Category Archives: Logistics

(Logistics) Flux Management

No, this isn’t an article about Flux Capacitor management and how to keep your DeLorean in peak condition, but about managing in emerging and developing markets when rising labor costs, increasing transportation costs, and shifting demographics are constantly chancing the success equation in these markets.

The inspiration for this post is a recent article in Logistics Management by Bill Read and Michael Tse of Accenture who noted that emerging and developing markets like China and India will be the key battleground for the years ahead for those multinationals eager to grow in the ever changing global economy. The reality is that the emerging middle class in the fast growing markets in China, India, Taiwan, Malaysia, Thailand, Indonesia, and the Philippines represent a significant opportunity for those companies poised to take advantage of global opportunities.

According to the article, mid-size companies need to build unique capabilities in four key areas in their efforts to ensure success:

  • Entry Strategy
    It’s not just about red-tape. Where are you going to get the resources and partners you need for success? Where are you going to launch? Chances are, the middle class aren’t just emerging in the tier one cities, but the tier two and tier three cities where populations are also exploding.
  • Channel Strategy
    The majority of people in countries like India, China, and Vietnam still reside in rural areas. Even though the countries are rapidly urbanizing, you could missing out on a large market segment if you just focus on the urban centers.
  • Supply Strategy
    How are you going to get your supplies and distribute your products? Building a new network from scratch can be a challenge – you’re likely going to need a local 3PL provider – but who?
  • Workforce Strategy
    Local talent is critical to the success of a market entry in Asia for a host of reasons, from language skills to market insight to just plain practicality. How are you going to attract and retain this local talent?

Each of these strategies is critical, and each comes with a host of questions that need to be answered. The article is definitely worth a read.

10+2 Readiness … Beware! It’s strategic, not tactical …

Today’s guest post is from Matt Gersper of Global Data Mining,LLC (acquired by CUSTOMS Info, acquired by Descartes).

As president of Global Data Mining, I have the opportunity to speak daily with a broad range of clients from many diverse industries, all involved in international trade.

On January 2, 2008, US Customs & Border Protection (CBP) published in the Federal Register a notice of proposed rulemaking for Importer Security Filing and Additional Carrier Requirements, commonly known as “10+2”. Since then, I’ve watched companies react to 10+2 in three distinct ways.

A very small minority of our clients have responded by funding a cross-functional team to study the issue and develop an enterprise-wide strategic solution to meet the new requirements and optimize global trade business processes while they are at it. These best-in-class companies are way ahead of the 10+2 curve.

I have noticed the remaining companies seem to fall into one of two groups. There are companies heading full speed for a cliff and completely unaware of it; and there are companies heading full speed for the same cliff, but at least they are aware of it.

The “aware” group has a chance to use this dramatic change in customs regulations as a catalyst for process improvement and to remain competitive with the best-in-class group. I fear any companies that remain unaware will suffer mightily when 10+2 goes into effect.

The reason even “aware” companies are heading towards disaster is while their leadership may be alert to the newly proposed customs regulations; they mistakenly believe it can be managed tactically by their trade compliance department when in actuality it will require an enterprise-wide strategic solution.

It is important for senior management of US importers to understand the significant impact 10+2 can bring to their companies and develop an enterprise-wide strategy to prepare for it!

Let me explain.

CBP is proposing to require your company to transmit an Importer Security Filing twenty-four hours prior to loading a U.S. bound vessel. The filing must contain 10 data elements including 3 new data elements not currently required for US bound imports. The existing 7 data elements will need to be reported a lot sooner in your supply chain than is required today. This is not a small change. It will require a considerable re-engineering of corporate processes and systems.

These are the data elements that will be required, their typical source and responsible parties:

Data Element Source Responsible Party
Manufacturer name and address Procurement/Sourcing Importer
Seller name and address (New) Procurement/Sourcing Importer
Buyer name and address Procurement/Sourcing Importer
Ship to name and address Procurement/Sourcing Importer
Container stuffing location (New) Supplier/Forwarder Supplier/Forwarder
Consolidator (stuffer) name and address (New) Supplier/Forwarder Supplier/Forwarder
Importer of record number Trade Compliance/ Import Importer
Consignee number(s) Trade Compliance/ Import Importer
Country of origin Trade Compliance/ Import Importer
Commodity HTSUS number Trade Compliance/ Import Importer / Broker

Creating an effective solution to the proposed 10+2 regulations is beyond the scope of the trade compliance department. It will require an enterprise-wide, strategic solution. Here are three examples to clarify my point.

