Logistics Quarterly Magazine - Volume 16, Issue 1, 2010

A Conversation with Nikhil Sathe, CFO, Kelron Logistics

Interviewed by Nicholas Seiersen, Senior Manager, KPMG and LQ Executive Editor

LQ: How is risk management in the supply chain putting a greater emphasis on excellence in supply chain practices?

Nikhil Sathe: The supply chain has a heightened importance in today's economic environment. The financial matrix has a direct relationship with the supply chain performance, whether it is revenue growth, marginal profit, return on capital, or customer satisfaction.

We have seen that 64 percent of the SCMs now report to the CEOs. The SCMs are making probably more rounds to the C-level suite - that's become of strategic importance. We know that supply chain is critically linked to a cash-to-cash cycle, working capital management. That's becoming so important to organizations in today's situation. The banks are pressing the reset button on facilities and resetting the covenants. There is hype and growing attention to the working capital management that organizations have. Supply chain managers have grown in their stature and their importance to the organizations. We know that supply chain is becoming of strategic importance. They also have the board-level appearances at the board meetings. So there is certainly a heightened importance in the supply chain.

Today's supply chain is closely related to financial metrics and it directly or indirectly affects revenue growth, margin of profit, asset efficiency and customer satisfaction.

Risk management has assumed greater importance with heightened security and compliance environment in the freight transportation. Flexibility is key in supply chain but is often compromised to drive out the costs.

Quality of supply chain is critical, however supply chain failures keep on happening. Collaboration and optimization have proven to be extremely essential to a linear and effective supply chain. The biggest risk in freight transportation is the risk of capacity and unpredictability of rates. It is estimated that more than 60 percent of the capacity in freight transportation lies in a probabilistic environment. Freight forecasting models can reduce this risk by streamlining forecast information exchange, making freight a tradable commodity and introducing business interest software applications.

LQ: When your firm looks at developing innovative and sustainable supply chain practices does it look at innovation in its alignment with partners?

Nikhil Sathe: We have a situation where there's a transactional sale and a transportation management sale. We have seen enterprise opportunities growing where the financial sale is overtaking the transportation or logistics sale.

You are selling to C-level suite in terms of supply chain opportunities, not necessarily to the logistics managers and director of transportation. Right now optimization, dynamic routing, and transportation cube manipulation are in the background. Everyone wants to save their nickels and dimes - it's all about cost-dominating supply chain agendas at the present time. There is definitely a heightened importance.

As the markets are rebounding and capacity is changing, it offers opportunities for 3PLs to position themselves to seize new opportunities. Unlike 2009, we will see more enterprise level opportunities in managing and optimizing freight. Transactional or our commodity/brokerage opportunities will also grow as capacity tightens and 3PLs will have to leverage technology and expertise to re-emerge as capacity finders. We bring in innovation as part of our corporate strategy.

The unspoken rule of innovation is to solve a problem. We believe that big breakthroughs do not cost big money. I recall in one of the paradoxical studies conducted recently on supply chain, they talked about innovation paradox. New product innovation is growing fast, however innovation in supply chain is not that quick!

LQ: What are your views on the shared service drivers between 3PLs and logisticians, such as overall savings, efficiencies, better accountability and enablement of strategic priorities, that will result in some of the most innovative practices in the supply chain?

Nikhil Sathe: I think there is a very exciting and encouraging pattern that is developing in the 3PL growth. Armstrong and Associates is probably the most reliable data that you can get in the 3PL market space where the rate of growth of outsourcing is almost three times the rate of economic growth. We have seen certain modal shifts during this time as people are now transferring their freight from over the road to intermodal - part of the cost-saving initiative and also part of the sustainability green transportation initiative. Two to three percent of GDP growth is a very exciting trend. While the freight volumes are depressed by 22 percent, we see the level of outsourcing is growing. Every Fortune 1000 company is using at least one 3PL. There is a bigger market share that is coming that's more, not because of the cost control issue, but it's because of the value-added services. They're gravitating from the brokers, to forwarders, to 3PLs, to lead logistics providers: there are enterprise opportunities versus transactional opportunities; be a strategic supplier versus a tactical supplier. So we have seen a transformation in the 3PL capacity of providing service offerings. That's been a major value chain. They are now becoming partners in the supply chain. Supply chain is broad spectrum. But demand plan is to warehouse managers. 3PLs fit into that as value service providers.

As the level of outsourcing has grown consistently to more than two to three times that of normalized economic growth, shippers have started to use outsourcing at the strategic management level. 3PLs have moved from being only a broker, forwarder, or logistics service provider to being lead logistics providers. 3PLs have built their service offerings around shippers' stress points as solutions providers.

LQ: What are the flexibility-based strategies that your firm uses, or its partners, to define its overall supply chain strategy?

Nikhil Sathe: The transactional to enterprise, tactical to strategic, being a business value provider versus a cost saver. Traditionally 3PLs have been working as capacity finders. But as the capacity is very fluid in the market right now, where supply exceeds the demand, we have a situation where a sustainable situation on the cost savings is more important than just finding the capacity. This is going to dramatically change in the next 12 to 18 months. I've no doubt about the resilience of the North American economies where we bounce back in terms of our turnaround times and then demand will exceed the supply. That's where the capacity will become tight and that's where the 3PLs will play an increasing and progressive role into the cost control and the value-added services.

LQ: How does your firm balance and mitigate risk with innovation and business development?

Nikhil Sathe: I think it's a great question. Yes, there is a heightened importance of the supply chain in the current economic environment. Supply chain has become a burning platform for the C-level suite. Supply chain managers have been doing the rounds to the C-level suite more often. They've gained strategic importance with the organization structure today. The financial matrix has a direct relationship with the supply chain performance. Where there is revenue growth, marginal profit, return on capital, or customer satisfaction, they are directly linked to supply chain performance. Supply chain is becoming a strategic piece of the organizational performance. We have seen this in the current economy where cash-to-cash cycle is so important. Working capital management is very important.

Outsourcing is also growing because you want to save money; you're in a capital preservation mode rather than a sales, growth and strategy mode. Outsourcing fits into that category and supply chain is a burning platform. We talk about a balanced growth and a controlled growth. We do not want to clip our wings to grow for tomorrow. I want to talk about cost optimization - reduce your baseline costs and maintain services at acceptable levels. We need to be careful to do this in such a way that does not undermine our ability to capitalize on new growth or revenue opportunities.

LQ: What's your forecast or outlook in terms of the dynamic between logisticians and 3PLs?

Nikhil Sathe: It's an 80/20 rule. Eighty percent of the 3PL relationships are strategic in nature. But only 20 percent of the shippers' relationships with the 3PLs are strategic in nature. In terms of the shippers, their primary focus right now is to save money. It's not so much about customer service or technological advantage. So that's a financial sale today rather than a transportation sale. I think that's a real transformation in our industry today. This will change. In good times it becomes an optimization rather than a price sale. In today's economic environment where every dollar is important in the present value concept, that's where it is becoming a financial opportunity.

(This interview is an abridged and edited edition of LQ's Executive Insight Interview Series, held December 2, 2009.)