Canadian firms rethinking logistics business models, new report shows

by Lou Smyrlis

TORONTO, Ont. – Despite the economic downturn, investment in distribution facilities in Canada has increased dramatically over the past five years with total annual investment growing from $674 million in 2005 to $1.39 billion, an increase of 106%. That’s one of the many findings of the just-released research report Global Business Strategy and Innovation: A Canadian Logistics Perspective.

“This is huge and it doesn’t follow the economic cycle. It shows Canadian firms trying to become more agile even if they are sourcing from China,” said Philippe Richer deputy director, service industries and consumer product branch, Industry Canada.

The report is an ambitious research project undertaken by Industry Canada, Canadian Manufacturers & Exporters and Supply Chain & Logistics Association Canada. In addition to its findings about investment in distribution facilities, the report provides insights on four other logistics aspects: logistics business models; global sourcing; innovation trends and strategies; and a best-in-class analysis. Its findings are being presented at special meetings across the country.

“As competition becomes more global and intensive, logistics innovation is expanding from the firm level to a supply chain perspective,” said Bob Armstrong, head of SCL. “To remain competitive in the global market, Canadian firms are rethinking their logistics business models while investing in logistics and implementing innovative tools and practices.”

Canadian manufactures and retailers in recent years have faced the challenge of integrating increasingly complex global sourcing processes while responding to heightened service level requirements. They’ve responded by trying to improve their agility and reduce inventory levels while simultaneously focusing on minimizing total landed costs. Yet with energy costs expected to increase, the control of transportation costs remains a key focus in the supply chain.

“These new realities are leading firms to develop new distribution centre strategies,” the report states.

Ontario may have been one of the hardest hit provinces by the recession, yet in 2010 32% of total distribution centre investments were made in Ontario, followed closely by Alberta (25%) and British Columbia (10%). And while recessions (not to mention the impact of the high Canadian dollar) tend to cause American firms to want to service the Canadian market from the US rather than maintaining operations here, distribution centre investment in Alberta points to a different dynamic taking place: Distribution facility investment in Alberta grew by 187% between 2005 and 2010 to serve both Western Canada and Northern US markets on a daily replenishment schedule, the report states.

Growth in Ontario (123%) and Quebec (83%) was driven by investments in continental and East Coast distribution hubs, while growth in British Columbia (79%) was due to major investments in deconsolidation facilities. Distribution facility investment in Manitoba, Saskatchewan and the Atlantic provinces grew by close to 40% over the same period.

As would be expected, the report found that a greater proportion of large manufacturers have opened new facilities and obtained capacity through mergers and acquisitions within Canada and abroad compared to their small and medium-sized counterparts. Large manufacturers have also proven more likely to close existing facilities or contract logistics capacity to consolidate their distribution facilities. Small and medium-sized firms are also investing in distribution facilities, however, and are doing so to better respond to customer supply chain compliance mandates and to integrate further into global value chains.

Other manufacturing sectors including pharmaceutical, and food and beverage, are investing in distribution facilities in order to meet retailers’ daily replenishment rotation systems. CPG manufacturers are also transitioning towards facilities with business-to-consumer e-commerce capabilities, the report states. Firms in the retail sector are investing in deconsolidation facilities and distribution platforms to support their collaborative planning, forecasting and replenishment efforts.

The report found that global logistics strategies are becoming more sophisticated in order to better manage globalization and outsourcing challenges. At the same time, uncertainty about economic growth has pushed firms to run as lean operations by re-evaluating the efficiency and effectiveness of every activity of their enterprise.

The report states: “As logistics management is central to several core activities, a common strategy among leading firms is to create an executive-level position to manage the overall logistics component of the business. Managing the entire logistics network means streamlining operations and driving innovation to improve supply chain performance across business functions and with value chain partners. It includes developing a common vision in forecasting demand capabilities with marketing, distribution, transportation, global trade management, strategic sourcing and after-sales service groups.”

The new supply chain strategies, according to the report, include adopting a continental vision to logistics and centralizing decision making processes to take advantages of scale, and leverage negotiating power with logistics and transportation providers.

By focusing on logistics activities many firms have either improved their internal operations efficiency or decided to outsource these services.

The report also found there is a growing trend in logistics outsourcing activities with the use of long-term initiatives using dedicated facilities, personnel, processes and technologies.

The growing importance of global trade since the early 1990s for the Canadian economy is nothing short of spectacular. For example, Canada’s West Coast container port traffic increased by 592% from 1990 to 2010 while East Coast port traffic grew by 83%.  Rather than continuing with the initial “me too” strategy of basing manufacturing and sourcing in low cost China, firms are now leveraging a mix of strategies with a four-tier global sourcing framework to estimate the trade-offs between opportunities in Canada/US, Europe, Mexico and China. They are paying attention to lead-time variability, logistics costs and on-time shipments when making their global sourcing decisions.

“Where velocity and agility are a priority, products that were once profitably sourced in low production cost areas, such as China, might be moved to nearer shoring zones, such as Mexico and in some instances to Canada/US,” the report states.
The report also includes a Best-in-Class analysis, comparing the top 20% with the bottom 30% as defined by their performance in logistics (on time shipments, picking and inventory accuracy, transportation spending and shipment integrity). The report found best-in-class firms are more likely to invest in the ability to collaborate electronically with networks of key suppliers (65%) and key customers (56%). Also, more best-in-class firms invest in software, training and advanced technologies to achieve inventory accuracy.

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