A Logistical Tragedy
Several contradictory trends are evident on the logistics market. On the one hand, experts point to the growing market of logistic services as more companies entrust logistics to a third party. On the other hand, the quality of those services does not always prove competitive. Accordingly, many retailers and manufacturers of consumer goods, who dealt solely with outsourced logistics operators just a short time ago, now are establishing in-house logistical services and even contemplate the construction of their own storage facilities.
Strategy
What’s the best way to solve the logistics dilemma? Experts suggest several strategies. Some companies work with outsourcers while others create in-house services and sometimes even get involved in warehouse property development; still others adhere to a hybrid scheme. The choice of a logistical model certainly depends on a given company’s philosophy: for instance, Western retailers and manufacturers are more inclined to trust outsourcing than Russian firms. Ultimately, the chosen scheme can be later adjusted by the realities of the Russian market: even Western companies, historically gravitating towards logistics outsourcing, sometimes cannot deal with Russian providers.
Transportation Difficulties
Logistics outsourcing, which has long been practiced on the Western markets, has numerous advantages. This scheme enables the investment of loose funds into the core business, ruling out unnecessary expenses on the establishment and support of in-house logistic structures. And there’s another important factor. “Trusting logistics to outsourcing, retailers and manufacturers minimize their financial risks, since the entire liability in this case is shouldered by a logistical provider who, in his turn, shifts the financial burden to an insurance company,” says Polina Vinokurova, advertising and PR expert at the National Logistics Company. According to the board chairman at Smart Logistic Group (affiliated with EMCTC, The Consolidated International Network of Customs Bonded Warehouses,) Vladimir Yelin, Western manufacturers and retailers seldom assume the functions of logistics operators. This may happen only when unique or specific commodity groups need to be handled. But in Russia, foreign companies occasionally forego their principles here. It’s not a secret that in many instances companies would be happy to hand logistics over to outsourcing but cannot. “Wherever outsourcers are unable or unwilling to provide quality handling of specific or sophisticated goods, companies are compelled to develop their own in-house logistical structures,” says Ruslan Suvorov, head of the industrial property department at Praedium. “For example, companies trading in stationery have to resort to this strategy.”
In the opinion of Peter Zaritsky, deputy director of warehousing and industrial property at Jones Lang LaSalle, many companies - including manufacturers in the FMCG sector, who operated exclusively through logistics providers just a few years ago - now are planning to switch fully or partially to their in-house logistics services for the same reasons. “Very few logistics operators are able to render quality services, which would meet the expectations of Western manufacturers and retailers,” says Zaritsky. “Therefore many of the latter prefer to work through in-house logistical services, but they’ve not been very successful: the commodity flows of many retailers are scattered over different warehouses instead of being concentrated in one place, X5 Retail Group being a good example.” In the opinion of Mr. Zaritsky, this trend is particularly relevant for retailers. They rent warehouse space, hire personnel, buy or lease equipment, set up storage control systems and go full speed ahead.
“The main strategic line of most companies today is building in-house logistic services,” reasons Peter Zaritsky. “Large retail companies have a huge assortment of goods and a very complicated structure of orders which is perplexing for some logistic operators.”
The MIR chain of household appliances and electronics is among those who use a combined scheme (outsourcing plus in-house logistics.) It handed over cargo transportation and partially the handling of articles at the warehouse complex to outsourcing. “Now we are contemplating the possibility of building our own terminal,” says logistics director of MIR, Aleksey Kurushin.
Talking about the difficulties related to outsourcing, Aleksey Kurushin pointed out, “Processes are somewhat slower under outsourcing: an outsider needs more time to adjust and introduce changes. In addition, we are often charged extra fees for new services, which were not originally specified in the contract. But the main problem is that not all logistic companies represented in today’s Russia can work with our assortment. They know how to serve companies with a simple variety but when it comes to heterogeneous commodities requiring complicated presale preparation, Russian logisticians back out. In other words, they know how to store tires or beer but catering to our needs is a far more challenging matter.”
Kurushin also commented on the positive aspects of outsourcing. “The main benefit of this strategy is the focus on the core business rather than collateral processes. We don’t have to engage in personnel recruitment and training; it is enough to have one person who would keep the work of contractors under control.”
Apart from anything else, there is one factor which makes both retailers and manufacturers think about an in-house logistic service and the development of warehouse properties, according to Peter Zaritsky. Any fast-expanding business sooner or later wants to bring the entire commodity stock to one place at a large storehouse in a distribution center for one particular region, such as Moscow or the Moscow Oblast. Not everybody has such an opportunity. “Euroset and X5 Retail Group have reserved land lots, aiming exactly at such a strategy, and Euroset has announced that it is at least considering plans to develop its own warehouse complex,” says the expert. “On the whole I don’t see any regularity in choosing particular logistical strategies, but one tendency is apparent: retailers will sign direct contracts of the lease and, as the next step, build their own warehousing complexes, where all their commodity flows will be concentrated.”
