UK supply chains are sprawling far and wide – growing not only in size, but in the impact they have on how logistics is done. Alexandra Leonards explores how extended supply chains have changed the logistics space.
Globalisation has seen the world’s supply chains stretched to their limits. But for the UK, where manufacturing overseas has driven a supply chain that extends further and further outwards, the pressure is mounting more so than others.
In the UK, a move towards offshoring was decided based on the ability to reduce a combination of labour and raw material costs. That’s according to Henry Canitz, director of product marketing and business development at Logility. He believes that when businesses decided to offshore, very few considered the end-to-end landed cost (including transport and inventory costs, and costs associated with increased risks and managing the extended supply chain.)
“The move towards manufacturing offshore has been driven by a need to reduce overall operating cost, however historically this took a more purchase (bought-in) cost perspective rather than fully landed cost, which resulted in many sub-optimal results being achieved,” says Julian Mosquera, director at BearingPoint. “Nonetheless, for commodity goods, simple manufactured products, or non-complex engineered products, this move has worked well.”
However, offshoring has also presented some challenges for the supply chain – they’ve become more complex, with longer, more expensive transport lanes and larger total inventories.
Lengthier chains mean more exposure to risk and disruption. When there are more factors to consider, like numbers of parties involved, time-zones, language barriers, manufacturing facilities, transport modes and legs, and the number of locations where inventory is stored, complexity surges.
“Inherent in this sourcing strategy, especially using the lowest sea freight cost options, resulted in extended supply lead times that had high inventories in-transit and unexpectedly high network inventories as businesses felt they needed to buffer supply uncertainties; this made supply chains ‘heavy’, slow and unresponsive, so only really suited to high volume steady demand products,” says Mosquera.
As well as this, a lot of businesses have not adequately reflected the increased lead times on total costs, inventory value and service level.
“An extended supply chain means that challenges arise around communication between suppliers and partners,” says Mohit Paul, senior vice president EMEA, BluJay Solutions. “Customers expect a granular level of detail regarding shipping and delivery.
“An increasing amount of information must be presented in a digestible way to give businesses a competitive edge.”
This pressure is pushing companies to rethink their perception of the supply chain from ‘cost centre’ to ‘profit driver’. Paul thinks that the strategic value of a supply chain that streamlines processes and minimises error is fast being recognised. “The increasingly global nature and attitude of the logistics sector is challenging the familiar legacy systems that have been in use for decades,” adds Paul. “To keep up in this ever-accelerating industry, businesses must automate their key logistics functions to ensure full visibility and customer service.”
BearingPoint’s Julian Mosquera says that fundamentally, any extended supply chain requires more time to deliver goods and this drives inventories up. “It is an unavoidable structural feature of doing business, so careful selection of which products are procured through these channels is essential,” he says. “Without establishing trust in the partnerships that exist, there is inherent risk that supply will be compromised and the first you know about it is when you are experiencing service failures.”
Hence why visibility in the supply chain, provided by track and trace technology, is essential in these circumstances. Of course, this requires everyone to play their part and be truthful with product declaration and shipment status. “Acting to optimise costs and inventory value is also essential, hence the emergence of overseas consolidation centres (OCCs), that serve to get the right balance of product onto shipments to support improved flow throughout the whole network,” adds Mosquera.
Brexit
Now that Brexit is just around the corner, the challenges brought on by extended supply chains might just be exacerbated. “The increase of industry and national bodies involved in customs and border checks will make the customs process lengthier,” says Blujay’s Mohit Paul. “With Brexit around the corner, businesses are understandably building financial buffers into their supply chains.”
But of course, it still isn’t clear exactly how different customs entities and control procedures will impact British importers and exporters.
“Currently, one of the largest obstacles to supply chain efficiency is missing information,” adds Paul. “In some cases, data has to be pulled from several individual sources, some of which may be paper-based.
“Under this model, every time a piece of data is added to a customs document there is a multiplying chance that errors will be made.”
And, ultimately, this harms the bottom line through incorrect duty charges, fines or rejected goods.
“There is no doubt companies whose supply chains flow through the UK will be impacted by Brexit, but fortunately—and unlike most supply chain disruptions—we have years to plan for this change,” says Henry Canitz, Logility. “This impact depends of the supply chain components that could be impacted, including those of customers, suppliers and partners.”
He says that unfavourable trade agreements might lead to bringing some manufacturing back on shore or might lead to separate manufacturing facilities for on-shore demand versus off-shore demand. And a reduction of available labour resources could lead to more automation.
“As the dust settles after Brexit, there will be numerous legislation changes to contend with. Businesses need to alter their model to adapt quickly to new compliance requirements with solutions that can roll out changes rapidly and across customers and partners,” says Mohit Paul. “Whereas previously procurement and shipping teams were kept insulated in separate silos, the accessibility of data delivered by paperless systems is now bringing disparate business teams closer together.
“ The expectation is now that the supply chain will pass information seamlessly from department to department, and indeed to end users, so companies have to be able to get full visibility across the whole supply chain.”
BearingPoint’s Julian Mosquera says that often a better solution, more widely adopted in the last years, is to near-shore.
“Gaining most of the cost advantage while limiting the supply lead time disadvantage, and allowing businesses to be able to respond with greater agility to demand and market changes,” says Mosquera. “Brexit has actually been seen to have an even greater impact, with businesses deciding to re-shore or near shore depending on supplier capabilities.
“We anticipate even more volume going this route.”
Strategies to manage complexity
With companies extending out to new markets and places, it is absolutely crucial that all parties in the supply chain are keeping tabs on every stage of the journey.
“Supply chain organisations try to combat this complexity through improved technology to provide better visibility, planning, optimization, collaboration, and execution capabilities,” says Henry Canitz, Logility’s director of product marketing and business development. “Complexity is often combatted through the use of additional inventory to buffer against unexpected events, increased risks, and longer lead-times.