Example One: The typical vendor master file in a corporate ERP system defines “Manufacturer” or “Supplier” as the party to which the company makes invoice payments. If a supplier has ten different factories that may fulfill an order, the proposed 10+2 regulations will require the name and address of the actual factory that fulfilled the order. This granularity of data, and the functionality to differentiate at the specific factory level, does not exist in many ERP systems today.

Example Two: One importer I recently spoke with is changing the way his company selects freight forwarders in foreign countries in order to manage the requirements of the Container stuffing location and the Consolidator (stuffer) name and address. They feel the 10+2 regulations requires a much closer relationship with fewer forwarders to assure all data elements, especially the two mentioned herein, will be accurate and complete in time to transmit the Importer Security Filing.

Example Three: Today, the assignment of the fully qualified Harmonized Tariff number (US-HTS) is frequently made after the generation of the commercial invoice and before the shipment enters a US port. The assignment of the US-HTS is often made manually by a broker. In order to achieve the requirements of 10+2, importers will need to create and maintain a Parts Master File complete with fully qualified US-HTS numbers assigned to every item. This data will need to be integrated into the software that will be used to electronically transmit the Importer Security Filing twenty-four hours prior to loading the U.S. bound vessel.

Each of these examples requires re-thinking and re-engineering current business processes. The scope of these projects extends beyond the responsibility and authority of the trade compliance department as cross-functional participation is required of the procurement, logistics and information technology departments at a minimum. Some projects will also involve third parties. Executive leadership should take notice. Lack of understanding and funding today may lead to dire consequences tomorrow.

The proposed 10+2 regulations state, “If the principal fails to comply with the proposed Importer Security Filing requirements, the principal and surety (jointly and severally) would pay liquidated damages equal to the value of the merchandise involved in the default”. If you have a $250,000 shipment that is in violation of the new regulations, you could be fined $250,000. Furthermore, the prospect of “scrambling” for data at the last minute will slow your supply chain, squander already limited resources, and erode profits from your bottom line.

However, 10+2 can be a hidden opportunity for strategic thinking companies. Optimizing currently inefficient business processes to meet the 10+2 requirements in the most direct, effective manner possible can improve supply chain performance, and potentially deliver a positive return on investment.

More effective management and visibility of additional trade data can:

  1. Improve supply chain planning
  2. Improve supply chain speed
  3. Reduce inventory requirements
  4. Improve visibility and controls of international transactions
  5. Create competitive advantage

One supply chain study has estimated the cost of each additional day ëin transit’ is equal to Ω of one percent of the value of goods. Improving supply chain speed by just one day would be worth $500,000 per year for a company importing $100 million annually.

I strongly advise executives of companies importing into the US to study the impact the newly released Importer Security Filing Proposal may bring to their companies. Best-in-class companies are funding cross-functional teams to develop a strategic enterprise-wide solution, using 10+2 as a catalyst to optimize currently inefficient processes, and creating competitive advantage in the process. Once you know the terrain, and have a good map of the road, you too can be traveling safely and efficiently down the new 10+2 highway.

Thanks, Matt!

Matt can be reached at mattgersper <at> gdmllc <dot> com

Freight Audits Alone Aren’t Enough

SupplyChainBrain recently published a good article by Jeremy Dotson of APEX Analytix that noted that industry estimates show inaccurate freight bills add an average of 0.2% to a typical company’s annual freight costs (which is significant on a 100M spend, as this equates to 200K). However, vendors who fail to comply with established routing guidelines can have twice the impact – an average of 0.4%, or a 400K drain to the bottom line. Maybe 0.4% is not that significant in the grand scheme of things, but it’s just the tip of the iceberg! If you identify, and stop, five leakages in the 0.4% range, you’ve saved 2% – or 2M. And you can’t tell me that’s not significant!

The article described seven common sources of errors that, collectively, will drain percentage points of potential savings from the best network design. Thus, it’s important to be familiar with these errors and institute procedures and methods to stop them from occurring.

