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It makes sense to own Assets!
Amit Kumar Head (Logistics) Indo Arya
LOGISTICS TIMES November 2012
I am opening my writing with a disclaimer – “Do not form an opinion unless you read the entire piece.” Folks, we have well understood and widely recognized that supply chain is increasingly becoming an area of core competency and key differentiator in the market place for all kind of companies and having agreed to it my question to you is – Do you want your core competencies or key differentiator or a part of it to be outsourced? Objection, you may say and I completely buy it. After all, I am making a strategic statement that is against current market command. But do you really think so? If your answer is yes then as you go through my note, you will probably find how market commands are changing albeit slowly but surely and this may turn out to be a mega trend within two years of arrival of GST. Allow me to be more specific and let me single out warehousing space and transportation management for the purpose to put my argument in right perspective. Take the case of warehousing. Lets say, you need a 50,000 Sq. ft. of warehouse and you have two options. Either you go in the market, do the basic checks and hire it at rate of Rs. 15/sq. ft. ( which is a very moderate rate) and you pay escalation of 8% per annum for the next 10 years. So at the end of 10 years your total payout is Rs.13.03 crore. The second option is: you build a 50,000 sq. ft. warehouse which will roughly cost you Rs 6.5 to 7.5 crore (Rs 1.5 crore/acre and Rs. 700 per sq ft construction cost for a modern warehouse or BTS) and since it is a part of real estate, price will always appreciate. Plus it will always seat in asset column of your balance sheet. If the idea of assets owning has still not excited you, let me share second example which is related to transportation. Hollandbased CNH, the globally renowned firm in agriculture and construction sector, which was created after merger of New Holland Tractor and Case corporation has operation in more than 170 countries. It is believed to have achieved significant cost saving by managing its transportation themselves against current outsourcing model. Certainly you cannot start making money from day one and CNH invested money to build IT and transportation capabilities.
But the end result is: CNH has dependable, confident transport wing and started making money from fifth year. Let me dig little more deeper. I am by no means advocating to own up all assets in supply chain. It is your strategy, future plans and size of the company which should be primary factors in taking a call on asset ownership. We have seen some companies owning up only warehouse and outsourcing its operation and some companies investing in transportation and IT capabilities. It is you, who has to decide what are and to what extent you need to own assets and to identify degree of outsourcing for your firm. But today outsourcing is the blind run for all kind and type of organization and it is here I could not disagree more with late Steve Jobs of Apple when he says – “ If you cannot compete then copy.” Merely monkeying in logistics is myopic, short term and frustrating and in the long term compounding to this frustration is the fact that we see poorly performing companies employing same set of strategies as industry examples rather than analyzing their own set of DNA and employing strategies which can provide value to their customers and stakeholders. Today is the time of hyper competition wherein you take your eye off from aim and you are off from the race. Your supply chain strategy has to be in right direction to keep you kicking, alive amd ahead. Before I put curtain to it, let me reaffirm, I am no authority to direct or decide your inscourcing and outsourcing strategies. You are the most appropriate and responsible authority to decide it. Market has space for both types of businesses for instance Nike and IKEA outsource its production while Armani and Tiffany in source its production activity. So you have to chart out your own strategy taking a long term view of your business. Let me also leave you with an open question on outsourcing - if you outsource your activity, it means there is someone who can manage your transportation and logistics better than you and can still make good money from you and hence my open question is: can you become that agile entity and bring that value to your organization by owning up a part of it? You Decide.