Change of Activity and Costs Structure - Essay Example

? Identify and discuss the change of activity and costs structure within the supply chain if LB looked to a third party logistics provider to supply their transport needs. To what extent would this facilitate LB in gaining ISO 14000 recognition? April 08, 2012 Table of Contents Identify and discuss the change of activity and costs structure within the supply chain if LB looked to a third party logistics provider to supply their transport needs. To what extent would this facilitate LB in gaining ISO 14000 recognition? 1 April 08, 2012 1 1. Introduction 3 2. Literature Review 3 3. Impact of using a third party logistics provider 5 4. Conclusions 7 References 8 1. Introduction Supply chain management – SCM has acquired tremendous importance with globalisation and outsourcing. This paper examines critical issues related to Lauritzen Bulkers - LB, one of the leading dry bulk shipping firms in the world with its head quarters in Netherlands (Wolf, 2008). The paper first presents a brief literature review about SCM and then it discuses the change of activity and costs structure within the supply chain if LB looked to a third party logistics provider to supply their transport needs. The paper also examines the extent to which this would impact LB gaining ISO 14000 recognition. LB is a very large shipping company that owns a large number of carriers and it has taken up partnerships with other shipping firms and uses third party logistics. As per the annual report (LB, 2011), by 2011, LB controlled through its owned assets and with those of its network partners, 100 ships of different sizes such as Handymax, Handysize, Capesize and Panamax bulk carriers. Through its subsidiary Lauritzen Kosan, LB controlled a combined fleet of 44 semi-refrigerated ships. Gas carriers for Ethylene, fully pressurised gas carriers, and several smaller refrigerated gas carriers. The firm also controlled 2 numbers very large oil carriers, DP shuttle tankers, and 18 MR product tankers. 2. Literature Review An efficient supply chain can reduce costs, increase efficiency and help to retain customers. Organisations across the world have come to depend on supply chains to service their production lines, fill customer orders and retail shelves. Some important aspects of SCM are discussed in this chapter. 2.1. Nature of supply chains and networks A critical review of Hugos (2011), supply chain management is not merely about picking items from one point and dropping it to another. It is more about estimating demand correctly, understanding the lead-time for procurement and then placing the order for manufacturing. If the lead-time estimation is excessive, then inventory is more and lead to excessive costs while lesser lead-time means the risk of stock out. There is also the economic order that indicates the minimum quantity required in a shipment. Shipping and logistics firms are integrated with the operations of large buyers so that efficiency is maintained, the quality of service is prompt and reliability of service is unfailing. 2.2. Cost structures in Supply Chains Supply chain analytics often focus on reducing cost structures of the supply chain. This is mainly done because in a procurement cycle, other than the basic product cost, the cost of the supply chain makes up a major component of the cost. The percentage of cost varies from 35% to 55% of the product costs. For perishable items such as dairy products, meat and poultry products, livestock, the costs are more than 67%. Much depends on the distance travelled, the nature of product, pressure for on time delivery, possibility of wastage and loss and other factors (Deloitte, 2012). A critical review of Xia (2003) shows that some of the cost structures in an organisation are inventory carrying costs, production costs, inspection costs, logistics costs, transportation and handling costs, storage costs, onward forwarding costs and other costs due to delays in berthing, availability of shipping and so on. Some of the costs are borne by the organisation while some are borne by the shipper. In many instances, the shipper has to give a delivery date after which a penalty can be levied. In case of delays, the costs can further rise. In general, costs are associated with each process, each activity and delay. There is no way to avoid costs and these are inevitable. However, large organisations reduce these costs by using strategic sourcing and manufacturing. Lee (2010) writing for the Harvard Business Review gives the example, Toyota that has manufacturing centres in India, UK, Brazil and many other nations. The firm has developed vendors who manufacture castings and then send them to specialist vendors who machine the component. These machined components are then sent to sub assembly units so that finally the fully ready to assemble engine block, cylinder head and transmission assembly is shipped to overseas plants. Toyota reduces supply chain costs by clustering the casting units, machining units and the assemblers in neighbouring units so that the supply chain costs are reduced and the impact of cost structures is reduced. 2.3. Issues related to quality and delivery of purchases Other than the cost factor, the quality and delivery reliability are the most important aspects for supply chains. Quality in the context of supply chain refers to factors and issues such as customer satisfaction, on time deliveries, delivery to the right destination, damages or part delivery, inability to track the consignment and so on. Other quality features to be considered are reducing the bullwhip effect, tracking abnormal demand through intelligent software and finally ensuring that the customer renews the contract (Zu, 2012). 