  • Failure to Combine Shipments
    The article points out that sometimes vendors overlook instructions to ship merchandise to the same destination on the same trailer and ship on multiple trailers at LTL rates, costing you significantly more than you need to be paying. However, even more important, is that in companies where different buyers handle different categories, it happens all the time! They’ll each schedule pulls from a central warehouses on different days when all pulls can be on the same day and freight consolidated.
  • Failure to Create a Single Bill of Lading
    Even if all shipments are consolidated onto a single trailer, if the shipments aren’t combined into a single bill of lading, you lose out on volume discounts. More importantly, if individual shipments consolidated onto the same trailer have a volume less than the minimum volume, you’ll be paying the difference for each individual shipment on the trailer!
  • Selecting the Wrong Carrier or Shipment Method
    Shipping by air when by sea is okay can cost hundreds of thousands of dollars extra!
  • Sending pre-paid shipments via freight collect
    Another case of the left hand not knowing what the right hand is doing. Adopt a standard policy for shipments and stick to it!
  • Failure to Automate Records
    Unless you do this, it will be virtually impossible to dig through mountains of paper to find the problems.
  • Failure to Make Your Routing Guide Web-accessible
    This allows vendors to enter information on each shipment and receive the specific routing instructions they are to use.
  • Failure to Review and Update the Routing Guide Regularly
    Your supply chain isn’t static. Therefore, your distribution network is not static either. As fuel costs rise, cost-effective breakpoints and shipping methods change. As demand changes, so does appropriate inventory levels and locations. As volume shifts between suppliers, your network needs to adapt.

MCA Solutions – A Strategic Service Parts Management Platform

MCA Solutions (acquired by Marlin Equity Partners, merged with Servigistics, acquired by PTC) a Philadelphia, PA company, is not only one of the few companies I know of that has an advanced strategic service parts management solution, but one of the very few that only does service parts management. Recognizing that many large manufacturing, semiconductor, high-tech, aerospace and defense companies often have tens of millions, if not hundreds of millions, of dollars tied up in inventory, and that an inventory planning and optimization solution that is off even by a few percentage points can cost these companies millions, if not tens of millions, of dollars annually, the founder of MCA Solutions, Dr. Morris Cohen, who has worked with IBM, Cisco, Applied Materials, Intel, GM, Saturn, Teradyne, and the U.S. Navy, decided to focus the company on this problem alone.

Why? Because the problem is a lot harder than you think. Just like a product has a life-cycle, so does a service part. Not only do you have to accurately forecast how many replacement parts you’re going to need in your network (as well as where they need to be), you have to manage the return, repair, and re-introduction of the repaired part into your inventory. (Remember, many parts are sub-assemblies because it can be too time consuming to replace an individual part — so it needs to be repaired once it is replaced; just like your IT department doesn’t throw out the desktop they just replaced when only the hard-drive needs to be replaced.)

To accurately solve the problem, MCA Solutions allows you to model your entire multi-echelon parts demand network. What does this mean? You can model all of your primary (warehouse) locations, forward locations, forward-forward locations, etc. to as many levels as you need; you can define all of the production lines, aircraft, or other equipment at each location; define the required replacement parts and desired availability and / or target stock levels for each part; define any and all (performance-based) contractual commitments if you are in the business of servicing lines, aircraft, or other commitments for your customer; define historical demand, service requirements, or maintenance plans; and specify the best type of statistical model for the part in question (poisson, normal, or negative binomial – as low volume, high-volume, and sporadic demand parts need to be modeled differently), as well as any location or usage-specific criteria that influences demand.

Furthermore, MCA Solutions’ platform not only allows you to strategically plan cost-optimal inventory levels for target stock and availability levels, but also takes into account current network stock levels and will give you an executable tactical implementation plan which will tell you what needs to be shifted between locations, what needs to be ordered – and when, and which parts should be repaired (and when) and which parts should be retired. In other words, not only does their solution understand product life-cycles, but it also allows understands the entire part life-cycle.

How well does it work? For their target industries, very well. It was chosen by the Navy, who spent almost a year exhaustively evaluating COTS (Commercial Off The Shelf) solutions against their own in-house solution, it’s used by KLA-Tencor and Cisco — who have some of the most extensive parts supply chains in the IT world, and their solution has been chosen by SAP as their preferred parts planning solution. Furthermore, it’s very well designed. You can work at the aggregate network, network (as it allows you to define different part networks if you have to meet different geographies, different environmental regulations, or just want to separate your internal service networks from those of your customers), forward location, location, equipment / contract, or part level, depending on your need; you can compare the current plan to various “what-if” plans that let you see how your altered stock levels / availability levels affect cost or how shifting forward locations (central warehouses) changes stock levels and affected costs; and you can do extensive reporting, graphing, and, if required, data export to Excel (and Power Point). Plus, you can export orders to your external procurement / ERP / MRP systems and import supplier response data. If the lead-times in the responses differ from what the plan expects, the system will automatically update and re-balance the plan.

