Category Archives: Logistics

10 + 2 = 690,000,000

CBP. ACE. C-TPAT. SAFE Port Act. You’d think importers already had enough documentation and security initiatives. Apparently not. The U.S. Government recently announced the “Secure Freight Initiative” in an effort designed to help reduce the risk of terrorism by leveraging trade data, trade partnerships, host country governments and the latest technology to validate the security of goods in maritime shipping containers. Part of this initiative contains a more detailed Security Filing that is being dubbed the “10+2” because it requires 10 data elements from the importer and 2 data elements from the carrier that must be electronically filed 24 hours prior to loading cargo onto a shipping vessel ultimately bound for the US.

The goal may be to:

  • target high-risk cargo through the identification of actual cargo movements,
  • improve the accuracy of cargo descriptions, and
  • speed lawful international trade by recognizing low-risk shipments earlier in the supply chain

… but all it’s likely to do is increase trade costs even more. According to a recent Supply & Demand Chain Executive titled “102 – Whats a US Importer To Do?” article, it’s estimated that this new 10+2 program will cost importers $390M to $690M annually due to filing fees levied by the government and surcharges levied by cargo agents for generating the required information.

And, let’s face it – it’s not going to negate the risks it is intended to negate. All it is doing is letting a potential terrorist (who cracks the system) know well in advance which shipments are likely to be identified as “low risk”, and, thus, which shipments provide the greatest opportunity for smuggling his weapons. Furthermore, pre-filing data elements, even if it includes route information, doesn’t necessarily identify high risk shipments – all you can deduce is if a vessel stuck to plan, and you can only deduce that if other global ports are willing to cooperate in your initiative and indicate whether or not a vessel arrived roughly on schedule. In short, the only goal that will be realized is improved accuracy in cargo description – which is valuable, but is a slightly better description worth 690M (or more)?

Considering that most of the data elements are already being provided to customs for clearance and entry via the CBP 7501, why is a whole new initiative needed? Can’t the current programs simply be improved to capture the new data elements and allow earlier submission of the data? It seems to me that this would be a lot less costly to all parties involved for the same net effect, and make a lot more sense. Any trade pros care to chime in?

Transportunity Identification Requires Decision Optimization

I recently discovered an archived “expert insight” on SupplyChainDigest from last summer on “Transportunities: What Kind of Results Can You Expect from Carrier Bid Optimization Projects” that was pretty good, but lacked advice on the right way to go about the more technical aspects of the project.

The article, which noted that savings in the 5% to 15% range are usually achievable, noted that there are factors that will affect the achievable savings range, namely:

  • How good have you been?
    It will be hard to generate savings if you have already captured them in a prior sourcing project. Remember, fuel costs keep rising, and with labor shortages and inflation, so do savings. You’re only going to capture savings if there are (significant) inefficiencies to be eliminated.
  • How good will you be?
    If you have been unable to capture transportation savings in the past, why will this time be any different? You need to be sure you have the knowledge, tools, and support you need before you begin the project, or you will just be wasting your time.
  • What is your freight profile?
    If you are a low-volume shipper moving light bulky freight from Hong Kong to LA … or need a “reefer” out of Florida after the citrus ripens, you can only expect to do so well or rather not so well. You need regular, high-volume shipments on the same lanes that have not been (properly) sourced in a couple of years if you want to find real opportunities.
  • What is the state of the market?
    In the midst of a capacity crunch, like we were a few years ago, you’re not going to get good rates. However, in the midst of an economic slowdown, like the one we are currently in, conditions are prime to negotiate better rates.

In other words, if you have not been stellar, have the resources at your disposal, and have an appropriate freight profile in a receptive market, then chances are you have a good shot of saving a sizeable chunk of change if you, as the article suggests, broaden the scope of the sourcing project and, most importantly, use the right tool for the job.

It’s critical to use the right tool for two reasons. The right tool enables the right process and, most importantly, the right tool makes sure you aren’t sacrificing other savings opportunities simply to get better freight rates. For example, if you over-allocate to a certain carrier, then you could lose the required volumes needed to achieve the TL rates you need for low freight costs on lanes only served by other carriers. Also, if you lock in freight lanes, then you restrict your supplier pool – and if freight is less than a quarter of your overall sourcing costs, this can be bad.

That’s why you should always source categories at a time in a sourcing project, so you can balance unit cost vs. freight cost, and do freight projects at least once, if not twice, a year where you amalgamate across needs based on expected lane-volume combinations using current contracts and most likely award scenarios.

For more information on the right way to handle freight projects, see my post on Missing the Point … or … The Right Way to Handle Freight.

