Moving with the times

The rapid pace of communications technology has made the world a tiny place. That makes it easy for companies to extend their supply chains throughout the world, in the effort to reduce costs. It’s a complex task which they would much rather outsource to third-party logistics operators.

By John Yip

Supply chains in a flattened world
To quote the title of Thomas Friedman’s best-selling book, “the world is flat”. With his characteristic style of presenting complex business ideas in laymen terms, Mr Friedman made the observation that technological advances such as the Internet and handphones have accelerated the pace of globalisation, and compressed what was already a small world into something even tinier.
This trend is causing immense competitive pressures on businesses in mature economies like the United States, while creating a wealth of new opportunities for rapidly growing economies like India and China. In particular, the easy flow of information in a “flattened” world has made it possible for complex supply chains to arise, particularly for large multinational companies (MNCs), which have set up their manufacturing and assembly facilities in India and China to leverage on cheap labour and service costs, often-times half a world away from intended destination of the finished product.
This has turned the logistical operations of these MNCs into an enormously daunting affair, where raw materials and semi-finished goods have to be transferred from one part of the world to another, as fast as possible, and at the lowest possible cost.
And to add further challenge, most of these companies have adopted “just-in-time” methods of lean production. In other words, they attempt to build to order from customers, rather than trying to guess what will be in demand and supplying it from accumulated stock. The benefits? Near-zero inventory costs, due to the drastically reduced need for storing both incoming materials and outgoing stock. The disadvantage? The massive risk of failing to meet consumer demands at the absolute last minute.
Given the enormity of the task, it’s no wonder then that companies would rather outsource their supply chain wholesale to specialised logistics operators, and focus their resources on the core business of product development, design and marketing. In the flattened world of the future, it would not be surprising to find that third party logistics (3PL), or even fourth-party logistics (4PL) operators have become an integral part of the manufacturing and distribution cycle.
Logistics operators need to respond quickly to meet Supply chains in a flattened world
To quote the title of Thomas Friedman’s best-selling book, “the world is flat”. With his characteristic style of presenting complex business ideas in laymen terms, Mr Friedman made the observation that technological advances such as the Internet and handphones have accelerated the pace of globalisation, and compressed what was already a small world into something even tinier.
This trend is causing immense competitive pressures on businesses in mature economies like the United States, while creating a wealth of new opportunities for rapidly growing economies like India and China. In particular, the easy flow of information in a “flattened” world has made it possible for complex supply chains to arise, particularly for large multinational companies (MNCs), which have set up their manufacturing and assembly facilities in India and China to leverage on cheap labour and service costs, often-times half a world away from intended destination of the finished product.
This has turned the logistical operations of these MNCs into an enormously daunting affair, where raw materials and semi-finished goods have to be transferred from one part of the world to another, as fast as possible, and at the lowest possible cost.
And to add further challenge, most of these companies have adopted “just-in-time” methods of lean production. In other words, they attempt to build to order from customers, rather than trying to guess what will be in demand and supplying it from accumulated stock. The benefits? Near-zero inventory costs, due to the drastically reduced need for storing both incoming materials and outgoing stock. The disadvantage? The massive risk of failing to meet consumer demands at the absolute last minute.
Given the enormity of the task, it’s no wonder then that companies would rather outsource their supply chain wholesale to specialised logistics operators, and focus their resources on the core business of product development, design and marketing. In the flattened world of the future, it would not be surprising to find that third party logistics (3PL), or even fourth-party logistics (4PL) operators have become an integral part of the manufacturing and distribution cycle.
Price crunch
Logistics operators need to respond quickly to meet these new competitive trends. Even if the market demand did not exist, they have strong incentives to find innovative new ways to integrate their logistics services.
That’s because traditional logistics operations in freight and warehousing have become very saturated in all developed economies, and no longer offer much room for growth. In Singapore alone, there are over 3,000 international and domestic logistics operators, and there is very little to differentiate their services from one another.
“Price is very important,” said Kevin Cheong, the Chief Operating Officer of the RichLand Group, in an interview with Channel NewsAsia (10 Apr, 2006). “The market is very competitive. A lot of these companies, especially larger companies, very often do not look at 3PLs as partners. They look at them as a supplier, someone who can be switched very easily based on numbers.”
Where Singapore is concerned, this challenge is being tackled by government and industry initiatives to develop e-logistics and logistics parks that would help 3PLs to offer seamlessly integrated supply chain management services.
Smart logistics
Singapore is already one of the most wired countries in the world, so the adoption of e-logistics is not in fact a very difficult affair. Traditional logistics operations have been radically transformed with the use of electronic means of storing and manipulating data, information and knowledge that allow 3PLs to deliver customer-centric services.
A good illustration of e-logistics in action can be seen in what TPG, one of the largest logistics company in the world, does for Ford, the giant American car manufacturer. Ford produces 1,500 minivans a day at its Toronto factory, and to keep it running virtually round the clock, TPG has to organise 800 deliveries a day from 300 different parts makers (The Economist, 5 December, 2002). TPG manages to keep the potential nightmare in smooth control by tying its own supply chain software to Ford’s computerised production system. Every point of the car assembly line is carefully sequenced into a clockwork operation that leaves no room for error.
Beyond the assembly line, e-logistics is also applied heavily in freight operations, which forms the next key aspect of the supply chain. The use of radio-frequency identification and the Internet have radically transformed supply chain management. Transponders carried on cargo, ranging in size from parcels to massive twenty-foot containers, allow both 3PLs and their customers to keep track of the cargo’s trail at any given time. This ability to track the movement of goods helps to greatly improve the ability of all parties in the supply chain to plan their production schedule.
The increased use of tracking devices also incidentally enhances the ability of 3PLs to provide security for goods in transit. This is an especially pertinent concern for the Southeast Asian region, where maritime routes are unfortunately vulnerable to pirate attacks, particularly along the narrow Malacca Straits.
Parks full of movement
The step would then be the development of various logistic parks throughout Singapore, each catering to a key sector of Singapore’s manufacturing industry.
The Singapore-based businesses that make the most use of this level of logistics are in electronic components, consumer electronics (including mobile phones and PCs), pharmaceuticals, and chemicals.
The chemicals industry, which includes petrochemicals, is particularly important for Singapore, as it accounted for nearly a third of the country’s manufacturing output in 2005 — second only to the electronics industry in size. Singapore’s strategic location between the Middle East and growing Asian markets makes the country a logical choice for various chemical logistics companies to base their operations here.
Fast moving targets
In conclusion then, significant headway has already been achieved by locally based logistics companies to latch onto the increasing trend of outsourced supply chain management. But given the rapid changes in technology and competitive dynamics around the world, there is never any time for complacency.
As Mr Cheong observed, “[It] is one thing for 3PLs to build on IT infrastructure to support the supply-chain initiatives, but it is also equally important that Asian manufacturers are ready to do this. Unfortunately, they themselves are also struggling in trying to manage the information well internally.” (Channel NewsAsia, 10 April 2006)
In other words, more can still be done by logistics operators to integrate their services more closely with their client companies. But that also means that outsourced logistics operations in Singapore has the potential to grow even further in the years to come, which is always good news to hear.

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