Today's frantic pace of globalization, fueled by rampant outsourcing, has created unprecedented complexity within the logistics process and spiraling transportation costs. A top challenge for best-in-class enterprises is taking back control of the logistics process. Firms are under tremendous pressure to create real-time logistics visibility within their organizations by closing the information gap between manufacturing and the rest of the enterprise and this pressure is increasing daily as the global business day becomes ever more frenetic. To retain their competitive edge in a global market, best-in-class enterprises are adopting new technologies that bring logistics operations in line with the rest of the company's operations to simplify delivery processes and create efficiencies that can deliver real cost savings.
Global Logistics Challenges
Historically, the field of global logistics has not benefited from long-term study or research due in large part to its nature of constant motion. Lack of formal training in the profession has exacerbated its inherent challenges. In recognition of how complex the logistics field has become, the Massachusetts Institute of Technology recently introduced a new Masters degree dedicated to logistics in the school of engineering. But those currently on the logistics battlefield have been fighting on the front lines without the benefit of formal tools they can use to handle today's complex delivery challenges.
Challenge 1: Offshoring and Outsourcing Increase Delivery Costs
With ongoing market pressure for the rapid development and deployment of goods, many companies have moved their manufacturing overseas to save costs on materials. For some best-in-class enterprises, offshore sourcing has gone from 5 percent to almost 50 percent of their materials' spend. Despite the cost-reduction gains from sourcing materials offshore, companies lacking real-time visibility across their logistics operations, together with the ability to optimize international transportation costs, can inadvertently grossly underestimate total landed costs. In addition to transportation fees, enterprises face import duties, taxes, fees, carrying costs, quality costs, supply risk and safety stock as other direct cost factors — costs that can add up to 50 percent, or more, of COGS (cost of goods sold).
Challenge 2: Globalization Impacts Shipping Lanes and Costs
Currently, there is an enormous imbalance between East-West trade. As China's trade activity has increased around the globe, the westbound shipping lanes to the United States have become congested, driving up logistics costs. On the other hand, eastbound delivery routes have been severely discounted so that empty containers can be returned to the Far East. As the world's trade activities proliferate, trade lane changes, which directly drive transportation costs, will continue to impact logistics costs.
To compound the challenge, import regulations, with their extensive use of exceptions and "provisional" rules, as well as the application of non-linear tariff formulas, make it difficult to predict logistics costs. This adds a level of complexity that makes cost certainty in these areas difficult to predict over any length of time — with actual costs often not known until the actual billing has been received.
Fluctuating trade imbalances — not only with China but all around the world — have prompted best-in-class enterprises to look for a technology solution that can provide visibility and control for wildly changeable logistics costs.
Challenge 3: Absence of Centralized Cross-Carrier Logistics Information Impedes Visibility
Many of today's logistics processes are handled manually; logistics data for freight shipments do not flow into the other operational systems of most firms, thus undermining the ability to identify trends, forecast costs or get an overview of delivery activity. Invoices, reports and miscellaneous logistics paperwork come in different formats: static PDF files, sparsely populated Excel spreadsheets, illegible receipts and more. Without data that can be easily reformatted into reports, most enterprises lack the visibility needed to make truly informed decisions about how to reduce transportation costs.
Challenge 4: Limited Resources Means Relying on 3PLs
Another challenge faced by logistics departments is dwindling staff. Because many enterprises underestimate the level of logistics sophistication that their globalization efforts demand, they downsize the one department that needs more resources — not less. Some enterprises have turned to third-party logistics (3PL) companies for help. Unfortunately, the core competency of 3PLs is to expedite traffic, not necessarily to reduce a company's transportation costs.
Challenge 5: Escalating Fuel Costs Increase Transportation Fees
Rising energy costs result in higher transportation fees for trucks, ships, trains and planes. Since enterprises cannot alter the limited supply of fuel in the world, they're turning to technology to help them mitigate other components of their logistics cost equation.
Three primary forces had to converge to provide best-in-class enterprises a cost-effective, practical solution to their logistics' problems: 1) a secure, ubiquitous World Wide Web with a fast connection, allowing easy access to real-time information; 2) the ability to organize that data into a format that assists managers to make intelligent, well-informed decisions; and 3) technology advances to support permission-based access to a global user community.
Ubiquity of the Internet
Ten years ago, when the Internet was still an unproven entity, it was viewed skeptically by enterprises. Since then, dramatic improvements in firewalls, IP protocols and load-balancing tools have made the Internet more secure, reliable and scalable. Browsers are now an accepted application user interface. And high-speed access has accelerated the adoption of the Internet as a practical day-to-day business tool. Today, enterprise employees use Explorer, Netscape, Safari and other browsers to quickly search for information, buy goods and even pay bills.
