Thursday, 16 October 2014

Is outsourcing logistics worth it?

Time was when outsourcing one's logistics operations to a third party logistics (3PL) contractor was thought to be more costly than an efficiently run in-house operation. After all, there is the contractor's profit margin to add to all the usual running costs which did not exist before outsourcing. So why, then, did outsourcing catch on or was even tried in the fist place? In Britain, one key driver was the turbulent record in transport labour relations which left companies a hostage to fortune and so they were only too willing to break that mould by outsourcing. It worked in the sense that labour relations became much calmer. It caught on because most companies using their own in-house logistics solutions were not particularly super efficient in that function partly, perhaps, because they saw it as a side show distraction from their main function of manufacturing products.

Most 3PL contracts are for a minimum of five years and it is possible that costs within the first year could be higher than when the operation was run in-house. But as when choosing or renting new forklifts, the focus of attention should be on the life cycle costs over the five years, not the initial cost, but how does one know what those costs may be four or five years hence and how flexible will the 3PL be to meet wide fluctuations in demand for the clients' products?

The problems of costs and uncertain product demands can be eased at the contract negotiating stage, which admittedly is a highly complex business that demands great care. A key element in success is the degree of trust -- in the form of confidential information -- that customers must extend towards the contractor, which is immense. Without that gesture the contractor will not be able to provide an effective service. Secondly, the partnership should involve pro-active suggestions, agreeing and implementing efficiency savings which are tracked throughout the contract's life and the monetary benefits shared with the client on a fair basis. This is where probing of potential 3PL contractors is critically important. The winner of the contract should have a long-term track record of not only reliability but also be able to prove how good they are at making big savings for their existing clients. It would also be comforting to the client to know if the 3PL has a wide spread of warehouses strategically located nationwide as this would enhance the flexibility it could offer, partly through shared user facilities, which is so important to cope with seasonal fluctuations in demand or long-term changes caused by adverse moves in the economy.

A third caution which every outsourcer must never neglect is the financial stability of the potential 3PL contractor. Size is no guarantee of solidity. Back in the 1980s, the high-flying logistics operator, Rockwood Distribution, collapsed, leaving its clients with embarrassingly empty shop shelves and frantically having to find alternatives. Financial investigations into prospective 3PLs should never be left to just bankers' references. There are various formulae which can predict bankruptcy up to two years ahead, one of which, the Lis formula, named after its creator, Roman Lis of the Manchester Business School, is said to be 90% accurate, and that is close enough for Government work. It takes four key ratios from a company's annual accounts, each of which is multiplied by a certain coefficient and the sum of their products is then compared with a cut off point of 0.037. The more a company's result is above that cut-off point the sounder it is. Below, the amber lights start flashing.

If the choice of 3PL has been wise just what benefits can be expected? A good example among many is how the 60-year old British, family-owned business of Howard Tenens (HT) transformed the logistics of Costa Proud, which supplies its entire ingredients supply chain. During the initial 12 months of a five-year contract HT achieved a smooth implementation of both a new IT system and 3PL provider with no loss of service. Stock was centralised from nine locations to one. Stock availability reached 99.9% and there was a 50% cut in stock holding at partner sites. Delivery refusals fell by half and annual logistics costs by 30%. There were also considerable CO2 savings which is a key attraction to blue chip clients keen to establish their 'green' credentials. HT, in fact, leads the 3PL industry in having 88% of its heavy goods fleet over 18 tonnes with dual fuel capacity. It has invested in re-fuelling stations for both CNG and biomethane which are all open to third parties.

So, to the question is outsourcing worth it? the answer is a resounding yes, provided the partnership is truly pro-active and the choice has not been made on price alone as the dominant factor in an industry where competition has always been intense and so likely to see a 3PL's margins under extreme pressure.

