Supply Chain Brain - October 2009

In a Downturn, Don’t Fixate on Price

Everyone scrambles to survive in a recession. But that’s no reason to treat logistics services as a

commodity, says Dave Malenfant, vice president of supply chain at Alcon Labs.

When shippers and carriers go into survival mode, there’s a tendency to focus exclusively on the freight rate. But Malenfant calls that a shortsighted approach. He urges both parties to seek partnerships that result in cost savings throughout the supply chain, even as they navigate the delicate balance between a fair rate to the shipper, and a fair return to the carrier.

“The problem we’ve had in the past is that some people wanna treat small parcel and LTL as commodities,” Malenfant says. They’ll initiate reverse auctions and rebid contracts every few weeks. Rates are important, he adds, but shippers and carriers must cooperate on a deeper level in order to achieve gains in such keys areas as sustainability. They need to treat the supply chain as a process that runs from “the greenfield all the way to the customer’s customer.” Only then can they achieve the level of transparency that’s needed in order to assess total supply chain costs, and discover where opportunities for savings may lie.

In the trans-Pacific ocean trades, carriers have asked shippers for substantial rate increases, despite the fact that current service contracts haven’t expired. Malenfant says shippers should examine each individual lane before deciding how to respond. In some cases, an increase might well be justified. But

carriers should then agree to work with their customers to realize savings within the supply chain. One possibility lies in more efficient use of containers. If carriers can come up with a way to boost the utilization of equipment, “there’s a cost saving for the entire supply chain.”

Poor economic conditions have motivated some manufacturers to reconsider their approach to outsourcing. As Malenfant sees it, the issue isn’t just one of shifting production overseas. In some cases, companies have found success in outsourcing capacity to a partner in the U.S. The focus, he says, ought to be on determining “the right sourcing... Every situation has to be looked at strategically.”