Logistics costs in the modern economy – part 1
According to available information, the volume of sourcing from Low Cost Countries (LCCs) will double within the next three to five years. Consequently, the supply chains of many enterprises will undergo fundamental changes in geographical, strategic, and operational terms (Figure 1). The nature of these changes will certainly also cause shifts in the level and structure of logistics costs.
According to A.T. Kearney, a firm known for various analyses in the field of logistics, due to the increasing degree of economic globalization and the resulting complexity of logistics processes, logistics costs—after many years of relatively stable levels—should increase by approximately 8% in the 2004-2008 period. While in the past logistics was treated as a central area from which cost reductions were expected, today a large portion of entrepreneurs forecast an increase in these costs (Figure 2). “The growing large share of purchases outside Europe and the high delivery reliability expected by customers drive their complexity. Increasingly shorter lead times, a growing number of stock-keeping units (SKUs), as well as the demand on the customer side for an increasingly complex level of service, place ever-greater demands on logistics.” This nature of change applies primarily to those industries where the share of logistics costs in market turnover is high. In the machine building industry, it amounts to 7.5%, in consumer goods production and media 6.3%, while relatively little, at only 2.5%, in the pharmaceutical industry.
Strategies applied by enterprises are intended to prevent increasing complexity and rising logistics costs. A significant action in this regard is certainly the segmentation of supply chains by differentiating them according to customer requirements, which define service levels and acceptable cost levels. This type of logistics differentiation is currently practiced by about 50% of European enterprises. By individualizing the shaping of supply chains, they can reduce logistics costs by an average of up to 15% and limit lead times by as much as 22%. Further, not yet fully utilized savings potential is associated with the optimization of cooperative activities between suppliers and customers through the effective use of information technology. Thanks to this, in recent years, every fourth company has improved delivery punctuality from 91.5% to 95%, and the share of error-free deliveries (i.e., delivery completeness) from 97% to 98.5%. A key issue is the optimization of the entire value chain and the holistic, comprehensive inclusion of partners in improving “end to end” competencies. Due to the increasing scope of outsourcing, enterprises expect suppliers to improve and change the scope of their competencies and quality standards. The necessary diversification of supply chains will be effectively implemented only by those enterprises that, in an environment of diverse customer service offerings, assign the highest priority to customer requirements and preferences. Flexibility and integration with customers and suppliers are effective solutions for optimizing supply chains. However, this leads to a qualitatively new situation where increasing customer requirements in many cases of chain organization will increase the share of value-adding processes, which in the long term will cause an increase in logistics costs (Figures 3 and 5). The previously presented phenomenon of production location shifts to countries in our region (Poland, Czech Republic, Slovakia, Hungary) also causes significant changes in the magnitude of logistics costs. According to some authors, in the case of automotive parts and sub-assembly production, they can even double. In particular, in the initial period of production, a problem of quality and productivity arises, caused by insufficient employee qualifications. Furthermore, maintaining very strong ties with the parent plant, where all production orders are coordinated and examined by headquarters, provides further problems. For the security of supply at the parent plant, larger buffer stocks are maintained, which, along with higher transport costs and longer lead times, “eats up” the benefits of low labor costs. By “bypassing” the new location by headquarters, there is a lack of direct contact between customer orders and production control at its new location. To confirm these remarks, two examples from the practice of automotive industry manufacturers and suppliers can be cited.
The article comes from the magazine “Logistyka” 6/2007.