2.4. How supply chains contribute to competitive advantage A critical review of Barney (2012) indicates that organisations such as Nike, Apple, Wal-Mart, Toyota and many other large firms manufacture less than one % of the goods in house. All the products and sub assemblies are subcontracted to vendors and these firms owe their competitive advantage largely to the supply chain and logistics management firms. Nike has vendors across China, Vietnam and other nations. These vendors are connected by a dynamic supply chain that anticipates demand and issues instructions to manufacture or to hold production. The supply chain provides a competitive advantage by providing solution such as inventory visibility, cleat to build, end market steering, available to promise, configure to order, and life cycle systems integration, tracking demand and pull factors and a number of other tasks. In the modern competitive world, the supply chain does all these tasks and these provide a competitive advantage to the firm. 3. Impact of using a third party logistics provider This section examines the impact of using a third party logistics provider for LB. The term refers to other ships and carriers that are taken on lease or contract. This practice is followed when LB runs short of ships to transport cargo or when customer demands ships with special features. Modern day shipping and handling of large and high value cargo means that one carrier would not be able to cover the risks of transportation. Such practices reduce idle ships and idle capacities and the savings in various cost structures becomes high. Therefore, large shipping firms often develop partnership with other smaller shippers and take up long-term contracts. 3.1. Impact on LB gaining ISO 14000 recognition Regarding the impact of using third party shippers, ISO 14000 is a certification for environmental management systems standards. It provides guidelines and frameworks for organisations to show their dedication and commitment to protect the environment. When implemented, ISO 14000 will help shippers to improve their systems and comply with regulatory requirements for protecting the environment. It reduces the exposure to liability caused by pollution and spreading waste (pji, 2010). According to Wiengarten (2012), when a third party logistics provided is used, the prospects of gaining ISO 14000 recognition can be negatively impacted. This can happen when the third party has not implemented ISO 14000 standards and is not interested in doing so. Some practices that LB and its partners need to carry out are to adopt adequate environmental practices so that environmental disasters are avoided and they are able to face lesser regulatory audits. According to Prajogo (2012), such organisations will need to create and maintain documents such as environmental labelling, control over release of ballast tank waters in foreign shores, life cycle assessment, environmental performance evaluation of the ships and waste disposal systems and so on. Implementing the standards requires money, efforts and dedicated staff. ISO accreditation organisations can reject accreditation demands if they find that the third party is not following the standards. They can even cancel any certification that was awarded earlier, if the gross violation continues. In such a case, LB has limited choices. It can ensure that its partner shippers are certified for ISO 14000 or it can make this condition a prerequisite. Since LB is a large shipper, it can terminate the contracts of third party logistic providers who do not comply with the requirements. Many ports have made it mandatory for shipping firms and ships to be certified for ISO 14000 else, the ship is not allowed to berth. Shippers often find it much more profitable to take the effort and obtain the certification. LB should impress this point on the third party logistics provider (Nishitani, 2010) 4. Conclusions The paper has examined the importance of supply chain management and how it helps to obtain a competitive advantage. The paper has discussed the impact of using the services third party shipper on LB obtaining ISO 14000 certification. The arguments and references have shown that third party shippers on contract with LB would have to obtain certification and follow the legislation. If this is not done, then LB can be penalised and certification for ISO 9000 can be denied. Some solutions have been proposed and these are that LB should make it mandatory for its partners to obtain certification else it should terminate the contract. LB can also decide to procure and operate its own ships but this can increase the cost burden and also create idle capacities. References Barney, J., 2012. Purchasing, Supply Chain Management and Sustained Competitive Advantage: The Relevance of Resource-based Theory. Journal of Supply Chain Management, 18 (3), pp. 76-83 Deloitte, 2012. Supply Chain Analytics: How Hard Should You Squeeze? Retrieved 8 April 2012 from http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/deloitte-debates/cefe46d054aaa210VgnVCM3000001c56f00aRCRD.htm Hugos, M. H., 2011. Essentials of supply chain management, 3rd edition. London: Wiley Publication LB, 2011. Annual report for 2011. Retrieved 8 April 2012 from http://www.lauritzenbulkers.com/upload/annual_report_27-03-12.pdf Lee, H. L., 2010. Don’t tweak your supply chain: Rethink it end to end. Harvard Business Review, October 2010, pp. 1-9 Nishitani, K., 2010. Demand for ISO 14001 adoption in the global supply chain: An empirical analysis focusing on environmentally conscious markets. Resource and Energy Economics, 32 (3), pp. 395-407 Prajogo, D., 2012. The effects of different aspects of ISO 9000 implementation on key supply chain management practices and operational performance. Supply Chain Management: An International Journal, 17 (3), pp. 56-61 pji, 2010. About ISO 14000 Standards and Certification. Retrieved 7 April 2012 from http://www.pji.com/iso_standards.htm Wiengarten, F., 2012. ISO 14000 certification and investments in environmental supply chain management practices: identifying differences in motivation and adoption levels between Western European and North American companies. Journal of Cleaner Production, 3 (2), pp. 34-39 Wolf, J., 2008. The Nature of Supply Chain Management Research: Insights from a Content Analysis of International Supply Chain Management Literature. NY: Gabler Publications Xia, Y., 2003. Market-Based Supply Chain Coordination by Matching Suppliers' Cost Structures with Buyers' Order Profiles. Department of Management and Decision Sciences, College of Business and Economics, Washington State University, USA Zu, X., 2012. An agency theory perspective on supply chain quality management. International Journal of Operations & Production Management, 32 (4), pp. 423-446 Read More