Sunday, 25 January 2015

Will robots destabilize society?

Whenever leading British clerics make remarks of a political/economic nature they are often chastised by politicians, particularly of the right, for not sticking to theology, the implication being that they are ignoramuses on non-religious matters. The latest example is the Archbishop of Canterbury, Justin Welby's remarks to an audience on New York's Wall Street, warning that the rise of robots and gene therapy could allow a tiny elite of the super rich to amass more power while almost everyone else grows poorer. But as a former City of London oil executive Justin Welby could hardly be described as an ignoramus on economic issues and would probably shame many politicians on that score, whose profession is often seen as far below a theologian's calling.

To some extent, the Archbishop's fears have already been realized. In real terms American incomes for the vast majority have declined while the top 10% saw a real income rise in recent years, and such disparity is worsening as a tiny majority now control much of America's wealth, a shift helped by legal but morally repugnant tax avoidance schemes whose architects' great wealth give them disproportionately great power to influence tax changes in their favour at the expense of the lower and middle income groups.

There are two key economic aspects to Justin Welby's claim: the rise of inequality of incomes and its implied threat to society and the second, perhaps more serious threat, arising from societal upheavals caused by automation and gene therapy which could reinforce the economic divide. But are his views on robots wrong, reflecting Luddite thinking? It is a difficult one to call but it is clearly a potentially destabilizing issue that will need very sensitive handling to prevent unwholesome consequences in the near future.

Inequality does, of course, matter, at least potentially because in democratic societies, in particular, great wealth brings great power and history shows that such power is often exercised against the public's best interests. But there is one key difference when comparing politics in democratic societies today against those of the past. Properly advised and motivated, electorates can curb the trend towards closet plutocracy, though arguably they have not shown much puissance in that respect so far. So that suggests the greater threat ostensibly is automation, but is there some woolly thinking here?

There is no doubt that futurologists from Thomas Malthus onwards often get it wrong because while their analyses of  problems were seemingly correct the assumptions on which they based their analyses were flawed, which is often why economists' forecasts are wrong. There can be no argument, however, that more repetitive, unskilled jobs will be taken by robots as their price tags slump and they become smarter and more versatile.

A good example of robot cheapening is the mobile Baxter robot endowed with assembly task abilities and costing only $25,000, about one tenth of a typical welding and paint-spraying robot. Even in low wage economies like China the lure of low-cost robots is irresistible. Apple supplier Foxconn, for example, has plans for investing in one million robots in China. As robot prices continue to fall demand will rise and it will by no means be confined to manufacturing tasks. For over 30 years, for example, supply chain functions like storage have seen steady inroads from automation, including both horizontal and vertical load movements, palletising and high speed sortation conveyors. Sometimes, however, the progress seemed a pace too fast, as in Britain 35 years ago when the Japanese forklift manufacturer, Komatsu, trialed a wire-guided driverless forklift that could handle horizontal movements and stacking tasks within racking aisles at what was then Britain's biggest brewer operating over 1,000 forklifts. Labour union alarm and pressure ensured that the revolutionary trucks were dropped. Today there is less union power and so employers will be more likely to embrace robotics.

A controlled, responsible move towards more automation should be desirable but there is a need to maintain a watching brief. New industries will arise to take up the slack in unemployment that may arise through more automation, provided the workforce is adequately educated  to take on the challenges. That is a big aspiration, and unfortunately societal breakdown in family values (one parent families, etc) stymies its realization.  

Sunday, 18 January 2015

UK retailers are crippling suppliers

UK food and drink retailers now face a perfect storm from the price wars raging among the big four grocers and with the surging discounter arrivistes like Lidl, Aldi and Poundland but it is their supply chain partners, and to a lesser extent their 3PLs (third party logistics providers) who face a hellish consequence from the squeeze imposed on them by the big four that account for over 75% of Britain's grocery market. It seems that over 100 food and drink producers are at risk of collapse over this price war and new research shows that the number of UK food manufacturers in "significant" risk soared by 92% to 1,410 businesses in the final quarter of last year. According to recent research, more than 100 of these companies will collapse into administration unless supermarkets treat their suppliers more fairly and trading improves. Neither is likely any time soon.

