Modularisation in Supply Chains – Why is it Attractive?

Supply chain management is a critical component of any business operation and the concept of modularisation has become increasingly popular in recent years. Modularisation in supply chains can help to reduce costs, improve efficiency and allow companies to remain competitive.The field of international goods transportation has witnessed several great advances over the last 100 years.
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Modularisation in Supply Chains

Supply chain management is a critical component of any business operation and the concept of modularisation has become increasingly popular in recent years. Modularisation in supply chains can help to reduce costs, improve efficiency and allow companies to remain competitive.The field of international goods transportation has witnessed several great advances over the last 100 years.

 

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Modularisation in Supply Chains– Before 1965, all packaged goods were packed into boxes of different sizes and shapes to be loaded on ships. General cargo ships themselves were small in size – no bigger than 20,000 tonnes or so – and stayed anywhere between 1 week and 4 weeks in any single port. About 70% of the ship’s time was spent in non-value-producing activities such as planning and loading boxes and crates of diverse sizes and shapes into the ship’s holds.

Containerisation

Containerisation changed all that. Ships are now built to carry standard containers of 20’ (or 40’). Containers are packed and unpacked in container yards far from ports – reducing the need for holding the ships in port, and costly warehousing space close to port.

The size of container ships has increased greatly – the latest ones will carry nearly 10,000 TEUs (twenty equivalent units) or about 100,000 tonnes. These ships utilize more than 80% of their time on value-producing activities.

No wonder the cost of shipping a one-meter cube of packaged cargo has gone down by nearly 75% to 85% in real terms over the last 40 years. This has made it possible to reconfigure the global SC in such a way that the Modularisation in Supply Chains most activities are now carried out in the best place to do so.

The manufacturing boom in China, super large container shipping companies, hub and spoke model of shipping, and the emergence of 6-10 global container terminals, is partially a result of containerization. So what precisely is the magic in using standard shipping containers instead of boxes and crates? The answer is simple – modularisation. We believe that a similar move towards the modularisation of global SC is emerging and it will have a far-reaching impact on organizations, nations, and businesses. Before looking at its impact, let us examine what modularisation means in the wider context of global SC.

We believe that a similar move towards the modularisation of global SC is emerging and it will have a far-reaching impact on organizations, nations, and businesses. Before looking at its impact, let us examine what modularisation means in the wider context of global SC.

We believe that a similar move towards the modularisation of global SC is emerging and it will have a far-reaching impact on organizations, nations, and businesses. Before looking at its impact, let us examine what modularisation means in the wider context of global SC.

What is modularisation?

Imagine a stock chain that is able to instantly flex itself to the changes in your business structure and dynamics. Every time your company bought a division, you could seamlessly integrate its stock chain with your overall supply chain. Every time you divested a business, you could unravel the integrated supply chain without too much pain (and/or expense). Moreover, every time trucking, freight forwarding, warehousing, or shipping company proved itself incapable of meeting commitments made during the sales process – you could easily take your business to another one. Every time you reconfigure your manufacturing footprint or alter your sourcing strategy, your supply chain follows closely. In other words, your business is not beholden to any one supply chain service provider or systems provider – because they are all interchangeable.The physical infrastructure, processes, systems, and services involved in the configuration of global supply chains are slowly but inevitably moving towards modularisation that will make this possible.

Modularisation, in this context, means breaking up a greater whole into interchangeable parts that fit together seamlessly; and, together, in many different combinations and permutations, make many different wholes. 

The gradual evolution towards modularisation of supply chains is being spearheaded by the customers who demand control and flexibility in their supply chains coupled with low cost. Modularisation is preceded by Standardisation – achieving commonality in terminology, measurements, and activities. Standardization is essential to modularisation because it helps simplify the complexity and bring uniformity. Imagine, if shipping containers were of many different sizes – rather than a standard container of 20’x8’x8’. Efforts to modularise general cargo shipping would have been seriously hampered.

​Why is modularisation attractive?

Because it helps us achieve homogeneity – a condition where products and services start looking more and more similar. Homogeneity, in turn, encourages substitution and/or switching between suppliers and hence commoditization of the relevant market.

This essentially leads to falling prices, and growing volumes – implications that we will analyze further after examining the causes of the modularisation of global supply chains.

To further explore the modularisation of supply chains let us examine each of the four components of the supply chains – physical infrastructure, systems, processes, and services.

Supply Chain Physical Infrastructure:

Perhaps the most visible part of the global supply chain is its physical infrastructure. Shipping containers, air cargo containers, pallets, racking, forklifts, warehouses, ships, trucks, trains, ports, and terminals – these are all gradually moving towards modularisation and standardization. Many of these are already well advanced along the path towards modularisation and standardization.

However, a large amount of work still needs to be done to make sure modules all fit each other seamlessly. For example the pallets currently most used throughout Australia – CHEP pallets – are not sized suitably for loading into shipping containers. Their size does not allow for two of these loaded together, side by side, inside a container.

However, because most of the trucks and warehouses are set up to accommodate these pallets it is not easy to switch standards, thus requiring costly double handling. Similarly, railway tracks in the various states of Australia are still in the process of being standardized after a supply Chain System.

