Supply chains have become considerably more sophisticated in the past decade, yet many companies still struggle with managing costs and risk.
At the heart of an efficient supply chain is transportation. This is the key to ensuring that the supply chain is not disrupted. For UK companies, sea shipping continues to be the main international transport method, and accounts for 95 per cent of UK imports and exports by tonnage.
Firms usually rely on freight forwarders to act as agents for organising sea shipping. Yet, while freight forwarding companies have traditionally only been responsible for bringing buyers and sellers of freight together, they are increasingly taking on a larger role.
As a direct result of the economic crisis, margins for buying and selling freight have tightened, meaning many freight forwarding companies now offer value-added activities as part of a bigger package. This can include landing services at the destination, managing suppliers on a company’s behalf or looking after a firm’s warehouses.
Michael Storey, business development director for freight forwarder Yusen Logistics Europe, says that, while cost remains important for companies, this is no longer the only factor affecting shipping decisions.
“People are governed by price, but they also have to look at the availability of transport,” he says. “The best price might not be the best solution for your needs. Freight rates move depending on demand, so the more flexible you are, the better your rate.”
Of course, this can also impact on a company’s delivery times. David Barron, group commercial director at freight forwarding firm Norbert Detressangle, says: “The cost of shipping depends entirely on capacity. Demand sets the market rate.”
Because of the greater demand, shipping around Christmas and Chinese New Year is always more expensive. Mr Barron estimates that these peak periods can add “up to several hundred US dollars per container”.
It is difficult for firms to predict the cost of shipping, as there is no futures market for container shipping, unlike in other markets.
In ten years’ time, it will make sense to bring manufacturing back to Europe
For shipping major raw materials, the Baltic Dry Index offers insight into future rates, as shipping brokers are asked about their daily prices for shipping dry bulk commodities, such as iron ore, coal and grain. The index is also used as an indicator of economic growth and production.
Creating a strong supply chain also means managing risk effectively, which is where the insurance industry comes in. Specialist insurers can look at a company’s supply chain and advise what the potential weakest points are, though it is also possible for companies to do this themselves.
Anj Chadha, global cargo development leader at insurance firm RSA Group, tells his clients to map out their entire supply chain. “Literally sit down and map out your supply chain from start to finish,” he says. “Look at where your suppliers are based. Are they near a river that is susceptible to flooding? Who is involved in the process and where? At what points do the goods change hands?”
Understanding the full life cycle of the products helps you to pinpoint the risks, he explains. “Preparation is key to managing risk, so understanding your supply chain is vital.”
Charles Davis, a partner at A.T. Kearney adds that unexpected events are any supply chain’s biggest risk. “Every year there is a major disruption. You don’t know what it’s going to be, but you can be certain that something will happen. So plan accordingly and consider a range of scenarios of where things can go wrong,” he says.
Therefore, picking the right insurance partner is key. A company will want to find an insurer that does not purely offer an umbrella when it’s sunny. Mr Chadha explains: “Simply put, find out whether they have a reputation for paying out when things do go wrong. And make sure they are there for the long haul, that they’re financially secure.” Insurers with a credit rating of at least AA+ are likely to be a safe pair of hands.
Closer to home, gathering data from your customers is central to managing demand and, therefore, your supply chain. Traditionally, consumers don’t have a great reputation for advising manufacturers when they plan on buying their goods, so an imbalance is almost inevitable.
Despite this, businesses can find it rewarding to try to mitigate this risk by extracting as much information as possible from the customer.
Dr Christos Tsinopoulos, lecturer in operations and project management at Durham University Business School, says: “From the minute you scan a pack of nappies in Tesco, this information is relayed back into the system and passed across the supply chain. You could do this in your business, too. Retailers can gather information through customer loyalty schemes, which can help forecast demand as well.”
However, while supply chains become more sophisticated, A.T. Kearney’s Mr Davis predicts a return to shorter supply chains. “Eastern Europe has similar cost structures to Asia, but is logistically a lot cheaper and a lot less susceptible to risk,” he says. “Both the rising costs of labour in China and the cost of fuel are having a direct impact. In ten years’ time, it will make sense to bring manufacturing back to Europe.”