,” says Braithwaite.

Peter Ward, the newly appointed CEO of the United Kingdom Warehousing Association (UKWA), also foresees a seismic shift in logistics strategy as a result of the changing face of retail, the growing complexity of fulfilling consumer demands and the constraints of urban delivery.

“For most of my career our industry has largely designed its supply chain strategy around economies of scale. It has been all about the centralisation of inventory, national hubs and building scale. But economies of scale are becoming a thing of the past – it’s now all about economies of scope. It’s about having bandwidth in your supply chain to be able to respond with agility,” he says.

Ward believes, “The future challenge will be getting into urban areas with smaller vehicles on a more frequent basis, delivering roll-cages off a 7.5 tonne tail-lift vehicle onto the curb side – no longer the big pallet deliveries into the back room,” he says. “Back up the supply chain this is going to change the way distribution centres are organised and operated. It has largely been about pallet distribution, huge amounts of automation, but now it will be wave picking and single pick items into totes and bins – the whole replenishment model is in a state of change. And this is going to have a dramatic effect on the industry.”

Ward explains that this change in strategy will require the industry to lobby national and local government to relax cumbersome working hours regulations and enable through-the-night deliveries. Planning and land-use issues will also have to be addressed if a new generation of replenishment centres is to be built nearer to cities. Ward says: “UKWA is the only representative body of the 3pl sector in the UK that can work with the industry and government to meet these challenges.”

But beyond the sphere of urban logistics, what is happening to global supply chain strategies?

Drawing upon his 30 years experience in international logistics and from his recent position as commercial director and head of cargo supply chain at London Gateway, Ward sees a change to global sourcing patterns. “Most of my working life we have developed supply chains based around China being the main source of supply, but that is changing. China has a hugely more affluent, growing consumer base that has all the same requirements as consumers in the Western world,” he says. With strong home demand to satisfy he suggests that Chinese businesses are now being less flexible on export deals, expecting to do business more on their terms.

“So there is a shift in sourcing patterns into other areas of the Far East, and this trend will continue as companies follow the cost of labour – we’ve already seen India and Sri Lanka opening up, and there’s a shift towards Vietnam, Cambodia, and Myanmar. Next will be Africa.”

But strategies for sourcing are becoming increasingly complex. A series of natural disasters in recent years has caused large international concerns to look closely at the risk profile of their suppliers and a growing proportion of these buying organisations are now sourcing key components or products from two or more suppliers to offset the risk of a factory being put out of action by an earthquake, flooding, political unrest or other disruptive factors.

Ward believes there is a ‘new normal’ of business uncertainty, he points out that companies are strategising for the unknown, in this case demand, by creating greater agility in their supply chains through near-shoring replenishment goods.

This growing need for agility is reflected in comments from Martin Green, managing consultant at Unipart Expert Practices and member of the Academic Advisory Board at Cranfield School of Management. “Strategists are having to respond to increased volatility in the supply chain. Okay, there’s nothing that new about this. We’ve been saying it for the last ten years. But this last year in particular, in the retail sector, it has become even more volatile with the trend to increased promotional activity and new seasonal events like ‘Black Friday’,” he says.

 

Massive peaks

“These promotional activities have a big knock-on effect further up the supply chain, impacting suppliers. You get these massive peaks in demand, but the supply chain – at any one point in time – has finite capacity. We have seen the effects of this in the lead up to Christmas when a number of courier companies couldn’t cope with the demand.

“From a strategic view point, that means we need far more responsive supply chains – everything has to be more rapid. We must be able to do smart planning and forecasting very quickly, as doing planning on a weekly basis is no longer sufficient,” he says. “We must sense those changes in demand within hours and then get the supply chain to respond within hours or days at the most. That may mean redeploying stock, or it could mean we need a shorter supply chain, one that can react really quickly.” He suggests that 3D printing could even be part of that responsive and flexible supply chain.

So will more sophisticated planning tools be the way of the future or will the good old spreadsheet still play the biggest part in planning and scheduling for managers? Green believes a whole new generation of planning tools will start to emerge which are geared to pulling data from a variety of sources, interrogating data in real-time to reveal trends and changes in demand patterns.

Interestingly, supply chain consultancy Oliver Wight has just published a white paper called ‘The power of insight: statistical forecasting as part of integrated demand management’ which gives an insight into effective demand planning.

One of the authors, David Holmes of Oliver Wight Americas, says: “All too often, processes and tools are addressed with vigour but people and behaviour not so. There is a tendency for an over-dependency on computer-generated forecasts, but without the intelligence, the forecast is just a number. Based on algorithms, forecasting tools take elements of history to fit out a projection of the future, but history doesn’t always repeat itself. Knowledge and processes must be in place before the right tools can be specified and a reliable statistical forecast established.”

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