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The world is speeding up. New products appear on store shelves at a dizzying rate. Retailers demand faster and more frequent deliveries from manufacturers. And manufacturers lean on their suppliers for "just-in-time" shipments of parts to the assembly line.
Not a good time for everything to come to a screeching halt.
Unfortunately, that's just what has happened over the past two years. The stampede of manufacturing to China and other low- cost countries, combined with overall growth in world trade, new security concerns and a revolution in "big-box" retailing, has created massive congestion at key points throughout the logistics pipeline. For consumer goods suppliers, it has never been more vital to get product to market on time. And it has never been more difficult to achieve.
Exhibit A: severe delays at U.S. West Coast ports, the traditional North American gateway for product from Asia. It's tough to ignore a dozen or so giant containerships lying at anchor, waiting a week or more to unload. But there are other, less visible symptoms of the malady. Inventory piles up inside warehouses, as merchandisers build safety stock in expectation of delays. Customs inspectors hold back containers because an importer failed to provide adequate documentation. Retail shelves go empty because manufacturers can't respond quickly enough to surges in demand. And supply chain costs skyrocket, as companies are forced to rely on premium transportation to get their product to market.
Blame China, one might say. The rush to capitalize on that country's cheap and plentiful labor force has lengthened supply lines and created numerous opportunities for delay. But the real problem is that companies haven't matched their new manufacturing strategies with changes in process and technology. For a global supply chain to succeed, each potential glitch must be answered by a new way of moving physical goods, information and cash. Here, then, are 10 common problems caused by the trend toward offshore manufacturing-and 10 possible solutions to achieving true supply chain velocity.
1. Problem: West Coast port congestion. Last summer and fall, the height of the season for shipping Christmas merchandise from Asia, vessels were stalled by up to 10 days at the ports of Los Angeles and Long Beach. Neither carriers nor shippers anticipated the surge in containers on trans-Pacific routes. But they weren't unfamiliar with the impact of delays. A year earlier, they had grappled with a coast-wide shutdown of marine terminals, when employers locked out dockworkers and caused a backlog that took weeks to relieve. And while more labor should be available this year than last, industry experts expect another season of delays at West Coast ports, as well as intermodal terminals in the U.S. interior.
Solution: Look for transportation alternatives. Already many shippers are making use of ports in the Pacific Northwest and, to a growing degree, the East and Gulf Coasts. The latter strategy requires smaller containerships that can fit through the Panama Canal. Wal-Mart Stores has opened a large import center in Houston, notes Gary Godfrey, associate partner in the supply chain practice of Accenture. Shippers are willing to build days into their logistics pipeline Toys 'R' Us has added a whole week to account for longer transit times. But all-water freight rates can be cheaper, and they avoid the snarls that occur at intermodal transfer points.
In some cases, shippers are turning to air or other forms of premium transportation. They are even working "critical" carriers into their plans, rather than reserving that option for emergencies. Roughly 55 percent of the moves by FedEx Custom Critical are forecasted by customers, says Virginia Albanese, vice president of service. The carrier specializes in production parts, which must reach the assembly line within precise delivery windows.
2. Problem: Longer supply lines create more delays and "black holes" of information. There is always the potential for glitches as goods move from supplier to manufacturer to customer, "but overseas is the biggest risk," says Marilyn Dykstra, project manager for global logistics and trade compliance with office furniture-maker Haworth Inc. Each additional stop or transfer of shipments creates another opportunity for delay. What's more, shippers can lose track of freight, even as they grapple with new documentation and compliance requirements at various points along the way, says David Kraemer, vice president of value chain solutions with Global eXchange Services Inc. (GXS), a provider of software for swapping data between trading partners.
Solution: Adopt creative distribution strategies that reduce the number of stops. According to Godfrey, many importers are eliminating deconsolidation at West Coast ports and shipping straight to regional distribution centers in the interior. Larger retailers in particular can bring full containers right into their DCs. Another time-saver is bypassing the distribution center and delivering to stores, although this option is limited to the largest stores and retailers that can plan full containerloads for individual outlets at the point of origin.
An opposite strategy relies on transloading at the West Coast. According to Thomas Hickey, vice president of consolidation and deconsolidation services with APL Logistics, some companies are breaking down the contents of ocean containers into smaller lots at the port, then timing individual domestic moves in line with customer needs. The practice helps to control costs and reduces handling, Hickey says. Michael Steen, senior vice president of sales and marketing for the Americas with Exel plc, points to the use of consolidation in Asia, whereby multiple shipments are combined for a common receiver in the U.S. Fashion-sensitive apparel can be placed on hangers and ticketed for movement straight to the sales floor.
3. Problem: Lack of infrastructure in the origin country. This is not a factor in the industrialized areas of China, such as Guangdong Province in the southeast, but it becomes a concern as companies migrate inland to escape rising land and labor costs. Much of China still lacks good highways and rail service, especially for freight. Finding steady sources of power and communications can also be a challenge. The infrastructure of India, another popular location for outsourced manufacturing and services, also lags the logistics requirements of global companies, Hickey says.
