“Disruption is when we make our money.” So said a logistics provider recently to The Loadstar.
In these dark and challenging times, the boardroom focus is all on cost. But this is clearly an issue that raises concern, judging by the responses we had to yesterday’s article. The article showed how, with today’s long and complex supply chains, and the world in a state of almost permanent disruption, flexibility and the ability to be responsive to those changes delivers strategic advantage. As Julian Stephens, technical development manager at software provider MJC2, noted yesterday on a LinkedIn group, in response to our post: “The ability to respond dynamically to changes increases flexibility and customer service but actually reduces cost by making better use of resources.”
This kind of thinking, however, is hard to reconcile with corporate boardrooms focused on using procurement to negotiate out cost, which in turn negates the ability and willingness of suppliers to offer dynamic options.
Again, in response to yesterday’s post, Emirates SkyCargo head Ram Menen told The Loadstar: “This issue brings home previous discussions about how the purchasing is now controlled by procurement folks, and not the supply chain managers. I totally agree with Professor Christopher’s take on flexibility and dynamic factors within the supply chain, and that managers should be working on creating economies of scope. Best is to create economies of scope by leveraging somebody else’s economies of scale.”
But has the emphasis on cost, cost, cost blunted managers’ abilities to think in this way? As Sean Smith, director southern region for Kerry Logistics noted, in response to the news that shippers are extending payment terms: “The strength of all business is in its cash flow, and some shippers are just ‘playing the game’ and using their buying power.”
He added: “Others can probably not afford to cover the cost of their shipping until they have sold their goods.”
Benjamin Genach, air export manager at Bendix Transport, wrote on LinkedIn: “This [new credit line] is the new competitive parameter – as most of the carriers provide the same rate for most forwarders. This adds up to a cashflow issue in the future, this could lead to a downfall for some in the various markets.”
As many companies throughout the supply chain will know, the relentless drive towards short-term cost efficiencies means that in periods of disruption – and it is questionable whether we are in a “period” or have permanently switched paradigms to a “new normal” – costs can rise significantly while squeezed suppliers are less able to address the challenges.
This focus on short-term cost is problematic because it weakens the whole supply chain, argued Mr Menen. “Supposing you are a supplier to the OEMs. And the OEMs want to take 50% out of the cost. The vendor then has to take 50% out of the cost, which means that everyone in the chain gets knocked backwards. And it can mean people go bankrupt. But the damage is often not done at the point of negotiation, but further along the chain.”
He added that there is a further consequence, of damaged or altered relationships, which can again impact on the ability to create a solid yet dynamic supply chain.
But as the logistics provider noted at the start of this piece, disruption is where he makes his money. That is where suppliers – carriers, forwarders and other freight service providers – can make up revenues that were squeezed out of the original contract.
So is this the self-defeating element: that the likelihood of surprise costs caused by disruption increase in direct correlation to a focus on minimizing upfront cost, at the expense of longer-term supply chain responsiveness?
“What has happened more in recent times is a request for extended terms and furthermore the agreed terms being ‘stretched’ even more, especially around rent quarters for retailers,” said Mr Smith. “Either way if the shipper can extend their terms then it helps their management of the business on a day-to-day platform.”
But as forwarders complain, it doesn’t help theirs. Mr Smith contends that the balance of power has shifted slightly in the current market. “Ultimately, business is difficult and losing customers in this climate is not what anyone wishes to do. Equally as difficult is to gain new business, so sales guys might be more inclined to offer better terms than they would have previously. Either way the customers could use this to their advantage when negotiating new deals with their chosen forwarder, and equally against their existing forwarder if they felt the need.”
But these short terms gains – wherever you are placed on the supply chain – seem to add up to less long-term sustainability.