Growing congestion has an impact on logistics across the U.S. Travel is slowing because highways and bridges are in need of repair; overburdened air-traffic control struggles to manage increasingly crowded skies; and port congestion is growing. New super-size container ships which will take longer to unload than older, smaller ships will only make matters worse.
One consequence for supply chains is that logistics costs are rising. Secondly, many companies struggle when demand changes quickly. Writing in Harvard Business Review last month, George Stalk, a senior adviser and fellow at Boston Consulting Group and a senior partner at Banyan Family Business Advisors, and Petros Paranikas, a partner and managing director of the Boston Consulting Group, explain, given the lag time before changes in demand are actually felt by different players throughout the chain, their effects are amplified, which may lead to inventory shortages or pile-ups. Then, companies tend to overcompensate by stopping or increasing production lines, and inventory levels can fluctuate wildly. This is the “whipsaw” effect, and congestion can intensify the situation, they explain.
The associated costs can be significant. Lost profits from a stockout equal the gross margin of a product—generally in the range of 20 percent to 50 percent, Stalk and Paranikas write. Product overstocks result in discounted prices, which are usually about half to two-thirds of the gross margin, they note.
The bottom line is that companies must redesign their supply chains or become victims of the direct and indirect costs of increasing congestion, Stalk and Paranikas believe. However, they explain, companies can minimize the business impact of congestion—and gain a strategic advantage over less-prepared competitors—by enhancing their supply-chain performance in several critical ways.
The first is to improve process efficiency. Speeding up value delivery can result in remarkable performance improvements. For instance, a 25 percent reduction in the time needed to deliver a product or service can double the productivity of labor and of working capital, Stalk and Paranikas write.
It’s also vital to improve information flows. Supply-chain speed and agility sharply increase when information is shared across the network. Walmart’s Retail Link offers an electronic bridge to the retailer’s suppliers, providing data on sales and inventory levels, and allowing them to download purchase orders, Stalk and Paranikas explain. This close integration gives suppliers a better sense of true demand, which can reduce the effects of congestion throughout the supply chain.
The ability to reduce variability can have a significant impact. Much supply-chain variability is self-inflicted, and comes from inadequately informed planning and needless complexity in processes, products, and portfolios, Stalk and Paranikas write. After improving process efficiency, companies should strive to shorten and simplify their supply chains by moving away from high-volume, world-scale plants that make just a few products to smaller plants that make a wider range of products closer to local markets. Increases in unit-production costs are often offset by lower logistics costs, faster replenishment cycles and fewer stockouts and overstocks, the authors believe.
Finally, companies should re-evaluate transportation methods. One tactical approach is to make more use of air freight. Air cargo costs per ton are four to six times greater than on-ocean shipping costs, which account for 0.5 percent to two percent of the shelf price of most products, according to Stalk and Paranikas. For the right products—those with high margins, a limited shelf life or short product life cycles such as fashion and technology items—the added costs of air freight are more than offset by the positive impact on profits of fewer stockouts and overstocks, the authors note.
Such tactics and strategies for improving supply-chain performance may lead to increased market share, reduced costs and dramatically improved profitability, the authors note. Consequently, companies which act now will be better prepared to seize opportunities as other companies struggle with logistics congestion.
What are your thoughts on logistics congestion? Do you see congestion getting worse? If so, is your company rethinking its approach to logistics?