Solution: Look for sourcing alternatives closer to home. Don't rule out Central America, which is becoming increasingly attractive to mass retailers, Hickey says. Mexico, too, continues to offer a developed, low-cost manufacturing base close to U.S. markets. In recent years, many manufacturers have abandoned Mexico for China, where wage rates are significantly lower. In doing so, they have discarded a location that can respond more quickly to sudden shifts in consumer demand. Some have opted for a dual strategy, making the bulk of their products in China while reserving Mexico for final assembly of goods in line with actual orders. There is even a shift of some manufacturing to Eastern Europe, says Godfrey, although East Asia remains the destination of choice for most offshore production.
4. Problem: Shippers lack visibility of order status information. There's plenty of data around, says Lora Cecere, research director of AMR Research Inc. Unfortunately, it's in pieces, separated by application, corporate department or trading partner. Companies can achieve "passive" visibility of goods through Web portals or electronic data interchange, but the latter involves delays in accessing data and doesn't support workflows across the organization. Hickey says many companies can't track purchase-order status down to the SKU level, robbing them of the ability to pre-plan destinations, postpone certain shipments and draw up contingency plans in the event of sudden changes in demand.
Solution: Embrace technology to speed up information velocity. Rohm and Haas, the big producer of specialty chemicals, relies on SAP AG for an "available-to-promise" system that prevents the company from delaying orders and disappointing customers, says Kathy Chrien, business process director for supply and demand planning. Godfrey notes the existence of many supply-chain event management (SCEM) packages, which issue alerts when something goes awry in the supply chain. Radio frequency identification (RFID), employing product, case and pallet tags with a wealth of information, could prove a boon to companies seeking instant updates on product status and location, Godfrey adds, although the technology is still in its infancy.
Hickey says electronic commerce based on the internet has already gone a long way toward speeding up information flow, allowing for the instantaneous transmittal of bookings, documentation and tracking data. Outside logistics providers with sophisticated information technology can help as well, he says, but only if they offer SKU-level visibility.
5. Problem: Longer supply lines conflict with trends in product assortment. According to Steen, consumer goods are undergoing a severe reduction in their lifecycles, as manufacturers roll out an endless series of new products and packaging in order to stay competitive. That, in turn, raises customer expectations of product innovation, creating an accelerating loop of supply and demand. And it triggers a corresponding increase in SKUs, adding to the complexity of global production and supply chains. The result: shippers end up chasing more product over shorter periods of time.
Solution: Enact better planning and execution at the manufacturing stage. Chrien says Rohm and Haas can make many different chemicals from the same basic set of equipment. The trick lies in speeding up production changeovers, so that the company can meet the needs of multiple customers within a relatively short span of time. In the process, manufacturers increase plant capacity. And, as a welcome side effect, they boost overall supply chain velocity.
Producers tend to operate their plants through batch runs, ostensibly the best way to make use of capital equipment. But SKU proliferation has altered that mindset. Software vendor Manugistics helps customers analyze and optimize production runs, based on actual orders and customer demand. Such a tool can bring about a steady reduction in manufacturing and order lead times, says Tarun Goyal, director of solution management.
6. Problem: More international shipments mean new regulatory headaches. Part of the reason for congestion in the pipeline, says Chrien, is greater government oversight of imports. In the post-9/11 era, every container is a potential vehicle for terrorists. Never mind that only a tiny portion of incoming boxes is actually inspected by Customs-the amount of documentation needed to get product into the U.S. today is immense. Requirements extend all the way back to the origin country, where importers must vouch for the legitimacy of suppliers, and file manifest data at least 24 hours prior to cargo being loaded aboard ship.
Solution: Get with the program. There's no alternative to cooperating fully with customs officials from the U.S. and other countries. Haworth has joined the voluntary program known as Customs-Trade Partnership Against Terrorism (C-TPAT), Dykstra says, although it has yet to be fully certified. Requirements include submitting to Customs exhaustive information about the company, its business practices and trading partners. The carrot: expedited processing of members' freight when it enters the U.S.
Haworth's customs broker, FedEx Trade Networks Transport & Brokerage Inc., is a fully certified member of C-TPAT, as are many other major carriers, forwarders and other third-party providers of trade services. "You have to control your entire supply chain," says Ned Blinick, vice president of sales and marketing with Blinco Systems Inc., maker of software for global commerce management. "Companies that are compliant will have velocity."
Security isn't the only reason for cooperating with Customs. Haworth, which makes and sells product both in the U.S. and Canada, uses the trade-management software of NextLinx Inc. to submit export data to its broker, who relays the information to both customs agencies before shipments cross the border. The system allows it to meet reporting requirements of the North America Free Trade Agreement, thus avoiding duty for goods and parts sourced within the region. Darren Maynard, chief operating officer of NextLinx, says the automation of shipping documents can eliminate manual processes and delays in the transfer of product across international borders. It also gives the shipper a "low-risk" profile in the eyes of Customs officials.
