As globalisation increasingly drives shippers to seek to track their goods at every stage, the container port is becoming a facilitator and partner in the supply chain, writes Kieran Ring
It is becoming easier than ever to forge international business ties, thanks to the internet, global communication and improved transport infrastructure. But either sourcing raw materials or finding a global customer for your finished goods are only a first step in a journey toward fulfilling those obligations.
With the push towards efficient manufacturing processes such as "lean" and "six sigma" continuing, it's not enough to know that critical parts or stocks are on the way or have been shipped. You need to know where they are in the supply chain, whether they've cleared customs, whether they're sitting in a warehouse or if they're on the last leg in a journey to your loading dock or your customer.
But keeping up with inbound and outbound shipments globally is not a core competency for manufacturers. So thirdparty logistics (3PL) providers have emerged. In 2005, 3PL providers based in the US had total annual revenues of about $100bn (t77.7bn).
Fourth-party logistics (4PL) providers have also emerged recently. These manage supply chains from various suppliers while acting as the intermediary between the manufacturer and its suppliers.
Both types of provider can help manufacturers to negotiate the maze involved in shipping goods around the corner or around the world. On behalf of the shipper, they stay in touch with shipments at each stage in its journey.
To facilitate this continuous visibility, more and more 3PLs are working to improve their relationships with port operators. As the custodians of the export and import gateways used by the shipment, these operators have an enormous influence on the safe, secure, efficient and timely execution of the dispatch and receipt of the container(s) in question.
The port industry is one of the world's most traditional and long-established communities.
But globalisation has led to the development of a new, more modern, type of port operator.
Rather than being the "big brother" in the transport cycle, it now sees itself as an equal but vital member of the global supply chain family or "ecosystem".
Accordingly, more and more ports are seeking to develop relationships with the world's shipping community to provide visibility and control to shippers in an ever-lengthening supply chain. In doing so, they are following the example of Yantian International Container Terminals in Shenzhen, southern China - the world's largest privately managed container terminal and the recipient of the award Global Container Port of the Year 2006 from the Global Institute Of Logistics (GIL).
This year, more than 40% of the US's imports are from the overseas subsidiaries of its corporations. And China accounts for about 25% of the global growth of GDP. Both of these factors are imposing a shift in global freight flows and creating an ever lengthening supply chain.
Comparative advantages are shifting rapidly, leading to de-industrialisation in North America and Europe, and a re-industrialisation of Pacific Asia.
The 1980s and 1990s have seen the transformation of logistics into the more comprehensive mode of supply-chain management (SCM). This process has been accelerated by the globalisation of manufacturing, SCM is based on new information and communications technologies, and also on changing habits of corporate management - such as the elimination of inventories and the integrated management of the chains. So the global expansion of production networks has been built upon logistics. And new forms of production organisation by global manufacturers are being determined entirely by provision of logistics services.
One such development is "modular production", in which production is driven by contract manufacturing, and vertically disintegrated and horizontally integrated management of value-chains. This modular manufacturing network happens against the background of organisational change.
It comprises both small and large firms, and small and large geographical scales, and it aims to create many products within few processes, in order to maximise revenue through economies of scale.
Logistics has grown to become the key unit within this production system. It has to provide for the agility or flexibility of any module, and the interaction of all modules in the entire network.
Flexibility is not only organisational, but also geographical. So a major shift has occurred in how and where commodities and their components are being assembled, manufactured and distributed.
This change is prompting a welcome development in the way organisations behave. The lengthening of the supply chain is forcing shippers and their service providers to relate more closely in the pursuit of visibility and process improvement. They are adopting "relationship orientation" as one of the central tenets of organisational behaviour in the global supply chain.
Academics have long identified the power of relationship orientation in improving logistics service quality. The idea first surfaced in 2002 in the US (in research by Zhao and Stank at the Department of Marketing and Supply Chain Management at Michigan State University's Eli Broad Graduate School of Management).
