Finding a blue ocean in the warehouse
Tuesday, September 06, 2016
"Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant," a book by W. Chan Kim and Renee Mauborgne, attracted lots of attention when it was published in 2005. It details how successful companies avoid battling it out among rivals, and instead seek out "blue ocean" — untapped new market spaces ripe for growth.
Few service providers are able to ignore the activities of rival organizations. Even when they try, their customers won't let them. Yet the ability to adopt this "blue ocean" approach to both marketing and operations can have a dramatic effect on growth as well as market position in warehousing.
4 ways to make competition irrelevant
1. Distinct features
Most companies in the warehousing industry are growing with horizontal integration. When they grow, they enter new cities, new regions or even other countries. In order to preserve capital to finance growth, they lease rather than own real estate, and their sources are usually providers of relatively new warehouse space.
Would your company benefit by a strategy that features vertical rather than horizontal integration?
Most logistics service providers offer similar information systems, frequently provided by a few developers of warehouse management systems. Would your company benefit by vertical integration of information systems, possibly developing a unique WMS that is superior to the competition?
Nearly all service providers take a passive position with respect to inventory management, recognizing they do not own the inventory and lack the power to control it. What if your company develops the capability to provide not only inventory control, but also inventory management? This would include reporting of significant changes in turnover of every SKU in the warehouse. The service might well include the systematic liquidation of nonperforming inventory.
Relatively few service providers or customers have considered the integration of packaging and warehousing. How many of your existing customers might use a packaging service located at the distribution center?
Some customers prefer to lease space and provide their own labor, but quality and availability are a real concern. How many of your customers would like to use your staffing services as well as your warehouse space?
2. Challenge existing assumptions
Logistics service providers never own the inventory they handle. What if you offer to take title to the inventory when none of the other bidders have done this?
It is rare to see this strategy in the logistics service industries, and those who practice it have an agreement with their client that the inventory will be bought back so they have no risk of inventory obsolescence. At the same time, the user creates a leaner balance sheet by transferring the inventory investment to a supplier.
Service buyers assume their providers either own or have long-term control of warehouse real estate.
CaseStack, a logistics service provider, offers both warehousing and trucking through its use of subcontractors who provide these services. CaseStack owns and guards its proprietary information system and its relationships with its clients.
3. Simplify your offering
Pricing is one way to do this. Could you devise a pricing format that is simpler than the typical logistics service proposal? Ad valorem rates, or a fee based on percentage of sales, is one way to do this. Similar pricing formulas have long been offered by bank-owned warehouses in Central and South America.
Because ad valorem pricing bears little or no relationship to operating costs, it is a risky strategy but one that is attractive for its simplicity. If inventory turns slower than expected or stops turning at all, the provider who offers ad valorem pricing will suffer.
4. Aim for different markets and services
The largest users of logistics services are consumer packaged goods (CPG) manufacturers, healthcare, chemicals, household appliances and retail chains. What if your marketing strategy targeted industries and companies that seldom use logistics service providers, possibly some that have never outsourced before?
The majority of logistics service providers — and probably all of your competitors — specialize in the storage and transportation of finished goods. Relatively few consider the substantial challenge of controlling and delivering the replacement parts that are needed when equipment breaks down. Only a handful of logistics service providers are focused on this market, and not all of these have international delivery capabilities.
When a computer system breaks down in a village in India, the ability to deliver components and the know-how to fix it can be critical. Furthermore, a provider with these capabilities is in a position to earn a profit margin that is well above average.
A few decades ago, finding a service provider who is a specialist in handling customer returns was difficult, and often impossible. Today, a growing number of service providers have learned in this business, but the majority have not. Like the business of replacement parts, there is an opportunity to earn attractive margins by entering into a field that few providers are willing to serve.
A blue ocean in warehouse space
Few service providers have the capability to construct new warehouse space, and even fewer are specialists in the rehabilitation of older warehouses. Some warehouse space is truly obsolete, but many older buildings that are considered obsolete are actually usable. White paint and state-of-the-art lighting can make a 50-year-old building attractive.
The buyer is interested in performance rather than architectural features. A creative builder can reconfigure the older building so it meets customer needs. In some cases, vertical conveyors can even make a multistory building effective for certain kinds of warehousing.
The majority of service providers will not consider a building that does not meet current design standards, and for that reason a creative property developer can build a niche market by offering older real estate at an attractive price. Companies such as General Electric are noted for their ability to maintain older industrial properties like NELA Park in Cleveland, developed a century ago for the manufacture of light bulbs and still in use today.
Despite the discouraging commoditization of the logistics business, selling value can still be a blue ocean for the creative service provider. One service provider compared his marketing strategy to the three ways to buy a spaghetti dinner.
The buyer of standalone services will purchase each ingredient at the best possible price and then prepare the dinner. The convenience buyer will purchase a frozen spaghetti dinner and heat it in a microwave at home. The custom buyer goes to a good restaurant where the dinner is prepared by a skilled chef, and where each person in the party can customize his dinner with more sauce or spicier seasoning.
In the world of logistics services, the company that offers an enterprise solution is equivalent to the restaurant, while the commodity vendor sells the ingredients in a supermarket. One vendor's blue ocean strategy is to search for the clients who appreciate the value of the enterprise solution and to reject the buyer who is looking primarily at price.
Recognize the risk of this blue ocean. You cannot sell the enterprise solution without delivering measurable improvements in performance. Therefore, to enter the ocean without drowning, the vendor must measure and report performance to the customers and quantify the value of the benefits that are delivered.
Growing the business through preferred customers
Take a look at the 20 largest customers that probably represent over 80 percent of your sales. Which of these companies is a pleasure to deal with, and which ones allow you to create significant customer value? These "preferred customers" should be the key to your growth, possibly offering the chance to expand to other communities or to offer additional services not available from competitors.
A starting point in dealing with preferred customers is to take the time to find out more about their needs. What do they want from service providers, and is there anything that they need and cannot find in today's marketplace? What value do they place on "one-stop shopping" and a single face with the service provider.
Find out if there is anything that is keeping them awake nights. Are they satisfied with the visibility or track and trace capability from their service providers?
When logistics service providers from Japan established branches in the U.S. and elsewhere around the globe, they seldom solicited local business. They built their multinational networks on the needs of major Japanese manufacturers who needed service around the globe. Others were quick to emulate the Japanese strategy, recognizing that executives responsible for overseas expansion have a comfort level in dealing with a provider who fully understands their language, culture and business environment.
Expansion to other regions or even to other nations can be part of a blue ocean strategy, particularly if your competitors are less willing to establish additional branch operations. Working with a preferred customer is certainly a good way to control the risk.
How well are you doing?
As you move into the blue ocean, there are four areas that will indicate your progress. These are financial, operational, customers and the team.
The critical financial measure is return on investment. Also consider free cash flow and revenue growth.
As you measure operations, accuracy may be the most important criterion. In the final analysis, your ability to generate perfect orders is what your client is paying for. Space utilization is usually worth measuring. Order cycle time — the elapsed time between receipt of an order and delivery to the customer — is a measurable indication of operations effectiveness.
The most important metric for customers is the degree to which your clients are satisfied with your work. Such satisfaction can be measured with surveys. How many of the existing clients could be considered preferred customers, and what percentage of the total clients fall in this category? You might also measure your success in converting an ordinary client into a preferred customer.
Finally, how does the quality of your people compare with other providers? Your ability to retain talent is an important metric. Worker productivity can and should be measured. However, productivity may be less important than the ability to attract and develop a talented and well motivated team.
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