Monday, 13 October 2014

Britain's food supply chains face grim times over price wars

Missing a favourite food item from one's usual UK supermarket is now more likely than ever to leave shoppers victims of an even harsher squeeze on food suppliers brought on by the intensifying price war between the food discounters and the four dominant supermarket chains. Losing market share to discount arrivistes like Aldi and Lidl, Tesco, with around 28% of the UK food market, are fighting back by squeezing suppliers not only on prices but also by numerous charges, including even for barcode changes and prominent display of products, along with the odious favourite of deliberate late payments that could easily bankrupt small supplier companies. Reportedly, there are almost 60 ways that supermarkets extract money from suppliers.

It has been a bullying practice long exercised by the big retailers and is symptomatic of a laissez-faire attitude of the Competition and Marketing Authority which took over responsibility from the Monopolies and Mergers Commission. In the past, any merger that would have meant control of 25% or more of the market would trigger a referral to competition authorities, yet Tesco currently has around 28% of the UK market, admittedly acquired through organic growth rather than by takeovers, but it nevertheless shows the unhealthy status quo where just four market leaders, Tesco, Asda, Sainsbury and Morrison control 76% of the British market. Such dominant control by a few retailers is also typical in mainland Europe.

For far too long the big four have exercised unhealthy control over Britain's food basket, leading to lack of competition and what at times must have seemed like a cosy cartel where price differences for identical products were derisory and special offers limited to only a handful of products for a very short period. Treating their customers as though they were addle-headed, supermarkets would uniformly push through steep price rises by significantly cutting the product weight but still maintaining the previous prices and the packaging size so as to disguise any real price rises.

In the past, the big four have sometimes acted in the shoppers' interests by resisting suppliers' price increases, ostensibly caused by commodity price rises, a practice that might have encouraged suppliers to introduce efficiencies. But it is clear that only if larger suppliers routinely stand against retailer demands for price cuts and charges will they succeed (albeit at the expense of smaller suppliers too weak to stand up for themselves) but at a risk of losing business through product delisting. Premier Foods reportedly lost £10 million in three months when Tesco delisted its Hovis, Mr Kipling and Oxo products three years ago. Tesco also, reported the Sunday Times, suspended 75 Princes' products, including baked beans and Cross & Blackwell soups. In denying their customers their favourite foods Tesco is insouciantly breaking the first law of marketing -- give the consumers what the consumers wants and not what Tesco thinks is best for them.

This is where consumer power, helped by social networks, can change the unhealthy status quo between oppressed food suppliers and the big four retailers. When shoppers cannot find their favourite foods at their usual supermarket they should put them under notice that they risk irretrievably losing their business to competitors. Better still, if they have not already done so, they should switch to the discounters like Aldi and Lidl who have no pressing interest in squeezing their suppliers and where prices are permanently lower than the big four by around 30%. This is important in one other sense. The big four will fight back and the only way to do so in a shopping environment that has seen a paradigm shift where price is king is by sharp, prolonged price cuts. That could hurt the discounters but they have one impressive weapon in their armoury that their rivals lack -- a smart logistics/business model. This model took Jack Cohen's (Tesco's founder) slogan of 'Pile them high and sell them cheap' one step further -- and sell them fast. The discounters' no frills shop displays and small car parks not only mean lower start up costs but crucially their limited 1,600 or so SKUs (stock keeping units) compared with the big four's 40,000 SKUs, are concentrated heavily on fast movers whereas much of the big four's stocks are slow movers, and money tied up in stock puts money to sleep, to the extent it could dwarf all other warehouse costs combined. It is a model that the big four may have to emulate to survive in reasonable shape and already there are signs of such a move. Sainsbury, for example, are joining forces with the Danish discounter, Netto, the first of the Continental discounters to set up in Britain some 20 or so years ago. Others are looking to cut back on their big store developments and concentrate instead on much smaller convenience stores.

The old Chinese curse of "May you live through interesting times" is about to fall on Britain's food retailing, but the risk is collateral damage to food supply chains, where pressures may lead to worse scandals over false food labelling, less consumer choice, and even human trafficking, oppression and slavery in the supply chains.