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CLM Report

Creating Profitable Logistics Models for the Future

by Russ Doak

As business shifts into the e-world, we’re asked to make more complex decisions with less time, resulting in greater exposure to risk and increasing our ability to profit. But in this new e-fast environment, are we in a position to make the best overall decisions for our companies today?

E-commerce can garner unprecedented economies of scale and increase corporate exposure to large markets at costs that are lower than through conventional means. The key to making a profit, however, comes from minimizing costs and optimizing on-delivery commitments. This is where supply chain planning process tools and technologies can play a key role in helping us make better decisions, so that e-profitability can be realized.

The growth of supply chain planning since the mid-nineties has been exponential. The supply chain planning segment is expected to grow 55 percent over the next five years, according to AMR Research, whose Web site bills it as the leading provider of research and analysis on e-business strategies and technologies. Furthermore, Boston, MA-based AMR Research has stated that “Supply Chain Management (SCM) puts the muscle behind e-commerce and trading exchanges are changing supply chain dynamics.”

In other words, e-commerce is accelerating the need to embrace the power of supply chain planning and its new technologies. This planning revolution is coming of age to handle a number of often conflicting and complex factors.

One of the most fundamental elements to be mindful of in reviewing supply chain planning tools is that tomorrow’s e-commerce is not static. It is made up of fluctuating demand, varying lead times and more demanding customers. Cost can no longer be the only factor in the planning process. There are tactical and strategic challenges to be addressed. Consider the trade-offs between cost and service. Different components such as quality, inventory levels, lost sales and frequency of deliveries must be balanced. Significant cost savings have been derived from addressing the tactical and strategic challenges involved with making the e-commerce delivery environment work.

As a result, e-commerce has accelerated the growth and need for new planning tools and technologies to support the supply chain process. During a recent Council of Logistics Management Toronto Roundtable session, one such technology for supply chain planning was presented as a solution, namely, the Logistics ReDesign tool from Remix Group, based in Helsinki, Finland, and Remix Technologies, Inc. of Terrytown, New York. Remix has a proven technology that can handle the planning of these multiple factors.

Rost Misyutin, president, Americas, of New York-based Remix Technologies Inc. and Antti Paatela, CEO of Remix Technologies’ parent company, Remix Group of Companies, demonstrated to CLM delegates how Remix affords logistics professionals with a powerful and strategic tool that is distinctive from other products on the market.

Unlike many current supply chain technology tools and systems, which are designed for a static environment and cost optimization, Remix’s tool has some unique benefits for the user. It is one of the only technologies capable of managing fluctuating material flows, which is a typical planning challenge for electronics and e-commerce environments. In addition, this technology enables multi-criteria planning, looking at costs, customer service elements, assets, and is capable of handling multi-company planning.

As Paatela pointed out, he sees the first goal of an e-commerce effort as increasing traffic and customers. Then, with this success comes the sudden convergence of volumes and demand patterns for product that are often greater then expected, stretching suppliers and logistics operations to critical levels. Many businesses react to these delivery problems by piling up inventories, acquiring new warehouse space and transforming logistics facilities to cope with small-size deliveries. But these steps do not necessarily make the business more profitable, especially when you consider the high cost of transportation and handling resulting from customized and reduced delivery sizes.

This tool is aimed at helping logistics professionals plan beyond this cycle, and it helps them to think through the logistics requirements for success in the dynamic e-market. For example, this planning tool and technology was recently used to reorganize the supply chain for spare parts for a new e-business procurement structure. Their customer in this case is a global mechanical engineering company.

To begin with, the information and material flows were separated. Also, the company had unnecessary circulation of goods with regional supply chains across the whole company. Using the Remix tool, a planning strategy was developed to identify ways to maintain or improve service, obtain cost savings and reduce inventory without affecting service.

An A-B-C and X-Y-Z matrix of nine product categories was created, based on expected demand patterned from actual deliveries. A number of different scenarios were set up, including the current situation, such as: what would happen with lower inventories, switching to a European 3PL hub and/or managing direct deliveries. The result led to discontinuing the practice of holding inventories for two product categories. Remix helped to identify a need for closer cooperation with critical parts suppliers to enable e-procurement capabilities and direct deliveries and also an opportunity to employ a third party logistics network. By using the supply chain planning tool and implementing this e-procurement strategy, the customer realized a cut in inventories by half, and reduced transportation costs by 15 percent and warehousing costs by five percent. With e-commerce, future value chains will include balancing supply chains among multiple companies, such as former competitors or strategic partners.

For example, the Remix tool and technology was recently used to support the merger of three consumer goods manufacturers who would be jointly executing an e-commerce strategy. Each company had overlapping logistics operations and its own diverse development plans involving new warehousing facilities under development. This tool was used to help identify expected cost savings network optimization. Challenges included difficult cost-service trade-offs, the lack of a common language and the fact that SAP implementation was underway.

The results of the planning process and technologies used assisted the new merged company in realizing savings. Recommendations led to closing one of the three distribution centres, adding a Far Eastern container terminal to decrease costs, speeding up delivery times and opportunities to improve control. Yearly cost savings were over $4 million and the organization was better prepared to meet the logistics and supply chain demands resulting from its new e-strategy.

Supply chain planning process systems, tools and technologies can assist decision makers in the ever changing and faster environment of today’s e-business. They can be applied in planning out the e-commerce logistics and testing fulfillment performance, where time is as important as costs. With e-commerce and the need to rely more on global sourcing for e-procurement, finally, the tools and technologies are catching up to meet the demand. Effective use of supply chain planning tools and technologies can make the bottom line and improve your profitability.