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The Logistics Industry

Introduction

The logistics industry is facing an unprecedented change now and in the near future. Technology, consumer behaviour, energy and newly emerging markets are amongst some of the factors continually shaping the industry bringing about new opportunities and risks (PriceWaterhouseCoopers 2015).

This essay will detail some of the major changes and challenges being faced by the logistics industry now and within the next decade. It will also detail the impact of the changes and challenges in terms of the outcome-driven supply chain framework which includes cost, responsiveness, security, sustainability, resilience and innovation (Melynk et al. 2010).

The Asia-Pacific region has been selected on the basis that countries within that region are currently experiencing significant growth that is set to overtake Europe as one of the largest contract logistics markets (Chao 2015). In addition, the Asia-Pacific region is the home to many multilateral organisations including the Asia-Pacific Economic Cooperation (APEC) which encompassed approximately 59% of total world GDP and 49% of total world trade in 2015 (APEC 2017).

Framework

The outcome-driven supply chain framework establishes that supply chains serve the purpose of providing six basic outcomes. One of the outcomes is cost which focuses on cost reduction while maintaining consistent quality and delivery at the same time. Another is sustainability which focuses on the environmentally friendliness of the supply chain including but not limited to carbon footprints, level of waste and pollution. Resilience is another outcome which details the recovery of supply chains from different scenarios such as force majeure events and other major issues or failures. Another is innovation which covers new supply chain efficiencies, processes and the development of new intellectual property. Responsiveness is an outcome which focuses on the ability to adapt in response to changing environmental factors while balancing cost considerations. Security is the final outcome which covers off on the level that supply chains being immune to risks and threats. It also includes the level of transparency, control and management of supply chains (Melnyk et al. 2010).

E-Commerce

Electronic commerce or e-commerce has emerged as one of the largest issues to confront the logistics industry in Asia. This is due to the fact that Asia is now in a position to become the world’s largest e-commerce market and the industry there is actively innovating to meet increasing demand (Mizar 2016). The rapid adoption of the internet has propelled a significant increase in internet sales, forcing businesses to adapt to internet sales and pushed the logistics industry to move towards new distribution infrastructure to effectively manage online sales. E-commerce has also prompted the logistics industry to focus on small order sizes and parcels, higher order volumes and turnaround times (Cho, Ozment & Sink 2008; Yee & Heutger 2015).

The traditional supply chain follows the movement of goods from the manufacturer to the distribution warehouses then to wholesalers and then retailers before it finally reaches the end consumer. E-commerce has led to a shift where manufacturers bypass distributors, wholesalers and retailers selling directly to the end customers. Benefits from e-commerce include reduced distribution cost and greater responsiveness to customer demands as it bypasses multiple layers of a traditional supply chain. While from a customer’s perspective there is greater convenience of purchasing when they want and not being limited by the opening hours of retail stores and a lower cost of searching (Mukhopadhyay & Setoputro 2004).

While e-commerce has brought about growth in third party logistics (3PL) companies as the fulfilment requirement is often outsourced to them, there have also been issues for businesses in the form of reverse logistics which is where products ordered on the internet are returned from the customer to the original supplier (Cho, Ozment & Sink 2008; Xiaoyan et al. 2012). Reverse logistics can result in additional processing costs for manufacturers and economic loss from goods returned (Mukhopadhyay & Setoputro 2004; Cho, Ozment & Sink 2008).

In terms of the outcome-driven supply chain the impact of e-commerce on cost is neutral as it has led to a reduction in product costs along with a faster turnaround time of goods being delivered straight from manufacturers to the customers bypassing traditional intermediaries. However, this is balanced out from potential cost increases due to reverse logistics such as goods returned and additional processing costs. For responsiveness, the impact is positive as manufacturers can respond quickly to demand by moving supplies quickly and directly to areas of high demand. The impact on the security outcome is also positive as there are fewer partners in the supply chain allowing more visibility and less risk of disruption. In terms of sustainability it is positive as there are less resources consumed by transacting directly with the end customer and greater visibility of the supply chain. For resilience, it is also positive as the manufacturer can react quickly to disruptions and as there are less layers to the supply chain they can monitor and reduce risks more effectively. For innovation, it is positive as e-commerce has forced the manufacturer to be more innovative in dealing with customers and for logistics providers to adapt to new conditions such as smaller parcels, higher volumes, reverse logistics and to innovate to remain competitive.

