Rationalising your supply chain

Posted on 17 Jul 2012 by The Manufacturer

End to end supply chain management is a dream for many and the recession has seen significant consolidation in manufacturing supply chains as companies seek efficiency. But how to you ensure that supply chain partners are maintaining a competitive offering and, crucially, how do you ditch those who don’t without disrupting a leaned out operation? Brian Templar, chairman at logistics consultancy Davies & Robson discusses.

Understanding and managing the interplay between stockholding locations, service levels and stock or the effect of order lead times and reliability of different suppliers on stockholding policy has resulted in lower operating costs and improved service levels for many manufacturers in recent years.

In addition, adopting an integrated approach across different organisations has resulted in more efficient product handling, reduced packaging costs, increased manufacturing and stockholding efficiencies and the more efficient use of assets.

But to assist the process there has also been a natural tendency to reduce the number of suppliers – not least logistics service providers. Where once an organisation had a whole series of regional providers, the trend now is for a single logistics supplier. 

As a result, these providers have developed their capabilities to design and provide solutions on both a national and international basis, effectively offering customers a one-stop-shop for all their logistics needs.  In turn, organisations have dramatically slimmed down their in-house resources, relying instead on the planning and management capabilities of their logistics providers.

While a single source of supply for logistics services may provide considerable benefits, it also carries risk, particularly when there are concerns with regards to cost or service. Losing the ability to change is perhaps the greatest risk involved.  

Supply chains today are leaner than ever before and failure can quickly have a dramatic impact on manufacturing operations, service levels and, ultimately, financial performance. It is therefore not surprising that companies are cautious when it comes to change and often opt for ‘the devil they know’ rather than risk a major upheaval and the possible risk of failure.  

So, how do you avoid this situation?

Competition is key

Although most companies now see the benefit of working closely with their suppliers, competition is still the key factor in driving innovation, service and efficiency improvement. 

Once a service provider is no longer concerned with competition, complacency can soon set in so organisations must ensure that the competitive process is still operable, irrespective of how comprehensive or integrated their supplier’s service may become.

Big not always best 

The first step in this process is to carefully consider how an outsourced operation should be structured.  Unless a logistics provider is able to gain true operational efficiencies from the managing an entire operation, it may well prove more effective to break the operation down into discrete packages that are managed separately.  

Few logistics providers are truly global and, given that the majority are paying the same for fuel, utilities, property and labour, irrespective of size, economies of scale are often a lot less than first thought. Indeed, small private companies often have a lower cost base as a result of less overhead and lower requirements for return on capital. 

There is often little advantage and, in some cases actual detriment, in outsourcing an operation where the lead contractor simply subcontracts it to a third party.  Structuring the operation into different outsourced contracts, with different termination dates, effectively spreads the risk and means that more suppliers are available to step in if the operation gets into trouble. Typically the choice is between different suppliers for different types of traffic flow or different suppliers for different geographical areas.

Keep your eye on the ball

You should be careful not to lose visibility of what is taking place in the operation and, with it, the ability to conduct a robust and rigorous tender process in the future. 

The second step, therefore, is to ensure that the outsourcing model allows you to retain a detailed understanding of the operation, resources employed and costs incurred, even under a closed book pricing system, in order to be able to provide the necessary data and information to possible replacement contractors.

Careful consideration should also be given to ownership of the IT systems; while it may be attractive to allow your contractor to provide the software, it significantly increases the risk of change.  Changing both the physical resources of an operation, and the IT systems necessary to run it, effectively quadruples the operational risk.

A smooth handover

The third step is to ensure that the contractual agreements contain the means to ensure an orderly handover to an alternative contractor.  Most contractors will manage the exit professionally but it is still a good idea for the process to be formalised in the contract.  A well prepared exit plan is an essential ingredient of a smooth handover.

Fail to plan, plan to fail

Finally, operational change is always dependent upon good planning and good project management.  Allowing enough time and resource to properly plan the change will greatly reduce the risk of operational failure. If the necessary support is not available in-house, consideration should be given to the engagement of external resources.  A combination of consultancy and interim management, engaged well in advance of the operational change, will significantly reduce risk.

While ensuring that your logistics service provider continues to innovate and provide good value for money does not mean changing every time the contract comes up for renewal, your contractor should be aware that you can and will change if necessary.

Changing Contractor; a 10 point check list to minimise the risk

  1. Be clear why you are changing. Ideally it should be because your new supplier will be a better strategic partner in the future rather than simply provide the same solution at a lower cost
  2. Ensure that you fully understand the services that you require and what is available in the market place.  Have you communicated your needs correctly?  Many companies are not fully aware of the complexities of their own requirements
  3. Prepare a data set that is truly representative and that covers periods of volatility and unusual demands. This data set may form an essential part of the contract and help protect you from demands for additional payments
  4. Satisfy yourself that your new contractor has the resources, skills and systems necessary to carry out the operation. Have you spoken to other customers that have gone through a similar process?
  5. Ensure the charging system provides incentive to the contractor to drive performance whilst protecting you from unexpected additional charges. If you are adopting open book, ensure the charges are linked to productivity standards
  6. Prepare a comprehensive legal agreement that clearly details the responsibilities and obligations of both parties, together with performance requirements and penalties for failure.  Ensure the operational requirements are in sufficient detail to avoid claims for services that the contractor had not costed in to their tender response
  7. Ensure you have identified the hidden costs of change; e.g. TUPE obligations, resource transfers, termination liabilities and systems interface costs
  8. Ensure an implementation plan has been properly prepared and forms part of the legal agreement.  Allow sufficient time for an orderly transfer
  9. Ensure that the new contractor has identified the necessary project team to support the operational staff.  Do they have the necessary experience?
  10. Ensure that you have been fair to your existing contractor in the tender process.  Retaining the support and cooperation of your existing contractor will help reduce the risk of change.  Fairness and honesty will go a long way in minimising an acrimonious and damaging split.