Feasibility for UK Logistics - Case Study Example

Feasibility Study for UK Logistics Name Grade course Tutor’s name Date Introduction As a company the operates in England, Scotland and Wales, UK Logistics (UKL) has already registered effective logistic management channels in its current market specifically in handling logistic operations in the fashion industry. Whether to expand into other markets, which include the larger UK market, China and India, and whether to delve into other logistic services (most especially in handling meat and dairy products logistic operations) however depends on whether the new line of businesses would be: technically feasible; possible within the provided budget; and profitable for UKL. This feasibility is intended to help UKL look at the “bigger picture” into the proposed expansion, and by so doing, the company will be able to decide whether indeed the new ventures will be worthwhile or not. Considerations that UKL needs to make To start with, it is important to recognise that either of the proposed expansions (i.e. in apparel logistic management or in meat and dairy products logistics management) would require UKL to enter new markets and make new investments. In the case of apparel, UKL would need to manage logistics for its clients in the three new markets namely India, China and larger Europe. Should UKL consider managing the meat and dairy products logistics, it would need to start operating in Romania and facilitating the supply of the products to retail outlets across the UK. Considering the perishable nature of the meat and dairy products, UKL would need to invest in cold chain technology, which according to Rodrigue and Notteboom (2013), ensures that the products are transported in controlled temperatures for purposes of maintaining the integrity of the products. Additionally, UKL would need to adopt a new method of logistical planning in handling the meat and dairy products as suggested by Genresenbet and Bosona (2012), and which would be different from what the company currently uses in apparel-related logistics. As UKL may have established in its current business managing apparel logistics, logistics services include physical activities such as transport and storage, non-physical activities such as supply chain design, freight negotiations, and the selection of contractors as suggested by Tseng, Yue and Taylor (2005, p. 1659). Additionally, UKL must be aware that most activities involved in logistics management are bi-directional since they involve communicating and transporting (distributing) products from manufacturers to the retailers and finally, to the consumers. As indicated by Tseng et al. (2005, p. 1659), companies that provide logistics management must have information systems that enable data for decision-making, and must also support the organisations ability to effectively track and trace products. Additionally, the information systems must provide a platform where the logistics provider and the target stations can access essential data (e.g. regarding the progress of ordered products) and should also act as a platform where the two parties can consult with each other (Iviae 2008; Sanders 1993). Moreover and as suggested by Tseng et al. (2005) logistic providers need to build infrastructure, which should include financial resources, human resources, warehouses, packaging materials, transport and communications. In addition to the existing infrastructure that UKL is currently using to manage apparel-related logistics in the three identified markets it operates in, it is obvious that the company will need to build new infrastructures in the new proposed markets. According to Chang (1998), transportation accounts for the highest cost in logistics-related costs. As UKL considers venturing into new markets therefore, it would be expected that the longer distances from the targeted European markets (especially when the products are sourced from India and China) will increase significantly. The figure 1 below shows transportation’s dominance in costs (29.4%), while other logistical operations such as movement, packaging, warehousing, inventory, ordering and management cost significantly less. Figure 1: Logistical operations and their percentage costs contributions to a firm Source: Genresenbet & Bosona (2012) Some of the other realities that UKL will need to grapple with as indicated by Palmer (2000) include: that transportation costs will most likely continue increasing especially since oil prices are usually on an ascent trend; that fundamental changes in the management of inventory management have led to a reduction in the stocks held by retailers, and as a result, distributors and manufacturers now typically hold 90% of stocks; that the growth in product lines has made transportation and storage more complex (e.g. the meat and dairy products may have different product categories which may need to be transported and stored separately to avoid contamination); that the use of computer technologies is an important part of successfully managing logistics; that growth in retailer power practically requires large chains to receive special treatment from suppliers (due to the large business they provide); and that the increased environmental concerns has impacts on logistics especially in product disposal, and the use of environment-friendly (recyclable) packaging. The feasibility of the meat and dairy logistics management opportunities Supplying meat and dairy products from Romania into the UK market is no doubt an idea whose profitability, technical feasibility, and budget implications need to be investigated comprehensively. Before deciding whether or not UKL should seize the logistics management for the supply of meat and dairy products to a supermarket chain for supply into the UK market, several considerations need to be made. For starters, and as noted by Sofos (2008), an integrated farm-to-table approach is required in order to effectively control food hazards. Although not entirely the responsibility of a logistics management firm, UKL would need to work together with other stakeholders such as producers, processors, packers, retailers and food-service operators in order to ensure that food hazards are controlled and/or eliminated. Sofos (2008) also notes consumer preferences are leaning towards food products with no chemical residues, no additives, food that have undergone minimal processing, and food that have been produced in safe, environment-friendly and economic conditions. If UKL was to seize the opportunity of supplying meat and dairy products from Romania into the UK, it would need to ensure that all its suppliers in Romania meet specific meat and dairy products supply standards. This in turn would