Building the logistics of the future

    Mycroft Assistant: When building the logistics of the future, it is important not only automation of work and abstract quantitative values ​​as such, but also a strategic vision of trends in the world. And also an understanding of how these trends will affect the company's activities in the medium term. For our part, we can solve the automation issue (by offering the Mycroft Assistant expert inventory management system), but issues related to the work strategy lie entirely with the company's management and depend only on the will of the head.

    Suggestions for solving strategic problems based on the experience of the well-known consulting firm McKinsey (founded in 1926; specializing in management consulting; 17,000 employees) were well described in the English-language article that we bring to your attention in the Russian translation.

    “Building the logistics of the future”

    Many supply chains are not ready for work in the upcoming reality. Most were designed (some brilliantly) to ensure stable production of large volumes, taking advantage of low-cost production in China and other developing countries. But in the future, when the attractiveness of production location is changing rapidly (as well as the economic feasibility of producing large volumes) - the lack of flexibility is fraught with danger.

    It is the upcoming new conditions, the main problems of which are the growth of uncertainty and the complexity of doing business, that will come earlier than many companies expect. Some problems, such as sales volatility or the active movement of capital, for example, have always influenced supply, but now everything is compounded by a general economic downturn. At the same time, other changes associated with the growth of world income and the emergence of reliable suppliers from emerging markets will have an impact on logistics for another decade. As a result, for the strategic decisions made in the supply chain, there is a problem that the decision taken will not have a positive economic effect as a result of the influence of forces that are beyond the control of the manager.

    Seeing this trend, some advanced logistics companies are working to solve the problem in two directions. Firstly, they diversify their old common supply chain into several small ones that better cope with complex tasks. Secondly, they view supply chains as protection against problems associated with changing working conditions of production facilities. A look at how pioneers solve their problems today can shed light on others on how to get more out of their established supply chain.

    Two problems

    The stakes are as high as ever. “In our direction,” says Jim Owens, former chairman of the board of directors and CEO of Caterpillar (a manufacturer of construction equipment), “the company that best manages its logistics may have the greatest competitive advantage. This is one of the components of success. ”Despite this, the classical supply chains of most global companies are poorly prepared for new conditions, which are characterized by increasing complexity and unpredictability.

    Unpredictable world

    According to a McKinsey study, almost 68 percent of global managers said that the risks associated with logistics would increase over the next 5 years. And there is nothing surprising in the fact that the financial crisis of 2008 significantly increased the influence of unforeseen factors on logistics: active capital movements and currency fluctuations - all this raises the problem of financial system stability, as well as the depth and duration of the recession. At the same time, when solving current problems, one should not miss the fact that a new, long-term decline trend in the global economy will continue to negatively affect logistics even after the economy begins to grow again.

    The growing influence of new markets is one of the main sources of unpredictability. Their economic growth will increase energy consumption by about a third in the coming decade. At the same time, the growing appetites of China and other developing countries for resources such as iron ore and agricultural products are pushing world prices up and complicating supply chain planning. Also, the world is discussing environmental issues, which also needs to be taken into account in light of the fact that the world is moving towards tougher environmental regulation.

    These long-term factors have a key impact that interrupts other “standard” sources of uncertainty. For example, the growth of developing countries contributes to the global currency market and raises the problem of protectionism in the developed world. But there are other problems: a different level of economic growth between different developing countries means that a change in the cost of labor can quickly change the relative attractiveness of hosted industries. In China, for example, labor disputes and rising suicides have led to a 20% increase in salaries, and even more in some cities in China. Bangladesh, Cambodia, and Vietnam are experiencing similar problems, which also affects salaries. And finally, with the increase in the quality of local production, the issue of choosing the location of production becomes even more complicated.

    Increasing complexity

    Among other things, manufacturers and suppliers also solve the problems of increasing complexity of processes. For many companies, this means an increase in workload in order to be able to meet the increasing demands of their customers. For example, mobile phone manufacturers in 2009 presented 900 different phone options more than in 2000. Assortment growth also affects classic product categories: for example, supply growth for baked goods, beverages, cereals, and confectionery products grew by more than 25 percent between 2004 and 2006, and the number of SKUs in some large North American grocery stores exceeded 100,000 in 2009.

    At the same time, globalization has given an advantage to companies that offer a wide range in developing countries, their market becomes desirable as a consumer, and not just as a production center. Effective distribution in emerging markets requires a certain degree of improvisation, as the established retail format varies widely from modern hypermarkets to private family shops. In Brazil, for example, Nestle conducts an experiment selling its products to low-income customers directly through two supermarket barges in two tributaries of the Amazon River.

