Category Archives: Supply Chain

There are No Economies of Scale … Just Economic Production Quantities

As the public defender likes to point out on a regular basis over on Spend Matters UK / Europe, economies of scale is a procurement myth. The idea that the more you buy, the bigger discount you can get because the cost diminishes is a myth because, if it were not, if you could buy a large enough quantity, then the cost would eventually get close to 0 per unit.

But the reality is that there are always hard costs that cannot be reduced in the supply chain … particularly those components that involve human labour — product creation, product transportation, product component creation, product component transportation, raw material mining, raw material component transportation, security guards for storage, etc. — and facility leases, utility cost, taxes, etc.

And there are always limits to “economies of scale” production lot sizes. If the line can only do 60 units per hour, then the line can only do 2400 in a normal workweek, 4800 in a double shift work week, 7200 in a triple shift work week and maxes out at 10,080 a week … assuming no downtime (and most lines will require some maintenance). In this case, the major economies of scale are 2400, 4800, and 7200 — as this insures that the labour cost (and facility costs) are spread over the maximum number of units.

In other words, there are economic production quantities (EPQ) where the price per unit is minimized, and this is the optimal economy of scale.

So if you really want to minimize your costs, you can start by minimizing your supplier, and carrier costs, which can be done by appropriately distributing the award across suppliers in economic production quantities that can allow them to give you larger discounts (and still retain a reasonable margin). So how do you do that? Considering that each supplier has a different EPQ, each carrier has a different EPQ, and this varies by product (and plant location), how can you possibly figure out how to split in such a way that you can enable suppliers to reduce their bids?

If you’re a regular reader of Sourcing Innovation, you know the answer. A decision optimization platform …

Factors to Consider When Re-Shoring Your Supply Chain

As part of his Make America Great Again campaign, Trump is preaching Buy American. If you want to fall in line, then you have to Buy American. But you can’t Buy American without American manufactured goods, of which there are not enough to go around if everyone wants to Buy American as so much manufacturing was outsourced over the years.

And even if you don’t want to fall in line with Trump, you might still want to Buy American because if Trump continues to raise import tariffs on a whole host of goods, you might want to Buy American just because the costs of not doing so are getting too high. Either way, if more companies want to Buy American, then we need to bring back American Made.

And if we are to return to “American Made”, that’s going to mean an awful lot of restoring. And, unfortunately, that’s easier said than done. Why?

Our Factories our Out of Date

You can’t just bring in a cleaning crew and restart a 20 year old factory overnight. By now, anything of value of moveable size that wasn’t already looted is probably broken or rusted. But even fixing everything up is not enough. Technology has moved on, and so has the production lines for that technology — and right now all the new production lines exist in China, not the United States, as a result of all of the production moving there and Chinese factories investing in the infrastructure necessary to make new products. In many industries, we need completely new or fully overhauled factories to start producing American Made products again, and these factories are not going to be built or revamped over night.

Our Workforce is Unskilled

You can’t just un-retire the workforce, or at least the workforce still of working age. First of all, if a plant has been shut down for two decades, any workers who are still young enough to come back full time would be in their late 40s or 50s now and would have been late 20s or early 30s then. These would have been the junior line engineers, not the senior line engineers or plant managers. As a result, they wouldn’t even have had half of the skills you’re looking for when they retired. And since technology has moved ahead 20 years, and they haven’t kept up (as they had no reason to without an appropriate job), they know less than kids in college. The workforce has to be retrained.

Our Logistics Have to be Rethought

This is not as big of an issue, but right now all of the carriers have lanes optimized for getting goods from ports to common warehouse locations, not from factories in busy industrial parks, or, more likely, on the outskirts of big cities to your warehouses on the outskirts of other big cities. You need to redesign your logistics and so do they. But the good news is that with the right re-design, and freight optimization, they’d have less empty lanes as, right now, they have a lot of full lanes from ports to warehouse districts and empty lanes back. Now they’d have full lanes from industrial parks with factories to other industrial parks with warehouses that also have nearby factories they can pick up from and so on.

