Category Archives: Supply Chain

Stepwise Logistics Management is Problem Plagued (LMI Part 3)

In our last article, we noted that Logistics Management, in addition to being costly and risky, is not an easy ordeal. You have a lot of steps to execute in an ordered fashion, which today typically requires at least five different loosely integrated (mostly standalone) modules in a big enterprise Operations Planning solution or, more typically, a number of standalone solutions which only support, at most, endpoint data integration where the outputs of one phase can be fed into another.

While this works, there are a number of issues with using separate systems for each step, including, but not limited to:

  • Inefficiency: entering and leaving multiple systems is timely, especially if 3 or 4 steps in you realize you made a mistake and have to go back to the beginning
  • Opaqueness: you only have visibility into the output of the previous step at any time; e.g. when a carrier asks if you can use a different truck size or pallet size, and you have no details on why you calculated a certain pallet and truck size as optimal, you have no idea and have to go back to the packaging system and do the calculations all over again;
  • Cost Bloat: due to limited visibility into data and models of other systems, each step has to introduce a safety margin, leading to ever increasing safety margins; e.g. the order adds a few extra units; the packaging adds a few extra boxes of units to create some give in the packing calculations; the quote adds an extra pallet or two to make sure enough space is quoted; the contract keeps this extra space; and so on … especially since there are usually different team members, each an expert in the different systems, doing each step
  • Hidden Risks: neither of these systems are good at identifying and tracking risks, and if not propagated to the TMS or a separate risk management system, they will stay buried until they materialize (with no mitigations ready to address them)
  • No Closed Loop Feedback: tracking, learning from, and adjusting future plans and predictions vs. actuals is the only way to improve transportation planning / logistics management

Not to mention the major issues present in most of the current piece-meal solutions being used.

  • Order Management solutions tend to be dependent on the MRP and very limited in terms of how far out they can accurately plan, then defaulting to (often) decades old forecasting models; they also can’t provide any insight into the packaging requirements
  • Package Management solutions depend on accurate inputs from the order management solution and the ERP/MRP, and can only compute packaging sizes, packages per standard pallet, and standard pallets per standard containers; no real issues here, but because they don’t connect to freight (quote) management systems, the users don’t often know the best package options to choose and the best configurations to consider
  • Quote Management solutions collect the quotes, allow comparisons, and allow some to be marked as contract (for a timeframe); no real issues here either, except the fact that because they aren’t a TMS, a buyer can’t understand the full cost associated with selecting a carrier or a lane for a particular shipment, and may make suboptimal decisions
  • Transportation Management Systems plan the transportation needs a few months out (at most; most traditional systems are very limited in how far ahead they can plan due to architecture, calculation requirements, constantly changing requirements as demand shifts and issues arise, and the need to regularly start the entire planning chain over again), create the orders, distribute them, collect the shipment notifications and estimated delivery dates, and maybe track updates; not bad, but not enough anymore
  • Financial Planning Systems are usually either modules of larger operational cash-flow planning solutions and limited in transportation specific cost planning, or sub-modules of TMS, and limited in overall financial planning and cost analysis capability

In other words, the logistics solutions created in the age of logistics (when logistics was also more predictable when natural disasters were few and far between, global pandemics were more theory than reality, global political stability was greater, and so on), while great at the time, are no longer sufficient for optimal supply chain management in the modern world.

What we need is a Total Logistics Management Solution.

A Brief Introduction to the Components of Logistics Management (LMI Part 2)

In our last article we noted that Logistics Management is something that many procurement professionals overlook because most larger organizations have a separate logistics department, but it’s something that they shouldn’t because they won’t understand the true cost, the true delivery times, or the true risk of their sourcing decisions, which may, because of this, turn out to be more costly, more risky, and considerably less efficient than they expect.

In addition to being costly and risky, Logistics Management is not an easy ordeal. In order to manage logistics effectively, you need to:

  1. determine what you need and when you need it
  2. determine how to package it and how much room the packaging takes, and this requires the organization to calculate
    1. how many packages you can get on a pallet
    2. how many pallets you can get in a truck / container / rail car
    3. how many trucks / containers / rail cars you need
  3. determine the viable lanes for shipping from the suppliers to your warehouses and get quotes
  4. select the providers and plan the transport
  5. accurately cost the orders, shipments, and tariffs to make sure you have enough cash on hand to meet your obligations when your invoices come due

This typically requires five different systems, and/or modules. Namely a(n):

OM/FS: Order Management/Forecasting System
This integrates with your MRP system, looks at the production plan, looks at the inventory level, and determines the order quantities needed by week for the next X weeks based on how far out the production plan goes (which, in most systems, typically isn’t that far out, maybe a few months) and then uses the forecasting capabilities to project out a few months ahead of the average transportation time. It will also allow a user to override plans and projections, override default suppliers and carriers if there are options, and calculate any ramifications. And any related functions the organization needs around order management and forecasting. (We’re not going to go deep on any particular capability in this article.)

