Moving towards 'economies of chains'

We are increasingly concerned about the impact of our actions on the environment. We need to be green in order to save our planet for future generations. There are numerous examples of local initiatives that minimise waste in production. We collect waste, sort waste to identify different valuable materials, and recycle were possible. You might have personal experience in sorting out your own household waste in plastic, paper, glass, and others. However, progress with the green economy and concepts such as cradle-to-cradle (waste = food) have been disappointing until now. After so many years of investment, the green economy is only less than 1% of the world economy.  So I guess maybe it is time for new approach.

Today’s management concept is based on economies of scale (high volume production) and scope (related diversification) in order to most efficiently serve the customer. For manufacturers and brand owners, managing reverse logistics is expensive, as supply chains are not designed for managing return flows. Managing returns and waste is seen as a cost in order to comply with government regulations. This is old thinking and need to change! There is an opportunity in connecting and combining seemingly disparate supply chains based upon physical processes common in the natural world, to create solutions that are both environmentally beneficial and have great financial value.

One good example is the coffee chain. Global coffee consumption today is about 155 million bags of coffee (1 bag is 60kg), of which Asia contributes about 30 million bags and has the highest annual growth. But harvesting, processing, roasting and brewing coffee discards an estimated 99.7 percent of its biomass, while only 0.2% acquires value on the market. Demand for mushrooms have enjoyed double digit growth for decades. Research shows that farming mushrooms on used coffee grounds is 80 percent more energy efficient than conventional energy intensive farming methods. In fact, used coffee grounds as growing medium for mushroom farming is more valuable than a cup of coffee. The rest material of the mushroom production on the other hand is also an excellent raw material for animal feed. By combining the coffee chain, with the mushroom and animal feed chains, you can triple or quadruple the economic value of coffee. Because of this enormous potential value of coffee, you can even imagine coffee producers in future not selling their beans to coffee shops, but instead provide coffee beans as a service. In this way coffee beans and its used coffee grounds remain the ownership of the coffee producer, as they want to use the valuable used coffee grounds for mushroom production.

We need change the way in which we run our industrial processes and tackle resultant environmental problems by solving our green planet supply chain puzzle. We are moving away from a tradition thinking of economies of scale and economies of scope, towards I would like to call ‘economies of chains’. We have to search for new business opportunities by linking our supply chain to other ecological fitting supply chains and clusters that increase our business value chain significantly. Instead of taking over your competitor, it makes far more business sense to focus collaboration, mergers and acquisitions with organisations that control ecological fitting supply chains. Ready to solve your ecological supply chain puzzle?

This article was first published in the New Straits Times of 12 April 2017. For more information on designing more sustainable supply chains, please visit www.lbbinternational.com or email marco@lbbinternational.com.

Purchasing critical for healthcare organisations

Managing a world-class healthcare organisation does not only require medical expertise but also business expertise. Within the healthcare organisation the purchasing function is increasingly important. In fact a significant part of the healthcare costs can be directly linked to the effectiveness of the purchasing function.

Professionalisation of the purchasing function is therefore essential in a more efficient organisation of hospitals, specialist centres, elderly homes, disability care, general practitioners, dentists, etc. However, what I often discover with healthcare organisation is that there is a lot of untapped potential in saving purchasing costs and improving purchasing organisation. Purchasing in healthcare organisation are generally not well structured, category management and inventory management practices are ineffective, synergy advantages not exploited, and supplier management inefficient. Let’s explore this in more detail.

Although many healthcare staff are in one way or the other involved in purchasing, purchasing in healthcare organisations is often not well structured in terms of purchasing policy, purchasing process, purchasing methods and procedures, purchasing organisation, information systems and performance measurement. The above components are often not well defined or show serious shortcomings.

Category management should be a critical focus area for healthcare organisation, which looks at standardisation of the goods purchased. A rationalisation of a category in direct consultation with the respective healthcare specialists reduces the number of suppliers, inventory levels, and purchasing costs. Today, healthcare organisations throw away many millions of ringgit in value of medicines and other consumables every year as they passed their expiry date. This wastage can be significantly reduced, with less different articles kept in storage against lower inventory levels.

