As understood, your good company, Kinley, invests heavily in research and development and you have loyal engineering expertises to design innovative product and one step ahead of your competitor. Even Kinley has a good relationship with distributor whole over the world, still for European region, instead of UK, will be a big issue to deal with warehouse business. Your company is independent on knowledge but dependent on capacity.
- Product
Kinley’s product is a diverse product mix of electronics integration, seems that all component stands independently for further composition (modular). For modular products, capturing knowledge is important, whereas having the production capacity in-source is less critical. Since your company still dependent on capacity therefore outsourcing this business is an opportunity.
- Cost Perspective
In case of in-sourcing, it will take €250.000 to be invested in the other hand outsourcing will also cost management fee to the partner. Looking through warehouse budget in potential location indicated that outsourcing the warehouse operation will keep the company cash flow on the good track. Cost reduction in real estate and labour due to less manpower needed for outsourcing.
- Benefits
Instead of economic of scale, Kinley will gain some advantage by put this business to Logistic Service Provider in terms of :
- Focus in core business, Kinley is a leader-driven in technology innovator for electronic devices and will keep focusing in the business, for logistics and distribution will be an attention to LSP.
- Risk sharing, by partnership any risk that may occur will not only be on Kinley but also partner’s risk.
- Capital investment will be low due to the LSP will take over that part.
- By choosing best LSP is like a “spy” for Kinley to capture fluctuation demand from customer side and use customer experience to accelerate product development cycle time as well as transfer of knowledge.
- Best LSP offers a high service performance level which is needed by Kinley to cover customer demand and good image for the company.
- Disadvantages
Sharing information and technology of the product to the partner, can also be a boomerang. It may open the opportunities to competitor and Kinley will loss knowledge competitiveness. Be more innovative and creative in product design and protect the copyright of the product or patent. Instead, working with a partner needs time to accelerate company objectives. Within the partnership, argumentation and conflict of interest may arise. Therefore an effective strategy to overcome this problem is highly recommended in advance prior partnership agreement settled.
Qualitative analysis as above indicates a good sign to outsource distribution and warehouse operation to the third party logistic (Logistic Service Provider). Choose a well-known and low-cost company to handle this business. Good service performance of a partner will lead to good performance of Kinley as well.
- TYPE OF RELATIONSHIP
4.1 Procurement Strategy
Kinley’s products are modular with high value, and manufactured from various suppliers. Small cost saving in supply chain leads high impact on the profit. Since a lot of logistic players in Germany then Kinley has more than one option. Building partnership with logistic services provider will share the supply chain risks to the partner as well. Therefore, Kinley has to exploit purchasing power and minimize cost (Leverage Items).
4.2 Retailer Supplier Partnership
Although the logistic business outsourced, as a market leader innovator, Kinley must have a power to determine level of inventory ( Vendor-Managed Inventory ). This kind of partnership will lead to reduce forecast uncertainty and better coordination in production and distribution by sharing information along the chain.
There are some factors has to be taken into account when setting up the partnership:
- Well-Understood Goals and Objectives of Relationship
Having knowledge and understand the business needs of all parties involved. Only when all parties are willing to disclose and respect their true goals and objectives will the relationship benefit.
Key factors that are relevant to this alignment include: corporate philosophy, management capabilities, and management style. Compatible relationships are characterized by effective multi-level organizational alignment, in which there are specific roles to be played in the relationship by people at the executive, managerial, and front-line levels of both organizations. Any disconnects between organizations that impair communications or the transfer or information, will contribute to problems and tension in the relationship.
- Ability to Reach Consensus on Matters of Importance
It is important for each party to understand the needs of the other and to reach consensus on matters of mutual importance. Successful relationships will be characterized by trust and commitment, effective communications, and a willingness by both parties to share risk and reward.
- Effective Measurements and Measurement Strategies
The most useful management tool is the availability of agreed-upon key performance indicators and an effective strategy for measurement, feedback, and continuous improvement. Best practices also would include defined standard operating procedures, cost and service baseline development, and common scorecard and data measurement strategies.
- Migration Plan Toward Advanced Service Offerings
This strategy should focus not only on functional services, but also on value added services.
