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Using online technology platforms for managing rising logistics costs

Operational effectiveness, within the context of a well formulated strategy, is required to effectively and efficiently respond to competitive and market changes. Strategy supportive operational excellence can result in increased productivity, higher quality, greater speed while increasing market share and profitability.

With capacity becoming an issue for U.S. trucking and railroad operators, as economic growth revs up, the ability to identify and compete for haulage space has become a key driver of lower costs for many companies.

The capacity imbalance is forcing companies to spend more on haulage and delivery, creating pressure to pass such costs onto customers. While transportations costs are a small fraction of the costs consumers pay at the retail level, it piles up for companies along the value chain.

Technology services have emerged as a solution for efficiently matching customers down the value chain with logistics providers. More logistic companies are now leveraging IT platforms to provide solutions that companies needing short-term warehouse space can utilize to locate available floor or rack space or space on a truck or a train for their goods.

Logistics companies lack an incentive to quickly expand capacity such as truck fleets and locomotives as the structural imbalance gives them bargaining power over their customers and a greater ability to dictate the terms of business. In addition, the capital intensive nature of the logistics sector, is a barrier to entry, at the scale required to ramp up supply. As companies such as CSX Corp. have seen their share price increase by an average of 22 percent year-on-year.

Businesses further down the value chain have to scramble to find efficient ways to reduce transportation costs or to pass them down to customers. Particularly pressed are companies that rely on outsourcing their logistics needs, those without the capacity to build one, or build-out existing capacity and those for whom a company-owned logistics infrastructure does not make economic sense.

The promise of online/cloud based integrated supply chain platforms, is mediated by the danger that new entrants into the logistics sector may have more knowledge of technology and software solutions, than of supply chain and logistics issues.

Given their promise and increasingly easy availability online, companies can be tempted to sign up, without doing enough due diligence to ensure that possible solutions have been tested, are scalable and robust and complement their own strengths, reduce their weaknesses and add to their competitiveness.

Distinguishing between operational effectiveness and strategy is key to this capability. The quest for operational effectiveness, has spawned a long list of techniques and practices, that have reduced costs but not had significant impact on earnings, as they become commoditized. Examples are practices such as benchmarking, total quality management, re-engineering, and six-sigma.

These practices are not by themselves invaluable. The problem is the ease at which they can be speedily adopted means that they do not constitute significant barriers.

As logistics costs increase and online solutions proliferate, companies that utilize these services within a well formulated and executed strategy, are more likely to leverage the flexibility and nimbleness such services offer, in a manner that creates value for their customers. In essence, such services will become a unique activity within their value chain that is supportive of their strategic position.

• Olu Ijose is an associate professor of management at Governors State University. The views expressed in this piece are his own.

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