Financial Times

Emerging trends in global logistics
By Shenali Waduge
Opinion One of the benefits of working with a company whose operations span six continents is that you're never the last to know about anything that's of global business importance. In fact, I frequently have a front-row seat! But that doesn't mean that international logistics has lost its ability to surprise me.

For example, who could have predicted the onset of SARS and how that would affect air travel to and from Asia? Who could have foreseen the enormous disruption the U.S. West Coast port labour dispute would create? And, before Sept. 11, 2001, who would have imagined a world with the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Container Security Initiative (CSI)? These events are key evidence that all of us working in global supply chain management have chosen one of the wackiest, most volatile professions around. And based on the emerging trends I see from speaking with our many multi-national customers, it's not likely to become a calmer career choice anytime soon.

More security
There's probably no single challenge that U.S.-based supply chain managers have addressed more often in 2003 than security - and with good reason. After the terrorist attacks on the World Trade Centre and the Pentagon, the standard definition of logistics, "getting the right product to the right place at the right time", was amended to include "without compromising our national security".

Don't expect the emphasis to disappear anytime soon. Far from being a sign that we have reached a more secure point in the supply chain, regulatory initiatives such as the C-TPAT and CSI are harbingers of things to come.

In coming years, U.S. Customs will work even more diligently to push security measures well beyond America's borders, even to the overseas factory floor.
What this means to you as a shipper is simple: Make sure you start to build increased security measures into your budgets and business processes now, because they will be a factor. Just as important, do what you can to be part of the solution, not the problem, by getting a better handle on the security readiness and compliance of your overseas manufacturing operations and suppliers.
If you don't do it yourself, it's quite likely that the government will do it for you in terms of increased legislation, a trend that could substantially stall the progress of international trade.

While globalization has been a buzzword during the past decade, only recently has it become more of a reality for most companies. Granted, some companies have had established and strong international supply chains for some time. But many others are just beginning to explore their global sourcing options.

China's entry into World Trade Organization in late 2001 has played a key role in changing that, and the shifting of production there will almost single-handedly accelerate the globalization of supply chains.

As one of the world's biggest economies - with close to 1.3 billion citizens -- it is quite simply a potential market that is too large to ignore. And as the country that currently offers the best manufacturing cost efficiency, it has quickly become the world's factory floor.

There are only two caveats.
The first is that while China is an excellent Plan A - and is in fact probably everybody's Plan A for global manufacturing right now - you cannot and should not ignore the possibility that other global markets such as Latin America, Eastern Europe, India and Vietnam might be viable points for some of your sourcing. This is especially true in light of the fact that geographic diversification has proven to be such a sound logistics strategy in recent years.

The second caveat is that while manufacturing in China does provide a number of attractive benefits, the country has much work to do before its transportation infrastructure and logistics practices work as efficiently as they do in other countries.

For example, according to a white paper released by APL Logistics, APL and Drewry Shipping Consultants, it can cost 50 percent more to transport goods inland in China than it does in Europe and North America - with a lower quality of service.
These inefficiencies must be factored in as you map out the flow of goods to and from that country.

Contingency and flexibility
A few years ago, one of our company's executives gave a speech in which he predicted that just as "location, location, location" were the watchwords for real estate, "contingency, contingency, contingency" were the watchwords for logistics. He didn't realize how right he was! Due to last year's port lockout, companies now know that freight can sometimes be tantalizingly close yet still out of reach.

And thanks to destabilizing events such as the war with Iraq and the spread of SARS, all of us are painfully aware that everything from politics to health can temporarily leave even the best-designed supply chain dead in the water.

It is safe to say that Murphy's law has officially been ratified - and that contingency planning is becoming more of a requirement for all companies whose supply chain extends further than next door. Be prepared for more short, sharp shocks to your supply chain, especially as you or your suppliers become increasingly global - because geopolitical and economic uncertainty are now about as certain as death and taxes.

Among other things, make sure you have a sound contingency plan in place for your logistics processes - one that is designed to accommodate the realities of today, not the hypothetical suppositions of three to five years ago. In addition, try to build some flexibility into your supply chain -- which brings me to the next trend.

Just-In-Time vs Just-In-Case
Back in the 1980s and 1990s, the whole push in logistics was to squeeze as much inventory carrying cost out of the supply chain as possible - a feat that was often accomplished by increasing inventory velocity and trying to eliminate long storage times.

Although only a few manufacturers ever reached the point of true just-in-time inventory, it was definitely the ideal to which all companies aspired. Times have definitely changed.

Now that more companies are sourcing globally, just-in-time is a harder feat to pull off, because the further away inventory gets, the more variables can affect its on-time delivery. Just as important, now that we live in more volatile times, most companies feel less comfortable operating without higher levels of safety stock.

In short, many supply chain managers have more fears about their inventory getting where they need it to be. And increased fear equals increased inventory.
The good news is, having just-in-case inventory isn't necessarily a bad thing, especially not if you source globally.

For example, by positioning some of your just-in-case inventory at points throughout the globe, you can help your company achieve some more aggressive customer service goals, because you won't have to move mountains to reach customers with last-minute needs.

However it's also important not to restrict your contingency planning to the use of just-in-case inventory, because it's both expensive and short-sighted. As an alternative, you may wish to experiment with the concept of just-in-case suppliers or vendors. More companies are now testing the concept of routinely diverting at least part of their sourcing and transportation to back-up suppliers or providers, a smart move that ensures they already have an established relationship with those vendors if they should ever have to call upon them to pick up some slack.

Speaking of relationships with outside companies, it's important to note that a growing portion of companies' supply chain dollars are going to outsourcing - a trend that I am happy to see for obvious reasons. According to a 2002 Cap Gemini Ernst & Young and Georgia Tech study, nearly two-thirds of all logistics expenditure in North America will be directed to outsourcing by 2007 - a marked contrast to the 43 percent that companies reported in 2002. And in Western Europe, 74 percent of all logistics dollars spent in 2007 will go to outsourced logistics providers.

There are many reasons to explain this shift - among them the fact that there is growing evidence that working with a 3PL doesn't necessarily mean relinquishing your control. And, as companies become more comfortable with 3PLs, they are providing more opportunities to work collaboratively with them, which allows 3PLs to add more value and gives them a better reputation.

But I believe one of the most compelling reasons has to do with the fact that as companies begin to negotiate more complex global markets, they are finding it helpful to have 3PL partners that know the territory.

For example, in China, several leading 3PLs have worked quite hard to negotiate key alliance relationships - and to invest in core assets to ensure that their clients have easier access to quality logistics facilities and services. It also doesn't hurt that many 3PLs and transportation providers are well-acquainted with the ins and outs of security regulations.

Most are C-TPAT certified. Most know the 24-hour Advance Manifest Rule like the back of their hand. And most are carefully screening everything from their employees to their suppliers. As a result, while companies do not necessarily have a guarantee of security when working with a 3PL - no company can guarantee that - most 3PLs do provide their clients with another line of defence.

These are by no means all of the factors at work in the international logistics arena. They are instead a quick overview of what I deem to be most significant based on my own experience. Just as important, they are a snapshot of logistics as it exists today - not an iron-clad promise of things to come. If the last few years have taught me - or any of us - anything, it is that the field of logistics is as volatile as the weather. You can certainly forecast what's ahead and keep an eye on the radar. But it's also important to expect a few surprises along the way.

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