Outsourcing

In this day and age more companies are choosing to outsource work to subcontractors for the purpose of optimising costs and to focus on the development of their core business (Fabianová & Ridzonová 2015). This also allows businesses to diversify risks, leverage their resources and gain competitive advantages (Wang & Regan 2003).

In terms of the logistics industry, companies regard logistics functions such as transportation, distribution, warehousing, material handling, order processing as a non-value add activity. Companies have decided outsource the functions to outside companies and pay attention instead on what will help them develop a competitive edge which are value-add activities (Ho et al. 2012). Companies use 3PL providers as a way of outsourcing as it is an effective method of cost reduction and risk diversification. This has led to a significant growth of 3PLs as companies in the Asia-Pacific region such as the United States continue to focus on core business activities while companies in China do so to reduce costs (Wang & Regan 2003).

However, while there are numerous benefits associated with outsourcing logistics to external companies there are also risks and issues associated with outsourcing. One of the risks includes a lack of control or governance of 3PL providers which can lead to issues with performance. There is also evidence to suggest that the outsourcing of logistics has had a negative impact on profitability, business performance and customer satisfaction. It is also said that outsourcing logistics ultimately had no impact on the level of service performance (Zhu et al. 2017). Other issues include that 3PL providers are not able to meet the established timeliness service levels; a lack of visibility and information availability issues when requested; and unrealised cost reductions (Aldebert & Hudziak 2012).

An analysis of outsourcing using the outcome-driven supply chain indicates that there is a

positive impact on the cost outcome. The reasoning behind this is that the cost of overhead especially around infrastructure in terms of both information technology and physical equipment, land, buildings and employee headcount is reduced significantly. In addition, by outsourcing logistics to external companies it is expected that the quality would be maintained because logistics is a core business competency for 3PLs and that is where they have their competitive advantage. 3PL companies can leverage off an extensive network of infrastructure and services internationally which allows them to ensure that goods are delivered reliably and on time. In terms of responsiveness it is negative as the information linkages are limited and responses to changes in demand is also limited due to a lack of capacity as 3PLs may be servicing other customers and they are not under the control of the business. For the security outcome, there is a negative impact from outsourcing, the rationale is that there is a lack of visibility and transparency of where the goods are located. In addition, if there are issues with the logistics company, there would be considerable difficulty in obtaining access to the supplies. There is also a lack of control from the business into the outsourced company. In terms of sustainability it is neutral because there is a lack of visibility throughout the supply chain. However, because the outsourced company is an expert in this field, it is expected that they will achieve significant competitive advantages and therefore efficiencies thus ensuring that the resourcing impact is minimal. Outsourcing under the resilience outcome is considered negative because there is a lack of transparency throughout the supply chain process. The reaction to disruptions would be slow due to a lack of control and if there were significant threats to the outsourced company, putting together an arrangement with an alternative company would be time consuming and expensive. The impact on innovation is positive as businesses can focus on their core competencies gaining a competitive advantage. This also facilitates the development of new intellectual property and businesses can leverage off the extensive network of logistics distribution to reach new markets more effectively.

Reshoring

Reshoring or backshoring is a process that involves companies re-locating part of their production of supplies from previously outsourced foreign locations and bringing them back to the original home country. Companies had previously offshored work to foreign countries on the basis of lower wages, financial incentives and opportunities to gain market access (Urzelai & Puig 2017; IEEE-USA STAFF 2013).

However, in recent years there has been a renewed focus by corporations in returning operations into the original home country. Companies such as Caterpillar, Google and Apple have either pledged to reshore or already have reshored their operations (IEEE-USA STAFF 2013). Ford have reshored from Mexico and Spain by shifting production back to the United States bringing 3,200 jobs, while Boeing has also shifted parts manufacturing of their 777 passenger planes back to the United States bringing 2,700 jobs (Sauter & Stebbins 2016).

Reasons attributed to this shift in reshoring include rising labour costs of the offshored country, higher transportation costs, longer delivery times and labour shortages. A survey of German manufacturing companies has indicated that there was often a lack of flexibility at the overseas country and quality issues were also encountered and that for some companies who offshored operations, after a period of a few years the companies backshored or reshored their operations (Urzelai & Puig 2017).

Other reasons include public relations and image, the requirement for faster turnaround on manufacturing, an improvement of the quality of the supplies and consumer demand for domestically manufactured goods (Sauter & Stebbins 2016). Companies utilising reshoring are also aiming to de-risk their supply chains and to respond faster and more efficiently to changing customer demands (Wingard & Connerty 2014). In addition, there are national security arguments and legislative requirements for companies to shift the manufacturing of military equipment or commercial components that would be used for military purposes domestically due to concerns around malware embedded inside foreign manufactured parts or a stop in trade with foreign countries (Coy 2017).

