When global manufacturers don't fully consider the power of synchronized transportation in their manufacturing strategy and execution they achieve cost precision but suffer supply-chain inaccuracy. All too often one can observe precise calculations of quick returns using low manufacturing costs (often in a far off land) without accurately understanding the full supply-chain hazards resulting from long lead times. The resulting business risks range from missing a few promise dates to a customer to complete loss of manufacturing and customer service intellectual capital.
The approaches of Company A and B illustrate the rich sources of competitive advantages that can be derived from synchronized logistics in global manufacturing. Both design products domestically and outsource manufacturing in Asia. Both use third-parties to distribute and transport raw materials and finished goods.
Company A designs a high-tech product for manufacturing in China and has it fully packaged and shrink-wrapped there, then transported through a freight forwarder to U.S. and European customers. Company A keeps 100,000 items in finished goods at $10 each for a total of $1m of total working capital. This inventory works to cover the 6-week lead time and demand variability of customers. Company A has also has a senior management team chasing isolated cost savings.
Company B designs the same product, but understands the logistics constraints of maximizing air and sea freight containers - the coordination of key components and the advantage of tailoring the product to individual customer desires. Through engineering of the bill of material to consider logistics, Company B keeps the 10 top level components in inventory rather than as finished goods. Company B has a coordinated view of the total working capital required to run the business and on the landed cost to customers.
The Benefits to Company B
• It is only required to keep 60 percent (or less) of the working capital ($600K) to meet needs vs. the $1m working capital requirement for company A.
• B can actually fulfill a much wider variation of demand and preference of the customer through use of postponed domestic configuration and assembly.
• B maintains much more involvement and control of the intellectual property of how to manufacture and continually include new innovations in global transportation lead-time management into profitable choices it can provide its customers.
• B's knowledge of the transport options allows it to actually have lower transportation costs by designing the product to maximize cube of air and sea freight containers and lower transport tenders for like service.
• When an "unplanned order" occurs, B can check real-time inventory and transport options and commit a feasible date and quantity to the customer.
• This might be the richest area of competitive advantage - B's ability to intelligently select transportation options that will leverage the freight forwarding knowledge to assist it in meeting lead times and synchronized manufacturing.
The Risks to Company A
• Company A begins to lose knowledge of "how to manufacture" since product arrives in the U.S. or Europe shrink-wrapped vs. ready to be configured. Over time this "dumbs down" operational jobs and the ability to meet changing customer needs is eroded.
• Because of extremely long lead times, A must sell customers the same or largely the same product. This sales approach begins to lose market share or at best must push product on customers, creating a more adversarial customer relationship
• A's sales force struggles to differentiate itself and begins to promise "whatever" to get orders without consideration of logistics feasibility and profitability.
• A must make bigger and more frequent "bets" (forecasts) and guesses of what customers want in the form of inventory.
• Competitors (domestic or foreign) now have an entrÃƒÂ©e to position themselves in this new market and to exploit when A stumbles. If you don't believe this to be the case, do a survey of where the high-value products you see at Best Buy and Wal-Mart are manufactured and for what companies.
It is possible to improve customer service while minimizing total company inventory and allow the U.S. manufacturer to maintain and strengthen its manufacturing intellectual capital.
• Strongly consider that in an outsourced manufacturing and logistics environment, your use of information technology is dramatically different than simply installing packaged ERP or APS software.
• Consider that you no longer "do" but must manage what others do? Recall what Galileo said: "... that that does not get measured does not get managed ..." These are wise words for the outsourced supply chain.
• Model your working capital consumption using some basic inventory planning models before logistics synchronization, and then after. The "after" should be grounded in feasible improvements, but this establishes a feasible stretch goal for senior management to improve customer service and lower overall inventory working capital requirements.
• Select transport freight forwarding partners that use their knowledge to accomplish your goals (e.g., working capital reduction).
• Understand that a global freight forwarder is primarily a buy-low and sell-high broker. Even the best has barely scratched the surface in serving your working capital needs.
• Obtaining your margin and competitive advantage will likely be a product of your own innovation and ability to measure and manage results.
• Your S&OP master plans must be re-designed, simplified and made communication-friendly to work in the "outsourced" supply chain.
• Don't let unseasoned IT staff talk you into waiting for IT standards before you undertake these initiatives. The information sharing is remarkably easy if the goal is well understood by both outsourcer and provider.
• There is no "best practice." It's all about competitiveness and business advantage. Start now and your efforts will result in financial advantage and improved supplier and customer relationships.
In addition to great quantitative financial results, you can also stay strategically involved in the manufacturing process to retain and enhance the intellectual capital of "how to manufacture." Such innovation leads to sustainable business models and profits, embraces the reality of global resources and economics, and has the potential to create new sustainable jobs that assist U.S. companies that are competing to win.
Jon Kirkegaard is president and founder of DCRA Inc., a Dallas-based consultancy and developer of software solutions to assist manufacturers and service providers in leveraging the outsourced supply chain.
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