mean that the company would need to identify suppliers, and train them on issues such as product quality among other things that may be deemed as necessary. For example, Bulitta, Bosona and Gebresenbet (2011) identified that loading and unloading animals when transporting them to slaughterhouses is stressful to them and may impact negatively on the quality of meat especially due to increased risk of contamination with pathogens. In addition to ensuring that suppliers abide by set product qualities, it is important to note that UK legislation has set 7o C as the maximum meat temperatures before transport, and requires the transport vehicle to be equipped with a refrigerated system. As noted by Nychas et al. (2008), the cold storage during transport and at retail outlets is critical to the quality and safety of meat products. The combined coordination and loading of meat and dairy products have been advocated for by Gebresenbet and Ljungberg (2001), who argues that such combination would enhance energy efficiency, and would also enhance the supplier’s ability to utilize the transport vehicle’s capacity. The logistics of transporting and distributing dairy products are however somehow different from those of meat products. In its raw form, unrefrigerated milk has to get to consumers within five hours otherwise its quality would deteriorate (Barabas 1999). As Gebresenbet and Oodally (2005) notes however, logistics companies handling raw milk need to have refrigerated vehicles if at all they need to transport raw milk while still maintaining its integrity. Notably however, processed dairy products are more recommended for transporting over long distances. Processed milk, which has already been packed for example, is easier to transport since it is contained in sealed sachets or packets hence reducing the chances of contamination and although they too require temperature-controlled transport, they are not as sensitive as raw milk. Other dairy products that are handled by logistic companies include cheese, milk powder, ghee and butter, all which require temperature regulation. Whether or not the milk and dairy products can be transported using the same vehicles that transport meat is a question that UKL would need to consider on a product to product basis. For example, the temperatures needed in transporting meat may not be favourable to transport milk powder in, but may be favourable for transporting packed milk in. In other words, not all milk and meat products can be transported in the same vehicles due to different temperature requirements, unless the vehicles have cabinets with controlled temperatures for the different products. The macro environment of China, India, and Romania using the SWOT analysis model According to Henry (2008), SWOT analysis is an ideal model for identifying aspects in a firm’s internal environment that it can control (i.e. strengths and weaknesses), and aspects in a firm’s external environment that it has no or less control over (i.e. opportunities and threats). In this part of the report, the weaknesses that UKL would have in the three markets where it has opportunities to launch its operations will be indicated. SWOT China (Apparel) India (Apparel) Romania (Meat and Dairy Products) Strengths Government support Ready infrastructure UKL already has experience handling apparel-related logistics on a domestic level UKL is experienced in managing apparel-related logistics and can thus extend the knowledge and skills acquired in the domestic market to the Indian market. The proximity between Romania and UK means that UKL can utilise different transportation mediums for use in the transport of meat and dairy products. Weaknesses The presence of established competitors The relatively high costs of transport The unreliable transport infrastructure especially in India’s inland The relatively high costs of transport The presence of established competitors who have already established themselves in the Indian market thus limiting UKL’s chances for future growth Retailers do not take bulk supplies, and UKL would need to build appropriate storage for the meat and dairy products, and considering the products’ perishable nature, UKL may have to incur some losses if the demand and supply do not match. Competition from UK local products may mean that they (UK products) have a comparative price advantage compared to the Romanian products Opportunities UKL could establish its position and state managing logistics for other UK firms interested in importing products from China The probability of growth is high considering that China has established itself as a major producer of apparel. UKL could use its existing infrastructure and contacts in the UK do make the new business a success As a developing market, India, just like China is establishing itself as a major exporter and this may be a starting point for UKL to start operating therein with the prospect of handling more businesses for UK clients in future UKL could also use its existing infrastructure in the UK to handle logistics from India-related import, and where necessary it could expand the same infrastructure to be more accommodating The meat and dairy products business opportunities presents UKL with a chance to operate beyond its current line of business (i.e. apparel logistics management) and may thus be an opportunity for the company to diversify Threats The high transport costs Threat by competitors The high Transport costs Lack of support by the Indian government Threat by competitors Social aspects (e.g. many holidays) which interfere with business performance As a new line of business, it is probable that UKL will have some initial problems in ensuring that meat and dairy products are transported, stored and distributed in the right temperatures. This line of business will also require UKL to invest in an entirely different kind of infrastructure with no guarantee that the business venture will be profitable in the long-term. Recommendations: Expansion into the Chinese, Indian, and Romanian Markets The major consideration that UKL needs to make when considering whether or not to venture into the Chinese and Indian markets is transport. As indicated elsewhere in this report, transportation is the major contributor to logistical costs, and this can only increase if a company wishes to go beyond its domestic market and into the global market. In the case of India, Srivastava (2006) notes that the government support is lacking, and the logistic infrastructure is poor. Specifically, the seaports, airports, railways, and roads in India are comparably poorer to what UKL may be used to in the UK. However, UKL would need to decide whether the benefits of venturing into the Indian market as a