In the past, companies that invested heavily in their own logistics infrastructure were viewed as stable, high-performing organisations. Customers, partners and investors all rely on them to deliver results. With asset-light strategies considered a defining characteristic of weaker, less efficient companies, it seemed the barometer was set.
The impact of global events such as the pandemic, however, saw fleet owners having to deal head-on with widespread inflation, including a dramatic rise in the cost of fuel and raw materials – turning the tables completely on traditional logistics perspectives. Adopting flexible, asset-light strategies was now considered a hallmark of company efficiency, irrespective of its size.
In this article, we’ll examine:
- The inherent issues of rigid logistics under normal market conditions
- How rigid systems struggle to deal with change
- Why flexibility is king
- How 4PL service providers like X2 (UK) are helping companies stay asset-light and agile
Rigid logistics under normal trading conditions
While “normal” may indicate an arena that companies are accustomed to operating in, it’s a misleading term. This perceived normality conceals a range of factors that significantly impact a company’s operational efficiency and financial performance. It may be normal – but is it necessary?
Sunk costs and overheads
Historically seen as par for the course, sunk costs and overheads may include leasing agreements and contracted driver costs, redundancy costs and unexpected agency fees. But that’s not all – parking costs, office space rentals and administrative staff salaries can also be added to the overhead equation. It’s easy to see how rigid logistics can result in an equally rigid strain on a company’s financial resources.
Penalty charges and operational costs
In addition to sunk costs, penalty charges imposed by retailers and partners for non-compliance with delivery schedules pose significant problems for logistics operations. These penalties not only dent profitability – they also have the potential to tarnish a business’s reputation.
Other operational costs may include tractor/trailer damage, year-long insurance, fuel costs and maintenance expenses. With the Total Cost of Ownership (TCO) of each truck in a company’s fleet soaring, businesses need to adopt strategies to mitigate the impact of these inflationary pressures. These include optimising fleet management practices, negotiating favourable leasing agreements and investing in preventive maintenance measures to minimise the risk of operations being disrupted. Moreover, leveraging data-driven insights to track and optimise TCO can help businesses significantly improve cost-efficiency.
The tyre issue
Despite representing only around 5%, of a truck’s overall TCO, tyres play a substantial role in influencing other key financial variables in the cost equation. One of the most notable effects of tyres is their impact on fuel consumption, the second-largest contributor to overall cost. Factors such as rolling resistance significantly affect fuel efficiency, making the choice of tires a critical decision.
Opting for high-quality tyres with lower rolling resistance can lead to considerable fuel savings, potentially reducing tire-related TCO by up to one-third. Additionally, selecting tyres known for their durability and offering features like regrooving and retreading can further enhance cost efficiency over the long term.
The importance of tyres extends beyond mere financial considerations. Their role in vehicle performance, as well as safety and environmental impact, is also crucial.
Issue when dealing with market change
If rigid logistics systems are demonstrably problematic when things are normal, they take a decided turn for the worse when trading conditions fluctuate.
Cash flow concerns and economic instability
One of the main challenges during fluctuating trading conditions is the heightened concern over cash flow management. Economic instability, exacerbated by events like the COVID-19 pandemic and recent geopolitical tensions, creates profound uncertainty, making it hugely difficult for businesses to predict revenue streams and manage expenses effectively.
Cash flow disruptions can lead to liquidity issues, hindering day-to-day operations and growth initiatives. For instance, paying above-market rates for services such as driver agencies during economic upswings can strain financial resources, impacting profitability and sustainability.
Difficulties in meeting customer requirements
Changing market conditions require dynamic logistics flexibility in order to reliably meet customer requirements. That said, businesses that operate rigid logistics systems often find themselves constrained by the nature of their own infrastructure, making it difficult for them to accommodate shifting demand patterns. For instance, sudden spikes in demand may strain existing logistics capacities, leading to delays in deliveries and resulting in customer dissatisfaction. The inability to quickly and flexibly adjust to customer needs is, without doubt, a leading cause of lost opportunity and damage to a business’s reputation.
The asset-light solution
Asset-light logistics is a strategic approach that prioritises agility and flexibility by minimising investments in physical assets and instead relying on external partners and resources. In this model, companies leverage third-party providers for transportation, warehousing and other logistics functions, allowing them to scale operations up or down quickly in response to changing market conditions.
By outsourcing non-core activities and adopting a more modular, partnership-based approach, organisations can:
- reduce fixed costs
- improve efficiency, and
- boost operational resilience
Unlocking growth
Asset-light strategies offer businesses profound advantages beyond operational efficiency, including higher total shareholder returns (TSR) and improved valuations. Recent research has revealed that asset-light companies have outperformed their asset-heavy counterparts in TSR over the past five years, highlighting the distinct advantage of asset-light models. These models facilitate the creation of responsive ecosystems, where all partners collaborate to generate value and enhance profitability.
Moreover, asset-light strategies are not confined to supply chain optimisation – they can also extract value from various areas along the value chain. For example, a company can leverage an asset-light approach to streamline front-office functions like research and development (R&D) and traditional back-office functions such as information technology and procurement.
Putting the right pieces together
Despite the evident benefits, adopting an asset-light strategy requires careful planning and execution. Companies must thoroughly assess their current capabilities and market opportunities while identifying potential partners with whom to create a dynamic asset-light strategy. Within this, collaboration and alignment among internal stakeholders are central to successful implementation. Considerations such as deal structuring, tax implications and governance models play key roles in shaping the effectiveness of an asset-light strategy.
Understanding the bigger picture
Companies looking to benefit from asset-light strategies also need to stay attuned to evolving market landscapes and industry trends. By proactively analysing market dynamics and emerging technologies, and keeping track of changing consumer preferences, organisations can identify new growth opportunities and pre-empt potential risks.
Stay light and agile with X2 (UK)
An asset-light approach allows companies to thrive in dynamic business environments so they can remain agile and responsive. That said, if it were easy to do, everyone would be doing it.
Deploying an effective asset-light strategy can be made far easier by partnering with a 4PL (Fourth-party Logistics) service provider that has the insight and technological capabilities to accurately assess market changes in real time – along with the required to create dependable asset-light strategies that stand the test of time. In short, businesses need a 4PL provider like X2 (UK).
Beyond conventional logistics support, we offer expertise in areas such as:
- supply chain optimisation
- market intelligence, and
- strategic planning.
We provide careful analysis and insight-driven approaches, helping companies engage effectively with complex market dynamics. Our teams will enable you to anticipate industry trends and capitalise on emerging opportunities. Whether it’s enhancing distribution networks, implementing innovative technologies or exploring new market segments, X2 (UK) provides the flexibility and agility needed for businesses to operate a successful asset-light strategy.
To find out more about X2 (UK) and how our 4PL solutions can help you create a high-performing asset-light logistics operation, contact us here.