Category Archives: Supply Chain

Optimization: Is It Time to Move Beyond Sourcing?

A big focus of this blog is, of course, Strategic Sourcing Decision Optimization (SSDO), one of the few advanced sourcing methodologies guaranteed to save your organization, on average, 12% if correctly applied (as demonstrated in two back-to-back studies by Aberdeen) and the doctor‘s speciality. But it’s not the only place you can apply optimization in Supply Management to save money. Another area, as covered a number of times on SI, is Supply Chain Network Optimization (SCNO). And, of course, some companies just focus on the intersection and do Logistics optimization. But this is not everything that can be done, or should be done, especially in an age where many industries now see The End of Competitive Advantage and don’t actually own physical assets, leasing them as need be to create the products and services desired by their prospective customers.

In this situation, what matters is Asset Optimization, where you optimize a one-time dynamic network to minimize sourcing, network, and logistics costs to minimize the total supply chain costs associated with the product you wish to produce. This is easier said than done. In sourcing, you are mainly considering bids, lanes, and associated costs to compute the optimal TCO (Total Cost of Ownership), and if lifetime costs and metrics are available, or TVG (Total Value Generated) with respect to a fixed situation. In network optimization, you are optimizing the location of owned factories, supplier production centers, warehouses, and retailers to optimize the distribution costs. But in asset network optimization, you have to simultaneously consider the network and associated distribution costs, the sourcing requirements and associated production costs, and the costs of using, or not using, the resources you already have available and contracts you have already negotiated. In addition, you have to consider the risks associated with each potential supplier and location, the sensitivity of the overall asset network to each supplier and location (and is there a single point of failure), and the ability to dynamically alter the network should a failure occur or customer demands change.

Plus you have all of the difficulties associated with each type of optimization. With respect to the network, there will be many alternatives for production site, each site will have multiple, and different, asset lines, and each asset will be qualified for a certain operation with respect to a certain product. In addition, some assets will be more efficient and cost effective, and unqualified assets will have a qualification/certification step, which will require limited manpower – a variable that does not need to be modelled in traditional sourcing or SCNO models. It’s a very difficult problem that requires modelling of multiple types of variables and constraints at multiple levels at multiple times. And this last requirement makes the model even more complex. In a traditional sourcing model, you don’t really need to consider “time”, as it doesn’t matter how often the trucks deliver your product, just how many trucks are needed to deliver your product as you are billed FTL or LTL by the delivery. And it doesn’t matter what production schedule the supplier(s) use(s) as long as your products are ready on time, so only the total volume need be considered. But when you are dealing with production models, especially when trying to dynamically construct and optimize an asset network, production schedules are significant. If a certain location only has 30% of capacity left available and can only schedule it during a given timeframe, that has to be taken into account. If some of the products have to be delivered before they can complete the first production run, then there has to be a location that is able to do so. And if a continual supply is needed over nine months, the production cycles should more or less line up with minimal overlap as, otherwise, inventory costs would soar.

It’s a complicated problem, but one that is becoming more and more important in fast moving industries such as fashion and consumer electronics — and one that most SSDO providers can’t address. But I’m happy to report that there are a few optimization vendors in the space who can. One is Algorhythm, in India, that has been doing SCNO for many years, and who has built up a lot of this capability over time while working for it’s global multinational clients such as Unilever. Another, newer entrant, is Trade Extensions, that has been doing SSDO for many years and, at the request of its major multi-national clients, including P&G and Coca-Cola, built up the capability in their solution with innovative new platform enhancements since SI last reviewed their solution in 2011 that make it very easy to define the models, run the scenarios, compare and navigate the results. A few of these enhancements will be described in a future post. Stay tuned!

If You Are In Food and Beverage, You Can Not Afford NOT to Have Supply Chain Visibility!

As per this recent article in Inbound Logistics, product recalls cost the U.S. economy $7 Billion annually, and the average product recall costs $10 Million. That’s Ten Million US Dollars that will disappear from your bank account if you are faced with a recall and are unable to quickly and effectively recall product. This is an incredible risk to your viability, and a real risk for the vast majority of companies that struggle with real-time visibility and managing inventory across a network of suppliers, distributors, and manufacturers.