    Solving problems

    In such conditions, the idea that a company can debug logistics once and for all is fantastic. Seeing this, some companies begin to solve problems in two ways. Firstly, they divide the existing monolithic supply chain into several small and flexible ones. While the new supply chains use the same resources and information, they manage them differently, helping the entire company to increase the quality of customer service.

    Secondly, industry leaders perceive their well-functioning logistics as insurance against unforeseen circumstances, actively and regularly inspecting it and modifying it, in the context of modern economic conditions, with an eye to the medium term for five to ten years in advance. By doing this, companies are building a diversified and flexible logistics structure that is easier to cope with the challenges of the modern world.

    From one to several

    Dividing the monolithic supply chain into several small and flexible ones reduces complexity, saves money, and increases the level of customer service. Let's take a look at a living example.
    Case: Supply Chain Separation

    The consumer goods producer in the USA was losing its competitor to the market due to logistics problems. Prior to this, the company (like many others) transferred most of its production capacity to China, leaving a small part of its production in the home market in order to be closer to its customers. The classic case: all plants operate according to a single production plan, producing a full range of the thousandth assortment of the company.

    Today, increasing volatility in consumer demand, together with an increase in the assortment of hundreds of new SKUs annually, has led the supply chain to cease to be predictable and problems with the quality of work have grown into a problem of the quality of customer service.

    Trying to improve the situation, the company conducted an analysis of its portfolio in two dimensions: weekly demand volatility and total production for the week. Armed with the resulting schedule, the company began to rethink its supply structure. This kind of grouping has shed light on options for optimizing supply.

    According to the results of the analysis, the company decided to divide the overall supply chain into 4 independent channels. For goods with relatively stable demand and high sales volumes (less than 10% of the assortment, but an overwhelming effect on profit), the company left production in China. But at the same time, the responsibility for the production of all other goods with unstable demand was transferred to a plant in the USA, and the plant in America and Mexico began to be responsible for goods with stable demand, but low sales volumes. The development of production in a high-cost country such as America makes economic sense even for low-demand goods, because in this case the company has the opportunity to bring the goods to the market quickly, without lost sales, while working with a low stock of these goods in warehouses. As a bonus, it’s possible to produce goods,

    At the same time, the company not only redistributed production resources, but also changed the planning and maintenance processes themselves. For the most volatile goods in the assortment (those that began to be produced in the USA), the company no longer needs to foresee demand in advance, but has gained the opportunity to quickly produce goods in the amount corresponding to current demand. At the same time, managers at the American plant were given the opportunity to simplify the planning process for goods with low but stable demand.

    For overseas projected sales, the company has its own factories in China, which produce goods on the basis of long-term plans, as it was until the present moment. But now, these plans have become more accurate, because managers no longer need to take into account the “noise” generated by sales of goods with unstable demand in their models.

    As a result, the changes made allowed the company to reduce the complexity of supply and production, which led to cheaper costs by 15 percent. At the same time, the quality of customer service has improved, and the average delivery time has decreased to three days from the usual ten. As a bonus, this allowed us to increase the quality of our products throughout the assortment.

    How much to divide?

    The first question that confronts a company that is studying the division of supply chains into flows is the number of these flows. The answer to this depends on the resources that the company uses to produce and sell its products, and how the use of these resources rests with the product distribution strategy and customer experience.

    The requirement seems obvious, but in practice, most companies use only the second part of the equation. They can, for example, willingly identify those products that they consider leaders in cost, service, novelty, or (in most cases) some combination of all this. A smaller proportion of companies carefully studies operational problems that affect their operations, and draws conclusions only on the basis of these problems.

    Often, a good practice is to start the analysis by analyzing the volatility of demand and sales, and compare the result with the cost of locating production in various places. This kind of analysis gives an idea of ​​the combination of "speed-costs" and can give an idea of ​​where it is best to place production. For example, one of the world's manufacturers, as a result of the analysis, saw that 2/3 of the demand is for the basic assortment (about 40 percent of the entire product portfolio) and production can be brought to the country with lower production costs, while the level of customer service will not decrease .

    Of course, companies should also consider customer interest in the planning process. So, one company operating in the consumer sector found that distinguishing in the packaging of goods was a determining factor when choosing a product by the client, in this regard, the company decided to transfer the entire production to one packaging line. Thus, in the sectors related to assembly and packaging, we found that a factor of customer demand and the complexity of the product itself makes a significant contribution to decision-making regarding the separation of supply chains and the location of production.

