Relying on cost reduction.
‘You cannot shrink your company to greatness’ is a very true saying for any business, including those supplying logistics services. Understanding and adapting to the market situation will drive growth, but playing short term cost reduction games is not the road to glory.
Cost reduction games are typically driven by senior management setting KPIs for middle managers that emphasise cost reduction. For meeting the targets, managers receive a bonus and for missing the targets they are dismissed. So the overriding objective is now to increase the middle (and therefore senior) managers’ bonus, not develop the business.
An example of cost reduction games is an Australian road transport company. Prior to its public float, the company increased its market value by reducing truck maintenance and so increased profits. After a crashed truck and others in the fleet were found to have poor maintenance, the company lost $100m of contracts and retrenched hundreds of innocent employees. From its float issue price of $1.47, the value of the company has fallen to 43.5c per share, meaning that shareholders have lost the majority of their investment. So there have been no winners from this short term ‘strategy’.
Another example of cost reduction games is that of reducing headcount. To receive their bonus, middle managers inflate the number of contractors required to complete a contract. Senior management sign off for the proposed number and the contractors are hired. After a few weeks (say) thirty percent of contractors are retrenched for ‘poor performance’ (leaving the correct number of contractors required) and the manager receives a bonus for the (fictitious) reduction in headcount.
Focus on markets and customers
Controlling costs should be an integral part of a managers job, but when a business has ‘cost reduction’ as its focus, then it is going nowhere. Markets change and so will logistics service providers (LSP); as China moves to a consumer economy the requirements of service providers will change and those that do not are unlikely to survive.
An example of an economy that has changed to meet new demands is Australia. The factors of change have been the growth of service industries, increasing use of technologies in business, the reduction in import duties on consumer goods and the high currency exchange rate since 2003. Manufacturing employment is still 70 percent of what it was at its peak in the early 1970s, but the products manufactured and where businesses are located has changed dramatically.
Future change in Australian logistics services will be influenced by the size of container ships and freight aircraft. As both get larger, owners want quick turnarounds, with loading and unloading at few ports and airports. To date, the long distances between major cities along the Australian coastline has required ships and freighter aircraft to visit each, but pressure is being exerted to have one container port on the east coast, combined with one port in the North Island of New Zealand. For airfreight the wish is one dedicated airport inland from the east coast. If (or when) this occurs, distribution patterns and requirements would be totally redesigned.
Also, as Indonesia gains in economic strength it is likely that more consumer goods will be imported from Indonesia and less from China. This will also change logistics services operations.
To grow your business, whether shipper or LSP, markets and customers must be the focus; managing costs are a part of each manager’s job, but it should not be the driver, otherwise your business will lose.