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Surviving in the logistics business — a constant challenge

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Janis Nathalie T. Moises

Suits The C-Suite

Given the rapid changes in technology today, doing business the traditional way is not an option for companies seeking to survive, particularly those in the logistics business such as third-party logistics providers, freight forwarders, trucking and transport companies, to name a few. These companies should be able to respond to the changing customer requirements and cope with how disruption is changing the way they do business.

So how should companies compete? For those engaged in logistics, the primary consideration is to re-evaluate how they respond to changing customer demands. They will also need to consider other factors, such as fuel cost, distribution cost, inventory and landed costs. Fuel cost, in particular, has been a top consideration for several years as fuel prices continue to be volatile on the global market. With tighter transportation budgets and the country’s still limited infrastructure, this may be a compelling reason to seek new ways to do business.

In a study that was conducted by EY Global, Trends in Transportation & Logistics, there are three main factors for a company to be successful in the logistics or transportation sector: (1) Flexibility; (2) Efficiency; and (3) Differentiation — or the FED model. In terms of adapting and responding to the dynamic customer needs and requirements, companies must be able to quickly meet different customer requirements, striking a balance between the right cost, time and place, to create maximum added value for the company.

Building flexibility entails strategic, tactical and operational actions and initiatives. There are a number of initiatives to address flexibility: use of multiple modes of transportation; alignment of labor force skills to better meet changed customer demand requirements; integration of internal systems; and increase in collaboration with key customers.

In addition, technology plays a critical role in value creation since it affects both efficiency and flexibility. Technology facilitates the physical and administrative management of the shipment and cargoes. For example, technology is used to keep track of shipments and enables logistics companies to plan quicker response rates and better use of resources.

The results of a study conducted several years ago are still applicable today. It reported that the primary tools and methods used to manage domestic distribution are encouraging, as fewer companies are using manual methods or spreadsheets to manage distribution. However, focusing on flexibility alone is not sufficient for a company to be in a transformative state toward long-term success.

Achieving the desired level of efficiency necessitates a deep understanding of the cost to serve (distribution cost). Companies should focus more on truly understanding their profitability. For instance, companies that can achieve greater productivity for every peso spent and be able to ship or transport more volume in a shorter period of time will have positive effects on their bottom line.

There are also other factors that may challenge efficiency such as volatility in energy (fuel) prices, demand uncertainty, and other regulatory issues that are beyond the control of the company. Logistics companies should be able to maximize utilization of their fixed assets and variable resources as well as consider investing heavily in technology to improve operational efficiency, while keeping up with the changing needs of customers.

The ultimate goal of the company is to combine the power of the three main ingredients of the FED model to create an organization that produces long-term and sustainable value for itself. In order to do so, companies must be able to develop and deliver logistics and transportation services that are viewed by customers as distinctly different from those of competitors.

Several logistics companies consider their distinctiveness based on the services they offer. For example, setting up a one-stop-shop that will cater to the needs of customers. Differentiation of service recognizes that the cost to serve is not the same for every customer. It is also one of the important things to consider in maximizing a company’s profitability.

In the same EY Global study mentioned previously, the top five impediments to developing robust capabilities in the area of differentiation are: lack of integrated processes; objectives that vary across business units; cost of implementation; lack of standardized data; and lack of organizational strategy.

Increasing distribution cost has been a major issue for some time now. The country’s investment in transport infrastructure remains low and certain modes of transportation, such as rail, fall far short in providing a national network. The quality of the Philippines’ freight transport infrastructure is also poor in comparison to regional competitors such as Malaysia or Singapore. Accordingly, the government’s “Build, Build, Build” infrastructure program seeks to address these issues by building more railways, improving urban mass transport, building or improving airports and seaports, bridges and roads. The business community looks forward to the program’s success to increase competitiveness while providing more value to consumers.

So how do companies address the issue of rising distribution costs? Or how do they at least generate enough revenue to compensate for increasing distribution costs?

One way is to determine the best routes while considering cost and delivery time windows. Technology has enabled logistics companies to plan for quicker response and better use of transportation resources. Logistics requires an intensive amount of capital as companies need to invest heavily in equipment and technology to be able to provide different types of services using different modes of transportation — road, rail, air and sea. In addition, companies need to invest in strategic sites and locations for pickup points and warehouses, in order to facilitate more efficient handling and temporarily storage of cargoes.

While there has been a noticeable change in how logistics companies have evolved, the challenges to be flexible, efficient, and different remain. These should be addressed in light of constant technological disruptions and fluid customer needs in order for companies engaged in logistics to achieve long-term success.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

 

Janis Nathalie T. Moises is a Senior Director of SGV & Co.