From Cost reduction to Value creation – Integrated Supply Chain Perspective

Supply Chain plays an important role in any business and Integrated -> Seamless ->Adaptive Supply Chain is the way forward.  It’s good that the Integrated Supply chain is catching the fancy of the emerging economies, though many years after Michael Porter introduced the value chain analysis concept in his 1985 book  ‘The Competitive Advantage’  where he depicted Integrated Logistics as a primary activity of any organization. However, in the emerging economies, it still largely remain as a ‘coining term’ and a secondary activity and yet to become the part of the ‘business philosophy’.

I, again, noticed this disconnect in a recent event – Conquest 2013. Conquest is a wonderful endeavor by the EXIM publications to bring together experts from Supply Chain, Logistics, Transportation, Custom Brokers fraternity and most importantly state representatives.

This year’s Conquest2013 was one such event which saw a confluence of Senior State representatives (Indian Customs, DFC, Concor, Indian Railways, JNPT and Kandla Port etc) and high profile dignitaries from 3PL MNCs and Indian companies from Supply Chain, Transportation and CHA fraternity.

The theme of Conquest-2013 was Integrated Logistics and Supply Chain. It was a good knowledge sharing platform and panelists spoke well about various elements of supply chain including Warehousing, Transportation, Infrastructure, Rail transport, Auto Logistics etc. However, as an audience, the general view that I gathered was that while few of the panelists talked about Integrated Supply Chain, substantial chunk of it was emerging from ‘cost’ school of thought and that too the transactional / absolute cost. It is good to know the macro aspects of cost, as one of the panelists puts forward, “India’s logistics cost stand at about 13% of the GDP which is one of the highest in the world”. One can hear these macro aspects often in most of the discussions at a political, academic or a business forum and also in the industry reports along with ways to bring this cost down, which is logical as Logistics Costs impacts the competitiveness of the countries and organizations alike.

It is also important to look at cost at micro level but without having a larger view of the cost and more importantly, the view of the value it delivers, the view can be detrimental. In a supply chain scenario which is made up of many elements including, transportation, warehousing, distribution, inventory carrying, transit times, visibility etc, it is important to know the delivered benefits of the all the cost elements put together.  A broken down supply chain element (e.g. warehouse or transportaion) will only be portraying part of the picture. This fragmented view of supply chain was apparent as some of the panelists put forward, “Customers would not pay more if we build better warehouses”. Considering country’s dismal warehousing infrastructure, one would easily interpret then that if we improve the warehousing infrastructure, our logistics cost would go up further than 13%!

But that can be inferred only through the ‘cost’ (fragmented) school of thought. If customers pick such fragmented elements from different sources to create their own comprehensive supply chain, the value proposition of the ‘warehouse’ would largely be restricted to ‘rental’. And beyond a limit one would not be able to reduce the rental.  Further this fragmented view also conveys an element of asset ownership and possibly emerges from owning warehouses, truck and MHEs etc. But owning an asset and putting it into innovative use are two different things. The asset would, generally, be seen as something having an attached cost, but its usage, linking different elements of supply chain would carry an element of value. And when customer’s perception of value in a company’s product or services decreases, revenue and profit fall and eventually customer goes.

In my view, integrated supply chain is an integral part of the overall business model. And one has to see its contribution in terms of value creation for the overall business and not merely from ‘cost’ perspective which generally is transactional or itemized in nature. Unless the supply chain is considered, seen or shown as an integral part of the business model, it is difficult to be seen as value creating. And that’s where the disconnect is. It is this fragmented view of the supply chain, especially from the service providers, that let many manufacturers consider the so called 3PL providers as Asset Aggregators (or manpower aggregators).

In nutshell, it would be appropriate to say, that unless we integrate our thoughts on supply chain, it would not be easy to integrate the physical supply chains.  And integration of thoughts would, perhaps, be the only way to move from ‘cost’ to ‘value’ and move supply chain from a ‘cost centre’ to a ‘profit centre’!

Reproduced from Genex Logistics blog