There have been retail "price wars" before but not of the kind now facing the industry, and certainly not on the same scale, brought on by years of declining consumer real incomes, a paradigm shift in shoppers' habits and the IT revolution that now allows shoppers to buy online the same product in different countries at the best price, so threatening the traditional bricks and mortar model of retailing. Price is now king, and the new heroes are the online facilitators and the discounters giving permanently low prices across all their SKUs, thanks to their business model that the big four cannot yet emulate without going through unprecedented, painful downsizing.

Even before the latest price wars broke out the big four had been squeezing their suppliers for years by using up to 60 different ploys, most notably extending payment periods from 30 days to three months and the ever-present threat of delisting if suppliers refused to come to heel. This attitude has cascaded all the way down the supply chain to the smallest suppliers. Given the most intense pressures yet on the supermarkets they are hardly likely to soften their attitudes to suppliers and that includes the 3PLs who themselves are struggling in difficult markets, even if the majority have five-year contracts with the big retailers. Woe betide them when their contracts come up for renewal.

It is difficult to see through the battle smoke how all the players will react to what seems like a permanent sea-change in shopper's habits. What seems in little doubt, however, is that the big supermarkets will have to cease being all things to all buyers by selling the widest range of goods possible, typically 40,000 SKUs in a large superstore. This is their Achilles' heel when dealing with the nimbler discounters whose stock lines would be less than 1,600 and nearly all popular, fast movers, a key requisite for minimising the most costly of warehouse functions -- huge inventory holding costs.

What must now seem reasonably clear, however, is that the big supermarkets will slash their stock lines to ease their cash flow problems and that means many suppliers facing widespread product delisting and charges for those who are lucky enough to see their products remain displayed on shelves. If the number of food retailers in significant distress, up 58% year-on-year, according to one report, to 4,552 in the final quarter of 2014 is bad enough the picture is even worse for the troubled food and beverage makers who saw a 92% rise. In desperation, the larger manufacturers are easing their plight by shifting the burden onto their smaller suppliers, as Heinz, the baked bean maker, has reportedly done by extending the term suppliers must wait for repayment from 45 days to 97 days. The climate in the milk industry is even direr, which over the last 10 years has seen the number of dairy farmers halve to under 10,000, though this industry's problems have more to do with supply and demand issues rather than retail wars. Yet more trouble is brewing in the poultry business, Britain's biggest selling meat, where price cutting threatens a profit collapse.

The extent of the problem, both political and economic, is potentially huge, given the 3.6 million people employed in UK food supply chains alone but there is much more potential pain on the horizon for traditional retailers and even online sellers like Amazon, Ebay and Alibaba, and it will come from further cyberspace innovations. The traditional retailers who want to survive the coming tsunami from the ether will have to offer an online service and be flexible with their pricing strategy and delivery times.

A good example of a potential game-changer is a new American online start-up called, founded my Marc Lore, a veteran of website shopping and former employee of Amazon. He wants to re-invent the wholesale shopping club for customers who will find just about everything they need in return for an annual fee of US$49.99 after a 90-day free trial period. Lore claims that Jet's prices will be 10-15% lower than anywhere else online partly because, unlike other online competitors, there is no money being made on the transaction. All income derives from the annual fee. Shoppers will also be able to extract more savings if they are prepared to let Jet discover how to deliver goods as economically as possible. Prices, for example, can drop if a shopper combines multiple orders with a single shipment or is willing to wait for a seller offering a more economical shipping option.

Birth and progress are rarely painless and never entirely beautiful. The problem for politicians will be to manage the inevitable upheavals that will affect so many in retailing as sensibly as possible but it could well prove beyond their capabilities.