Fallacies of Logistics Productivity Management

Manufacturing & Logistics IT recently ran an article on “The 10 Fallacies of Logistics Productivity Management” that noted that productivity management often represents the lowest hanging fruit for companies interested in reducing supply chain costs. It also noted that the failure to implement advanced productivity management systems may be related to a number of misconceptions surrounding productivity management system processes, technology, and impact. I’m betting the authors are right … because I know similar fallacies prevent many companies from adopting modern strategic sourcing support software.

The top 10 fallacies outlined by the article are the following:

  • My current WMS / ERP does productivity management.
    Warehouse Management Systems (WMS) manage your warehouse with respect to inventory, what’s coming in, what’s being stored, and what’s moving out. They don’t optimize your logistics. Enterprise Resource Planning (ERP) systems are even worse – they just tell you what you need to acquire to produce your products
  • Productivity management represents an unenlightened way of thinking about employee relations.
    Advanced productivity management systems emphasize such elements as management/supervisor engagement, detailed training on the best method to perform each job, and consistent employee feedback.
  • Productivity Management Systems reduce morale and increase employee turnover.
    The reverse is almost always true because employees want to know how well they are performing when measured against fair and objective feedback.
  • Productivity management benefits are primarily for the DC manager.
    Productivity Management provides a broad set of benefits that supports multiple organizational objectives by way of cost reductions and quality improvement.
  • Productivity management increases complexity and risk.
    The reverse is almost always true as it generally dramatically reduces operator variability by way of the increased training requirements.
  • Productivity management doesn’t add a lot of value.
    It’s true that engineered standards deliver results, but without productivity management, the extent of the results delivered will often be limited.
  • A new “system” won’t provide much incremental benefit when high quality DC supervision is in place.
    Good management is good – but precise, discrete goal time calculation and detailed feedback is better.
  • Productivity management requires too much time for data collection and administration.
    Companies with WMS and/or RFID systems already have the data collection infrastructure in place to support productivity management systems.
  • Productivity management is unnecessary in an incentive environment.
    Advanced productivity management systems offer benefits beyond incentive systems by way of discrete standards that precisely determine the specific goal times of each task.
  • Productivity management won’t fly in a union environment.
    It all depends on how you sell it … are you trying to ram it down their throats, or are you introducing it with increased training and a new incentive program based on the new, objective, metrics the system will capture?

the doctor Would Like to Assure Mid-Size Distributors that (Logistics) Opportunities Do Abound

the doctor recently stumbled on an article titled “Globalization – Risk and Opportunity for Mid-Sized Distributors”, and was quite disappointed. Even though the article suggests that there are lots of opportunities for mid-sized distributors who are flexible, transparent, collaborative, and customer-focussed, it asks more questions than it gives answers. This leaves one the impression that the opportunities will not be there until the questions are answered, and that, more importantly, there might not be any good answers.

Furthermore, like the article titled “Impact of Globalization in Creating Sustainable Competitive Advantage”, which the doctor stumbled upon while looking to see if there were any good articles out there that would point mid-size distributors in the right direction, it didn’t seem to say anything specific, or anything new for that matter. I don’t think there’s a single mid-size distributor out there who does not realize that at no other time have distributors faced such an urgent need to know themselves – their capabilities, their relationship potentials and their willingness to put aside comfortable notions of doing business in favor of growing in unforeseen ways and that their core must be built around the customer because, with rising energy costs (and, thus, rising logistics costs) on top of the quickening pace of globalization, they’re all feeling the crunch. I don’t think there isn’t a single distributor that isn’t asking the question “Here’s what they [my customers] are buying – how do we supply it?” every-time they lose a bid and I don’t think that simply telling them to ask What are my strategic competencies? What do I provide that the customer needs? And the corollaries: What does the customer need that I don’t provide, and what do I provide that the customer doesn’t need is very useful. If they’re not asking these questions already, they’re out of business. And more importantly, what do product evaluations have to do with a distributor who’s just an intermediary who enables the global supply chain and merely wants to stay an enabler, and not become a product or brand manager?

The answer for a mid-size distributor that wants to seize new opportunities and keep business from migrating to the bigger distributors, or the customers themselves, is the same answer that the big distributors give when a customer asks them why they are the best partner – bigger, better, faster, cheaper – but instead of “bigger volumes, and better prices”, the mid-size distributor is instead providing “bigger service, better value“. More importantly, the distributor is providing this “bigger service, better value” by using its nimbleness and hunger to partner with 3PLs, Global Trade Specialists, and (Network) Optimization Providers to offer its customer an integrated global trade and logistics management platform to help them get the right product at the right price at the right time – every time. Let’s face it, despite the importance of optimization and the value it brings – either due to its price tag, (perceived) lack of usability (as many solutions aren’t very usable), or the fear it inspires in transactional-focussed old-school purchasers, most organizations have not yet adopted either sourcing or supply network optimization solutions. Furthermore, it’s only recently that the compounding security, regulatory compliance, denied party lists, and classification codes have multiplied to the point where management of all of the information has become virtually impossible (even for the largest organization with lots of manpower) and only within the past year that solutions to manage this level of trade data complexity have emerged. Finally, only the largest organizations have dedicated logistics teams with preferred 3PL firms or carriers.

