Back to basics: Logistics as it should be
LOGISTICS is the backbone of any successful company, and, according to Michael Porter, a prominent academic best known for his theories on economics and business strategy, part of the primary activities of a company’s value chain is managing its inbound and outbound logistics.
Logistics, next to transportation and storage, adds value to a company’s supply chain by protecting product integrity, availability, short customer order lead-time, after-sales service level, sustainability, and supply chain costs.
However, continuous cost cutting in logistics and squeezing the last ringgit out of transporter and warehouse engagement has led to companies being left with poor supply chain performance.
Continuous cost pressure also results in local logistics service providers under-investing in transportation and warehousing equipment, information technology (IT), and research and development (R&D).
How to break this negative spiral?
The success of e-commerce in Asia, where the customer often pays significant delivery charges, shows that the average consumer sees the value of logistics, and is willing to pay for the service it provides.
In order to escape poor margins, logistics service providers have moved in great numbers into e-commerce logistics, as a flock of sheep into a fresh green pasture.
The e-commerce boom promises higher margins and profits for logistics service providers.
The future will tell if e-commerce logistics will be this game changer that will bring profits back to logistics service providers, or later known in history as the e-commerce logistics mania, or bubble.
Nevertheless, I would like to advocate the need to change the industry paradigm that logistics should not cost any money.
Research shows that companies that organise their logistics better than others have lower total supply chain costs and are more profitable.
Pure cost-cutting in transportation and warehousing leads to lower profits in the long run.
High-performance logistics helps companies organising supply chains more effective and efficient, minimising inventory imbalances, avoid an escalation of costs and ensure high customer service levels.
Then, how would companies do it differently?
High-performance logistics requires a strategic fit between corporate strategy and logistics design, a full alignment with market requirements and an effective planning and control of goods flows in the supply chain.
Logistics excellence requires effective collaboration with supply chain partners, as well as competing supply chains, in order to achieve synergy advantages.
Manufacturers and brand owners need to work together with their logistics service provider as equal partners, seeking to insource logistics expertise, rather than outsource non-core activities.
As argued by Porter, logistics is a core element in the value chain, and should belong to the core business of a company.
Hence, logistics and supply chain management deserve to be a top priority area for businesses and a recurrent topic in boardrooms.
Management needs to be better educated on logistics concepts, which should be reflected in masters in business and executive programmes.
Surprisingly, logistics and supply chain management are often not mandatory subjects in these programmes.
Round tables and conferences could further contribute in sharing the latest knowledge and innovations.
In the meantime, further consolidation of local logistics companies is expected in Malaysia, with the purpose to obtaining economies of scale for local logistics service providers.
This allows logistics service providers to make the long overdue investments in equipment, IT and R&D.
Due to the attractive value of the ringgit compared with other major currencies, local logistics companies will be attractive takeover prey for Singaporean, Chinese and Japanese logistics service providers.