Under the outcome-driven supply chain reshoring would have a positive impact on cost this is due to the reduction in time for delivery and the improved quality of supplies. The amount of inventory held would be less due to closer proximity to markets reducing the need for more buffer stock. For responsiveness, it would be positive as localised manufacturing means quicker response times to changing customer demands and a reduction in time in moving goods across locations. The security outcome would be positive as localisation means less vulnerability to geopolitical risk and other external threats and the products would be at less risk to tampering. In terms of sustainability it would be neutral as while there would be more visibility and transparency in the supply chain, efficiency in resource usage would not be at an optimal level due to a lack of consolidation. It would achieve a positive resilience outcome as a diversified supply chain reduces risks and is less prone to disruptions. Localisation also means greater reaction speed and meeting customer needs more effectively. In terms of innovation it would be positive as intellectual property would be better protected due to localisation and closer integration with customers would facilitate more innovation.

Technological Advancements

Advancements in technology is a challenge for the logistics industry as they learn to adopt and integrate it into their existing framework. Within the Asia-Pacific region, Singapore has seen companies such as YCH Group and Bollore Logistics invest more heavily in automation and other information technology systems (Woo 2017; Tan & Ming 2016). The reason is that there are significant opportunities to improve performance, better meet customer demands and become more effective at forecasting capacity through using machine learning and other artificial intelligence in data analytics (Tipping & Kauschke 2016).

In addition to software technological advancements, hardware technological advancements offer the industry significant opportunities to transform the industry. There is movement within the maritime industry towards autonomous cargo ships as there are significant benefits such as increased safety due to less human error, the opportunity to carry more cargo through the removal of facilities for the human crew, cost savings from hiring human crew and also the removal of risks to humans’ due to piracy (The Economist 2014). Drones and robotics offer lower costs, increased efficiency and a smaller human workforce, for example vision guided fully autonomous mobile robots have the ability to process orders four times faster than humans (Tipping & Kauschke 2016; Singh 2016).

However, the industry currently faces issues due to a lack of digital culture and training. In addition, many companies rely on a variety of legacy systems and have been slow to invest in the adoption of new technologies (Tipping & Kauschke 2016). Implementation of new technologies is costly and risky if companies do not fully understand the technology. Furthermore, adoption of new technologies may not automatically result in perceived improvements in performance as there are a variety of other factors and inter- and intradependencies present (Hazen & Byrd 2012).

Applying the outcome-driven supply chain to technological advancements it can be determined that the cost is positive as long-term performance and efficiency increases along with lower costs significantly offset any cost of adoption and lack of familiarity with new technologies. For responsiveness, it is positive as technological tools can be used to monitor demand and improve forecasting which can assist with planning on production capacity and logistics capacity. For security, it is negative as there are still significant concerns around vulnerability to external threats such as hackers and internal issues such as a lack of digital training and culture. In terms of sustainability it would have a positive impact as greater efficiency results in less waste and a smaller resource impact. For resilience, it would be a positive impact as there is greater emphasis on visibility due to more data being analysed and more information systems and sensors capturing data. This also allows higher responsiveness and increased monitoring and identification of risk. For innovation, it is considered positive as it provides new and more efficient methods of delivering goods and facilitates better cooperation with other stakeholders.

Conclusion

There are many logistics challenges within the Asia-Pacific region however if companies conduct an analysis using the outcome-driven supply chain framework, plan appropriately and implement risk mitigation measures companies can maximise the benefits and reduce any drawbacks. E-commerce can bring about significant positive effects such as better responsiveness and a push toward more innovation but it is worth noting that firms must be aware of the risks around reverse logistics and to appropriately plan for that. For outsourcing, there are benefits in cost reduction, efficiency and innovation as businesses can focus on their core competencies, however firms must prepare for more focus on supplier management and demand greater access and visibility so as to negate any risks to the supply chain. With regards to reshoring, firms can benefit from reduced lead times and increased control and reduced risks to external threats. However, companies must plan accordingly so that the benefits of reshoring outweigh the costs of setting up locally. Technological advancements allow companies to benefit from higher efficiency in terms of output, reduction in human overhead costs and better meeting customer demand. However, companies must understand the technology, the expected outcomes and the cost of implementation carefully to take advantage of the benefits and mitigate against the risk of failed implementation.

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