7. Problem: Inventory levels are rising, as a buffer against delays. The ways in which this happens aren't always obvious. All-water shipping between Asia and the U.S. East Coast looks attractive: it saves money and avoids inland congestion. But it also leads to greater amounts of inventory in the pipeline, says Godfrey. Moreover, consumer goods suppliers must keep more product at rest in order to meet the exacting demands of retailers, who dread empty shelves and resulting lost sales more than anything. And that means extra safety stock weighing down corporate balance sheets.
Solution: Look for new ways of managing inventory, to speed up order fulfillment and eliminate waste. A certain amount of safety stock may be necessary to keep customers happy, Godfrey says. But companies can do a better job of evaluating their product flow, thus cutting back on merchandise clogging up warehouses. They can take into account order size and shipping frequency, better to match their output with the needs of individual buyers. For one retail client, Accenture looked at various methods of flowing goods across 600 product groups, considering such factors as cube, package size, inventory value, and sourcing location. It was then able to determine how to store, pick and ship each order-by individual case, full pallet, cross-dock, or direct to store, among other options.
Goyal notes the growing popularity of postponement, in which basic items are made overseas, then customized closer to the end user. Last-minute additions include power cords, special packaging and instructions in the buyer's native language. Hewlett-Packard is a pioneer of this practice, having used it to sell printers in Europe for a number of years.
8. Problem: It's getting harder to devise accurate demand forecasts. The stretching of supply lines "almost forces you to predict demand further out," says Goyal. Airfreight is too expensive for most shippers; instead they must do a better job of assessing long-term demand while factoring in additional manufacturing and transit time. Suppliers might be turning out product six months or more in advance of its appearance on retail shelves or the factory floor.
Solution: Use optimization and collaboration techniques in supply chain planning. Cecere recommends the practice of "probabilistic optimization," employing mathematical modeling to gauge future demand levels. Up to now, she explains, most planning technologies have relied on fixed values for factors such as lead time, run time and supplier quality. The new theory takes a more dynamic approach, assigning probable values to those factors, then matching supply and demand alternatives with operational constraints. In addition, says Cecere, knowledge of the past is used to predict future events.
Steen says close collaboration among shippers and their vendors, including logistics service providers, is essential. Information systems must be linked to ensure the accuracy of data flowing along the supply chain. Godfrey cites Wal-Mart Stores' Retail Link as one example of an effective bridge between retailer and vendor, who receives actual point-of-sale data and can adjust orders accordingly. On the manufacturing side, Dell Computer is tightly integrated with suppliers in Asia, who know immediately of any changes in demand or inventory levels.
Collaboration can reach even further up the chain. Blinick urges companies to work closely with suppliers on packaging. Designs should be sent early enough so that suppliers can turn out product and meet delivery deadlines. "Velocity," he says, "is based on certainty."
9. Problem: Global supply chains are threatened by corporate disunity. For all the talk of silo-busting, many organizations remain split into business functions that have little or no communication with one another. For example, says Maynard, a sourcing manager might decide to buy product from a manufacturer overseas. The import manager won't hear about it until the customs broker calls and asks how the item should be classified. Meanwhile, the shipment is stalled at the border.
A similar disconnect exists between operations and finance, according to Blinick. "If the financial people can't see what's happening in the physical supply chain," he says, "they can't appropriately plan."
Solution: Tear down the walls, once and for all. It begins, says Cecere, with new ways of thinking. Many supply-chain organizations grew out of operations, she adds, and don't view themselves as touching upon other areas of the company. They need to begin thinking "holistically," tying the movement of physical goods to information and finance. One way to achieve this goal, she says, is to begin thinking in terms of cash flow. The exercise helps managers to identify everyone who makes key decisions across an end-to-end supply chain. And it could spark a new relationship among the chief finance, procurement and supply chain officers.
Kraemer says a well-managed financial flow can make up for shortfalls in other areas of the chain. For example, by streamlining processes between banks and their customers, companies can dramatically reduce their days sales outstanding.
10. Problem: Relentless pressure to cut costs has a negative impact on supply chain velocity. Senior executives still aren't fully aware of the contribution that logistics and supply chain departments can make to the corporate bottom line. Too often, says Hickey, such functions are viewed first as cost-cutting opportunities. And the pressure to slash overhead is intensifying, as retail companies look for ways to lower their price points. As a result, logistics departments might be unable to implement innovative techniques that speed up orders. Even Chrien admits that the main reason for changes to the Rohm and Haas supply chain was to boost productivity and efficiency, not velocity.
Solution: Start thinking big. Supply chain management should play more than a supporting role in the organization, says Cecere. Supply chain strategy should be aligned closely with business strategy, with top managers scrutinizing the flow of products, information and cash. And the exercise should be repeated at least every quarter or six months. "People don't do that as an iterative process," Cecere says. "You need a constant flow of information."
In any case, efficiency and velocity need not conflict, says Chrien. The search for better business processes, such as taking out factory cost and rework, can also speed up order cycles. Managers need to be focused on anything that adds cost to the supply chain. At the same time, she says, they must understand the long-term implications of getting product to market faster, even if such efforts require up-front expenditures.
"It's all about balancing cost and customer service," says Chrien, adding that customer demands for product quality, availability and cost are growing ever more intense. "The expectations keep going up and up and up."
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