Zhao and Stank's research concluded that operational and relational capabilities do not only just complement and enhance each other's impact on performance but act as a strategic fit. To achieve superior performance, they require either a high-low or a low-high combination of the two capabilities.
Their research (based on resourced-based theories combined with the notion of capacity limitations from operations management) presents theoretical explanation of the trade-off between operational and relational capabilities in the logistics service context.
They concluded:
"Organisations that identify and develop relational marketing capabilities and operational capabilities to support relational capabilities set themselves apart from the competition."
So what exactly is relationship orientation? It is the proactive creation, development and maintenance of relationships between global supply chain partners, resulting in mutual exchange and fulfilment of promises at a profit. It is a philosophy of doing business successfully that promotes an organisational culture, putting the buyer-seller relationship at the centre of a firm's strategic and operational thinking.
At the GIL, we believe that the higher the levels of relationship orientation achieved between the stakeholders in the global supply chain, the greater the improvements in operational logistics service quality, resulting in better economic performance for all.
The crucial question in logistics has always been integration between the various parties in the supply chain. GIL's definition of supply chain management includes coordination and collaboration with channel partners - suppliers, intermediaries, thirdparty service providers or customers - as being critical to supply chain operations.
Supply chain partners and leads have always considered integration essential to improving operational and economic performance. This theory is now being put into practice. The evolution in supply chains and logistics models has driven supply chain partners such as shipping lines, stevedoring companies, inland transport operators and forwarders to rethink their role in the logistics process.
But the greatest challenge from globalisation is the one faced by ports in their new role as functional nodes in a logistics network.
Globalisation has led to increased activity at the world's ports, particularly those in China and other low-cost manufacturing centres where large hubs are experiencing heavy congestion - particularly problems getting goods in and out of the ports.
This is mainly a problem of landside infrastructure, which creates bottlenecks and congestion in and around the larger ports.
The terminal operator can be imagined as a juggler trying to balance four distinct functions:
The receipt and delivery of empty and full containers to and from its landside partners arriving by road or rail;
The receipt and delivery of empty and full containers to and from its seaside partners arriving by barge or ship;
The transfer of containers between sea and land and viceversa;
The storage of containers waiting to go or come.
The terminal operator's ability to keep these four balls in the air with the least amount of touches is what determines how much ground it needs to stand on, how many arms it needs to juggle with, and how much energy it needs to spend doing it.
The fewer "touches" or shuffling of the containers inside the terminal, the less energy expended, the least time wasted and the less money spent. This leads ultimately to a greater return on investment for port operators. And the bigger the cost savings in terminal handling charges, the greater the cost savings that are passed onto the shipper, and ultimately to the consumer.
However, as the terminal operator gets busier and the number of containers it is trying to juggle grows, adding "hands" - materials-handling equipment, cranes and so on - and "feet" - more storage space, yards and so on - is not necessarily the answer. In some cases it becomes impossible as land runs out.
The answer is reducing the overall number of containers in the terminal at any one time.
The operator must manage its own supply chain of containers and, like any lean practitioner, regulate supply and demand on a just-in-time basis.
The terminal operator, already adept at the use of both its "hands" and "feet", must move up the value chain and see how it can use its "head" to help it to optimise its assets.
Low-cost sourcing and globalisation are increasing throughput at the operator's port, and the operator now needs to understand and influence the source of these benefits.
So the operator moves upstream and downstream to the point of demand (purchase order) and supply (production), and ultimately into the minds of the logisticians that are engineering the supply chain.
By becoming involved earlier in the supply chain planning process, the terminal operator exchanges its expertise, particularly in customs processes and security - both traditionally enemies of time - for early visibility of what is coming down the chain to it and when.
Armed with accurate forecasts, the terminal operator can finally distinguish some of its containers from the bulk, and instead of treating all containers the same can create a class system whereby those containers that are known to him can benefit from express clearance or guaranteed positioning.
