The 12 Principles of High Performance Warehousing: 1. Align business & warehouse strategy

Align your warehousing strategy with your business strategy to accelerate your overall business performance

This is part 1 of the promised series on the 12 Principles of High Performance Warehousing that I first presented at the 7th ELSC in Mumbai in September 2013.  These ideas are the core that I will expand upon in my book to be released later this year.

Before we get to the warehouse we should consider if you even need one, what it should look like and should you run it yourself or outsource it to someone else.

Supply chains are constantly evolving and have undergone dramatic changes over the last 20 years in particular as the pace of globalisation and technology has created truly global supply chains.  The internet has brought transparency and visibility of product and pricing and the means for individuals to purchase globally and for businesses to sell their products globally.  This trend will undoubtedly continue to affect the nature of the logistics and warehousing operations within increasingly fragmented and personal supply chains.  The diagram on the next page illustrates a simplified model of modern supply chains.

So where does your business fit?  Is your business about generic manufacturing for others or do you have a brand with unique products and services?   The brand originators are now the power players in commerce.  Having a unique value that cannot be replicated by others they can control their own destiny now because there is no need for an intermediary between them and the customer.  A brand and a customer relationship is now all powerful, increasingly relegating wholesale and retail to the role of physical distribution and price taking rather than making.

Are you in wholesale or retail stores?  Transparency and the personalisation of supply chain are currently waging war on traditional wholesale and retail.  Although conventional retail is still very significant, much of the value add of retail can now be done online with better product advice, wider range (limitless in fact) and lower prices.  That retail will be fundamentally re-shaped over the coming years, is inevitable.  Similarly wholesale is under pressure; with razor thin margins, only those with large volume are profitable.  Some wholesalers are moving into 3PL services to leverage their logistics expertise with manufacturers who now seek a more direct relationship with their customers.  3PL services have the added attraction of eliminating inventory carrying cost and risk.

Another wholesale strategy is to source their own branded products.  If they cannot tie up an exclusive distribution agreement with a big brand manufacturer, then they can build their own brand by sourcing from the generic manufacturers and marketing to their existing customer base.  Whilst this can be a very effective strategy, it may also put them in competition with the core brands that support them.  This may damage key supplier relationships and the potential impact of this must be considered.

Universal model of supply chain

Your business strategy will determine where you fit in the supply chain and consequently what type of warehouse you will need. Manufacturers typically require bulk warehouses suitable for storing and shipping large amounts of a limited range of SKUs.  A wholesaler requires a warehouse that can manage a very large range of SKUs in much smaller quantities required by retailers.  A pure-play online retailer may carry very little stock, relying on rapid replenishment from wholesalers and a network of direct ship orders from network partners.   Depending on what business you are in and where in the supply chain you fit.  Some retailers barely have a warehouse and instead run a large cross docking operation with carefully scheduled supplier deliveries in one side and a sophisticated conveyor sortation system to sort inbound deliveries to outbound transport by store. 

If you do have a warehouse then how big should it be and where should you put it?  Given the substantial capital investment required to build a warehouse this is a very important question.  This can be done at a high level with a spreadsheet cost analysis of various options.  A more sophisticated solution is to use special mapping & route optimisation software such as CAST or simulation software such as Supply Chain Guru.  Supply Chain Guru is an all in one design tool that optimises supply chains based on data and constraints and can also run simulations to review the impact of various strategies on the design over time.  Use of these software tools can give you a high degree of confidence in your warehouse location and sizing and technology decisions.

The final question is whether you should run your own warehouse or outsource it.  The only real answer to this question is that whatever choice you make, you commit yourself to managing a positive outcome for your business.  By that I mean that whether most similar companies in your industry outsource or run their own warehouses there will always be successful and not so successful examples of each type of solution.  Both options require real work to make them successful.  If you outsource and forget, you will likely come to regret the decision as high costs and/or poor service will creep up on you until you find the outcome intolerable.

The main reasons to outsource are:

1. To reduce operating costs and increase profit
2. Create a more scalable platform for growing your business
3. Eliminate a non-core business activity to allow you to focus on growing your         business.

You need to watch out for:

• Cost structures that you do not understand or that will not reduce your logistics cost/unit as you increase your sales.  You need to understand your current costs and the impact of any particular outsourcing arrangement on your business as you expect it to change over time.
• Lack of visibility of activity and service level performance.
• Lack of responsiveness to your business needs.  Does the logistics provider understand your industry and have demonstrated experience in similar businesses?