PMS: Package Management System
Logistics management is not as simple as calculating an order and contracting a carrier. You have to know how much space you will need for the shipment, which will dictate how many trucks, rail cars, or containers. That will depend on how many packaged units you can fit in the space, and that’s often more than a simple volume calculation, as you have to fit parts to boxes, boxes to pallets, and pallets to containers/cars. This requires more sophisticated volume and weight calculations than one would expect, which are not easy to do in a spreadsheet. Plus, if you have multiple options, you have to figure out which is best to minimize your shipping requirements.

FQMS: Freight Quote Management System
Once you know what you need, where it’s coming from, where it’s going to, how it’s going to be packaged, what kind of transport you need, and how many units (trucks, rail cars, containers, etc.), you need to find, and contract, a carrier. But the first step is to get inclusive quotes (costs per mile, fuel surcharges, handling charges, etc.) from carriers, compare and analyze them, contract one or more carriers, and then mark their quotes as contract rates, and others as quotes, but not guarantees.

TMS: Transportation Management System
Once you’ve determined your shipping needs, selected a carrier, and contracted a quote, you need to manage the transportation. You need to provide all the appropriate information to the carrier, get the pickup dates and expected delivery dates, receive and track updates, manage any issues that arise or reroutings that need to be done, identify any delays that will cause production or customer delivery risks and determine resolutions, and so on.

FPS: Financial Planning System (Cash Flow Planning)
Finally, you need to track all of the current and projected costs, and changes, so that you can manage your cash-flow and have the necessary cash when the invoices come in.

In other words, Logistics Planning and Management is currently quite an involved process that requires quite a few modules and process steps to do (reasonably) well.

A Brief Introduction to the Importance of Logistics Management (LMI Part 1)

Logistics Management is something that many procurement professionals overlook because most larger organizations have a separate logistics department. Logistics should not be separated from the whole of supply chain operations management because not only can you not compute a total cost of acquisition (which is the minimum calculation you should do during sourcing) without a solid understanding of the true logistics cost, but underperforming logistics teams costs an organization much more than Procurement thinks (and way more than the Logistic Division’s estimate of getting a product from point A to point B).

Logistics represents a significant part of Cost of Goods Sold (COGS). It’s more than just the transportation costs quoted by the carriers in each multi-modal leg in the journey. (Truck to the outbound port, ocean freight to the inbound port, rail to the regional distribution center, truck to your warehouse.) For an average shipment, costs also include:

  • (special) packaging (sur)charges
  • fuel surcharges
  • surcharges
  • loading/unloading/cross-docking fees
  • interim storage/inventory fees
  • insurance
  • loss (damage or theft)
  • tariffs (dictated by route)
  • losses from unplanned delays
    (loss of sales due to stock-outs; losses from production downtime due to missing parts)
  • inventory fees due to overstock

And all of these costs are variable depending on:

  • the route
    determines legs, length of legs, costs for the leg, tariffs, etc.
  • the carrier
    determines rates, surcharges, risk/OTD expectation, etc.
  • the transportation timings
    determines intermediate inventory needs, risk of delay, risk of loss, etc.

And that’s just the cost considerations. You also have to consider delivery times, inaccurate estimates, improper performance measurements and lack of end-to-end visibility here can lead to:

  • part shortages
    which can cause production line slowdowns/shutdowns
  • stockouts
    which can lead to lost sales
  • inventory build-up
    if too many shipments come in too fast, and this drives up costs and can cause space constraints for other orders
  • unexpected cost increases
    if you have to expedite

And then there’s the risk factors. Depending on the route, and the carrier, you could have increased risk of:

  • natural disaster
  • geopolitical disruption
  • port slowdown or shutdown
  • provider bankruptcy
  • cost increase due to currency exchange fluctuations, new regulations coming into effect, etc.

In other words, you should not overlook the implications of logistics cost to serve and service levels when sourcing. You don’t necessarily have to lock in the contracts, but if you already have contracts locked in, only have a few options, or need to use certain routes or carriers to keep costs down, you will need to ensure that the suppliers, and locations, you select are congruent with any options you may be restricted to. And if you are unrestricted, then you should know the assumptions you are making when sourcing, capture them, and pass them on to the logistics team at order/fulfillment time to make sure that the logistics team is planning and contracting appropriately.

Sustainable Supply Chains Sacrifice China! (Most of the Time.)

Where your supply chain is concerned, China has just demonstrated what SI has known for over a decade — it is the enemy. (This isn’t the only situation where China or the CCP is the enemy, but those are different rants. Note that we do NOT equate China or CCP with Chinese people. Most Chinese are NOT the enemy of your supply chain or democracy just like most Americans are NOT the enemy of intelligence and common sense.)