Tuesday, 6 January 2015

UK retailing suffers Chinese curse

Few things can be eternally certain in UK retailing but what cannot be in doubt is that the industry is about to suffer the ancient Chinese curse of "May you live through interesting times." But what does it mean for the logistics industry, and ultimately the large property companies and pension funds so reliant on their retail property investments? At least three strands of shopping habits are convulsing the industry and a fourth could emerge to see the disintermediation of bricks and mortar retailers in favour of consumer goods producers selling directly to their customers, with or without the use of vast, shared-user order picking stores. This fourth horseman of the apocalypse could wrest back control of the industry from retailers to producers who have for many years suffered bullying by virtue of the big four* retailers' domination of the UK grocery market. Such retailers use up to 60 different odious ploys to squeeze their suppliers, which in turn has forced some of the bigger suppliers to adopt similar tactics with their smaller suppliers.

The catalyst for this development has its roots back in 2007 when casino economics had the banking industry in its thrall. The inevitable banking crisis in 2008 which this writer warned about in the January 2007 issue of Warehouse & Logistics News midwifed a long period of declining real incomes which forced consumers to seek value for money. Today price is king, which hopefully heralds an end to the big four's odious price-changing tricks and their suspicious, cozy cartel behaviour which have never acted fully in the shoppers' best interests. Now the shoppers' and food producers have the power to bring the big four to heel.

The sea change in shoppers' habits involve a shift away from the big, out-of-town retail stores to smaller, retail convenience shops, the remorseless rise of online shopping and, in particular, a move towards the foreign-owned retail discounters of Aldi and Lidl who are taking market share from the big four. The last of these was not surprising to this writer who 25 years ago visited the Danish discount retailer, Netto, who arrived in northern England shortly after and long before Aldi and Lidl came to Britain. Netto's business model was impressively slick.It realized the importance of moving as much inventory as possible for fast turnover, for which it had to harness IT and high speed sortation conveyors at its only NDC (national distribution centre) serving all 120 of its shops nationwide. To achieve this, Netto restricted its SKUs to 600 popular, fast-moving items, and when fast movers became slow they were quickly dropped in favour of new, expected popular items. The result was that all EPOS-connected 120 shops downloaded their daily sales by close of day to the NDC which served as the picking instructions for order replenishment overnight for delivery before shop openings the next morning. Consequently, 90% of all goods stored passed through the NDC every 24 hours, so vast sums of money were not tied up in slow-moving stocks. Depending on the value of inventories held, the cost of holding stocks can dwarf all other warehouse costs combined. This is a key reason why the discounters can undercut the big four by up to 30% across a broad range of products without having to compromise on product quality. Another big help to them was their no-frills shop displays which made store start up costs much cheaper.

The big four tried to be all things to all shoppers by stocking everything under the sun, much of which were slow movers. At that time 25 years ago I commented in Materials Handling News that "If this business model ever crossed the North Sea to Britain it would give the big grocery retailers nightmares." Belatedly, the big four realize this and so are now converting their larger stores into smaller supermarkets, allocating the freed up space to catering, creches, gyms and other smaller tenants, a practice adopted in France by Carrefour and Casino. Some of the large supermarket space freed up could also be used as dark stores -- supermarkets without customers which are used to pack online grocery orders. Sainsbury has diversified in a different way by teaming up with Netto of Denmark to open small convenience stores with a limited stock range to compete with the rapidly growing Aldi and Lidl. Even so, some executives and analysts believe that Tesco, Sainsbury and Morrisons will need to close one in five stores to protect their profits.
Declining market shares and profits for the big four mean that supermarkets face billions of pounds in property writedowns, which will have a knock-on effect on property companies because many retailers have sold their freehold sites to landlords for lease back. While that would pose no immediate problems where leases are long, as time passes there will be an income problem for landlords because if underlying rental values fall with leases getting shorter then valuation yields need to reflect that. Some landlords and big grocers could convert their land into housing but that seems only likely to work in London, rather than the provinces where stores are most under pressure to shut. To make matters worse, the big store chains value the land on their balance sheets at around twice what it would fetch if sold off for housing and Tesco, in particular, is highly geared.

                                                 Property bust?

