How Logistics organisations deliver the needs of the Customer and optimise cost to maximise bottom-line growth

In this final release, we’re going to examine how logistics organisations find that ever-so-elusive balance between cost & service. I’ve intentionally combined the final two outcomes into one article, partly because it is so difficult to write about them as separate areas, and partly because I wanted to time this release within the final week of summer.

Let’s start with looking at delivering the needs of the Customer. When we talk about the Customer in this context, we’re talking about the end-consumer of the product. An important point when thinking about the Customer is remembering that as a logistics function, we are a means to an end. Sometimes, we are the most crucial means to the end – think COVID-19, global supply chain challenges and recoveries from disaster – however, even in those circumstances, our purpose is still to get the product to the Customer. We are not the product. We exist to serve the needs of the product & therefore the needs of the Customer.

One common theme that occurs throughout organisations is that their Logistics functions become so big and wide, they become quite disconnected and far away from the Customer. As a result, they start to believe that logistics is the start and end point of the organisation, decisions become blinkered and narrower and suddenly, reducing logistics cost takes precedent over maximising the experience of the Customer.

One way of avoiding this is ensuring the logistics constraints are set at a level that is agreeable with the rest of the business and understood by the Customer. This may sound more rigorous than it actually is, in reality, most organisations do this very well today. Calculating and communicating logistics constraints is sometimes challenged by those outside of logistics – normally the question is ‘’why logistics should be constraining our ability to sell’’. The reason is often because it becomes so expensive to offer an unconstrained capacity that the profitability of the business would be lowered if the logistics capacity was unconstrained. The main cause of the requirement to constrain logistics capacity is seasonality or fluctuating volume requirements.

If a warehouse needs to pick 100 units for 6 months of the year but then in the other 6 months of the year needs to pick 200 units, then how much resource should the warehouse have? If the warehouse has sufficient base resource to pick 200 units, then for 6 months of the year they will have too much resource, and therefore be expensive. If the warehouse has sufficient base resource to pick 100 units, then for 6 months of the year, they will have insufficient resource, and therefore cost the business in lost sales.

Somewhere between those two options is the optimum answer and it is often created through maximising flexibility. The main factor that determines the sensitivity of the logistics capacity decision is the correlation between total flexible logistics cost and profit.

If an organisation has a flexible logistics cost that is 1% of revenue and a profit margin of 30%, then the impact of over-resourcing in logistics on overall business profitability is low. If an organisation has a flexible logistics cost that is 1% of revenue and a profit margin of 3%, then the impact of over-resourcing in logistics on overall business profitability is high.

Put very simply, if the logistics cost-to-serve is small compared to profit then it is not worth trying to save a few ￡’s in logistics as it could be lost through lost sales very quickly. If the logistics cost-to-serve is large compared to profit then there is a greater level of care required when making decisions that are going to bring cost and service facing off against each other.

When we think about Customer & Cost in the context of the Future of Logistics, there are 3 questions we said we would explore:

Will the outcomes be the same?

Customer: Customers will still expect the products they want to buy to be available quickly. The thing that is likely to change is what Customers want to buy. Net Zero ambitions and changing behaviour of the Customer are potentially going to drive a different behaviour as Customers will be more considerate of the impact of their purchases. They won’t necessarily want availability of every option as quickly as possible when the consequences of that are considered in the broader context of Net Zero.

Cost: Customers will still want the price they pay to be competitive and therefore logistics cost-to-serve will continue to need to be optimised, without impacting the experience of the Customer.

What threatens our ability to deliver the outcomes?

Customer: Logistics resources, especially labour, look like they’re going to continue to be scarce in the future. We’re in the early phases of a logistics race to automation. Organisations that prioritise investing capital in logistics automation now will be best placed to mitigate against the risk of labour scarcity in the future. Organisations that don’t will likely face difficulty in resourcing their logistics labour operations. The result of this difficulty will be that they either have to pay more for labour and inflate the price Customers pay for their products, or they can no longer remain competitive in the market on price and therefore will cease to exist.

Cost: The threat to Cost is the same as the threat to the Customer. Potential scarcity of logistics resources will drive up cost of those resources as supply reduces and demand increases. As we explored earlier, if the cost of logistics is small proportionately to the amount of profit, then the impact of this is likely to be less. If the cost of logistics is large proportionately to the amount of profit, then there is a reasonable chance that another significant rise in Logistics costs will threaten the future of the business. If competitors have the same challenge, then the risk to business continuity will be lower as Customers will have to pay more for the same product and service across the industry. However, if competitors move earlier and make investments to mitigate against this risk, such as automation, then the future of the business could be threatened.

What opportunities exist that will enable us to improve performance on the outcomes?

Customer: Logistics functions have a crucial role to play in defining the future experience of the Customer. We should ensure we have a seat at the table when exploring what the future Customer offering is going to be. Our scarcity of logistics resources, commitments on Net Zero and opportunities to innovate in delivery methodologies should be contributing to the decisions organisations are making.

Cost: Automating quickly will de-risk against labour scarcity and the subsequent rising labour cost. Additionally, encouraging product innovation that focuses on simplifying the way a product flows to a Customer will help reduce logistics cost. There are some everyday consumable items that go through as many as 20 individual process steps between Manufacturing and the Customer – this feels like too many and potentially carries with it lots of cost reduction opportunity. Finally, the pressure on logistics is only going to increase in the coming years – Net Zero ambitions, rising resource costs and changing Customer demands mean that logistics is going to become more important to organisations. It is not incomprehensible to imagine a world within the next 10 years where logistics makes or breaks a business – organisations that future proof their business now with logistics at the heart of the decision making will put themselves in the strongest possible position for the future.