Scaling logistics networks
Part 3: The right strategy

What to keep in mind when scaling the logistics network
Part 3 of 4: The right strategy

Welcome to the third part of our series on scaling logistics networks. In the last two parts we looked at the aspect of time ("How do I find out when I need to create new capacity?") and the aspect of space ("How do I determine the best place to create new capacity?"). In fast-growing networks, these two issues are primarily operational, i.e. recurring. You should therefore look at your capacity curves and business cases every six months. However, there are still many questions of a strategic nature that create the framework needed for such a well-functioning process in the first place.

The network strategy lays down a large part of the ground rules. Without them, answering the above questions would soon become a complex, multivariate problem. The following part explains what needs to be considered when developing this strategy.

The strategic aspect of logistics networks

In theory, developing a network strategy is actually always the starting point. Even before thinking about points in time and coordinates, you should know the number of objects and connections, including their type and size, that go into a network at an assumed scale in order for it to work perfectly.

In practice, however, this is hardly ever followed through for a number of understandable reasons. One of them is uncertainty, on the one hand in planning, on the other hand in business orientation. At a time when you can still freely change your set-up without switching costs, there is usually not enough clarity, neither about your own demands or those of your customers, nor about your own material flows. Another reason is the moderate short-term ROI (return on investment) of such an endeavour. Developing a strategy involves work and usually also requires external help, however, the benefits are often only seen after a number of years and are not always easy to measure. The effects scale with the network and often bring a decisive competitive advantage. The long-term ROI is thus very attractive, but for ventures designed for a long time horizon, there are rarely resources to spare, especially in the initial phase.

Instead, e-commerce companies often approach what is perceived as an optimal solution iteratively, i.e., first comes the company’s own location that can do everything that’s needed. When this reaches capacity, or ideally before it reaches capacity, a second location, probably identical in terms of build, will be set up so that it easily fits into the current set-up. The supposed point of no return creeps up slowly, because at some point a company will become so entrenched in the iteratively developed set-up that the costs of switching to a better set-up will make a change in strategy seem unattractive. Of course, it is impossible to predict when the point of no return will occur. However, any company thinking in the medium to long term would do well to invest in these switching costs, even if the breakeven point won’t be reached for another two to three decades.

How can you escape this development? First of all, it is advisable to think about a suitable logistics strategy as early as possible. If you do not want to or cannot do this, it still makes sense to remain strategically flexible when setting up logistics, i.e., keep the theoretical costs of switching to another logistics set-up as low as possible. In this case, you should periodically check whether you are in a position to rethink your strategy, but then also initiate a change without hesitation. An external sparring partner can be helpful here, as they can contribute valuable experience and market knowledge. Most importantly, however, it ensures that your view of reality is not obscured by so-called operational blindness.

By the time this hurdle has been cleared and you are sitting in the strategy workshop, the question will arise as to what a logistics strategy actually entails. First of all, there is the network strategy of course. Then there are all the technological and process-related aspects that can be summed up under ‘process strategy’. After all, technologies and processes are not effective on their own, but only in the context of the logistics network in which they are used. The logistics strategy thus paints the overall picture and establishes harmony between the network and process levels. The network strategy, which is the focus of our article, on the other hand, looks at the individual locations like black boxes with different functionalities.

Despite the abstraction from the process level, countless decisions still have to be made. Network objects can perform a vast range of different functionalities in almost any conceivable intensity and can be combined as needed. Classic department stores can be combined with satellite stores, with cross-docks, with buffer or central warehouses, the company’s own returns or distribution centres, etc. What’s more, numerous control strategies can be applied to these objects, i.e., goods can be stored redundantly or according to a specific allocation, markets can be assigned to certain department stores or groupings, the product range can be proactively moved in the direction of customers, etc. The possibilities are endless!

The process of creating the optimal network strategy involves at least two steps. The first step focuses on identifying and defining suitable strategy concepts. A catalogue of requirements provides the starting point for this step. Implicitly, this is already the time for a qualitative evaluation, so that set-ups that already intuitively make no sense can be consistently discarded.

The variants that are then identified can now be evaluated quantitatively. This is a demanding task that can be fraught with minor uncertainties at times, but it is rarely a mammoth project.

Based on the quantitative assessment, the most suitable strategy can be determined, which then undergoes optional fine-tuning in a third step. This step may sometimes mean a bit more work and involve special models or software solutions, but it does immediately deliver several advantages. Not only does it secure the results of the second step, it also provides valuable insights into sensitivities and dimensioning as well as a more resilient benchmark for future controlling.

All in all, developing a strategy is one of the most exciting tasks you can come across in e-commerce logistics. We will be happy to answer any questions about the article and discuss the matter in further detail with you. You can contact us via e-mail, or on LinkedIn and Xing.