The term “supply chain management” is out of date. The challenge is on-demand network integration.
Logistics is Resource Management
By Peter Keen
Logistics has moved from being a set of largely administrative overhead functions, such as procurement, freight forwarding, and warehouse management, to becoming core to both service excellence, operational productivity, and capital efficiency. It shouldn’t be handled as overhead and administration.
Logistics is an opportunity for leaders in any sector where “just-in-time” and “on-demand” mean exactly that and not “soon” and “if it’s in stock.” It’s survival for players in commodity markets, such as tea. When prices are within a narrow range for the same good, new products easy to copy, production costs roughly the same for all the major players and customers mostly price-driven, then logistics is the only controllable cost that creates value and offsets operating margin erosion. In the past 20 years, that reality has reshaped personal computers, consumer electronics, apparel, and much of retailing. All this makes logistics key to tea industry success now and even more so for the future.
The logistics industry has adopted four categories to describe service and relationship levels: “nPL.” The P stands for “party”. 1PL is single party logistics – the firm itself or a contractor, such as a freight forwarder or wholesaler, handling a function directly. 2PL refers to outsourcing. 3PL, third-party logistics, extends contracting and relationships to managing not just executing processes. 4PL is today’s 3PL players’ behalf or what’s coming next and will keep them special. Take these as broad labels; there are a lot of overlapping and even contradictory explanations.
1PL: Single party logistics
1PL is where the assets – and expertise – are largely kept in-house. The advantage is control and flexibility. It allows the organization to set clear measures of performance and avoid dependence on a single supplier. Own your own warehouse and operate your own truck fleet for road haulage. It’s not an efficient use of capital and it often makes more sense to lease the building and trucks obtain services from an asset owner that has advantages of scale, financing, and creative tax dancing.
An obvious question for tea firms, including small ones, is the value of being asset light. The very term “asset” is misleading. A machine, truck, or distribution center shows up as a balance sheet, as do inventory and accounts receivable. They are more management liabilities for the average company. They have a carrying cost that is easy to overlook. For example, receivables are uncollected funds that are not used but charged an implicit tariff. Work in process and goods in transit are a cost, not a benefit. One of the main forces in modern logistics across industries has been to maximize ROWC (return on working capital).
2PL: Standard outsourcing
Contracts replace assets here, largely on a direct operating cost basis. Obvious targets of opportunity are truck delivery, freight forwarding, and warehouse storage. Outsourcing allows firms to focus on their core competencies. That managerially defines these functions as non-core. That is a risky assumption in an era where Amazon has redefined delivery down to a few days as the norm and even hours as a practical target. Add in the complexity of such regulation as FSMA (Federal Food Safety Management Act) and international import and inspection requirements plus the dynamics of online commerce and these are no longer just procedures. They demand new levels of expertise, coordination and service design. 2PL is fading as most firms’ logistical base.
Here’s just one example that is highly applicable to tea: warehouse location. A central warehouse next to the firm’s manufacturing, blending, and packaging facility is a natural distribution center for a tea firm that serves a regional market. Extend the market and the model breaks down. Here are elements of the new mix: megacities plus regional pockets of growth; on-demand and multimodal shipping replacing scheduled weekly delivery; smaller orders of a larger range of products; rail/road/air tradeoffs; high cost variations depending on distribution options, constraints, customers, and relationships.
In the coffee business, which is very comparable to tea in its dynamics, Starbuck had to retool its entire warehouse and distribution as its growth disproportionately stretched it capabilities with 65% of operating costs going to outsourcing (201). It reconfigured its manufacturing facilities, adding a fourth location, added 5 US distribution centers and 2 each in Europe and Asia, and 33 distributed smaller DCs, with 3PLs service providers operating them.
This goes well beyond outsourcing.
3PL: Collaborative services
3PL has replaced outsourcing as the logistics norm. It is also today’s obsolescent mainstream and the label of 4PL is entering discussions and ads. With 3PL, the warehouse issue is handled through a mix of consulting, technology support, and - in many instances - direct coordination of 2PL firms with which the client has contracts. Often, the 3PL provider takes on the capital load, both of assets and investment in sharable resources, such as software and warehouse automation.
Several of the leaders add extensive services and management to their existing experience and product base. FedEx, which is establishing a strong reputation for small business 3PL logistics obviously leverages its massive courier and package delivery platforms and resources. Ryder Supply Chain Solutions similarly is built on its truck fleet and all the data, process, labor force, and global reach. One of its tea clients, Milo, reported that its 3PL relationship through a long-term dedicated contract carriage arrangement reduced road transport costs by 20% and mileage by 25%.
Whereas 1PL and 2PL services are built on logistics execution, 3PL is relationship- and experience-centered. It includes specializations in offers and expertise. It emphasizes facility-sharing and long-term contracting. Typhoo’s choice of 3PL provider announced in mid-2019, seems to have been based on its strength in road and rail on-demand fright from the Port of Tyne to the tea maker’s manufacturing plants: 14 shuttles a day of 14 million tea bag volumes. Tetley’s 2012 3PL-coordinated joint venture with Kellogg and Kimberley-Clark was set up to relocate and share warehouses and consolidate distribution centers. Pennske Logistics is a fully-owned subsidiary of Penske Truck Leasing, exploiting its rich asset base to help clients be asset-light.
