14.2 Logistics Strategy

The importance of logistics in business, as demonstrated through the examples of Amazon, Walmart, and Kraft Heinz, cannot be overstated. However, it’s crucial to acknowledge that logistics involves significant capital costs. These costs necessitate a comprehensive, long-term strategic approach, aligning logistics with broader business objectives.

As discussed in Chapter 2, strategies involving substantial cost implications and direct impact on achieving business objectives fall under the umbrella of strategic decisions. In the realm of logistics, these strategic decisions encompass various critical components, ensuring that logistics operations not only support but also enhance business goals.

Key components of strategic decision-making in logistics include:

1. Ownership vs. Outsourcing: A fundamental decision is whether to own logistics infrastructure (like fleets and warehouses) or to outsource these services to specialized providers. This decision impacts not only cost structures but also the control over logistics operations.
2. Mode of Transport Selection: Choosing the right mode of transport (air, sea, road, rail) is crucial, as each mode has its own cost, speed, and capacity characteristics. The decision should align with the company’s delivery speed requirements, cargo volume, and geographical coverage.
3. Distribution Network Design: The structure of the distribution network, including the number and location of distribution centers, directly affects delivery efficiency and customer satisfaction.
4. Type of Warehousing: Decisions about warehousing involve determining the right mix of storage facilities, including traditional warehouses, distribution centers, and automated storage systems, considering factors like inventory turnover, product type, and accessibility.

In this chapter, we will explore the first two components: the decision between owning and outsourcing logistics operations and the selection of transportation modes. These choices lay the foundation for a company’s logistics strategy, influencing cost, efficiency, and the overall effectiveness of the supply chain.

The following chapter will delve into the remaining components: the design of the distribution network and the types of warehousing facilities. These areas are critical for ensuring that the physical movement of goods aligns with the strategic objectives of the business, enabling effective and efficient delivery to end customers.

4.2.1 Ownership vs. Outsourcing

The decision to own or outsource logistics operations, particularly in terms of transportation like truck fleets, is a pivotal one for businesses. Giants like Walmart and Amazon exemplify the approach of owning a substantial part of their truck fleets. Owning a private fleet offers greater control over logistics operations, and for companies with significant freight movement, it can be more cost-effective than outsourcing.

However, managing a private fleet comes with its own set of challenges:

Backhauls and Deadheads: One major concern is the issue of empty backhauls, or ‘deadheads.’ A backhaul refers to the return journey of a truck from its destination back to its point of origin. For instance, in a retail scenario, the journey of a truck returning from the retail store to the warehouse is a backhaul. While logistics companies can often find alternate loads for these return trips, private fleets usually return to their distribution centers, often without cargo. This empty return trip is known as a deadhead. Deadheads represent a loss of efficiency and an increase in operational costs, as the truck is not generating revenue on its return journey.

Technical Expertise in Fleet Management: Another significant challenge is the technical expertise required for managing fleet maintenance and operations. Retail and other non-logistics businesses may not possess this specialized knowledge, making private fleet management an expensive and complex endeavor. In addition to maintenance and operations, the perennial shortage of truck drivers further complicates this scenario. Ensuring consistent driver availability poses a challenge, potentially disrupting logistics operations and adding to the costs and complexities of running a private fleet.

Given these considerations, businesses must weigh the benefits of having direct control and potentially lower costs (in high-volume freight movement scenarios) against the complexities and expertise required in managing a private fleet. This strategic decision should align with the company’s overall logistics strategy, considering factors like cost, control, efficiency, and the nature of the business’s supply chain requirements.

14.2.2 Mode of Transport Selection

The strategic decision regarding the mode of transport is a critical component of logistics planning. This decision often balances two key factors: cost and service level, which includes speed and reliability. Generally, there is a direct relationship between the cost of transportation and its speed and reliability. Cheaper modes like ocean transport typically offer longer lead times, whereas more expensive options like air transport are faster and more reliable.

The impact of this decision extends to inventory management, as we explored in the chapter on inventory. The level of inventory and safety stock a company holds is directly influenced by the lead time of its chosen transportation mode.

Consider a product with a daily demand of 20 units and a 30-day lead time when delivered by ocean carrier. Using a reorder point (ROP) inventory system, the ROP would be set at 20 units x 30 days = 600 units. The safety stock, in this case, needs to cover the variability over these 30 days. Conversely, if the same product is shipped by air, with a lead time of only 3 days, the ROP significantly reduces to 20 units x 3 days = 60 units. The safety stock for this scenario would only need to cover a 3-day period.

This relationship between inventory costs, transport speed, and cost has substantial strategic implications. Generally, items with high inventory costs are better suited for faster and more expensive modes of transport to minimize holding costs. Conversely, items with lower inventory holding costs can be shipped using slower, more economical modes of transport.

This decision also influences other aspects of the supply chain, such as packaging design. Products intended for ocean transport, which may face rough handling and long storage periods, require robust packaging. In contrast, products shipped by air, where weight is a crucial factor, necessitate lightweight packaging designs.

Thus, the selection of transport mode is not merely a logistic decision but a strategic one that affects various aspects of supply chain management, from inventory levels and safety stock to packaging design and overall supply chain efficiency.