Hard Assets as Part of the Value-Added Logistics Equation
Introduction
Over the past 10 years, logistics has relied on software applications to reduce supply chain costs. Initial efforts sought to optimize the transportation, manufacturing, and warehousing by creating integrated multi-modal systems and using software systems for warehouse management, manufacturing resource, and enterprise resource planning.
Serving the end-user in the global supply chain requires new applications, including manufacture to order, mass customization, and other techniques that optimize service and cost levels. Developing these new applications has created the additional benefit of value-added logistics services, which incorporate the processing of goods as an essential part of an integrated transportation system.
To maintain competitiveness in the new world economy, existing transportation hubs are re-evaluating their structure. Countries with emerging economies have also begun initiatives to incorporate special economic zones into the global supply chain to support economic development while exporting to the larger world markets.
These contemporaneous trends have resulted in a new focus on the hard assets that are required to effectively participate in the global supply chain - infrastructure, facilities, and equipment - while capitalizing on previous investments in soft assets. To realize the full benefits, a renewed commitment to integrating hard and soft assets is needed from executives in the private and public sectors.
The New Focus
The higher level of sophistication needed to compete as part of the global supply chain requires tapping in to the traditional flow of goods to the world's markets. While flows were previously defined by mode, they are now defined as time-critical (express or overnight) and time-definite ("say when"), and incorporate numerous modes of transportation as a part of an integrated process. This is true for both ends of the service spectrum - the large shipping companies and the air express freight operators (including the integrators like UPS, FedEx, and DHL).
The creation of transportation hubs and their associated networks has resulted in the concurrent creation of multi-modal logistics platforms and logistics pipelines. The platforms act as both a multi-modal transportation node and a processing center, while the pipelines act as dedicated feeders.
Figure 1 - Principal International Air and Sea Trade Routes
Even traditional transportation corridors, such as the Suez and Panama canals, are creating such logistics platforms to improve their competitive positions and increase market share in handling higher-value-added goods. Traditional transportation hubs, such as Hong Kong (the largest ship container movement and the second largest airfreight movement in the world), are rethinking their strategies in order to maintain their competitive position.
The trend towards international competitiveness, while focusing on core corporate activities as part of the new global economy, has also resulted in the outsourcing of traditional warehousing and transportation functions. This has accelerated the growth of the third-party logistics supplier industry. In order to compete, 3PLs have had to either create logistics assets or use those provided by others — while providing higher levels of service and lower overall cost.
Creating the Optimum Infrastructure
A new level of sophistication is required in the creation of the hard and soft infrastructure to meet the needs of the manufacturing, transportation and third-party logistics providers as part of the new world economy. Increasing sophistication provides new opportunities for servicing these special needs through hard infrastructure, soft infrastructure, and the ability to integrate these two components.
Hard Infrastructure
Real estate, physical transportation linkages, and facilities are the primary components of hard infrastructure. Selecting the appropriate location for industrial and distribution facilities has become more and more sophisticated due to network modeling software, which can assess multiple variables and their economic interrelationships. In addition to evaluating the options and costs associated with transportation, logistics management, during the past decade, has increasingly emphasized utility costs, telecommunications infrastructure, labor availability and cost, economic incentives, and taxation. A truly sophisticated site location analysis needs to incorporate product manufacturing, assemblage, and processing to achieve the value-added logistics solution.
Everyone seems to be familiar with the line from the movie Field of Dreams - "If you build it, they will come." This message has been internalized by governmental entities and the private sector on a global basis for creating the appropriate transportation infrastructure to support large-scale industrial projects. Fundamental transportation modes include air, rail, road, and water. Governmental entities looking to facilitate economic development understand the critical importance of creating and linking these modes to the efficient handling of products to support broad and accelerated economic development. The great cost of transportation infrastructure has compelled private investors to seek cooperative arrangements with the public sector to share funding.
Soft Infrastructure
Advanced computer software that facilitates sophisticated network modeling and supply chain analysis has had a pronounced impact on developing logistics solutions. The next challenge in creating value-added logistics platforms is to develop software that can track and manage the flow of products among various transportation modes, and manufacturing and distribution activities. Integrators have developed their own proprietary software to perform the tracking function through their proprietary logistics platforms. Other public/private partnerships developing logistics platforms need to use common standards. This is of particular importance for containers that move both by sea and by truck, where individual transportation companies have developed their own custom systems. In addition, electronic manifest systems and remote customs clearance require activities to be performed outside the confines of a particular location.
This focus on the fulfillment side of logistics is complemented by the need to address order-taking requirements. Traditional trading centers, such as Hong Kong, are therefore recreating themselves as the "Trade Port of the Future," creating a multi-modal logistics platform to support the order-taking and commercial functions.
Integration: International Logistics Platforms
On a national or regional basis, efforts to successfully integrate hard and soft infrastructure have focused on the creation of logistics platforms with associated special economic or free trade zones. Examples of relatively new projects exist in Dubai, Hong Kong-Shenzhen, Navi Mumbai (India), and KwaZulu-Natal in South Africa. These projects use "technolopolis" environments, in developments ranging in size from 4,000 to 20,000 acres and integrate work, home, and leisure-resort types of activities.
