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The Role of Logistics Providers in Handling Supply Chain Dynamics

Supply chain objectives are rarely fully met because of the individual behavior of decision makers in firms along the supply chain, as their behavior is neither optimal nor rational (Parnaby 1979). Due to the dynamic nature of the supply chain, amplifications and fluctuations occur from suppliers all the way down the chain (Sterman 1989). What is needed is a robust control system that is flexible enough to counteract any disturbances along the supply chain.

Logistics and supply chain management are seen as the fields in which logistics providers, by virtue of their particular expertise, are able to offer the most added value to transactions in the freight trade. Freight forwarders, as “logistics service facilitators,” play an important role in supply chain management, as an increasing number of firms outsource their logistics function (United Nations Economic and Social Commission for Asia and the Pacific [UNESCAP] 2002). These third party logistics providers are now becoming more involved in the design, management, and control of firms' supply chains. Asia-based regional logistics providers are the best equipped to manage supply chains in Asia as they are familiar with the context in which they operate.

The selection of a logistics provider is critical to supply chain competitiveness (Hensher and Chow 1999). Third party logistics plays a pivotal role in the design and provision of an integrated supply chain that responds to the client's needs. In order to help their customers, logistics providers need to behave more like partners of their clients. Not only do logistics providers have to arrange for the transport of cargo and facilitate its clearance through customs, they also need to manage their clients' order processing. This means that logistics providers are involved not only in lowering their clients' costs by reducing waste in ordering operations, but also in integrating their clients' supply chains. The aim is to make the partnerships so tight and seamless that the logistical services provided become part of the clients' own businesses. Figure 1 [ PDF 23.3KB | 1 page ] illustrates how logistics service providers control a global supply chain.

The task of a logistics provider is to facilitate trade to the extent that the trader needs only to produce and sell the goods (or to order the goods, in the case of imports). Once this has been done the logistics provider can take over and provide every subsequent function from factory gate to final delivery. As the distance between the manufacturer (i.e., the exporter) and the distributor or retailer is often quite considerable (and vice-versa for imports), problems relating to both material and information flows are common.

Suppliers have to respond as quickly as possible to various situations within a specified time frame. If the supplier cannot do so, the multinational enterprise (MNE), as the focal firm in the supply chain, will probably choose another supplier. This creates a number of problems for manufacturers, as they not only have to manufacture goods on time, but they also need to deliver them on time (Bruisma, Gorter, and Nijkamp 2000). The problem of delivering goods on time becomes very crucial when MNEs use JIT management techniques.

The logistics provider's main role is to manage the supply chain such that goods arrive on time; however, because of limited resources and various operational constraints, logistics providers are not always able to deliver, rendering their clients less competitive.

3.1 The Logistics Provider's Role in a Regional Supply Chain

Supply chain routing alternatives between Thailand and Viet Nam will now be presented and compared. The purpose of this subsection is to illustrate some of the issues logistics providers have to deal with when managing their clients' supply chains in the context of Southeast Asia. A total of three supply chain alternatives are described in Table 2 [ PDF 71KB | 1 page ] and illustrated in Figure 2 [ PDF 71KB | 1 page ]. Exporters and importers are not interested in routing decisions. Their sole focus is on having their goods delivered as per the agreed upon service level and cost. It is the duty of the logistics provider to find the optimal solution that balances the client's cost and time requirements. A contextual scanning is needed in order to find the most suitable option for a client's supply chain.

There is currently no direct maritime link between Bangkok and Hanoi. Freight containers being transported by sea must therefore be transshipped at Ho Chi Minh port, increasing transit time and cost. Sea transport costs (including transshipment) represent about 30% of total transport costs, but more than 70% of transit time. Trucking costs represent around 15% of total transport costs. It is interesting to note that administrative formalities can comprise up to 36% of the total cost of transportation between Bangkok and Hanoi via the maritime route. Also, while the total cost of transport by road is 30% higher than the maritime option, it is also 80% faster.