Every day of recall delay results in lost revenue and lost consumer confidence, and, if you’re talking products with salmonella or e-coli poisoning, additional lost lives. The first empties your bank account, the second dries up your revenue stream, and the third can shut you down if consumers decide they do not trust your brand anymore (even if the regulators chalk it up to an accident and allow you to continue operating with additional monitoring and safety precautions).

Ten years ago, given the dearth of supply chain visibility solutions and the cost of extended enterprise ERP systems that could manage your inventory and talk to supplier systems through EDI, you might have had an excuse to not have such a system as it would have cost you 10 Million to acquire and implement such a solution and millions in annual maintenance costs to maintain it. Given that serious incidents, like supply chain disruptions, were much rarer than they are today, the cost savings just weren’t there (and by the time you extracted the relevant data and sent the message out to the affected parties, who probably had to be faxed, the damage was done, the news was on TV, and the opportunity to prevent a significant number of injuries and death wasn’t there).

But today, when you can acquire such solutions for six figures and completely map the supply chains of the suppliers who account for the majority of the goods you buy, and all critical or perishable items, there is no excuse. Properly implemented, these systems can track the complete chain of custody for any item manufactured, stored, or shipped within the supply chain and when (not if) a recall is needed, a simple query will pull up the inventory location by item, batch, and lot — anywhere, and at any time.

In addition to the quick location of an affected product, the system allows a manufacturer to focus in on contaminated or faulty batches, instead of recalling an entire product line because the affected product cannot be isolated quickly enough. So not only is the supply chain more visible, but actions can be taken on a more granular level – allowing a company to minimize the impact to the revenue and reputation with minimal effort and cost. As Nike would say, Just Do It.

If You Want Profits to Go Up, Help People Get Up!

This spring, the Economist published a very interesting piece on how things are looking up for lift-makers who help people who need to get to the top floor, please. The four firms that control two-thirds of the global lift market — Otis (United Technologies), Kone, ThyssenKrupp, and Schindler — have seen their profits, more or less, steadily rise over the last ten years, as their margins increased approximately 10 points.

This is partly due to the fact that global demand for new lifts has gone from approximately 300,000 a decade ago to nearly 700,000 this year. This is primarily due to the urban migration — as approximately 70 Million people migrate to cities every year, where they live in apartments and condos and work in high-rise offices which all use escalators and elevators. And these people, who despise getting stuck in lifts, pay $2,000 to $5,000 a year to keep them running smoothly. As most of these only need a quick check-up and a little grease every few months, margins on maintenance are 25% to 35% compared with 10% on new equipment.

The mega-trend of urbanization provides opportunities for any business that can service the changing needs of the population, which needs to live and work in high-rises. This poses more opportunities for companies in construction, utilities, (last-mile) transportation, and service industries that cater to busy people who need dry-cleaning, maid service, meals on the go, and entertainment. And it also poses opportunity for companies that can optimize the services and servitized supply chain and the last-mile of delivery.

Make Sure Your Savings Don’t Perish With Your Perishables

A recent article over on Inbound Logistics on Cutting Costs When Shipping Perishables had some great tips on how to reduce your perishable related costs while shipping. This post will cover them, and provide some more tips for reducing perishable related costs while also increasing your sustainability.

All ten tips were good, but the following five were very good and often overlooked:

  • Know the seasonality trend in the regions you source from.
    This will allow you to adjust your shipping patterns to take advantage of excess capacity in advance.
  • Become a C-TPAT member.
    This expedites the release of your cargo, which is very, very, very important when shipping perishables. Sometimes it only takes a few extra hours on a truck on a scorching hot day to ruin a shipment.
  • Include ALL commodities to be imported on a single USDA import permit.
    Not only does this save time and money, but it minimizes the chance of a permit being lost and the entire truck held up for one item!
  • Purchase an annual bond.
    Not only does this save time and money, especially if you’d file a lot of single entry bonds otherwise, but, along with C-TPAT membership, it shows you are a serious, regular importer of these goods and not a fly-by-night operation which might exist only to smuggle drugs in the citrus boxes.
  • Do not load produce at night.
    When it’s easy for insects and other pests to get in unnoticed. Not only can a family of spiders ruin the grapes, but they might be illegal in the company you’re importing into, which would result in your truck getting stopped at the border and turned around.