These projects are invariably a public-private development initiative, and require the creation of commercially viable solutions that can be implemented on a phased basis as part of a master plan. The master plan must address both operational issues and the hard and soft environment that must be created to achieve an internationally competitive solution.
The Alliance Airport Development in Forth Worth, Texas has been successful in developing a sophisticated and integrated solution even though it was primarily a private sector undertaking. The overall size of the development is approximately 9,600 acres and incorporates both a freight airport with intercontinental capability and a road-rail inter-modal yard. Other elements of the master plan include manufacturing, merchandising, housing, and commercial zones. The development received initial public sector funding for infrastructure from the City of Fort Worth, the State of Texas, and the Federal Aviation Administration totaling in excess of $150 million. Private sector investment in and around the development now exceeds $4 billion. A recent economic report indicates that the development generated approximately $15 billion in economic activity during the first decade of existence. This development is successful notwithstanding its proximity to the Dallas-Fort Worth Airport, which is one of the largest passenger airports in the world.
Figure 2 - The Role of the Integrated Service Provider
The Navi Mumbai Free Trade Zone development in India is more than 10,000 acres and adjoins a deepwater post and a future airport development. The project seeks to replicate the success of Shenzhen as a Special Economic Zone adjoining Hong Kong.
Another example is Jebel Ali in Dubai, which incorporates a free trade zone of 20,000 acres adjoining a deepwater port. The development provides a preferred location in the Middle East for trading and logistics activities, including the processing and manufacturing of goods. A notable component in the development is the recent addition of a "cyber city" focused on e-commerce and telecommunications. The project is part of an overall program in Dubai incorporating port, airport, and special economic zones to provide an integrated logistics capability.
Role of the Executive
Corporations frequently make less-than-optimal investment decisions about the facilities that support an efficient and cost effective supply chain. One of the recurring problems for corporations is the lack of cooperation among corporate real estate, operational, and logistics executives. Several real-life examples help demonstrate these points.
The director of real estate and facilities for a global company with more than 30 million square feet of industrial and distribution facilities was asked by one of the company's real estate service providers about how it had established the need for a new 200,000 square feet distribution facility. The director said that the business unit of his company had made the request for the new facility. When the service provider asked whether the facility was actually needed, the director said that he had no way of knowing, and that they could sublet the facility in a few years, according to a new directive.
Another director of real estate at a company with $5 billion in sales and a large amount of distribution space was approached by the company's real estate service provider, in concert with a third-party logistics consultant, to propose an analysis of the company's distribution methodology. The director liked the idea, but wanted to check with a fellow executive who had responsibility for logistics. The logistics executive responded by saying that he didn't think it was a good idea, because the company would have to buy software to analyze their distribution network.
A real estate executive at a corporation with $4 billion in sales retained a real estate service provider to assist in finding a new 150,000 square foot distribution facility to replace two antiquated facilities as a part of redesigning the corporation's U.S. manufacturing platform. The corporation had a history of decentralized decision-making at the individual business unit regarding facilities requirements and locations. The real estate service provider was retained to add a higher level of sophistication by guiding the entire site location process. The real estate executive said that, in the past, proximity to the residence of the key on-site operational executive had been the primary determinant in locating a new manufacturing facility.
Executives need to push the issue of developing a thoughtful and thorough approach to facility investment decisions that impact their supply chains. Frequently, egos play a significant role in not seeking best-in-class advice, if third-party consultation is required.
Generally, executives in the public sector have been more receptive to using third-party consultants to formulate master plans for integrated logistics platforms. Clearly, the required expertise rarely resides within these entities. The most significant challenge for public sector executives is accepting "out-of-the-box" thinking associated with developing integrated logistics platforms. Although it is always a challenge to approve major funding to build the infrastructure for these new concepts, the consequences of not maintaining a competitive position can severely impede economic growth and job creation.
Back to the Future
A focus on hard assets is hardly new, but effectively integrating hard assets and soft assets represents a new challenge. Hard assets need to be developed with the same level of sophistication as is used in the creation of software applications. Further, the movement from traditional operational and organizational sites must therefore address both hard and soft assets as part of an overall solution.
Developing logistics platforms as a part of an overarching network requires creating integrated physical feeders among the individual transportation nodes. The platforms must also provide enough space to handle the efficient movement and processing of goods. These requirements mandate developing space with a higher level of sophistication than the traditional industrial park.
In addition, the facilities within this space must handle and process goods with a higher level of accuracy and efficiency. Advanced material handling systems and manufacturing techniques are used, which employ computer-integrated systems. A digital network must be provided, both inside and outside the facility, to assist the intelligent communication of needs and control of activities.
Broadband and connectivity issues are of particular importance as a result
of the growth of e-commerce, especially for the order-taking and fulfillment
functions. In addition, the virtual market provides a new avenue for the sourcing
of production on a global basis.