There is a lack of horizontal and vertical collaboration in purchasing with other healthcare organisation. Horizontal collaboration, collaboration with similar organisations, can be achieved through collaboration on project basis (e.g. in case of a national epidemic or disaster), selective collaborative purchasing in certain disciplines (e.g. certain expensive equipment and medicines), or a joint purchasing organisation. Synergy advantages are achieved in terms of reduction of purchasing costs, but also better purchasing conditions, or consolidating pressure to suppliers comply with important needs, such as halal. In case collaboration with competitors is too sensitive, a separate healthcare purchasing organisation could play this role. Vertical collaboration, collaboration within your own healthcare chain, like collaboration between hospitals and nursing homes, allows for faster flow between hospital and nursing homes with less bed stay in hospitals. Hospital stays are less cost effective than nursing home stays. Collaboration can therefore reduce healthcare costs in a big way.

Better supplier management benefits with a reduction of invoices from suppliers and the introduction of purchasing automation to support especially the administrative purchasing process.

In summary, purchasing in healthcare organisation need further professionalisation! Massive cost reductions are possible in healthcare without affecting the quality of healthcare in government and private healthcare organisations. Annual reporting and benchmarking on purchasing performance of Government hospitals as well as private hospitals could be an effective instrument to enhance awareness on the importance of the purchasing performance of healthcare organisations.

With an aging population by 2035 and increase of non-communicable diseases, such as heart disease and diabetes, purchasing excellence in healthcare is not just a luxury for Malaysia but a pure necessity.

This article was first published in the New Straits Times of 15 March 2017. For questions on achieving purchasing excellence, please visit www.lbbinternational.com or contact marco@lbbinternational.com.

Opportunities abound for logistics firms in Indonesia

Last week (on 2, 3 and 4 March) CeMAT Southeast Asia hosted Indonesia’s largest logistics conference and exhibition in Jakarta. The conference had the theme ‘accelerating interconnectivity: ASEAN and beyond’. Indonesia is the largest country in ASEAN, both in terms of size and population. Under the leadership of the President Joko Widodo it is transforming its transportation and logistics sector fast! According to the Minister of Transport of the Republic of Indonesia, the Government is committed to heavily investing in transportation and logistics infrastructure in connecting the archipelago together through sea, road, rail, and air.

Currently Indonesia has one the world’s highest logistics costs, on average about 26% of gross domestic products (GDP). In practice this ranges from 5 to even levels of 40 percent of sales value. In comparison, for Malaysia this is 13 percent! The Indonesian government is determined to bringing down logistics costs to 19 percent of its GDP by 2020, thanks to government efforts to modernise ports and open up the logistics sector to foreign investment.

The upgrading of its existing ports as well as many new port developments will allow for a better access of large industrial parks to ports. Currently much of industrial traffic between industrial parks and ports passes through Indonesia’s largest cities like Jakarta, Surabaya, and Medan. Another strategy, better know as model shift, is targeted at removing freight vehicles from road to rail through expanding rail infrastructure. Rail infrastructure is limited to the Islands of Java and Sumatra, mainly using the rail track developed during the Dutch colonial era. Although the expansion of rail is a critical backbone for ports, rail infrastructure developments in Indonesia will take massive investments over many decades to come in order to be able to make any serious impact in volume percentage of cargo moved by rail.

Logistics costs are also high in Indonesia due to a lack of both ambient and cold room warehouses throughout the archipelago. A few traders have invested in their own warehouses in various parts of Indonesia, monopolising distribution channels and hereby artificially increasing supply chain costs. These monopolies of warehouse infrastructure are also not very beneficial for the quality of facilities and the resulting food safety. Both government-linked and private sector logistics service providers are slowly investing in warehouse infrastructure on the islands other than Java, Sumatra and Bali. One of the important economic stimulus packages unveiled by President Joko Widodo in 2015 is the Bonded Logistics Center (Pusat Logistik Berikat) licence. The Bonded Logistics Center is a multi-functional logistics warehouse for stockpiling goods imported or locally with the ease of tax privileges by withholding the payment of import duties and free of VAT or sales tax, as well as operational flexibility. These privileges are not only given to local but also foreign logistics service providers.