Our Labour Costs are Much Higher

So not only do we have to overhaul our factories, but we have to insure we adopt the most efficient technologies that allow our workers to be as productive as possible for every hour they work. And we have to focus on lean process design and lean manufacturing to ensure that there is no waste in the process. That’s the only way a company can really compensate for the higher labour (and sometimes energy and overhead costs in general) that comes with American Made. One has to remember that even though a lot of consumers want to buy American, just like they want to buy sustainable, they are only willing to pay so much of a premium.

This is not to say that you should not reshore. You absolutely should. the doctor has been preaching the value of home-sourcing for a decade! However, you have to do it smart and to get it right, you will have to start slow. And don’t be afraid to ask for help.

Visybl: Asset Tracking for the Modern Supply Chain

Every company has not one, but three, supply chains. The physical, that deals with the movement of goods. The financial, that deals with the payment for goods and services rendered. And, finally, the information, that controls the flow of the goods and money by way of messages between parties. While SI, and most Supply Management blogs, focus on the optimization of the information transfer and the financial costs, if the physical chain doesn’t flow as expected, the financial costs can skyrocket and the information can disappear.

For the physical supply chain to flow smoothly, there are two requirements. One, the obvious, goods have to flow from A to B as required to meet organizational and end customer needs. Two, the resources necessary to process those goods, both in terms of people and physical assets, need to be available and accounted for. This is often overlooked. If a forklift is needed at the warehouse to unload a shipment, and all of a sudden the forklift is not there, that’s a problem. If a raw material or chemical shipment has to be inspected for purity, and all of a sudden the mass spectrometer goes missing, problem. And so on.

So, today, we’re going to discuss a company that helps you keep track of those assets necessary to keep the physical supply chain flowing in a relatively new way, but at a very low cost compared to traditional methods. Traditional methods for tracking goods in the supply chain typically revolve around RFID, which requires each good to be tagged (which is not a problem, as RFID chips cost pennies) and requires readers at each waypoint, and GPS tracking. While RFID is great for tracking movement of goods, as someone just needs to scan the pallets at each waypoint, its poor for tracking goods in a warehouse as you need readers at least every 30 feet (as the max read distance of a Gen2 tag is a mere 12 meters). And while handheld readers are cheap, high-end UHF readers can cost up to 2K, with each antennae up to $200.

GPS tracking is not a good solution for individual good tracking either. GPS tracking requires a GPS device that can upload location data through a cellular network connection. And while you can bulk buy basic GPS units these days for $10 or less, each requires its own SIM card, and while SIM cards are also cheap, cellular providers charge a hefty price for access to their networks (relatively speaking), even if you buy in bulk. You’re easily spending over $100 (or $1,000, depending on where and the resiliency and battery lifespan of the GPS unit you need) a year to track an asset, so while this is very reasonable for tracking a truck carrying $100,000 (or more) of cargo, not so much for a $5,000 workstation that you’d rather not see carried out the door. Especially if you have 100 that you’d like to track and monitor and the odds of more than a couple being carried off are low.

That’s where Visybl comes in. Using Bluetooth Low Energy technology, it has developed low cost beacons that transmit an identifier and temperature that can be picked up by modern smartphones (that support Bluetooth LE) and local wi-fi enabled cloud-nodes that continually monitor their presence. And since Bluetooth has a range that is 10 times that of Gen2 RFID, an organization can not only monitor a wider area with less units (up to a factor of 10, depending on building layout), but do so at a considerably lower cost as these bluetooth LE wi-fi nodes don’t cost much more than a high-end router (which is around $200).

Moreover, since Visybl sells asset monitoring as an integrated hardware / software service, where you can track all assets through the interface in real time and get alerted when they leave or enter an area (and if temperature goes beyond an accepted norm), the only upfront cost is the cloud nodes. By adopting low-cost technology, they provide all of the standard beacons (and replacements on failure) free. And the cost is very affordable. Pricing starts at 2.95/month/asset (beacon) for the full service with considerable discounts at the 100, 1000, and 10000 level. This not only makes monitoring of lower cost assets (such as workstations, warehouse equipment, etc.) even in the $1000 range affordable (as it would generally be in the 1% per year or less range of asset cost at high volume levels), but advantageous as a company that was on-the-ball would be able to use this to negotiate lower insurance rates as the insurers that cover supply chain and physical assets like to see asset monitoring as part of the company’s operations.