- Strategic Plan for Succession of the Relationship
When the termination or dissolution occurs, it is of great importance to modify the relationship as may be needed, or even to transform the relationship to include a new 3PL provider.
- RISK MANAGEMENT
Global supply chains are exposed to similar risks to those faced by domestic supply chain, as well as other risks that are more global in nature. Distribution Centre and warehouse located in Germany ( as recommended ) will face some risks whether it is uncontrollable or controllable. Potential risk that may occur in Germany such as:
- Natural Disaster
Nobody knows when and where it will occur, even though many expert and science can read and forecast some of natural disaster. Historical data shows some natural disasters during 1990-2008 in Germany.
Flood and storm are mostly occurred. Although no significant numbers in victim reported (compared with disaster victim in other country), it will affect to business environment since infrastructures and transportation mode in damaged. Special strategy required like invest in redundancy, having plan A and plan B for emergency, put two warehouses in different locations for instance. Off course it will cost more but the benefit will be more than first investment if unpredicted situation happens. If only a disaster hit one chain, another chain will cover.
- Terrorist Attack
It has been a global threat for terrorist, it can happen anywhere unpredictedly. Germany also a “destination” for terrorist as historical data on the past 5 years listed in the big 5 attacked by terrorist and mostly occured in Hamburg, Frankfurt and Berlin. Since warehouse operation will be outsourced, your LSP should be fulfilled with appropriate information of this threat and prepare appropriate actions.
- Market Change
Kinley is a leader driven in innovation. To maintain the position as market leader requires a sense of demand forecasting.
- Port delays
Although Germany has good infrastructure as well as proximity to all kinds of port, this issue still will be a possible risk. If uncertain situation occurs in other place could lead to port congestion in Germany.
- Supplier Performance
Openness and trust are important aspects when working together with suppliers and driving compliance and performance improvements. Assuring that product meets the standards and just in time is very important to Kinley. If something goes wrong in production side will effect to company brand image as well
- RISK MITIGATION STRATEGIES
- Dealing with Unknown-Unknown Situation
To overcome any misfortunes, redundancy is built at the design stage and additional warehouse needed to maintain supply chain of the product without significant cost increasing. Sensing and responding also required by accurate information in a timely fashion, and finally adaptive to local culture, work toward the same objectives and benefit from financial gains.
- Global Risk
Flexible strategies will be applied by production shifting on manufacturing sides, sharing information along the chains, global coordination and political leverage in overseas operation. Since Kinley is a market leader we believe that Kinley has all basic function of firms (product development, purchasing, production, demand management, and order fulfillment).
- Control
It is better to have centralized control if the decision impact to the whole supply chain and leave the local problem to local conventional wisdom. This strategy will balance the authorization and building trust with Kinley’s partner in logistics.
- RECOMMENDATION
As consultant, we provide our customer with best solution based on quantitative and qualitative approach. For Kinley’s projects, with regards to trade off among cost, advantages and disadvantages, we strongly recommend to put additional warehouse as distribution centre in Germany. In order to risk mitigation, two warehouses in different city in Duisburg and Dortmund for instance.
Leave warehouse management and operation (outsourced) to a well-known and low cost Logistic Services Provider in Germany, under Leverage items and Kinley has the power to manage inventory ( Vendor-Managed Inventory ). Sharing information required and make sure decission in whole supply chain under control, thus local authorization to your partner.
APPENDIX 1
ANNUAL WAREHOUSE OPERATIONAL COST
APPENDIX 2
ANNUAL DISTRIBUTION COST
APPENDIX 3
LOCATION SELECTION CRITERIA
SOURCES
- Developing and Improving Relationships with 3PL Providers Being a good partner has become a key corporate asset in the global economy, C. John Langley Jr., Ph.D.
- Designing and Managing The Supply Chain : Concepts, Strategies, and Case Studies, Simchi Levi-Kaminski-Simchi Levi
- EU Enlargement : European Distribution Centres On The Moves?, A Cap Gemini Ernst & Young Production
- Europol Report 2006-2010
- Germany : Europe’s Logistic Hub, Germany Foreign Investment
- International Logistics, Donald F. Wood-Anthony P. Barone-Paul R. Murphy-Daniel L. Wardlow
- Kinley Company Profile
- Slovakia The Gateway to Enlarge Europe