These significant retail property holdings (Tesco's alone are valued at £11.5 billion) could pose sleepless nights for pension funds who have so much invested in retail properties, and by extension fears for pensioners' incomes because the revolution new technology has wrought in the retail world affects far more than the big four retailers. For some years now e-commerce has shaken up retailing, with online shopping sales for 2014 expected to hit £100 billion in 2014, and while this appears to have contributed to some high street shop closures could it be made much worse by upheavals within the e-commerce world, both actual and potential. Among the actual is the advent of Alibaba, a Chinese-based e-commerce giant that recently raised US$20 billion on the New York stock market. The value of goods sold through its portals in 2013 hit $248 billion, twice what Amazon achieved and three times as much as Ebay, but unlike them it offers a truly global online marketplace to enable border-hopping commerce that bypasses middlemen. Shoppers will be able to compare prices of the same product in different countries as well as source generic products at the cheapest price. Buyers will have a world of sellers from which to buy anything and the increased competition is likely to standardise and depress prices globally.

An example of a potential e-commerce threat is the ability of major food and household consumer producers to band together to finance huge, shared order picking centres for direct home delivery to shoppers so as to disintermediate the current retail set-up which involves unnecessary retailer costs and profit margins. If this and the Alibaba effect succeeded then the sparks would fly upwards for landlords and pension funds.

To some extent, the disruptive e-commerce events have already forced changes in the logistics industry. These include making loading bays more flexible to accommodate a wider range of delivery vehicles from 40-ft double-deck trailers to medium and small vans for home deliveries. Dedicated e-commerce fulfillment centres are also being built. But it seems the good times are over for the logistics equipment providers used to a decade of the big four's huge expansion spree. According to one consultancy, large supermarket openings will roughly halve in the 2015-16 financial year to 1.5 million ft2 compared with the preceding year. On the other hand, demand for delivery vans should continue strong.
*Tesco, Sainsbury, Asda, Morrisons 

Tuesday, 16 December 2014

Should the West soften stance on Russia?

Economics, it seems, is rarely top politicians' forte, evidently as much for what they do and don't do to promote  their countries, and arguably nowhere is this more obvious when politics is allowed to trump economics as in the current case of unpleasantness no afflicting the Ukraine. It is a sine qua non, or at least desirable, that the majority of people's wishes should take priority over the minority, provided the minority is not unduly disadvantaged, which is what happened when the Crimea overwhelmingly voted to prefer Russian enosis to closer EU relationships. The West voted the armed Russian help in this split as unlawful, apparently overlooking the illegal putsch in the Ukraine that sparked the brouhaha, but one wonders what they would have thought had, for example, the peoples of the Falklands and Gibraltar overwhelmingly voted for union with Argentina and Spain respectively without deference to Whitehall. Moreover, had Scotland decided to vote for independence without the UK's blessing and won would the West have viewed Britain's subsequent armed intervention as unlawful? To its credit Britain has agreed that if there were a majority vote in the Falklands and Gibraltar to join their former territorial owners Britain would not stand in their way, which is as it should be.

The West has now resigned itself to Crimea's secession from the Ukraine but could its resistance to any further secession from the Ukraine by the small, largely Russian-speaking eastern provinces be dangerously over reacting, given the obvious economic and political risks it poses to Russia, the EU and the wider world? It seems so.

It is to be hoped that the Ukraine will not see more lost territory from the east, because together they will be stronger and more prosperous but to achieve that desirable outcome both Russia and the West much be more accommodating. Russia, for its part, should withdraw all its overt and covert forces from the Russian-speaking eastern provinces in return for the Ukraine guaranteeing, with the UN, that there will be no reprisals and oppression of the ethnic Russians that could leave them oppressed. Both sides should also contribute to reconstruction costs with adequate outside loan help. The EU must also be wary over allowing closer ties with the Ukraine before that country has cleaned out its Augean stables of corruption, cronyism, debt welching and colossal economic mismanagement, which now sees the country in an unholy economic mess. It would also be sensible for the Ukraine to maintain good relations with both Russia and the EU and purge itself of fascist tendencies that are still evident in parts of the Ukraine's political establishment, in particular.