For a shipment traveling by land between Bangkok and Hanoi, transport has the highest activity ratio: more than 68% of total costs and 73% of total time for the whole journey. If no transloading is conducted at the border, it is possible to reduce transport costs by over 300 US dollars (US$) per twenty-foot equivalent unit.1 Transloading does not need to be done at the Lao People's Democratic Republic (Lao PDR)-Viet Nam border.

A number of fees are levied by various related authorities in the transit of goods between Thailand and Viet Nam. This creates a problem for the land route as there is empirical evidence that the land route is likely to be selected by traders who are handling higher value and more-time-sensitive commodities. These add-on fees defeat the purpose of physically and institutionally connecting Thailand and Viet Nam via Lao PDR to facilitate trade.

The actual physical transportation of goods is not a problem in and of itself. The difficulty lies in border crossings, despite the existence of the Greater Mekong Subregion Cross Border Transport Agreement, whose objective is to reduce border crossing time to not more than 30 minutes per border.

Cost is not the sole factor taken into account in routing selection; transit time is another key component. The land route can link Bangkok to Hanoi in just over two days, while the sea route takes more than 14 days due to transshipment. Even if a direct maritime link between Bangkok and Hanoi existed, the journey would take at least five days to complete.

The current maritime linkage is a reflection of the relatively low volume of direct trade between Thailand and Viet Nam's northern region. If the volume of trade were higher, there would surely be direct links between the countries. The existing maritime linkage is not competitive given the time dimension and is probably only suitable for cargo that is non-time sensitive.

3.2 Designing Supply Chains: The Role of Logistics Providers

In Asia, supply chain control processes, including production scheduling, shipment of product, and inventory maintenance, are frequently decentralized and remote from each other. The processes usually operate independently of one another and in serial order. Slow feedback from the marketplace causes scheduled production to over or under manufacture in relation to the actual demand. Another issue in the region is the relatively high cost of logistics—the result of inadequate physical facilities and cumbersome administrative barriers, coupled with a legal framework not adapted to modern international business practices (Banomyong, Cook, and Kent 2008).

Specialized middlemen, such as logistics service providers, perform critical, value-enhancing functions that benefit all the players along the supply chain and increase the supply chain's competitiveness. One of the ways Asia-based logistics providers can support the integration of supply chains for their clients and their network is by designing and developing effective supply chains and integrating multiple service suppliers into a seamless distribution system.

Limited resources and operational constraints are not unique to logistics provider operations in Asia. In each region or country in the world, various resource limitations and operational constraints exist. It is the duty of Asia-based logistics providers to make the best use of their resources within the existing physical constraints and the limited institutional framework prevalent in many Asian countries (Banomyong and Beresford 2001).

The logistics provider sees its function in the supply chain as that of a distributor. Its main role is to move goods from one end of the supply chain to the other within the constraints imposed by both clients and the commercial environment. “Customer panic” occurs when a client is faced with a difficult situation in the supply chain—usually a stockout—and is unable to rectify the situation. When a break in the supply chain occurs or is going to occur, there is a very strong risk that the whole supply chain will be immobilized, generally for a longer period that it took the break to occur (Hong-Minh, Disney, and Naim 2000). An analogy may be drawn between this type of situation and a traffic jam along a motorway. Typically, it can take up to three times longer for a traffic jam to clear than it takes one to build up.

The increased interest in managing supply chain dynamics in recent years has led to a number of research activities that have tried to verify the predicted demand amplification and information distortion. So far, most of these studies have focused on retail networks and distribution chains, neglecting the complexity introduced by product conversion in supply chains.

According to Hines, Holweg, and Sulliwan (2000), the factors affecting supply chain complexity are:

  • A lack of interaction of information and material flow, causing, for example, short or late deliveries, which force firms to reschedule production.
  • Interaction of whole value streams, competing, for example, for capacity at bottleneck points.
  • Multiple routing of parts or products through the supply chain.
  • Dynamic demand and supply patterns of particular parts or products.
  • The average numbers of parts bought from each first tier company, which can range from 50 to 600 parts.
  • Ordering policies and customer prioritization, which distorts demand and supply chain flows.
  • Product conversion and value added within each manufacturing level of the supply chain.
  • New product introduction and product retirement, which creates further instability.