Emergence of Web-based technologies
The declining costs of bandwidth have made it possible for complex technologies to be delivered over the Web. These technologies are being developed and deployed by application service providers (ASPs). Enterprises that used to invest costly resources to develop their own applications or buy off-the-shelf software solutions now subscribe to hosted applications for a fraction of the cost of older technologies.
The ASP revolution made it possible to deliver information-rich, price-comparison engines over standard Internet browsers and — this is the important benefit — start making sense of the information. One of the more effective products of this revolution was the real-time reverse auction. Overnight, anyone with an Internet connection could find product information and compare apples-to-apples costs for travel on Expedia and Travelocity or hunt for bargains on eBay. Information that had previously been held hostage by a select few was now available to everyone online. In a free information society, competition abounds.
The Next Step: SaaS
Software-as-a-Service, or SaaS, is the next evolutionary step of the ASP model. Cutter Consortium, an Arlington, Mass., research firm, states that the transformation of the software business model from packaged products — like off-the-shelf solutions — to Web-enabled subscription services like SaaS is one of the most significant present-day trends in the IT industry because of all the benefits they offer enterprises:
- Low overhead and involvement
- Little need for IT manpower
- Immediate return on investment (ROI)
- Guaranteed cutting-edge technology
SaaS applications provide support for multiple users, multiple applications and multiple platforms. Since they run on the Web, enterprise employees can use them on any computer with Internet access. The SaaS provider takes care of all updates and maintenance to the system; the enterprise is off the hook for IT support. In today's rapidly changing world, updates can be made at a moment's notice at no additional cost to users.
Indeed, best-in-class enterprises have found that using Web-based technologies can shorten their deployment times and minimize total cost of ownership (TCO) by eliminating the upfront costs of hardware, consulting support and network setup. In fact, the Gartner Group claims that application outsourcing can actually reduce TCO by 30 to 50 percent, depending on the complexity of the application.
Consumer applications have paved the way, but sophisticated B2B (business-to-business) applications are now becoming commonplace in the global economy. For example, Salesforce.com is being used for enterprises as large as Cisco Systems. The pharmaceutical industry has also been using the ASP model to advantage. McKesson, one of the nation's largest pharmaceutical distributors, now allows hospital and retail pharmacies to search for and order products with real-time pricing and availability data. Not only is this process saving time, money and effort, it helps deliver the right medication to the right patient every time.
Case Study: Maxim Integrated Products
Maxim Integrated Products is a multi-national leader in the design, development and manufacture of integrated circuits. The company boasts 2005 net revenues of more than $1.6 billion and over 8,000 employees across facilities in the United States, the Philippines and Thailand. Diverse geographic locations made it challenging for Maxim to control shipping and distribution. Like many best-in-class enterprises, Maxim needed help with the following:
- Centralizing decision-making for how goods would be shipped and which carriers would be used
- Enforcing strict parameters on shipping methods and vendor selection
- Reducing overall costs of shipping and distribution
- Simplifying management of volumes of weekly invoices from multiple vendors
Maxim chose to adopt a SaaS shipping and freight management solution from Agistix instead of developing proprietary software. Within hours of implementation, Maxim was able to enforce a uniform policy for shipping methods and vendor selection. Gradually, Maxim realized increased pricing visibility for small-parcel shipments and began using the spot-quote market for heavy freight. By the end of one quarter after implementing the Agistix on-demand solution, Maxim had reduced shipping costs by more than 28 percent.
Within six months, instead of processing up to 2,500 shipping invoices each week, Maxim began receiving a single electronic invoice for all weekly transactions. With this change alone, this world-class enterprise reduced accounts payable processing time from 70 hours per week to five minutes per week, generating savings of up to $20,000 each month.
Best-in-class logistics processes are now available to any enterprise. Global companies know that the operational complexities caused by globalization must be managed proactively. They realize that to remain competitive in a global environment, they must optimize their supply lines to build in more flexibility and efficiencies. The road to flexibility and efficiency is technology; in particular, technologies that unite multiple processes and systems into a common information and real-time decision support network that supports all internal and external relationships.
About the Author: Frank Cirimele is a recognized expert on global trade and the practical application of effective Global Logistics Strategies. He has represented the United States on the United Nations International Trade Procedures Working Group (UN/CEFACT ITPWG), which addresses Trade Facilitation and global e-commerce issues. This respected UN group provides strategic and functional guidance to government and business entities on maximizing the efficiencies of an automated trade and logistics environment. Frank was also selected as a private sector expert by the U.S. Department of Commerce, International Trade Administration to join the Free Trade Area of the Americas (FTAA) Committee on Electronic Commerce. www.agistix.com.