With the possibility to massively reducing supply chain lead-times and costs, Indonesia is a rather pristine area for professional logistics, open for investors in transportation and logistics infrastructure. With the projected mega investments in the Indonesia transportation and logistics sector over the coming years, Indonesia will be narrowing the logistics gap with other ASEAN countries. Indonesia’s logistics progress will be important for the logistics integration of ASEAN and the economic performance of ASEAN and its member countries. In other words, great opportunities for the logistics sector to expand to Indonesia.

This article was published in the New Straits Times of 8 March 2017. For more information on logistics in Indonesia, please visit www.lbbinternational.com.

Local logistics sector set for more M&As?

With last week’s announcement of Tasco buying Gold Cold Transport, is a consolidation trend through mergers and acquisitions set in motion for 2017?

The logistics sector is a dynamic sector in Malaysia and changing continuously. Malaysia has strong industrial and logistics clusters, which has seen good growth figures over the past 10 years. The ASEAN Economic Community (AEC), which just came into existence about a year ago on 31 December 2015, allowed the industry to expand transportation networks throughout Asia.

In this fast changing environment logistics companies need first of all be agile through innovation and growth.

Size matters in the logistics industry! The bigger the company the more containers and trucks you have, the better regional or global covering network you have, the more customers you will bring in. So growth for logistics companies is purely a matter of survival. This is true for pure transporters and warehouse operators, third party logistics service providers (3PL), logistics specialists (like cool chain operators), as well as fourth party logistics service providers (4PL).

Bigger logistics companies can also invest more money in research & development (R&D). R&D results in the development of new logistics products & services, new technologies in transportation and warehousing operations, lower operational costs and better anticipation on new market opportunities through solid market intelligence.

On the other hand you need to be stable and flexible, otherwise your customers will leave you. This requires excellence in data management and IT infrastructure.

A systemic underinvestment in IT by the logistics industry makes it a major challenge to meld different companies together. IT infrastructure should facilitated digitalisation and sharing of 100% intact data throughout the supply chain. The need for a solid supply chain data management from a single source is an emerging requirement for manufacturers, which would like to transfer this task to the logistic service provider. Different sources of data and re-entering of data in different systems has a high risk of making mistakes, and cost a lot of time and money.

Larger logistics companies therefore need to clean up their legacy systems and invest in life-cycle management to avoid new legacy problems in future. Secondly, standardisation is important in order to create flexibility of the IT landscape and making changes in here. Finally, moving IT processes to the cloud.  Cloud based systems allow you to easier charge your customer for IT services offered (pay per use) and upscale with acquisitions of a new company. Through hybrid cloud designs, primary processes could be put on a private cloud, whereas supporting IT processes can be facilitated through a public cloud.

I am convinced that Malaysia is set for more mergers and acquisitions in the logistics sector over the coming 3 years. As mergers and acquisitions offer a fast-track growth as compared to relying on organic growth, it is an attractive strategy in expanding your business. However, finding the right business partner is not easy as company cultures might be very different. Furthermore, IT integration between the companies in order to fully meld the companies together into one larger company is critical. Otherwise you are just consolidating assets and profits together initially, without achieving any synergy advantages of a larger company due to operational problems caused by poor IT integration and clashing company cultures.

This article was published in the New Straits Times (Malaysia) of 18 January 2017. For more information on logistics strategy and M&A, please contact marco@lbbinternational.com.

Timely to invest in cold chain logistics automation

Most consumers do not realise what processes and handling the food on their plate has gone through before they actually consume it. As food product quality deterioration and decay starts from the moment of harvest (fruits & vegetables); slaughter (meat & poultry) and catch (marine products) onwards, within 6 hours fresh food products need to enter the so-called “cold chain”, in order to preserve the food in accordance with health regulations to maintain the important properties of nutrients, texture, flavour, appearance, and moisture. A cold chain is a temperature-controlled supply chain, in accordance with an uninterrupted series of storage and distribution activities, which maintain a producer given temperature range specification.