In-house logistic structures also have some benefits. In spite of occasional stumbling and faltering, retailers and manufacturers keep the handling and movement of their commodity flows under control, saving on their expenditures in many cases: many services offered by outsourcers seem overpriced to retailers and manufacturers. “Ideally the expenses of organizing an in-house logistics service are comparable with the prices that logistics operators charge for similar services,” say representatives of YuniTrans Logistic. “For example, some chains trading in household appliances are known to operate only through their own distribution centers, motivated in their decision both by the quality of some services rendered by contractors and by overpricing on the part of outsourcing companies.”
At the same time Vadim Pozorov, director of the industrial property department at Knight Frank, notes that logistic outsourcing is justified for most market players, especially small and middle-sized companies leasing from 3,000 to 20,000 sqm of warehouse space. It is wiser for the latter to use the services of professional logisticians while the giants, in many cases, justly establish their own logistic divisions. Yet we see both small and large companies operating on their own whenever the commodity specificity does not allow them, for some reasons, to hand over logistic operations to outsourcing. It should be noted, however, that creating in-house logistical solutions will call for a considerable amount of spare cash. Construction on a modern 10,000-sqm logistics center may cost from $5 million to $10 million depending on its location and types of equipment. Skilled personnel recruitment and social bonuses will demand additional investments. It is difficult to make this osrt of logistics service truly effective. The risk of failure always exists at every stage of handling commodity flows, be it the control of warehousing programs or cargo transportation, which means potential financial risks. This is not just a bluff; we’ve come across numerous examples in our everyday practice,” says Polina Vinokurova
A Third Option
In the opinion of Peter Zaritsky, the third approach to logistics (besides in-house logistic services and outsourcing) may in time become a serious option for large manufacturers in the FMCG sector. The gist of this approach is that manufacturers, rather than logistical operators, act as tenants of warehouse space. They will invite outside providers to render logistic services at rented facilities. “This option will give the customer an important role in terms of influencing a logistics provider,” explains Peter Zaritsky. “If need be, he will be able to hire any other outsourcer without the need to move commodities. This strategy gives manufacturers a good means to control their logistics. This scheme is already used by Oriflame at its storage facility on Novaya Riga, operated by Tablogix.
Heading for the Regions
The regions have their own special charactersistics, of course, which direct influencing the logistical strategy of the companies. Even those operators who are used to a certain unified scheme have to accommodate for the idiosyncrasies of any particular region. “Often it is the case in Moscow,” says Vadim Pozorov, “That such companies as Auchan, Ramstore or Metro can trust their logistics to outsourcing. But expanding into regions, they either create their own logistics network or optimize their operations.” One of the problems faced by regions is the dearth of high-end warehouse space. “The projects of retailers often stall because of the actual lack of modern logistic facilities,” says Vladimir Yelin. “A number of companies have to use old distribution depots dating back to the sixties and seventies to keep up the planned pace of expansion, whereas large retailers such as X5 (Pyaterochka), Ramstore and Metro have to build their own distribution centers, diverting considerable investments from their core business.”
In addition, very few of the nationwide logistics providers which offering their services in Novosibirsk, Samara, Kazan, and Ya ekaterinburg, in addition to Moscow, operate in the more remote areas of the country. According to Ruslan Suvorov, whenever any particular region lacks operators capable of rendering the service of proper quality, retailers and manufacturers take care of logistics themselves or make arrangements with Moscow-based providers of logistical services that the latter would launch their operations in a given region to meet the needs of specific clients-retailers. The experts from UniTrans Logistic say there are only two ways of running business in the regions: build-to-suit distribution centers or logistical outsourcing. In the latter case it would be expedient for a single operator to serve both the Moscow and regional markets. Yet the number of providers, capable of serving their clients all over Russia, is very limited. “For the time being large players have not entered the regions on a mass scale but I assume that they will either develop build-to-suit warehouse complexes or lease them for their in-house logistical services,” says Peter Zaritsky. “Now retailers willing to trust logistics to outsourcing have to deal with 5-6 different companies in regions, which naturally implies certain management risks, meaning that additional resources will be needed to control such a considerable number of moving parts. Retailers might be quite happy to hand logistical operations over to outsourcing, but they often just do not have such possibilities.”