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There is a profound shift underway in the relationship between shippers and their logistics providers.
The former, faced with the continual, will-sapping uncertainty of today’s economy is understandably seeking to eliminate as much cost as possible from every area of their businesses; while on the other side forwarders, carriers and other logistics suppliers – all as equally perturbed as shippers by the commercial gloom – are seeking to cement and deepen their relationships with their key customers.
But these two ambitions are driving customers and suppliers in very different directions.
One freight forwarder told The Loadstar: “I went into a couple of blue-chip retailers recently for supply chain meetings and was amazed to find them fronted by the procurement department rather than their supply chain executives.
“The last three years of rate volatility and capacity manipulation by carriers has frightened everybody into treating freight as a purely transactional commodity, whereas the real value is found in understanding a customer’s supply chain – using lead times to manage inventory and acting for the customer.”
He said that the speech given by Marks & Spencer’s head of logistics Jason Keegan at the TOC Container Supply Chain event in Antwerp was “a cry for common sense”.
“Procurement departments are great at paperclips and not so great at evaluating service – they give freight on a differential, and if that differential happens to be just 50 cents, it’s still a differential,” he added.
The roots of the problem are twofold: logistics providers of various hues and across different modes have been periodically engaged in bitter battles for market share, prompting violent swings in freight rates and the temptation for shippers to contract only on price.
At the same time, the continuing failure of many major shippers to have a supply chain executive at board level has meant that freight contracting falls to the procurement department, rather than the supply chain department. “These two departments’ interests are rarely aligned,” says one insider. “There are a lot of forced marriages taking place and most of them will end in tears.”
On the sidelines of the Antwerp TOC event, MOL’s director for Asia-Europe trade Stanely Smulders told The Loadstar: “In the relationship between carriers and customers, I like to make a distinction between direct shippers – BCOs – and the forwarders. With forwarders, the relationship is actually very good. You talk to parties that are professionals – they know their business, they know where you are coming from and forecasting is easier. A forwarder can say they are going to do a certain volume on this trade lane this year, and I can have confidence in that, and the larger the forwarder, the tighter these relationships are because there is a mutual dependence.
“With the BCOs, the relationship is different. Some have very professional people with a logistics background that are running the operations. They work quite similarly to forwarders. And then you get BCOs who are procurement professionals and for whom shipping services are simply just another procurement item, as if they are buying a toothbrush. Then you work on the basis of a spreadsheet; you fill in your numbers and you are either in or out. The problem for us with that is that if you are out – or even if you are in – our organisation has to establish a lot of new contacts with the shipper and his receiving organisations, and with that always comes disruption. So if you aim to keep service levels up, a stable relationship helps.”
While the trend is long underway in container shipping, where it has become part of shippers’ planned distribution activities, it is also turning up in the express sector, which mostly deals with unplanned, emergency shipments. However, recent shocks to supply chains such as the volcanic ash cloud and Japanese tsunami are leading some shippers to budget annually for express services, looking to commoditise a service that is by its very nature entirely unpredictable, according to Priority Freight’s chief executive Andrew Austin.
“Shippers’ procurement departments are trying to commoditise our service, while we are trying to turn that commodity into a relationship. We want to personalise the relationship with key customers, but many of them want to behave as procurement officers,” he told The Loadstar.
“Procurement specialists are answerable to the company’s shareholders, but they appear to take little account of the operations and needs of that company’s supply chain. Commoditisation of expedited freight is to some extent the consequence of natural maturity, but ultimately shippers won’t get real value without a long-term relationship to accompany it,” Mr Austin said.
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Comment on this article
Michael KusuplosAugust 14, 2012 at 6:17 pm
Most of those on the procurement side really do not understand the logistics function of supply chain management until the problems start to occur.
Then they are left standing like a deer in the headlights, absolutely clueless as to what to do.
This is what happens when the “Spread Sheets” gain the control over the logistics function of supply chain management – Price, Price and Price are all that is considered. Relationships are really never thought about and the service to the client both internal and external is what suffers.
Andrew F SmithAugust 15, 2012 at 2:22 pm
I think this very much depends on the procurement professionals. I have worked in this area as well as the supply chain and I have found some very good procurement professionals who know the industry, as well as others who are far less competent. When heading a procurement function I took care to recruit people from the relevant industry, we then taught them the procurement tool-kit. There is a reason why so many selling companies would rather not negotiate with procurement people; this often is because they tend to get a better deal when they are not negotiating with ‘experts’ (those responsible for the supply chain in a business do not always make the best decision for the shareholder; often it is more about their own preservation). It can also be argued that procurement functions also open up businesses to new suppliers that would otherwise not be the case without a tender (in which case incumbents would continue to prosper regardless of the value they provide). The harsh reality in today’s global economy is that price is an extremely important factor. For me the optimal solution is to ‘front up’ procurement alongside supply chain experts, working as a team. If both parties agree, it normally is the right decision.
Niamh AllanAugust 16, 2012 at 6:51 am
Procurement is the entire process used to select suppliers and negotiate contracts for delivery of goods or services. Procurement logistics typically form a major part of the contract with material suppliers.
Adriaan GroenendijkAugust 17, 2012 at 12:38 pm
Procurement staff for Logistic Services should be the enabler not the decision making unit, that much should be true indeed.
But to characterize Procurement as mere bean-counters not knowing what they are dealing with is too far fetched. Recruiting procurement staff from relevant industries/knowledge is indeed the key-word and can off course, be equally good or bad in relationship-management.
Michael KusuplosAugust 17, 2012 at 3:28 pm
Believe that comments on procurement making logistical determinations has been seen by some as them vs. us situation. Feel that ” Silo Thinking” is somewhat in place in the comments.
The goal of any supply chain management system, yes, procurement is part of the supply chain, is to obtain the lowest landed cost, i.e., the cost that is incurred to deliver the product to the specific destination, in manner that meets the organization’s requirements for the procuring goods and/or services for the commodity that is being acquired.
To reach this goal, collaboration is required amongst ALL PARTIES in the supply chain. Accordingly, all factors must be considered in obtaining goods and/or services.
Simply “Recruiting procurement staff from relevant industries” does not guarantee that those individuals are knowledgeable on logistics operations.
Propose that procurement teams include representatives of both procurement and logistics to make the best purchasing decision for their clients, both internal and external. Isn’t this the type of process that assures that collaboration is in place?
David AtkinsonSeptember 12, 2012 at 8:25 am
Paper clips, toothbrushes, frieght…. These procurement professionals only buy tactical products and services, don’t they?
Well, no. Depending on the sector, procurement can be a strategic as you can imagine, and tactical as you might caricature them. When 75% of the cost of a Honda motor car is made from product sourced from thrid party suppliers, you can predict that procurement is very much near the top of the stratgeic agenda.
The idea that procurement doesn’t understand value (the implicit argument of this piece) is risible. Of course, the most obvious KPI is cost reduction but it’s never the only measure for professionals.
The solution for sales people, whether they’re in logistics or elsewhere, is to truly understand how procurement works; their organisation designs, their targets, tools, processes and professional aspirations. Sadly, few on the supply side take the time to invesitigate this and so remain in the dark, accusing procurement of not understanding the business.
It’s a tough gig being a salesperson at the moment; you need all the advantages you can develop, just to stay in the game.