    The benefits of "assembly"

    Although dividing into several logistics flows seems rather complicated, in reality, this approach allows companies to reduce complexity on the contrary and makes it easier to manage supply, because in this case, the company's resources will be used in the best way. At the same time, this kind of approach allows management to use classic tools to improve each logistics flow individually, which until then could not be applied to the entire chain.
    For example, one producer of consumer goods, after dividing the supply chain into several small ones, was able to use production options that were impossible before (the start of production was closer to the time of demand, which reduced the cost of storing the goods). The factories of the American company are now engaged in the assembly of products from several semi-finished products, thus shifting the date of creation of the finished product to the date of actual sale. Which, of course, allowed to reduce the cost of storage of finished products and offset the impact of the high cost of the American workforce.

    With a better understanding of their logistics, companies can improve their performance. For example, one of the world's manufacturers found that the effect of the separation of logistics flows was greater than the introduction of “lean” production practices at the plants. And from the advantages, the company received: quick switching of production for factories with high production costs, which allowed to more effectively solve the problems of production of complex goods.

    Using built-in logistics as protection against risks

    The advantages that small supply chains provide are most effective if the company adjusts their work in accordance with changing external circumstances. Will, for example, today's built logistics make sense if the Chinese currency rises in price by 20 percent, oil costs $ 90 per barrel, and shipping will be underloaded by 25 percent? It is very important for a company to invest its efforts in understanding the situation on the global market and determine which of the many questions like the above you need to ask yourself. Nike, for example, for the first time since 2010 has produced more shoes in Vietnam than in China.

    The fact that a well-built supply chain can survive in various scenarios will greatly affect the profitability of the company, and in the near future, the viability of the company in general. In light of this, companies should carefully select their suppliers and manufacturers in order to reduce their costs when it is possible to implement various scenarios. The task is to determine the most flexible supply and production option, even if today it is not the cheapest. This kind of approach requires a certain change in consciousness, not only from operational managers, but also from the entire management of the company.

    For one company, for example, executives were worried that betting on a Chinese manufacturing hub could be a problem if conditions change. Studying the issue, managers analyzed the cost structure, and how it will change over the next five to ten years under the influence of modern global trends. They also raised the question of how fluctuating prices and logistics costs will impact the company.

    As a result of the analysis, the company came to the conclusion that, despite the fact that in the short term, China remains the most attractive place to host production, but the risks associated with fluctuations in the rate and increase in salaries are quite high. And so much so that Mexico was chosen as the best alternative based on the analysis of several possible development scenarios. Thus, the company began to build relationships with suppliers in Mexico and expand its production portfolio there, so that, if necessary, be able to quickly switch from China to Mexico, depending on changing conditions.

    Another company did the same, diversifying its assets across several developing countries, which helped protect against fluctuations in labor costs, tariffs, taxes, and other factors. It also contributed to protecting the company from force majeure: fires, earthquakes and strikes.

    Another North American manufacturer divided its manufacturing facilities between Brazil and Mexico to protect against the risks of exchange rate fluctuations in these countries. The company also invested in the division of capacities for the production of high-tech components, which can only be manufactured in Europe or the USA, between these two regions. This allowed not only to protect against currency fluctuations and economic risks, but also improved the supply of partners who work in emerging markets.

    Such changes, of course, are not so easy to make, since the supply chain is usually very deeply embedded in the structure of the company. To carry out such changes, much more work and cooperation between departments is required than many companies are used to doing. In general, organizational problems have a key influence, as we wrote in the previous article, “ Does your team create problems for suppliers?” "

    But, in any case, the result is worth the effort. By creating more flexible and efficient logistics that can work efficiently in the face of increasing complexity and uncertainty, the company will be able to gain a significant competitive advantage in the coming years.

    About Authors

    Yogesh Malik and Brian Ruwadi executives at McKinsey in Cleveland; Alex Niemeyer is the director of the Miami branch. The authors thank Sebastien Katch for his contribution to the creation of this article.

    We, Mycroft Assistant , are not a consulting company, therefore issues of strategic development are beyond our competence. Unlike questions related to forecasting automation, inventory management, building plans and other related work with supply - you can contact us with this.

    Our automated expert inventory management system Mycroft Assistant helps small and medium-sized businesses avoid overstocking or shortages in stock, reduce costs and expenses, and increase company profits. By analyzing the sales history and current balances by department, Mycroft Assistant generates a forecast and gives recommendations on which products need to be purchased and which trade needs delivery. And also forms a plan of sales and purchases in future periods. The system replaces manual analysis and work with Excel, which allows the company to develop and work efficiently without attracting additional staff.

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