Modularisation in Supply Chains

Supply Chain Systems

The term modularisation originally emerged from supply chain systems. Most supply chain systems started off as trying to solve one single supply chain problem – which they did very well. As they expanded their reach through acquisition or product development, more modules were attached. While modules of systems from the same company generally work together quite well, real flexibility emanates when the systems from different companies work together seamlessly. Whether it is a demand forecasting system that needs to work closely with an inventory planning system, or a production scheduling system that needs to work with a transportation route optimizer – the systems need to work with each other irrespective of the vendors.

This is now becoming easier and easier. The use of XML and other open languages, web-based interfaces, and standardized processes are leading to modularisation in supply chain systems to an extent where companies can choose a variety of functionalities from a diverse range of vendors to form a customized best-of-the-breed solution that precisely meets their needs. Good CIOs are already saving their companies significant amounts of money by mixing and matching the right solutions. However, though they are willing to be a part of a best-of-breed solution, each of the major vendors of supply chain systems is still trying to sell itself as the best end-to-end system provider. This push, coupled with some of the disingenuous practices of the systems industry, leads to the conclusion that the level of modularisation in supply chain systems still has a long way to go before it becomes a standard accepted industry practice.ng time spent double handling cargo at state borders. Around the world, there are numerous examples of such inefficiencies in supply chains emanating from a lack of standardization and/or modularisation of physical equipment.

About the Author

Global Supply Chain Group - vivek BWVivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com

Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.

Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities. Vivek has served dozen of world-wide corporations in nearly 85 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains. Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner. More information on Vivek is available on www.linkedin.com/in/vivek  and more information on Global Supply Chain Group is available on www.globalscgroup.com

Supply Chain Processes:

Most business processes are increasingly being commoditized. (please see the article “The Coming Commoditization of Processes” by Thomas H. Davenport in Harvard Business Review June 2005 for more discussion on this topic). Supply chain processes, in particular, have an increasing Gly propensity for standardizationtion, modularisation, homogenizationtion.

As supply chains, even for the smallest of businesses, are turning global in nature, standardization is becoming necessary to reduce complexity.

This in turn is leading to modularisation and ability to outsource and offshore some of the low-value-added processes. Finally, this modularisation is leading to homogenization and thus commoditization of the processes. That is because while, in their totality,the standard processes of two companies may be sufficiently different from each other when broken up into smaller sub-processes or modules they are homogeneous enough to be carried out by many possible vendors – including internal incumbents.

Supply chain Services:

Supply chain services such as trucking, shipping, warehousing, third-party logistics, railways, etc. are always fairly homogeneous in nature.

Control of supply chain assets does give a temporary cost advantage in some locations, however, this advantage is neither universal nor permanent.

Supply chain service providers’ efforts to build barriers to switching by proprietary systems linkages have not proven very successful due to modularisation in the supply chain systems. Similarly, while size may provide some economies of scale and scope, and hence cost advantage, to the larger players in these industries – their claims to be uniquely qualified to carry out the supply chain task of a company rarely stack up.

Moreover, it is self-evident that none of the service providers have the physical capability to carry out all the supply chain tasks at all locations of a large multi-national organization. More often than not they themselves use sub-contractors where it is expedient. While resisting modularisation by their customers, they tend towards it in their own operation. It will be fair to say that the supply chain services are fairly standardized and modularized.

The customers only need to recognize and treat them as such while configuring their supply chain strategy. It will be fair to say that the supply chain services are fairly standardized and modularized. The customers only need to recognize and treat them as such while configuring their supply chain strategy.

It will be fair to say that the supply chain services are fairly standardized and modularized. The customers only need to recognize and treat them as such while configuring their supply chain strategy.

Implications of Supply Chain Modularisation:

What will be the impact of this coming modularisation of global supply chains? ​

​Firstly, Supply chain strategies will become increasingly important – something which could never be outsourced to your third-party logistics (3PL) service provider in whichever avatar they present themselves. Customers will be able to unravel the packaged bundles of services presented to them, pick and choose the components that suit them the best, and put together a best-of-breed customized bundle for themselves. ​

​Secondly, modularisation makes it easier to homogenize and hence commoditize a market. Hence, whether it is the market for supply chain systems, or for processes, or for physical infrastructure or for services – these will be increasingly commoditized going forward. Companies will do well to prepare for this coming commoditization and stay on the leading edge of the curve rather than grudgingly follow their competitors half-heartedly. ​

​Thirdly, this modularisation will change the face of global supply chains. All tasks will be carried out where it is most cost-effective to do so. You can expect service factories to be the norm, working in unison with physical factories in different locations. ​

​Finally, this coming modularisation will consolidate supply chains’ position as one of the key drivers of the organizations’ competitive advantage. Supply chain strategists’ role will be viewed as much more than the ‘dispatcher of trucks’ or the ‘storekeepers’ – which have been the traditional forte of the logistics departments in many companies. ​

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Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com 

Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.

Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.

Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.

Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.

More information on Vivek is available on www.linkedin.com/in/vivek  and more information on Global Supply Chain Group is available on www.globalscgroup.com

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