Russia, too, needs some stable cleaning in economic affairs. The West's sanctions are now beginning to bite seriously as Russia's economy moves into recession, prices rise, the Rouble plunges and unemployment worsens.Opinion polls may show that President Putin is still popular but rumbling bellies could soon change that. The falling oil price, however, will do even more harm than sanctions. About half of Russia's revenues derive from oil and gas and for every dollar fall in the global oil price Russia loses US$2 billion  a year if the fall is sustained. Now languishing at $60 a barrel from a multi-year average of $100, estimated oil revenue losses are $90 billion to $100 billion compared with only $40 billion from sanctions so far. It is not too fanciful to believe that oil will fall to below $50. What this exposes is the inherent weakness in Russia's economic management. Other than armaments, it produces very little manufactured goods and not enough agricultural output and the billions of dollars it earned when oil prices were high have been unwisely spent on multi-billion dollar fripperies like the Sochi Winter Olympics, instead of diversifying the economy.

Mickhail Fradkov, head of Russia's foreign intelligence service, has accused America of introducing sanctions and attacking the Rouble through manipulation of oil prices in order to oust Putin. On sanctions he has a point, but the oil price has always been volatile, despite the best efforts of the OPEC cartel. "No one wants to see a strong and independent Russia," he said. This, of course, is patent garbage, for anyone with the most basic grasp of elementary economics would know that the world has a strong interest in seeing Russia prosper, because the wider world would also benefit through more trade and trade is the handmaiden of prosperity and prosperity the surest guarantor of peace.

Fradkov's remarks may go down well with ordinary Russians but they are, nevertheless, potentially inflammatory and dangerous because a populace not grounded in elementary economics is unlikely to see through the crass vapourings of political mountebanks and toadies. This is just one, but critical example, why economics should be taught at all schools.

For Russia the pain can only get worse as the oil price continues to tumble, ramping up the risks of political instability. Reforming and rebalancing its economy to favour much more manufacturing is an urgent necessity to give the people what they really want, which is not, as in the days of ancient Rome, more costly games like the World Football cup matches in 2018. NATO and the West, for their part, should not make provocative moves on Russia's borders and the EU and global lenders of last resort should realize the economic lessons from the 1930s. When economies are placed under extreme pressure through sanctions and other circumstances events like the unrealistic war reparations imposed by the victors of Versailles on Germany, leading to the collapse of the Wiemar Republic and its hellish aftermath, could resurface in another devilish form.

The Western democracies have long cherished their desire to see democracy planted in Russia, just as at one time Russia tried to export its political ideologies to the World, almost to the point of sparking World War 3. Russia has given up on that path and the West should follow suite. Democracy will come to Russia as sure as day follows night but it must never be by outside interference.

Saturday, 22 November 2014

World's first "truly green" forklift unveiled

A collaboration between Honda and Briggs Equipment, Britain's largest forklift dealer, with Government financial backing, has produced the world's first "truly green" engine emissions that will not only save lives and misery from pulmonary and other killer diseases caused by NOx and other toxins but help the world to achieve its targets on global warming. The motive power project is unique for two reasons; a converted Yale forklift uses lithium-ion battery technology (80v) charged by a hydrogen fuel cell and secondly it uses hydrogen generated from solar power via an on site electrolyser rather than a conventional natural gas process. The project, developed at Honda's UK Swindon plant, is also innovative in that all this technology fits in a standard DIN size battery compartment.

Hydrogen fuel cells have been powering forklifts for a few years now and are especially finding favour among American big forklift fleet users. Their key advantage over lead-acid batteries is the longevity of the fuel cell, typically 10 years, their quick charging over a few minutes, compared with eight hours or more for lead-acid, the abolition of costly batteries and storage/changeover facilities in multi-shift operations, and no drop off with truck performance towards the end of shift as there is no voltage droop. Maintenance is also 1.5 times lower and the performance more or less on a par with other motive power fuels. One big drawback, however, was the pollution aspect, because while clean at the point of use it was not clean at the point of hydrogen production owing to the use of fossil fuels to make the hydrogen.

A Briggs spokesperson confirmed to this writer that this remarkable project is aimed at replacing lead-acid batteries, though diesel engines can be converted but the technology is only suitable for delivery vans owing to space constraints. Richard Close, Briggs Equipment CEO, said: "The project has proved what can be achieved. The challenge is now to extend this as widely as possible."

