Logistics may not seem as sexy as, say, R&D or social-media marketing – but messing it up could easily ruin your business.
There are several things SMEs should think about when planning the part of their business that gets products out to customers.
Far too many companies miss out this key part of the business equation, warns Victor Deyglio, founding president of the Logistics Institute Canada.
“I remember running into these young, enthusiastic entrepreneurs. They had done all of their design and development. They even did their manufacturing,” he says.
“But the one thing they all failed to understand was how to get their product to the market. They didn’t know how to get it to their customers.”
Push me pull you
Richard Powell, managing director and co-founder of supply chain consultancy Crimson & Co, says there are two types of supply chain to consider when putting together a logistics strategy: supply push and demand pull.
Each functions differently, driven by different priorities, and it is important to understand the disparities.
Supply push chains typically use slower, more economic modes of transport to get bulk loads in place according to a planned schedule.
The type of product might be baked beans or low-cost clothing – items with a relatively low margin that need to be delivered as cheaply as possible and for which demand is predictable.
Demand pull uses faster, more expensive services to fulfill less predictable demand, driven by signals from the sales channel.
“If the retailer or customer has the power in the relationship, then that’s a demand pull. You might end up sending smaller shipments more frequently, so the costs for you are higher for being more agile and responsive,” says Powell.
An example here might be smartphones or an emergency medical item. “In that case, immediate response is good because they are going to pay for it,” Powell adds.
Typically, demand pull chains focus on higher-cost items, but there is a caveat. If companies are bad at manufacturing and unreliable, customers can lose trust.
“It could be a company that is so bad at manufacturing that customers give up and just start pulling everything,” Powell says.
“Once that happens, all the costs go through the roof. Then the manufacturers start to lose money on the whole thing.”
Back to basics
This is why effective logistics operations start with manufacturing. Understanding your sales throughput, and therefore your manufacturing volumes, has a direct effect on your logistics operations.
Predicting sales volumes helps you to plan how much shipping capacity you will need. This can give you the necessary leverage to negotiate discounts from carriers, especially if you can commit to certain volumes over a given period.
This commitment is a vital piece of the puzzle, according to Rob Riddleston, head of transport and logistics at Barclays Bank.
“You have to ensure that if you are asking a logistics company to move 100 shirts they are not 150 shirts,” he says.
“What you are asking the logistics people to transport is what you actually deliver to them when they come to collect from the factory.”
Being able to predict volumes and supply reliably can also help companies to move to a demand-driven supply chain, in which they can look further back up their supply chain to find more efficiencies.
If you have a better idea of your inventory needs over time, you will be able to tweak orders from your own suppliers so that you don’t have too much sitting in stock at any one time.
The type of supply chain, along with your source and destination, will affect the type of transportation you use to get products to customers. But consolidation and other tricks can help keep costs down.
Transportation can be expensive, depending on what you are shipping and the destination. Air freight tends to cost between four and five times as much as road freight, and between 12 and 16 times as much as sea freight.
Consolidation is key. With enough product volume a company can hire whole containers in airplanes, and the same goes for road and sea freight. If you are shipping enough product to take up more than two-thirds of a container, it is often cost effective to hire the whole of it.
Freight forwarding companies can be useful allies. They specialise in supply chain management, often for international shippers, and can aggregate shipments from smaller companies into containers, making it easier to get good rates on shipments.
Cementing relationships with logistics carriers can yield valuable benefits
They can also help with combination shipments, which also help to bring costs down. Air-sea freight combos may see a product flown to one place and then shipped the rest of the way. It is important to understand the lead times involved in hybrid shipments like these.
Cementing relationships with logistics carriers and suppliers can yield valuable benefits if you configure your supply chain well. For example, some haulage contractors may be willing to negotiate backhaul deals with small businesses.
In regions where there are trade imbalances at certain times, haulage firms are likely to send trucks back partially or fully empty after making a delivery because there may not be anything to bring back.
If fashion goods are being flown from the far east during peak periods, for example, then there may be little cargo going back, leaving empty cargo space going begging. That could translate into cheap haulage for you.
Another way to negotiate backhaul is to talk to other companies that may have haulage needs along the same routes as you, but going the other way.
These manufacturing and logistics operations can be difficult to manage, especially for a smaller business that is only just emerging from early stage picking and packing in its own offices.
David Menachof, the Peter Thompson chair in port logistics at the University of Hull, says it can often be better to work with a fulfilment company in the early to mid-stage of a company’s growth cycle.
The fulfilment company will allow the manufacturer to outsource the difficult parts of the logistics process.
“I move that over to use their expertise if I don’t have the space,” says Menachof.
The fulfilment company takes the manufacturer’s inventory and stockpiles it in the warehouse until it is ready to be shipped. It can handle the shipment process, negotiating with carriers and leveraging existing relationships to reach an economy of scale that a small business new to manufacturing could not achieve on its own.
This spares the manufacturer from having to grapple with time-consuming shipment and labelling issues. Even more importantly, it frees up real estate because the fulfilment firm handles the warehousing side.
The other advantage is that costs are based on demand. “Most of those contracts are on volume, so you are paying only for the service you need. You are not paying a fixed fee. It’s a variable based on your volume,” says Menachof.
Many of these fulfilment houses are able to deal with light assembly tasks, which can make it easier to manage inventory based on product demand, especially if you are using the same components for different stock keeping units.
Many happy returns
Products may reach their destination safely, but they may also come back. The Interactive Media Retail Group’s quarterly benchmarking report for Q4 2013, conducted with CapGemini, found that almost one in five products ordered online was returned in 2013.
In key markets such as fashion, many customers order several versions of an item so they can return the ones that don’t fit. In addition, the UPS comScore study, Pulse of the Online Shopper, found that 61 per cent of consumers shop more often with a retailer that offers a hassle-free returns policy.
Logistics systems must cater for these instances. Commonly, companies include a label for a product return, making it easy for a customer to package and return the product.
Services such as UPS Access Point are a convenient solution for receiving parcels or returning unwanted items. The service allows consumers to collect or drop off packages at a location of their choice – such as a convenience store, petrol station or newsagent with extended opening hours – rather than having them delivered to their home.
Maintaining solid relationships with suppliers, keeping your own back-end sales and manufacturing straight and sticking to your commitments are just some of the must-dos when planning your logistics operation as a small business.
Above all, it is all about keeping costs down while maintaining a level of service that customers are happy with. To truly understand your profit on each transaction, it is important to factor in the true cost of shipping, wherever you happen to be sending to.
No wonder, then, that some companies prefer to hand the whole thing over to an expert.