There are obviously wide variations internationally. In India, 3PL companies are offering services in cargo handling and distribution in a country with one of the world’s longest road networks, with many complexities of congestion and routing. Kenya has seen growth in ones that assist in transborder cargo with all the paperwork and processing. Tata is focused on warehousing, including pallet design, and flexible pooling. South Africa’s logistics needs center on road congestion and the shortage of skilled labor for inhouse and outsourced basic operations.
In Europe, super providers offer advantages of scale in areas of concentrated markets. China’s Alibaba is taking on more and more foreign clients needing logistical support in its growing e-commerce. Historically China has been dominated by registered brokerages that have tight control of export licensing and inspection certification.
Order fulfillment seems to be lagging in 3PL. This may reflect its being increasingly seen as a core competence to be directed inhouse as customer relationships become more and more central to market growth. Overall, the 3PL industry is strong and full of very skilled and asset-rich firms. They are looking for new differentiations through an accelerating digitalization of just about every aspect of logistics and bush to cup supply chain integration.
4PL: The digitalized logistics path
4Pl seems more a label for “innovation coming soon” than a clear category. There are firms claiming they are 5PL and even 6PL. 4PL does capture the growing current developments among leaders that shift from handling the flow of physical goods to the digitalization of the flow of information. These include a wide range of applications, where the technology is beyond proof of concept and in trials and early applications:
TMS (transport management systems) that link to clients’ ERP (enterprise resource planning) IT base. Examples of the value of these is the reported ability to relate costs to activities at a granular level: freight cost as a percentage of net sales for individual products, regions, and seasons; transit time patterns; contract claims or nonacceptance of deliveries to retailers, or returns as a percent of shipping costs and methods, etc. This moves logistics from line item overhead budgets to precise activity-based costing.
IoT: internet of things: This term refers to the fact that anything can be given an internet address and then to be for data capture – where is this pallet, order, truck or – instruction processing and real-time reporting. The impact on logistics is that the information moves with the goods. The truck cab becomes a command center. The smart container moved by a smart port robot to a smart truck to be stocked in a smart warehouse…. To a large degree, the business message of 4PL is “Don’t be dumb.”
Blockchain: blockchain is a topic of when not if? Unilever is a leader in bringing together Ugandan small tea growers, financial institutions, agencies, retail customers, and supply chain intermediaries to build what essentially is a secure and real-time recording of transactions along the entire supply chain. Other large players in agriculture, food and beverages, and crossborder trade have similar initiatives at varying stages of development. Basically, every record in the logistics flow is updated and accessible to authorized parties, including immediate payment subject to contractual conformance.
Warehouse and distribution automation: Advances in the use of robots in picking, packaging, and loading are becoming if not routine then proliferating. There remain many problems and the smart machines can be truly clumsy idiots in early deployment, but the warehouse is becoming data- not labor-driven.
Artificial intelligence and machine learning: Amazon is leveraging AI/ML along its entire logistics chain. Today it offers over 750 million different products (6,000 times a typical Walmart store) that customers can easily search and find. It stocks 25,000 items (20% of the SKUs in a Walmart store) with 1-2-hour delivery in urban areas. Amazon is now applying AI along the entire supply chain from recommendations to forecast to store, pick, pack and ship in the distribution centers and through the delivery, including piloting autonomous last mile delivery vehicles.
More distant and uncertain are self-driving trucks being tested on highways and smart robots that make delivery of small orders. Alibaba has demonstrated drone delivery of tea in several cities. FedEx’s ads increasingly highlight robots that maneuver their way along streets – and wait to cross when the light is green, making sure they give way to pedestrians; they can even climb stairs. Starship has many clients who are testing delivery in real-world conditions of pizza, mail, hospital supplies, and even tea: a California University has robots taking orders as it moves around the campus and delivering the snack and beverage to a specified point.
The soft $3
How much of this existing and emerging capability is needed by tea producers and sellers is obviously situational? A key figure to consider is the one on which Li & Fung, the company that “orchestrated” the transformation of the global garment industry based its strategic innovations on. Its studies showed that for every dollar of originator manufacturing cost, an additional $3 accumulated along the logistics path.
For the tea industry, the soft $3 is the difference between marginal performance in a market dominated by ferocious competition, price erosion, overcapacity, and customer power. “Free shipping” isn’t free. On-demand service means just that. Resource-sharing is a necessity rather than an option.
The starting point for firms is to get rid of the overhead myth and make logistics a controllable cost and a differentiator in commodity segments. 3PL seems a requirement except for a few giant or very specialized players. As for whatever 4PL turns out to be, it marks a step shift in logistics capability and opens new horizons on the business landscape.
Today employing third-party logistics merely represents good practice. On the horizon is 4PL, a shift from handling the flow of physical goods to digitalization of the flow of information.
20% of logistics costs are for the last mile. Smart robots are well on their way.. 10% of US goods – and meals – are now delivered direct to the home. In China, it’s 30%.
Every tea shipment generates paperwork, contracts, and legal procedures: this takes days if you are lucky. Or have a top-rate shipbroker handle it.
“So, your driver got caught in a snow blizzard? Your problem. Our contract specifies a three-hour time window. And don’t be early as we don’t have the storage space.”
The UN lists over 100,000 international trade locations The sea transit time for tea exports from China and India averages six weeks
If your logistics data isn’t online, updated in real-time and able to relate an activity to its full cost, you are at risk of being “Amazoned” by an innovator with a stronger 3PL base. Do you know exactly where you stand in relation to relevant logistics leaders?