If you’re in one of their target industries, it’s certainly worth an investigation. Not only is it designed well, but it appears to be very efficient. The average response time for an update even in a fairly sophisticated what-if network model (with hundreds of locations and thousands of parts) is under two seconds. That’s impressive where optimization is involved given the complexity of a multi-echelon network model.

Strategic Service Parts Management

Last year in my posts on Strategic Service Management and Tomorrow’s Strategic Service Management Today, I introduced you to service management, which is more than just outsourced services management. At a holistic level, it’s really a form of customer service management (where “customer” means your internal customers as well as your organization’s external customers) with the goals of making the customer efficient and satisfied while making a profit.

One possible definition of this, which I gave in my posts, was through a union of parts management, price management, and workforce management with the ultimate goal of optimizing the workforce to deliver the right part at the right time at the right price. If we analyze this closely, we see that the key is to first optimize the parts management. If the part is not there, it doesn’t matter what it costs, because either your customer is going to go to someone else, or you’re going to violate a performance contract, and whatever additional profit you might make through price optimization is going to disappear in lost sales or penalties. Furthermore, there’s no way to optimize a workforce if you don’t have the parts they need to do their jobs.

So what is service parts management? In my posts I originally defined it as the process of ensuring the right part is available at the right place at the right time. It is the alignment of planning, forecasting, and inventories to make sure you can respond to a customer need as it arises, without costly expedited shipping, unnecessary wait times, or financial losses (that can result from service level guarantees). And I think that’s still a good definition, but it doesn’t convey the complexity that is involved in certain industrial and medical equipment manufacturing, semiconductor, automotive, aerospace & defense operations. Nor does it convey the extremely high costs of doing parts planning poorly in these industries.

Consider aerospace. New commercial aircraft cost hundreds of millions of dollars, and it’s critical that a plane spend as many hours in the air as possible to recover that cost, and even more critical that it not miss a scheduled flight and that all maintenance and repairs are able to be completed during scheduled downtime. Without extremely good parts planning, a plane can be grounded for days and cost a company millions of dollars in losses.

Furthermore, not only are the planes expensive, but so are the parts. Many parts can cost thousands or tens of thousands of dollars. Therefore, you don’t want to be stocking more parts in inventory than you need to because, in a squadron of 15 fighter jets or a fleet of 25 commercial airliners, excess inventory can lock up sufficient funds to literally buy another plane!

Now consider automotive. Production lines cost hundreds of millions of dollars, if not billions of dollars, and an unscheduled line shutdown can easily cost a few million in lost labour, sales, and man-time required to get the line up again. More importantly, some of the equipment is very complicated and in order to get the line up again quickly when it does fail, you have to replace entire assemblies, which can cost hundreds of thousands of dollars. Therefore, it’s important that you not only carefully control your inventory levels, to avoid locking up tens of millions of dollars that could be part of the cash flow, but that you have a good process for servicing and repairing the replaced assembly so that it can be re-used next time the same type of sub-assembly, either in the same line or in a different line, breaks down.

In these industries, the importance of a solution that can model the expected need for each replacement part that may be required over the expected life of each major production line, vehicle, aircraft, or sophisticated high-tech system that has to be kept up and running, as well as the required inventory to statistically meet the target up-time requirements at any point in time, starts to become very clear. Furthermore, since you usually have multiple plants, and storage locations, some of which can quickly service other locations (and if you only expect to replace, on average, one instance of a $50,000 part each year, it’s much cheaper to spend $500 on an express delivery from a central warehouse than to stock the part at each location), you also need a solution that can look at these needs holistically, factor in lead times, and give you an optimal inventory level across your network. This is the only way to design a strategic service parts management plan that will give you a target up-time and / or part availability level at a minimum cost of ownership.

Tomorrow we’ll explore a solution that, depending on your industry, just might help you achieve this goal. Stay tuned.