Many companies in manufacturing and service industries are transforming themselves with solutions strategies. Market and industry structures can change fast, but such changes provide opportunities for innovation. That innovation often takes the form of moving from selling products to solutions.
Vendor-managed inventory is now common in the grocery industry. Outsourcing IT and telecommunications is the norm in some sectors. But because of the increased emphasis on customer service and logistics, the freight and logistics industry is beginning to work more closely with customers, their customers’ customers, and sometimes even with competitors.
The trend is towards manufacturers and distributors outsourcing logistics to strategic partners. This is leading to alliances, acquisitions, mergers, sub-contracting, and niche marketing. Consolidation produces larger companies that have an expanded traffic base, reduced overhead costs, and improved service. Suppliers can also become global entities by recreating themselves as virtual global companies. By forming partnerships with complementary companies they can provide end-to-end services. These partnerships allow expanded services without making additional investments. Their growth has been helped by transformation since the mid-90s from service to solution companies.
Previously, the service was productised typically differentiated by the characteristics of the individual shipment size (from letter to ship-load), frequency, urgency, fragility and so on. However, in the early 90s many client-side companies came under pressure whether because of costs or because of difficulties in managing their increasingly complex logistics operations.
This applied particularly to the electronics manufacturing industry. Here, product lifecycles were collapsing and reliability was rising, increasing the risk of manufacturers and distributors being left with obsolete inventories. Companies tried to cut costs by moving from servicing by replacing components, to servicing by replacing modules even asking customers to do it themselves.
This brought the spectre of expensive, rapidly obsolescing inventories scattered at different levels all over the world. However, when the modules were needed, they were needed quickly, increasing the cost-of-movement. Similar pressures were appearing in many other industries, particularly those with a strong science or technology element, such as pharmaceuticals.
The wiser logistics companies had noted the pressures and were already approaching their clients with the statement, ‘we think we can do this better for you give us the chance.’ It became clear that the slightly more complex service products (e.g. faster delivery, bookable at shorter notice, with more comprehensive and rapid tracking and tracing) could help client companies cope with some pressures, and the only comprehensive answer lay in outsourcing the complete logistics operation. This meant that the outsourcing supplier needed to take full responsibility for the physical movement element of the supply chain as well as all the associated information, communication and documentation systems.
This required suppliers to transform from simple service product suppliers to services suppliers, though note that the core offering of the supplier normally stayed the same. In most cases it needed to be more comprehensively and clearly modularised, so that those configuring the services for their clients could establish and then deliver against standards promised to customers.
New types of logistics staff needed to be recruited too, especially by the high-speed logistics companies – these companies were not used to managing inventories. They also needed to adopt e-business technology even more rapidly. They had already found it useful in terms of reducing costs for their traditional business; customers could now log on, order, pick up, and then track and trace using the web, cutting the suppliers call-centre costs sharply. Now, however, their clients’ logistics managers were requiring advanced, consolidated information and reporting, enabling them to focus on ensuring that the outsourced contract was running smoothly.
A particularly crucial area was pricing. Previously, this used a relatively simple formula, based upon the characteristics of individual or combinations of shipments. Now they had to price for contracts in which the service being delivered was inventory availability, not movements. In many cases, they were being asked for ‘value pricing’ by their clients pricing which could demonstrate not just improved performance but overall cost-saving.
In fact, this proved to be a boon for many suppliers, as once they were organised to supply services, they could do it far more cheaply than their clients. This was not just because of their knowledge and their shared infrastructure of transport, warehousing and information systems, but also because their disciplines of fast movement allowed their clients to save significant sums in terms of avoided product obsolescence, deterioration and pilferage and also reduced inventory finance costs.
Today, the global logistics management industries is one of the best examples of how a company can transform itself into a services company to meet the needs of their customers. It’s an object lesson for those companies who believe that they can carry on selling a commoditised product and survive.