However, insurance savings are not the only ROI of the Visybl solution. There are also considerable savings associated with:

  • manpower savings in auditsyou know which assets are on your premises, and where they are within 300 feet (which is the limit of Bluetooth range), and, since most buildings will have walls, floors, etc. that limit range, within 150 feet
  • manpower savings in asset location whenever a low-use asset is needed, there is always time spent looking for it, especially in MRO – many people fail to realize how much time is lost looking for even 300 hundred assets over the course of a year — if it’s an hour per asset, that’s almost 8 weeks of lost productivity
  • un-utilized or under-utilized asset identificationif an asset never moves from the range of its primary node, and that primary node is in storage, then the asset is not being utilized and should be evaluated for sale or replacement

The web-based solution is very easy to use, allows tags with associated asset details to be bulk uploaded in a spreadsheet, and supports map-based display if you store assets across different geographic locations. Beacons and nodes can be added, configured, and re-configured as needed (if you change the position of a node or reassign the beacon to a replacement asset), and the alerts easily customized to your needs. Plus, the technology has the advantage that all beacons can be read by all nodes, so if you and your supplier, that you lend assets to for special projects, both use Visybl, you will not only be alerted when the asset leaves your premises, but when it enters the supplier’s premises — no need for RFID. (And since the beacons only transmit an id and signal, there is absolutely no privacy concerns — only Visybl and the owner of the tag know who owns the tag and what is attached to.) [Or, if an asset walks out the door and ends up near a location with a cloud node, you'll at least have an approximate location to give to the authorities and insurance company when you file your report and claim.]

Visybl also offers an API that allows the data to be pulled directly into your inventory or asset management application, and even supports Amazon echo for simple status queries. It’s a great low-cost asset monitoring solution whose value increases as more customers adopt it, and it will do great things towards pushing monitoring technology costs down across the supply chain.

Twenty-Two Years Ago Today …

The PlayStation was released in Japan. Even though Sony was late to the scene, as the PlayStation was released with the fifth generation of video game consoles, it was the first “computer entertainment platform” to ship 100 million units and set the gold bar for computer entertainment platforms at the time.

But this is not the only reason it is significant. It’s also significant because it also set the need for a gold bar in supply chain management as Sony lost $150 Million in sales and product reformulation when Dutch authorities halted a shipment of 1.3 Million PlayStations back in 2001 due to illegally high cadmium levels.

What do you think, LOLCat?

All PlayStations are great to sleep on!

So Why Do You Want To get a Grip on Supply Dynamics?

Simply put, because when you do, target costing becomes a reality. And with target costing, you can not only set, but achieve, realistic cost goals for key products. This is only achieved when you have good insight into end to end cost components from a raw material, energy, labour, and overhead perspective. And this is only achievable when you have the systems that allows you to gather real cost data right down to the raw materials, and not just average cost data from across buying organizations (that are used to feed statistical models).

Seven years ago today SI ran an article on how Target Costing Works and You can Do It Too! We quoted an article from the now-defunct Purchasing magazine on how purchasing learns cost modelling which noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpol was able to close a gap of 30% between the target cost for a module on one product and the initial design cost.

We also noted that new players in the market, like Akoya (which was puchased by I-Cubed in 2014) and Apriori (which Whirlpool selected as a provider in 2013 [Source]) could be used to help set target costs as Akoya’s market intelligence and statistical models gave a decent target range and Apriori’s production cost models, when populated with raw material, energy, and overhead costs, gave an expected production cost.

But one thing these providers couldn’t necessarily do was figure out how low costs could go if the costs could be traced right down to raw material providers, which can only be done if the input component costs can be traced through the supply chain. But with a solution that allows all costs to be collected and correlated, aggregation and streamlining opportunities to be identified and captured, and high production / overhead costs to be identified, aggressive, but realistic target costs can be set and realized as the organization knows where to focus its cross functional teams. And that’s one of the big reasons why you want to get a grip on supply dynamics!