Other ways to save money include:

  • Always home-source during harvest season.
    Unit prices might be higher, but shipping will be lower, and loss will be lower still as you won’t risk losing product in long shipments, which happens regularly when trucks break down and/or get held up at the border. Plus, many people will pay a slight premium for local produce.
  • Know the seasonality for key staples in every region, not just the ones you generally source from.
    This will make sure you’re always sourcing from the region with the most supply, which will help you to get you the lowest costs as you will be able to negotiate better unit prices and secure transportation in advance when prices are low.
  • Always import full trucks.
    With the current cost of fuel, shipping adds a considerable cost component, so you want to minimize it as much as possible. This may require an optimization solution as you have to figure out whether to:

    • order more of a seasonal item to fill the truck, and then make sure an appropriate special is offered by sales to insure the extra units are sold before they perish
    • rebalance out-of-season items from one locale to another – i.e. you would normally buy oranges from Argentina, but moving the order to Mexico during banana season will fill the truck
    • order more of an out-of-season item with a longer life span, keep it properly refrigerated, and increase the length between orders
  • If the perishables will be processed, re-optimize the processing network.
    If you’re going to can, freeze, or otherwise process the perishables into a less perishable product, do it as close to the source as possible, even if it means using new suppliers or investing in new manufacturing plants. These refined products, which are typically denser, and which may not even require refrigeration, will be much cheaper to ship and suffer a lesser risk of loss.
  • Have a plan to sell excess perishables once they reach their prime before they perish.
    50% off at the store is not always good enough, especially if they are marked down an hour before closing on a Tuesday night and will not be saleable tomorrow. For example, even overripe, tomatoes are still great for pastes and soups. You could have each store strike a deal with local restaurants that allow them to buy perishables at prime at a discount before they are unuseable, or, if you are socially responsible, setup a donation program with a local shelter or soup kitchen where the shelter can pick up perishing items each day before close before they perish (and take your cash with them). Done right, you could probably even get a charity tax write off (as long as the items were donated while still edible). You may consider these ideas beyond the scope of sourcing, but you shouldn’t when you consider that 1 in 7 people in the world are undernourished and almost 40% of food is wasted in North America. Fix this. You have the power.

Maintaining Competitiveness – Adaptable Supply Chain Structure

In our recent series on The End of Competitive Advantage, we noted that in many industries, there is no such thing as sustainable competitive advantage. The best a company can hope for is to deftly move from temporary advantage to temporary advantage in an effort to remain in the black.

In order to do this, it has to follow a new playbook with a new set of rules, which include the switch to competing in arenas and not industries, the requirement to get (out) while the gettin (out)’s good, the support of the C-suite, and the continual resource re-allocation to deftly move from one arena to another where temporary advantage can be obtained.

In order to do this, a company needs a supply chain that can keep up. Such a supply chain has an adaptable structure at its core, as per this article on the essence of supply chain flexibility. Such a structure allows a company to get back to business quickly following a disruption. Consider Nissan, the first Japanese car company to get back to business following the 2011 quake. And in the wake of the Thai floods, it was able to contain the issues locally by swiftly resourcing parts from China. It was able to do this because its low-cost “V” platform for vehicles in emerging markets allowed Nissan to extend its production base across the world using standardized parts in different production facilities.

So how do you get an adaptable structure? Start with the checklist presented in the article:

  • focus on risk management, not risk avoidance
    with a 98% chance of a disruption within 24 months no matter what you do, this only makes sense
  • develop a variable cost structure
    that can be applied on a node-by-node basis and ramped up and down as needed
  • launch flexible capacity initiatives
    to adequately handle peaks and troughs in demand
  • establish hedging strategies for critical components
    and put appropriate backup plans in place
  • acquire actual supply chain insurance policies
    and insure specific high-risk events are covered
  • explore shared services models
    and use them where they make sense
  • implement flexible pricing structures
    to support flexible capacity initiatives that allow demand to be rapidly aligned with supply
  • and form cross-functional teams, led by a C-suite officer, to get the job done!

Within days of the Japan earthquake, the CEO of Nissan and a risk management team visited the plant, surveyed the damage, and determined what needed to be done to regain normal operations. The CEO. Take note of that.