“Extended supply chains also lead to the use of more expedited freight.”
Of course, track and trace is already a fairly well-established technology – something that most in the supply chain business provide in one form or another.
“The real development is in the Digital platform capability that is now emerging,” said Julian Mosquera, director at BearingPoint. “This capability allows all parties in the distribution transaction to hook up seamlessly, using their native systems without having to invest in multiple systems solutions or point-to-point solutions that would otherwise drive cost into the transaction and generally slow things down.
“Recently, we have seen some trials with blockchain which promises to be a tamper-proof, shared data exchange.”
Companies can track against specific events, and use predictive algorithms to establish the timeliness of deliveries.
BluJay’s Mohit Paul says that the reality is that legacy systems can no longer give enterprises the level of visibility over the supply chain they need to answer customer needs.
“Embracing cloud technologies allows businesses to share vital data with external suppliers and other logistics partners,” says Paul. “The lower price point of cloud systems also means that small businesses can access capabilities previously reserved for larger players.
“The Amazon effect is driving consumer expectations of next-day delivery and tracked parcels into the B2B world. By matching this level of customer experience and convenience, smaller businesses can ensure that they are performing competitively within a globalised marketplace.”
He says that an end-to-end system that centralises information needed for planning, booking, customs and fulfilment can help businesses get a clear overview of supply chain activities. “Rather than drowning you in data, automated analytics processes can alert users to blockages in the supply chain – or even better, spot opportunities for optimising the supply chain,” he adds. “The digital revolution has made more and more data available to supply chain managers, but it’s crucial to cut out the white noise and use data to streamline the process, rather than complicating it.”
But there’s more too it than simply maintaining visibility. “Companies affected by Brexit need to use this opportunity to redesign their extended supply chain,” says Henry Canitz of Logility. “Develop a complete picture of your inbound and outbound operations especially those affected by Brexit.”
This includes developing the process, people and technology capabilities to fully analyse both the volumetric and financial impacts from Brexit. On top of this, there needs to be an understanding of cost to serve and analysing the likely effects due to currency, trade agreements and workforce availability.
“Determine alternatives to mitigate risks, pursue opportunities and improve operations using advanced analytics, what-if scenarios, etc,” says Canitz. “Raise awareness and help senior management understand how Brexit will affect the supply chain and the business both in the short and long term.
“Processes, people, and technology can then be applied to maintain and improve visibility as the new supply chain structure is implemented.”
But where do you put the warehouse?
Extended supply chains have an impact on the property market. “Typically when a company makes significant investment in a manufacturing process we see a “ripple effect” in the property market with suppliers taking warehouse space to store components and other products,” says Kevin Mofid, director in commercial research at Savills.
“Often this can distort local warehouse real estate markets as suppliers and 3PLs compete to take space to service the manufacturing process.” He says that this has actually taken place in many areas across the country – but has been most pronounced in the West Midlands.
“JLR have made significant investment in their manufacturing and their supplier have followed suit by taking significant amounts of space in existing warehouse units in the wider Midlands area,” adds Mofid.
Of course, the impact that growing supply chains have on the property market really depends on the commodity being handled in the warehouse. A heavy industry manufacturer would look different to that of a retail fashion brand’s facility.
“One feature is the greater use of overseas consolidation centres, but in their absence, we see a significant role for import centres, that hold the bulk receipts at or near to the port, so they can be processed economically before getting into more sophisticated distribution networks where higher costs of distribution apply,” says Julian Mosquera, director at BearingPoint.
“That said, many businesses also choose to hold bulk within their mainstream network, with the inevitable requirement for bulk storage and the emergence of high-bay facilities (25m or more) alongside more traditional National / Regional DC operations (NDC/RDC); at the same time, increased omni-channel volumes drive small scale deliveries which is counter to the way the facilities are generally set up.”
He also points out that the emerging composite building arrangements does make the solutions more customer bespoke, which from a commercial property perspective makes these more difficult to market at point of release, probably resulting in a flattening and start again attitude.
“The market is recognising these changes and institutional builds are progressively increasing in scale (footprint) and height (now typically 12-15m). For instance, the new speculative build by Gazeley at 21m in Magna Park, Milton Keynes, is also potentially changing the baseline for institutional investments,” he says.
“With labour and property availability getting constrained in the ‘golden triangle’, business are looking for property (especially bespoke, higher, and larger sites) outside these core areas.
“This has driven demand in ports (especially Teesport, London Gateway and Felixstowe) and places such as East Midlands, M62 corridor and M1 corridor north of Nottingham.”
Brexit is certainly something that needs to be considered when it comes to the property market. Is the answer to build warehouses closer to home?
“While the impact so far on the industrial real estate market has been negligible we expect to see an increase in demand in 2018 as retailers and manufactures start to take more warehouse space in the UK,” says Mofid.
“This will be driven by the short to medium term goal of storing more inventory in the UK as supply chains are expected to be slower as Brexit approaches.
“However, as the nationwide vacancy rate for warehousing is just 6.5 per cent, occupiers may struggle to acquire warehouse space that matches all of their initial requirements, or in the timescales that they require.”
Mosquera believes that building warehouses closer to home isn’t necessarily the right approach. “The more we source from home, the less the network will physically hold, and the focus will revert to greater throughput capability,” he says.
Along with this, Brexit might see more conversion, processing and even production within warehousing operations; holding basic sub-assemblies and bundling, building, or even fabricating finished goods for final distribution. “Technology will also play its part,” says Mosquera. “Although take-up has been initially slow, 3D printing may well become the new value-added service model for 3PLs, wherever they can find the option to exploit.”
This article first appeared in Logistics Manager, June 2018
