In our previous article, we investigated the reasons why logistics is a complex activity. However, we saw that this complexity does not have to be bad, as long as we know how to keep it as a synonym for “being made up of many elements” and not as something “complicated, tangled, difficult”.
To properly manage logistics complexity, you need to know what to look out for, identify when your complexity is adding value and when all it is doing is hindering your company’s processes, without the work or the client noticing any real benefit.
Using Pareto’s Law
According to Pareto’s Law, in a hypothetical company we can expect that 80% of sales and profits come from only 20% of its products and services. In other words, 80% of the product portfolio barely manages to generate 20% of the income. In the same way, this 80-20 relationship is also transferred to customers: 20% of customers will generate 80% of the billing.
In view of these numbers, the questions arise by themselves. Do we have to reduce the product catalog to keep only the most successful? Should we part with our smaller customers? Why bear the storage costs of a huge catalog when my profits are so concentrated?
This is where things get complicated. Although they constitute a smaller proportion, sales and customers are still sales and customers. How do we know if the complexity of serving them is profitable for us?
For example, a client may be using one of our least used services, of those that correspond to 20%, but perhaps that service is serving as a gateway for those clients to use the rest of the services in our portfolio. Thus, we may be facing a less used service that makes our logistics more complex -storage, orders, manufacturing- but which may be indirectly profitable.
The new digital economy has also opened fields to be able to bypass what the Pareto Law seems to indicate. Traditionally, supplying physical stores with infrequently requested products had a very high cost: units that were not sold, storage space consumed for a low number of sales, etc. This is where the development of electronic commerce and digital purchase channels have opened up new options. Stock that was previously scattered in many places and too many units is now kept in fewer warehouses -or in a centralized one-, with a number of units closer to the actual purchase demand and which can supply even more customers than before.
How to track down complexity so you can remove it
The increase in the complexity of logistics has an immediate effect on costs and the bottom line. Whether it is a higher level of customization, a new way of delivering the merchandise, a new way of reaching the market, or the displacement of a supplier to a more distant place, all of this will affect the cost-complexity balance of our structure.
That is why it is essential to be able to self-assess our supply chain and, furthermore, to do it constantly. Martin Christopher, author of books on logistics, proposes the following steps when measuring our logistics complexity:
1.- Understand the origins that cause complexity.
2.- Analyze which elements of this complexity add value and which do not.
3.- Try to eliminate the components of complexity that do not add value.
4.- Minimize the cost of the elements that add value.
5.- Constantly review and monitor the cost/benefit ratio of our complexity.
It is clear that the challenge lies in knowing how to detect where complexity is adding value -and a value that the client perceives- and where it is simply generating complications, costs or inefficiencies.
Risk is a factor that you should also assess when talking about complexity. And it is that sometimes we assume greater complexity when we try to reduce costs. For example, instead of working with a single supplier -in which we bring together the supply of several products or raw materials- we decided to do it with several, each with their own products, in which we look for better prices. Or with one that is further away but offers us a better price (which, in the case of globalized companies, can mean a difference of thousands of kilometers away).
In these cases we will be adding risks -more time to receive supplies and more distance to solve unforeseen events- and complexity -a greater number of suppliers- in exchange for theoretically lower costs. A reduction in spending is good for the business and can ultimately result in benefits for our customers, but this is where our ability to measure whether the complexity and risks are justified will come into play. Perhaps the personnel/time cost of dealing with more suppliers or solving more complex incidents represents a hidden cost that is greater than the reduction in purchase costs that we were looking for.
We must be clear that complexity is not something intrinsically negative. Furthermore, it is almost by definition a feature of logistics and supply chains. The real battle will be in the decisions you have to make regarding that complexity: do you have to reduce your portfolio?
Increase suppliers because they give you a competitive advantage of some kind? Increase or reduce delivery possibilities? Serve new sales channels? The key to success will be in the constant analysis of the complexity of your supply chain and the benefits it brings you.
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