Although rightly hailed as a breakthrough as a proving ground for future development in emission-free forklift technology it is recognized that in its current form this process would not be viable for small fleets and would need the benefit of scale and further efficiencies to make it universally realistic. So what size forklift fleet is required to make this technology viable, this writer asked Briggs. The response was non committal on size but a spokesperson said: "If high purity hydrogen is available then all that is required is a suitable compressor to make the gas available for the fuel cell. We think that the first large scale commercial use will be at a big distribution centre, probably with some government grant assistance to get the project going." Nevertheless, said Briggs, "cost reduction will come with volume and that is linked to the availability of fuel."

This development may not be confined to industrial trucks. So far the project consortium has focused on creating a whole system from solar as its source to hydrogen as the output fuel to run vehicles -- converted vans running normal duty patterns -- as well as forklifts operating on site. The consortium intends to investigate hydrogen as a means to provide power to Honda's manufacturing plant in the future. If that process were extended to factories world-wide it would be one giant step for mankind in the struggle to clean up the planet. Meanwhile, Honda, Briggs and the British Government have earned a small but well-deserved bow.

Monday, 3 November 2014

Europe pays price for Ukraine's lousy governance

Getting others to pay for one's own sins has long and commonly been part of human nature but succeeding in palming off the sinful bill at national level is much more difficult and rarer. The latest example of a successful master stroke in financial chutzpah is the Ukraine's long-running refusal to pay Russia for gas that goes back over 18 months. It now owes Russia about $3 billion for unpaid gas that it says it has no money to pay owing to the money spent on the war against secessionists in the south-east. It may not have the money but the country owed $1.5 billion up to March this year before any hostilities broke out and so one must look for the real reasons for such insouciance. As explained in my blog, How to Contain Crimea's logistics threats, the Ukraine's economy is an unholy mess deeply mired in corruption and largely in the thrall of plutocratic oligarchs.That is the real reason for non payment and unless the Ukraine takes good governance to heart at all levels the canker within its society will continue to fester.

Russia, to its credit, has offered a new gas deal by cutting the gas price by $100 per thousand cubic metres to $378 by the end of this year and $365 in the first quarter of 2015, provided the $3 billion has been paid off first and that there should be an element of future payments in advance. The $100 price cut is according to a formula contained in the gas supply agreement dating back several years. The Ukraine reportedly said that at first it could not pay and would, if necessary, steal the gas from the pipeline that runs through its territory on its way to Europe. The Russian response, understandably, was a threat to cut off all supplies. Given that such action would seriously affect European consumers of Russian gas, sending prices soaring at a time when Europe is flirting with deflation, the EU felt over a barrel and so has now agreed to pay for the Ukraine's financial delinquency with some help from the IMF. The crisis has been averted, the Ukrainians will no longer risk death from the cold and in the circumstances Russia's deal has been generous and shown much forbearance towards a serious debt welcher.

But what are the bail out figures and implications for the rest of the EU struggling with sputtering economies burdened with dangerously high youth unemployment and a banking system under great strain? The EU will act as guarantor for Ukraine's gas purchases and helping to meet outstanding debts. The total package is worth $4.6 billion, with money coming from both the EU and the IMF. "Unprecedented levels of EU aid will be disbursed in a timely manner and the IMF has reassured the Ukraine that it can use all their financial means at its disposal to pay for gas," the European Commission said. The EU is also considering a further loan of 2 billion Euro. Doubtless much more will be needed to pay for the huge war damage costs.

The trouble with blackmail is that the blackmailer often comes back for more but if the victim (Europe) can reverse the role by resorting to its own threats then the unpleasantness is likely to come to an abrupt end. The EU should now impose its own conditions by pledging not to allow any moves to advance the Ukraine's interests in closer union with Europe until after the Ukraine has drastically overhauled its economy primarily through dint of good governance in politics and economics, and paid off any debts it may owe.