Therefore, any mid-sized distributor who could offer its customers access to an on-demand web-based integrated global trade and logistics management platform is going to be much more attractive than your standard big box distributor who still believes that you should buy from them because they have the most volume. After all, without these systems, how are the big box distributors going to know that the trinket from Zimbabwe contains remains from an endangered animal that is banned from import into Canada, or that the US has just put a certain Chinese manufacturer on its denied party list for one too many batches of tainted toothpaste.

So don’t fret, opportunities abound – especially if you’re willing to be innovative. Then you’ll truly be your customers’ first choice.

Capacity, Inventory, and Lead Time

Recently, Supply and Demand Executive published an article called “The Three Things You Need to Get Right in Your Extended Value Chain” by Steve Mehltretter and Vadim Kapsutin which suggested that there are only three critical operational resources that businesses need to balance and get “right” in order to succeed:

  • capacity
  • inventory
  • lead time

Although I don’t agree that the problem is this simple, I do agree that these are three key operational levels that need to be well understood if a business wants to improve its operation and that the authors are right when they state that most companies struggle with effectively optimizing these resources holistically and in an integrated fashion across the extended enterprise. I agree that few companies understand their interactions well enough to make explicit and accurate trade-offs between them and take a “silo” approach to optimizing each resource independently and that this frequently leads to poor cost, quality, and delivery performance. These issues really need to be looked at as a whole, and not as three distinct problems.

The authors also note that operations research experts can derive the interactions and trade-offs on a mathematical basis, but the question of how managers can use the insight to make the right decisions within their organizations still goes unanswered for the most part. They also note that most managers don’t understand how each of these operational resources individually affect quality, price and (reliable, on-time) delivery – the dimensions that matter to the organization’s customers. I have to agree here as well. I also think that until the right optimization & simulation based tools to understand the tradeoffs are acquired by an organization, the situation is not likely to change.

Diving in, capacity is defined as machine capacity, labor capacity, and the physical space required to achieve a desired level of output within a desired period of time. It’s something that every business measures and controls, but few appropriately take the notion of demand “uncertainty” into consideration when planning and fewer still look at capacity in conjunction with inventory requirements and inbound/outbound order-to-delivery lead times. Volatility of demand and order-to-delivery lead time need to be an integral part of the overall resource planning exercise. This is the only way that an organization will be able to accurately determine where capacity should be located, what form it needs to take, and what levels need to be available.

Inventory is defined as the number of finished goods on hand as well as the number of unfinished goods and raw-materials on hand required to produce the finished goods. A high level of finished goods inventory (theoretically) allows for shorter order-to-delivery cycles and better customer service, but can come at a high cost. A low level of raw materials inventory can lead to significant idling of capacity or long lead times when demand suddenly spikes.

Lead time is defined as the amount of time it takes to get new raw materials into the processing plants and get finished goods from the plants or warehouses to the end customer. When not well understood, procurement may grant excessive lead times for piece-price reductions that cost the company more than it saves or finance may require unreasonably low levels of inventory that have the same negative effect when demand spikes.

The authors than include a nice chart that categorizes key trends, their drivers, and the resulting impact on critical operational resources.

Trend Drivers Capacity Impact Inventory Impact Lead Time Impact
Globalization new market emergence & low-cost labor locations more capacity required more transit stock and finished goods inventory longer and more variable lead times
Extended Enterprise technological and functional focus on “core” less capacity required more transit stock and finished goods inventory longer and more variable lead times
Product Complexity niche market, product localization, & shorter life cycles more capacity required more finished goods and raw material inventory longer and more variable lead times
Capacity Consolidation fixed and variable cost reduction, market share, new markets less capacity required less finished goods and raw material inventory longer lead times

Finally, it finishes off with some recommendations of the solutions that companies should employ to come to grips with these problems, which include:

  • Develop Buffers to Improve On-Time Delivery Performance
    Capacity and lead time can also be buffered like inventory. For example, telecommunications and computing always reserve redundant capacity and companies can pad lead time requirements for non-critical or non-fad goods.
  • Make Differentiated Customer Service Strategies a Reality
    Understand what each customer segment values in terms of cost, quality, features, and delivery performance. Don’t promise more than is necessary up-front, leaving room for buffers if needed, and balance inventory, capacity, and lead time to meet each customer need even in extreme situations.