Long time readers will know that in the naughts, SI spent a lot of bandwidth telling your deaf ears that you should be investing heavily in nearshoring and home country sourcing because of the dangers of outsourcing in general, and, the dangers of oversourcing to a specific country, like China, in particular — which have finally become very apparent. It’s too bad it took a freakin’ pandemic to make clear how dangerous it is to outsource so many critical products and JIT materials to a country halfway around the globe, especially when such sourcing in bulk across the industry leads to the lack of capacity close to home due to factory closures and talent evaporation.

There’s a reason the doctor told you two weeks ago to remember the 80’s (and the early 80s in particular) … and that’s because that’s the last time most multi-national corporations in the Americas got outsourcing right … when they were near-sourcing to Mexico (who should build the wall just to keep Trump out, but that’s yet another rant for another day).

Let’s face it, some stuff just shouldn’t be sourced from home. Stuff that’s not critical, stuff that’s very expensive to make at home (but easily trucked across a single border) for various reasons (which can go beyond labour to energy costs if there are no affordable renewable sources nearby, transportation costs for raw or unprocessed materials are ridiculous otherwise, etc.), or stuff where most of the raw materials or necessary environmental conditions (for growing, mining, etc.) are just not present at, or near, home.

But when you consider a typical organization, how much stuff really falls into this category? First of all, you have to exclude any product for (re)sale that’s a primary profit line. Then you need to exclude any raw material or component critical to production unless you just can’t get it nearby. Then any product necessary for security or safety. And so on. At the end of the day, you don’t have much left, and if you’re doing the analysis right, you’re going to be left with:

  • raw materials and products just not available nearby (because you need certain growing conditions, large deposits of a mineral only found in certain geographies, etc.)
  • processed materials or chemicals where the raw materials are very expensive or dangerous to transport
  • products unique to a culture or region
  • novelty or other items not critical to your business

which (before the short-sighted wall-street loving common sense hating clueless and unskilled consultants of the late 80’s and early 90’s, like Steve Castle, put everything into the outsourcing bandwagon and blinged it out beyond belief) were the only products a company would outsource halfway around the world and still the only products a company should be sourcing from halfway around the world. Everything else should be near-sourced, and if really critical or the cost differential is small, home-sourced.

This also means that just shifting everything to another country in the BRIC, and India (which is ruled by a more open, transparent, and dependable democracy) in particular, is also NOT the answer. (They may not be the enemy, but they are still NOT the answer.)

So, unless you want your Supply Chain to completely collapse after the next global disaster, go back to basics, remember the smart outsourcing decision from the 80s, reopen those Mexican factories, and start near-sourcing again. And then, where you can, bring it back (close to) home.

Supply Chains in 2020 …

… are going to be hard to predict, and more complex than even the true experts are predicting. Why?

1. Tariffs, Trade Wars, and Escalating Tensions

Once upon a time, tariffs were well understood, changed rarely, and could be easily calculated into total cost of ownership equations. This allowed an organization to make long term sourcing decisions with a solid understanding of long term costs. But with trade wars on the rise, tensions escalating, and tariffs being introduced and increased on an almost daily basis … no sourcing decision is safe beyond the minute it is made.

The situation is not going to get any better, and, in fact, might get worse. As a result, the ability to track not only costs, but tariffs, tensions, and risks thereof is going to get more complex than even the average expert expects.

2. Carrier Complexity

Carriers continue to come and go at the regional and local level (as a result of recently introduced or increased insurance requirements in some countries), ocean carrier availability depends on overall demand, suitability depends on costs which depend on availability and unpredictable energy costs, and air carrier availability depends on plane availability (which is affected when planes get grounded), weather and the non-occurrence of natural disasters (such as volcanic eruptions and hurricanes and severe thunderstorms that ground airplanes), and, of course pilot availability (impacted by strikes).

Then we have the risks of war closing off routes and even downing commercial planes. The risks of regulation limiting driver, pilot, conductor, and captain availability and/or putting carriers out-of-business. And of course the risks of escalating high-tech theft, including theft from moving vehicles.

3. Automation and AI

Automation is taking humans out of the equation, and AI is threatening to take even more out. This isn’t a good thing. Automation can streamline tactical processing and information gathering and processing, but not strategic decision making. And despite what some enthusiasts may claim, AI does not improve the situation … in fact, it makes it worse.

You see, with so many unknown variables across such a broad spectrum, no AI solution can even know all of the data to monitor, yet alone interpret it all properly when there is no foundation to measure against with so many new situations cropping up daily. AI will work the 90% to 95% of the time that the statistics says it will, but will fail in the remaining situations, and fail miserably. All of the savings or efficiencies the solutions will deliver across the first 19 solutions will be undone, and then some, in the 20th situation when the solution goes unchecked.

Even without getting into specifics, supply chain complexity will be a challenge in 2020. And, if things get worse, it could be a nightmare. We hope you’re ready.