Much of the tragic trouble the Ukraine now faces in its south-eastern provinces, where there has been an overwhelming vote in favour of independence at local referendums in May, could have been avoided if there had been good governance in politics and economics that benefited all. It is to be hoped that the Ukraine will remain one united country rather than lose a region said to be worth one third of the country's GDP. Together they would be stronger and more prosperous. The Ukraine should also seek to improve trade relations with Russia. Trade, after all, is the handmaiden of prosperity and prosperity is the surest guarantor of peace.    

Thursday, 16 October 2014

Is outsourcing logistics worth it?

Time was when outsourcing one's logistics operations to a third party logistics (3PL) contractor was thought to be more costly than an efficiently run in-house operation. After all, there is the contractor's profit margin to add to all the usual running costs which did not exist before outsourcing. So why, then, did outsourcing catch on or was even tried in the fist place? In Britain, one key driver was the turbulent record in transport labour relations which left companies a hostage to fortune and so they were only too willing to break that mould by outsourcing. It worked in the sense that labour relations became much calmer. It caught on because most companies using their own in-house logistics solutions were not particularly super efficient in that function partly, perhaps, because they saw it as a side show distraction from their main function of manufacturing products.

Most 3PL contracts are for a minimum of five years and it is possible that costs within the first year could be higher than when the operation was run in-house. But as when choosing or renting new forklifts, the focus of attention should be on the life cycle costs over the five years, not the initial cost, but how does one know what those costs may be four or five years hence and how flexible will the 3PL be to meet wide fluctuations in demand for the clients' products?

The problems of costs and uncertain product demands can be eased at the contract negotiating stage, which admittedly is a highly complex business that demands great care. A key element in success is the degree of trust -- in the form of confidential information -- that customers must extend towards the contractor, which is immense. Without that gesture the contractor will not be able to provide an effective service. Secondly, the partnership should involve pro-active suggestions, agreeing and implementing efficiency savings which are tracked throughout the contract's life and the monetary benefits shared with the client on a fair basis. This is where probing of potential 3PL contractors is critically important. The winner of the contract should have a long-term track record of not only reliability but also be able to prove how good they are at making big savings for their existing clients. It would also be comforting to the client to know if the 3PL has a wide spread of warehouses strategically located nationwide as this would enhance the flexibility it could offer, partly through shared user facilities, which is so important to cope with seasonal fluctuations in demand or long-term changes caused by adverse moves in the economy.

A third caution which every outsourcer must never neglect is the financial stability of the potential 3PL contractor. Size is no guarantee of solidity. Back in the 1980s, the high-flying logistics operator, Rockwood Distribution, collapsed, leaving its clients with embarrassingly empty shop shelves and frantically having to find alternatives. Financial investigations into prospective 3PLs should never be left to just bankers' references. There are various formulae which can predict bankruptcy up to two years ahead, one of which, the Lis formula, named after its creator, Roman Lis of the Manchester Business School, is said to be 90% accurate, and that is close enough for Government work. It takes four key ratios from a company's annual accounts, each of which is multiplied by a certain coefficient and the sum of their products is then compared with a cut off point of 0.037. The more a company's result is above that cut-off point the sounder it is. Below, the amber lights start flashing.

If the choice of 3PL has been wise just what benefits can be expected? A good example among many is how the 60-year old British, family-owned business of Howard Tenens (HT) transformed the logistics of Costa Proud, which supplies its entire ingredients supply chain. During the initial 12 months of a five-year contract HT achieved a smooth implementation of both a new IT system and 3PL provider with no loss of service. Stock was centralised from nine locations to one. Stock availability reached 99.9% and there was a 50% cut in stock holding at partner sites. Delivery refusals fell by half and annual logistics costs by 30%. There were also considerable CO2 savings which is a key attraction to blue chip clients keen to establish their 'green' credentials. HT, in fact, leads the 3PL industry in having 88% of its heavy goods fleet over 18 tonnes with dual fuel capacity. It has invested in re-fuelling stations for both CNG and biomethane which are all open to third parties.

So, to the question is outsourcing worth it? the answer is a resounding yes, provided the partnership is truly pro-active and the choice has not been made on price alone as the dominant factor in an industry where competition has always been intense and so likely to see a 3PL's margins under extreme pressure.