This "VIP" treatment allows the shipper to send its cargo portside on a just-in-time basis.
More time is squeezed out of the chain by eliminating dwell time at the port - a win-win situation for terminal operator and shipper alike.
But the real reward in the exchange is the terminal operator's guarantee to the shipper and the 3PL of greater visibility of their container(s) inside the perimeter fence of the terminal.
Traditionally for the shipper and 3PL, the port has been the "black hole" in the supply chain.
Once the container has entered the port, they lose visibility. This loss of visibility has forced shippers to make decisions about inventory and its delivery status based on logical conclusions as opposed to real intelligence based on physical events inside the port of origin or destination.
This information disconnect between the virtual or office world and real world down at portside is responsible for shippers' over-compensation in inventory levels.
Shippers err on the side of caution because of uncertainty about delivery times, and build up stocks close to market in anticipation of missing delivery for one reason or another.
Uncertainty through lack of visibility and collaboration drives up "safety" stocks which use up working capital and space on the warehouse floor or port yard. But increased collaboration and visibility among supply chain partners create greater reliability that allows inventories to be reduced.
Inventory cost makes up 25% - around $750bn (t584.2bn) - of the $2.7trn (t2.1trn) spent annually on global freight logistics. So terminal operators are being welcomed with open arms outside the perimeter fences of the ports.
The combined agendas of shippers, terminal operators and logistics service providers is forcing a confluence of opinion which is shifting emphasis from meeting service standards and minimising storage and transport costs to reducing inventory levels.
The 3PL industry lies at the heart of this exchange, playing the role of ambassador between the shipper and infrastructure and logistics asset owners such as the terminal operators on the ground. In this capacity, the 3PLs work to create a confluence of opinion between all parties and create a formula for a winwin scenario for all concerned.
The 3PL focuses on streamlining the process and finding real cost and time savings in the supply chain on behalf of its client the shipper - and often shares directly and equally through a gain share arrangement in any financial savings found. So the 3PL is keen to leverage relationships.
Once any consignment has left the port of origin within the low-cost economy and is destined for a high-cost, highprice consumer market - where to even look at a shipment costs money, never mind moving or storing it - the 3PL will effect at the point of origin as many of the value-added services needed to customise the product being shipped.
Such thinking has led to the development of the "direct to store" (DTS) service by 3PLs, whereby they deconsolidate bulk shipments at the China side of the supply chain, for instance, break them down to exact quantities, and ship them, together with shop-specific promotional materials, direct to the high street.
So shippers, particularly those transporting goods to high street retail, gain the opportunity to keep inventory moving from manufacturer to end-customer by eliminating stops at warehouses along the way.
DTS allows companies to shrink the fulfilment cycle and eliminate inventory costs, so it offers a good balance between fulfilment speed and logistics costs. It has become a particular favourite with shippers whose products are tied to specific holidays or seasons - stock that is virtually worthless once the holiday or season is over. DTS can ensure that products arrive just when they're needed without relying on costly temporary warehouse usage.
The DTS model is also effective for items that are out of stock and must be replenished directly from the factory.
Although DTS is not a panacea for all global logistics challenges, it proves the tangible benefits of relationship orientation in global supply chains, of joined-up thinking at source, and of the creative impact that outsourcing to 3PLs is having on global supply chains.
The concept arose out of 3PL, and its development shows that process engineering in collaboration with all parties leads to innovation and higher profitability all round.
Kieran Ring is CEO at the Global Institute of Logistics, www. globeinst. org, the New York-based, not-for-profit, organisation concerned with the proliferation of best practice in global logistics and supply chain. He studied industrial engineering before working as a publisher in the trade, technical and scientific sectors of the Irish and European media industry.
He founded the Global Logistics Forum at the European Institute of Transport before going on to found the Global Institute of Logistics in 2003. To contact him, email ceo@globeinst. org
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