logistics service provider for the UK retailer are more than the challenges and the risks encountered in that country. As Srivastava (2006) observes, logistic service providers can succeed in the Indian market of they create strong linkages with other supply chain partners, and if they use technology as an enabler for logistics management. Overall however, UKL would need to grapple with the higher costs of fuel in India, low-load bearing capacity of the Indian roads, load restrictions by the Indian government, cumbersome documentation, and some societal issues in India (e.g. many public holidays) that leads to larger lead-times in logistics management as indicated by Sahay, Gupta and Mohan (2006). Unlike India, the Chinese logistics environment enjoys great government support, and as a result, major investments have been made in major infrastructure projects involving rail transport, roads, ports, and even airports (Fu, Bentz & McCalla 2011). Moreover, the Chinese government has in the recent past introduced a uniform tax rate for logistics enterprises, while some preferential tariff rates are common by a few local governments as a way of promoting exports (Fu et al. 2011). As KPMG (2011) notes however, the government support comes at a relatively high cost for logistic service providers. Specifically and in addition to logistics management being complex, it is also relatively costs. In an effort to recover funds invested in infrastructure development KPMG (2011) notes that city and provincial government often set up road tolls, which can account to an average 35% of transport costs by a logistics company. For a new entrant into the Chinese market, UKL may have to face stiff competition from existing firms, especially since it has been established that smaller firms find it extremely hard to survive in China’s economic environment. The costs for facility rentals, fuel and labour are also rated as being high in China, factors that according to KPMG (2011, p. 14) are encouraging mergers and acquisitions, where several small logistic firms consolidate their resources with an intention of increasing their capacities and controlling the costs more efficiently internally. Overall, it is obvious that UKL will need to make a significant investment in processes, system and human resources should it decide to take the opportunity for manage the logistics of importing apparel for the UK retailer from China. UKL will not only have to deal with the threat posed by competitors and the high transportation costs, but will also need to invest in warehouses, and information systems that can track the vehicles and loads as they move from Shanghai and into the UK. The overall decision on whether to embrace the opportunity to manage the logistics in apparel imports from China should be based on whether UKL will be able to recoup its investment in good time, and whether the company will be able to establish a competitive advantage over others especially in relation to managing Chinese imports or vice versa (i.e. managing UK exports to China) effectively in the long term. As Cooperate Supply Chain Co., Ltd (Co-Logistics) does, UKL can choose to ship cargo from China and into the UK by sea or air. While air transport is faster, it is costlier and limited in the amount of cargo that can be shipped. Shipping by sea is however time-consuming, but has the advantage of accommodating bulky cargo. Similarly and as demonstrated by Vrat (2004), shipping products from India into the UK is mostly done by air or by sea. Just like the case of china, air transport is fast, limiting in capacity and expensive, while shipping by sea takes longer, is cheaper, and can carry huge cargo capacities. In the meat and dairy products considerations that UKL would need to make in order to determine the viability of handling supply logistics for a UK retailer. The less than 500 miles distance from Romania to the UK can be covered in approximately 45 minutes by air, hence making air transport the most ideal way of transporting the meat and dairy products. However, the bulky nature, the temperature control requirements and the costs may make air transport a non-viable method to use. Road and rail are the other alternatives, with road transport being the more suited of the two since it allows the logistics firm to develop and control the infrastructural capacity (i.e. vehicles with the right temperatures, and tracking systems) needed for proper management of logistics involved in the transport of meat and dairy products. Notably, the distance between Romania and UK can be covered in 24 hours, and this underscores the importance of temperature controlled vehicles when ferrying temperature-sensitive products. Among the issues that UKL would have to contend with if it opts to take up the meat and dairy products supplies logistic management, is the country border checks. As indicated by Hulsmann and Windt (2007 cited by Ehmke 2012, p. 10), the logistics costs and performance will depend on whether a company is able to deliver products within short time periods; whether the schedule can be relied upon; whether the firm has flexible delivery systems; whether it is information ready; and whether it is able to utilise its processes optimally. Considering the SWOT analysis comparisons above, UKL is best positioned to pursue the apparel logistics management in China and India, in the short-term, and could consider venturing into the meat and dairy later to allow for the development of the necessary infrastructure. In view of the strengths, weaknesses, opportunities and threats present in each market, China is positioned as the most promising country that UKL could venture in with the assurance that logistics management in apparel is technically feasible and with an assurance of making profits. India, although with several handicaps in relation to the absence of government support, and the poor transport infrastructure is the second best opportunity for UKL, specifically because the company can use its established resources in the UK to handle the inbound logistics. Due to the complexities involved in transporting, warehousing and supplying perishable meat and dairy products, the opportunity presented by the retailer who is considering selling such products in the UK market should be the last for UKL to consider. References Barabas, J 1999, ‘An alternative method of milk treatment’, FAO, viewed 4 April 2013, < http://www.fao.org/ag/aga/agap/frg/FEEDback/War/v6200b/v6200b0t.htm>. Bulitta,F S, Bosona, T, & Gebresenbet, G 2011, ‘Modelling the dynamic response of cattle heart rate during loading for transport’, Australian Journal of Agricultural Sciences, vol.2, no.3, pp. 63-73. 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