Remember that:

• Once you outsource it is expensive and difficult to go back to doing it yourself. This almost never happens.  As a consultant I can tell you that there are far more outsourcing projects than insourcing projects.
• It is better to outsource than to do it yourself badly. 
• It is usually cheaper to do it yourself well than to outsource.  Following the 12 Principles of High Performance Warehousing will ensure that you do it yourself well.

Need some help with your warehouse?

What if your logistics is already the best? (Part II)

Is collaborative logistics the future?

Yesterday I suggested that you should collaborate* with your competitors to reduce your logistics costs.  If you actually did this what might it look like and where could you take it?

Well it might look like BevChain. Which is a joint venture between Lion Nathan and Linfox.  This is a live example right now of what I am talking about at least in basic principle.  It obviously helps if you start off with a giant like Lion Nathan to kick things along.  

I think the joint venture is the key.  It is not just a venture by Linfox and Lion Nathan is not trying to be a 3PL.  The two together provides the critical volume required to get economies of scale and essential infrastructure and process development that can be sold to other industry players.  I see no reason why the joint venture idea could not be extended to multiple industry suppliers who provide the logistics volume to make a viable business and who also have a stake in the new company and share in the savings.  Indeed the whole thing could be run almost like a co-op to reduce costs to all concerned whilst still providing a return to the 3PL partner.

If you apply some Vested Outsourcing concepts you will ensure that the costs keep going down over time whilst also enhancing the profits for the 3PL partner.  Once you have the basics running well then why not go further up and down the supply chain?  The new industry based logistics company could aggregate demand for common supplies, raw materials or even  stock and buy on behalf of the group.  This would allow them to negotiate better volume discounts and also manage inventory jointly to eliminate multiple safety stocks.  

Managing the total freight task goes without saying, but why not develop a shared services online direct to customer distribution model?  This could be presented to the customer as a category killer single distributor or individually branded mini-sites, but offer to consolidate freight as an incentive to buy across multiple brands.

Of course such a strategy endangers the currently entrenched distributors, and depending on the relative market power differential between maker and distributor, this may or may not be a good strategy.  Generally the theme of the internet age is that the middle man is being squeezed as the makers of products seek direct relationships with their customers.  If the only value you add is a cheap price, someone will eventually find a way to do it cheaper than you.

This idea was developed by DHL with their Pharmacy Supply Model in 2006.  For a while they turned their pharmaceutical pre-wholesale 3PL business into a wholesale distributor and challenged the big three pharmaceutical wholesalers (Sigma, Symbion, API).  The alliance that made it possible with Alphapharm eventually failed and the business could not fulfill its promise, but it was a very innovative idea at the time.

I worked on the DHL Pharmacy Supply project for my first consulting job with Logistics Bureau and it was an extraordinary experience to help develop such a a ground breaking new logistics service.

If the manufacturers and product originators can't or won't develop such a service it leaves the door open for the wholesalers to do essentially the same thing further up the supply chain - if the circumstances are right.  The retail pharmacy supply industry certainly has the right set of conditions for this to occur.  Three wholesalers serving the same market in a highly competitive and increasingly commoditised environment plus a number of smaller distribution operations fragmenting the supply chain.

These are I think the prime conditions to make such a solution possible:

1. A few major players who can reach agreement for a joint venture to pool their logistics operations
2. High competiton with price sensitivity
3. Opportunity to grow by securing some of the remaining logistics and thus make some profit from logistics services that would not otherwise be available to them.

Like all good consultants I have come up with a name for this idea.  I call it the Integrated Collaborative Logistics Service or ICLS for short.  In part III I will discuss some other reasons why I expect to see more of this type of collaborative logistics in future.


* Just in case it is not obvious, the sort of collaboration I am talking about is not anti-competitive or price fixing in anyway. The formation of a joint venture aimed at achieving a low price logistics service does not limit what any of the joint venture partners do with their cost savings.  They can hold on to them to invest in innovative and more profitable business ideas or continue the price war and be back where they started.  I am simply pointing out the next logical step in logistics evolution when a certain set of conditions exist.

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1PL, 2PL, 3PL, 4PL, 5PL ???

There is clearly a lot of confusion in the industry around these acronyms, what they stand for and what they mean in practice.  I was surprised to see the 5PL term used by a WMS vendor I was looking at and as I searched the net to see how many other people had started to use this term I stumbled upon an old Times of India article that illustrates the confusion and even found a transport company branding themselves as a 5PL.

Seriously? This is a case of