Due to the complexity involved, a new system dynamics framework is necessary to gain a more comprehensive view of supply chain reality. Supply chain management in many Asian countries, such as Thailand, is still in its early stages. This is particularly true for local small and medium enterprises (SMEs) and family-owned businesses. Supply chain management practices have been widely implemented between multinational firms operating in Asian countries, but these practices have not yet reached the small- and medium-sized local suppliers (Wong and Boon-itt 2008). Supply chain performance for most local firms in Asia is weak, but has great potential for improvement because most business owners do not yet have a grasp of supply chain issues. During a supply chain assessment of many local firms, it was discovered that existing assessment tools, such as the Supply Chain Operation Reference model or the Enkawa Supply Chain Logistics Scorecard, were considered to be too complicated and too difficult to use, especially for SMEs (Banomyong 2008). This shows that many SMEs in the region are not in control of their supply chains and are subject to the influence of the focal supply chain firm, which is usually an MNE.

When members in the supply chain are rendered nonoperational, costs increase significantly and major penalties are incurred. In such situations, the players involved must find someone who is able to solve the problem of immobilization in the supply chain.

This is where logistics providers become invaluable as, through their network of overseas agents, they can monitor manufacturers throughout Asia, giving them complete control over their clients' supply chains. Some logistics providers may even act as a buffer to potential problems, creating an emergency network so that goods will arrive on time. The purpose of such an “emergency channel” is to minimize the impact of interruptions along supply chains (Jennings, Beresford, and Banomyong 2000).

The only prerequisite for a logistics provider to be able to activate an emergency channel is that the provider, or a member of the provider's network, must be physically in possession of the goods. In such cases, a solution is feasible and can be worked out at the most reasonable cost to the client. If the goods are not in a logistics provider's (or the provider's agent's) possession, however, it is almost impossible to find a solution.

The logistics provider's role is not only to organize the supply chain, but also to service it. As such, the logistics provider can be described as the “engineer” or “architect” of the supply chain. The duty of the logistics provider is not only to forecast customers' requirements, but also to provide value-added services that will contribute to the enhancement of customers' competitiveness. However, forecasting customers' requirements is not an exact science and the logistics provider must also be able to respond rapidly to unforeseen events or requests involved in the provision of logistics services to clients.

The logistics provider cannot operate successfully in isolation, but has to rely on his agency network, subcontractors, and clients. A close partnership has to be formed between the service provider and the client. This partnership, in turn, will facilitate the creation of more realistic supply chain designs and operational processes. It is the duty of the logistics provider to be aware of all the options available and to design supply chains flexible enough to cope with unforeseen events.

Today, logistics providers are faced with the daunting challenge of balancing cost minimization with clients' almost infinitely variable requirements. The outsourcing of logistics functions and JIT management techniques have forced logistics providers to design moredynamic and more-efficient supply chains within various operational constraints. However, it is the physical aspects of the supply chain that will ultimately shape supply chain dynamics.

The successful development of basic infrastructure and the adaptation of local commercial practices to international standards through the removal of all unnecessary trade barriers are preconditions to the integration of supply chains in Asia and the rest of the world.

The challenges for logistics providers in Asia include identifying essential transport infrastructure and networks, as well as determining how to achieve and maintain an active and competitive role in providing logistics services through the integration of global supply chains.

Logistics providers located in developed Asia provide extensive logistical and supply chain management services. These services go beyond transport and distribution, catering to the needs of exporters and importers by managing all transport requirements from the point of origin of raw materials, through the manufacturing process, to delivery to the final consumer. In contrast, logistics providers in Asia's developing economies are faced with many physical and non-physical barriers to providing full door-to-door transport and other logistical services, such as inadequate banking practices, documentation, and insurance.

Logistics and supply chain management, as a discipline, is not fully developed in many parts of Asia. The main functions of logistics—purchasing, production, distribution, warehousing, inventory, and information—are available in the region, but the emphasis is generally on transportation or distribution issues. The majority of logistics providers in Asia are not currently capable of offering a higher level of value-added logistics services.

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