Depending on the required preservation time, we distinguish two methods of cold chain preservation: fresh (concerned with maximum shelf life) and frozen (concerned with maximum expiration date). The respective preservation time depends on the type of product. Fresh food products have relatively short shelf life.  Fruits, vegetables and meat cold chains are executed through close control of temperature, humidity, carbon dioxide, oxygen, and ethylene. Not all food products can be frozen for preservation, however, through high performance IQF (Individual Quick Frozen) cryogenic freezers, that uses nitrogen  (-195.8°C) and carbon dioxide (-150°C) as coolants, a wide range of products is eligible.

Malaysia imports many of its agriculture and food products. Transportation from farm to retail is executed by refrigerated sea containers; air cargo containers or Styrofoam boxes; as well as reefer trucks. As food producers put their priority investments in product development and production, they outsource their logistics needs to logistics service providers, as those companies can build the required economies of scale, enabling them to execute cold chain services more cost-effective.

According to Raymond de Graaf, cold chain consultant, Malaysia has two cold chain challenges. First, Malaysia has great variations in temperature range in the cold chain, leading to sustained and cumulative damages to perishable foods. This results in high wastage of more than 30% of shipments. Second, the country is very much dependent on foreign labour for its cold chain logistics. Therefore, in order to ensure safe and sustainable food handling from farm to consumer, the establishment of automated temperature and atmosphere-controlled facilities is of vital importance according to him. This enables cold chain service providers in Malaysia to render comprehensive and customised product services of handling, multi temperature and compatible controlled storage, value added processing, customised order picking and reefer distribution of food products in accordance with an uninterrupted cold chain provision. The result is fully automation of all processes with minimum labour involvement. Conveyor belts are used for vehicle unloading and loading of distribution trucks, as well as for internal temperature controlled product transfer; automated configured palletizing; ASRS (Automated Storage & Retrieval System) rapid crane based multi temperature storage compartments, 12 to 17-pallet stacking positions high; and automated order picking processes.

Unfortunately, Malaysia does not have such automated facilities yet and for that reason is not able to provide cold chain food logistics in accordance with the highest global quality, efficiency, and cost-effective standards. With double-digit domestic annual growth in the cold chain sector, it is timely to invest in automation by cold chain logistics players in Malaysia!

For more information on how to develop professional cold chain infrastructure, please contact marco@lbbinternational.com.

Middle-Eastern airlines set new benchmark for full-service air travel

Legacy airlines, formally know as ‘full-service’ airlines, are reducing their rates to compete with the fast growing low-cost airlines. The way to do this is abandoning their traditional differentiator with low-cost rivals, namely: ‘service’! In Asia low-cost carriers today often serve more destinations at higher frequency than their full-service counterparts. Low-cost carriers also offer business class with amazing seats, food and even service! Some low-cost carriers like Air Asia even have started premium lounges at airports. If these airlines also fly with the same planes, what is the difference today between legacy and low-cost carriers?

Today legacy airlines are managed by managers that benchmark against low-cost rivals and implement low-cost airline strategies: cutback staff in planes, baggage allowance, service level offered in business class, removing in-flight catering on short-haul flights, and removing first class. Also business class lounges of many legacy airlines today are basic canteens with low quality of food offered at the buffet and mediocre service. For good coffee (prepared by a barista), food and service you need to go outside the lounge. When your luggage is damaged, you need to chase the airline by calling unreachable telephone numbers, and it takes two weeks before your luggage is collected, and anther two weeks for repair and return.

This continuous hollowing out of service by legacy airlines resulted in service levels offered by low-cost and legacy carries, which are more or less the same. Is this the future of air travel?

The coming up of Middle Eastern airlines
As low-cost airlines like Air Asia and Lion Air are slowly becoming bigger than their full-service counterparts, legacy airlines will be doomed as merging or acquisition partners if they don’t embrace 3S: service on the ground, service in the air and after sales service. Although the Asian airlines have long been the benchmark for global air travel, Middle Eastern Airlines (like Etihad, Emirates, Qatar) have clearly taken over and moreover have redefined service in the airline industry.

What did they do right? Middle Eastern Airlines have put the customer first, reintroducing first class, redefined business class travel on the ground and in the air, and uplifted economy travelling. These airlines fly with new planes with advanced entertainment systems on big screens and good headsets, even in tourist class. Connecting flights at their hubs in the Middle East are well designed, with step-over time reduced to a fun shopping hour or two. An unfortunate long wait is rewarded with free meals and hotel stay.

With every booking you are providing the airline with a lot of information. Middle Eastern airlines leverage this data, also known as big data, for service! They show they truly care about the customer. When flying economy, a birthday cake is given to a passenger who spends her birthday in the air. A stewardess personally greets a frequent traveller. Selection of flight crew is based on key nationalities of passengers, to giving customers that extra experience. These are some examples that all add to more confortable travelling, less stress and happy returning passengers.

Asia has one of the fastest growing middle class and upper class in the world, with increasing budget to spend on quality and service! In other words, it is time that Asian legacy airlines offer better service!

This article was published in the New Straits Times (Malaysia) on 12 October 2016

Start weaving your brand DNA into the supply chain

For brands to connect with their final consumers, brands need to develop an authentic character or DNA as the core of their true differentiation. However, the DNA of a brand is not only based on the company’s doing but also the actions of your suppliers, the suppliers of your suppliers as well as your logistics service provider, distributors, retailers, etc. Therefore the DNA of a brand is a function of the entire supply chain. The question is: how can an authentic DNA of a brand owner be woven into the supply chain?

In particular in developing countries in Asia, there can be a great diversity of quality and food safety practices in the industry. One the one hand you have multinational and large local companies adoption high product quality and safety standards. Local SME companies on the other hand could not have adopted even the basic hygiene, quality and safety standards. Evidence supports that in the selection of supply chain partners ‘price’ is often a key determinant and other criteria are not clearly defined. As other criteria are not clearly defined, they are not well measured and quantified.  As they are not quantified, they are not evaluated in supply selection. The result is that at the end they are not incorporated in supply chain partner selection. This is a serious problem!

In fact, supply chain partners play a key role in protecting the product quality & safety of the product and in times of a crisis to minimise the negative impact on the brand. It is therefore time to weave the brand owner’s DNA systematically into the supply chain.

To do this three areas are of utmost importance:

1. Supply chain partner selection

In supply chain partner selection there are 5 essential steps to assess: 1. which evaluation criteria are important (price, quality, halal certificate, etc.); 2. how to combine criteria (are poor scores allowed?); 3. the relative importance of the criteria (what criteria has what weight?), 4. the scoring mechanism; and 5. method of awarding. In practice I find that many of these steps are either not correctly undertaken or skipped at all. Supply chain partner selection determines an estimated 50% of your supply chain DNA. Very important.

2. Contract & Audits

From my experience in supply chain diagnostics for MNC companies, contract clauses show serious gaps. Company values, principles and quality & safety standards are not well defined in contracts, measured and audited. In case you do not have your own resource, please outsource these tasks to supply chain specialists. Contracting & audits determine an estimated 30% of your supply chain DNA.

3. Supply chain relationship management

Supply chain relationship management is made concrete through training your supply chain partners in your values, principles, and quality & safety standards. This should not be a one-off engagement, but shall be repeated with annual refreshment trainings. Similar to the former point, outsource this when you do not have sufficient own resources. Supply chain relationship management determines an estimated remaining 20% of your supply chain DNA.

Weaving your DNA in your supply chain takes a coordinated effort by purchasing, sales, and logistics, to ensure a competitive advantage in today’s market. There is still much to be won in this area by brand owners.

This article was published in the New Straits Times (Malaysia) of 31 August 2016.