The second era of globalization (1800-2000) was driven by companies seeking goods and materials, labor, economies of scale, and markets. This era produced multinational companies with global reach and enormous economic market power. In the second phase of globalization, companies headquartered in developed countries like the United States, Western Europe, and Japan had an advantage in terms of infrastructure, educational systems, and capital markets. It has been suggested that the world was, figuratively speaking, tilted in favor of the developed countries. The economic advantage was such that the citizenry of the less-developed countries tended to migrate to the more developed countries, especially the United States. The well-educated and skillful immigrants added to the advantages enjoyed by the developed countries.
The third era of globalization is said to have begun around the year 20 The significant characteristic of this era is that it is being powered by individuals and smaller organizations in contrast to the countries of the first era and the large companies of the second era. The critical ingredients for this new era have been the technological advances, especially in information technology and communications, that have connected the “four corners of the globe.” Thus, with the enabling of more broad-based participation in the global economy without some of the massive infrastructure previously required, the world has indeed become flat.
This logic is even more apropos for supply chains. It can be argued that supply chains help to establish the limits of what is competitively possible in the market. In other words, the cost and value at the end of the supply chain determine a firm’s ability to compete in a global marketplace.
In 2000, China was number four on the top-10 list following Canada, Mexico, and Japan, and its trade volume with the United States has nearly quintupled since that time ($457 billion vs. $94 billion). The total value of trade with these top 10 trading partners increased by 63 percent from 2009 to 2010, and since 2000 it has increased by about 288 percent in total value. Both of these percentage increases are reflective of the growing interdependence and the trade relationships with other countries.
India does not appear in the top 10 countries listed in Table 3.1. India’s strength has been in the area of information technology services, which tends to understate its importance for global supply chains. In 2005, 59 percent of U.S. corporate spending (offshore) for information technology services was spent in India. Interestingly, China, which is known for manufacturing various types of products, is attracting U.S. companies to establish research centers. Microsoft and Intel established research centers in Beijing in 1998, Google in 2005, and Rohm & Haas and Dupont in Shanghai in 20 The combined populations of China and India, which are in excess of two billion people, make them attractive as markets and as sources of imports. Consequently, it seems safe to conclude that global supply chain connections to both China and India will continue to grow.
Before the events of September 11, 2001, ships would frequently clear U.S. ports in a matter of hours. That scenario has changed because of security measures that have been introduced. More cargo inspections, much more paperwork, and a longer time to clear U.S. borders are now a reality. Ships may be stopped and inspected and cargo inspected and checked. Some ships and items are given very close scrutiny because of their country of origin.
Given the importance of global trade to the United States, a delicate balance exists between security and the efficient flow of global commerce. If security is too tight it could impede the flow of needed goods or materials, causing delays and decreased efficiency. Ports and border gateways can become congested because of security measures. Consequently, clearance time has increased from hours to days in some instances.
States, and Mexico in 1993 and was ratified by Congress in early 19 NAFTA establishes free trade between these three countries and provides the way the agreement is to be interpreted. NAFTA states that the objectives of these three countries is based on the principles of an unimpeded flow of goods, most favored nation (MFN) status, and a commitment to enhance the cross-border movement of goods and services. MFN status provides the lowest duties or customs fees, if any, and simplifies the paperwork required to move goods between the partner countries. Even though the U.S.-Canada Free Trade Agreement has been in effect for some time, certain trade barriers still remain. For example, many U.S. companies do not recognize certain French-English requirements for packaging and ingredient labeling.
The supply chain constraints will eventually be eliminated as NAFTA experience grows. Computerized customs information systems are currently operating in the United States and Canada, with Mexico a few years behind. The electronic transfer of information for NAFTA shipments into Mexico will speed the border crossing and improve logistics service.
In the long run, the goal of NAFTA is to create a better trading environment; but in the short run, it has created some confusion due to the recordkeeping required to prove the origin of the product to obtain favorable tariff treatment. NAFTA’s goals involve making the needed structural changes to operate a borderless logistics network in North America. Information systems, procedures, language, labels, and documentation are being redesigned. As new markets and supply sources develop, new transportation and storage facilities as well as intermediaries will need to be developed.
An export trading company (ETC) exports goods and services. The ETC locates overseas buyers and handles most of the export arrangements, including documentation, inland and overseas transportation, and the meeting of foreign government requirements. The ETC may or may not take title to the goods.
To ensure that valuable, actionable knowledge readily flows across the supply chain, information must be accessible, relevant, accurate, timely, and transferable.
(2) Synchronization is the ability to coordinate, organize and manage end-to-end supply chain flows – products, services, information, and financials – in such a way that the supply chain functions as a single entity.
(3) Adaptability is the degree to which respective supply chain members can change practices, processes and/or structures of systems and networks in response to unexpected events, their effects or impacts.
(4) Velocity is the speed at which end-to-end flows occur in the supply chain. It encompasses speed-to-market for new product introduction and execution which conditions are rapidly changing.
(5) Profitability is the result of creating value through supply chain activities. Asset performance, working capital, returns on investment for infrastructure, technology, and people are some of the critical parts that create value in a global environment.
1. Secure the commitment of senior management.
2. Remember that it is not just an information technology project.
3. Align the project with business goals.
4. Understand the software capabilities.
5. Select partners carefully.
6. Follow a proven implementation methodology.
7. Take a step-by-step approach for incremental value gains.
8. Be prepared to change business processes.
9. Keep end users informed and involved.
10. Measure success with key performance indicators (KPIs).
Data collection of relevant information is needed at every point in the supply chain. Whether it is captured via bar codes, radio-frequency identification, or other technology, the information must be relevant, accurate, and accessible to users in real time. A lack of timely information leads to dysfunctional decisions that spread across the supply chain.
Data synchronization focuses on the timely and accurate updating of item information within and across enterprises to ensure dependable, consistent product information within a company’s systems and between business partners. It is critical for every organization in the supply chain to have standardized, complete, accurate, and consistently aligned data in their SCIS to perform at peak effectiveness. It is impossible for supply chain partners to effectively collaborate, utilize automatic identification, or leverage demand-driven replenishment techniques if the product, price, or invoice data being transferred are inaccurate. Thus, organizations must clean and align data internally before sharing it with partners.
Furthermore, processes have to be in place to maintain high-data quality. This requirement has both technology and organizational structure implications. First, the organization must be willing to make data management processes a priority. Second, there must be strong business ownership of product data and aligned SCIS that enables access to timely, accurate data. Those who succeed will achieve inventory and logistics cost reductions, as well as fewer out-of-stock situations.
Supply chain execution does not rely upon a single software program. Instead, it consists of a group of tightly integrated tools that link well with supply chain partners’ systems to share relevant data and provide visibility. Interest and investment in execution tools is high because of the strong capabilities being developed, the costs being saved, and the return on investment being achieved. Successful implementation can provide users with improved inventory visibility, improved data accuracy, faster throughput and higher inventory turns, better control of transportation costs, and improved customer service. The tools also support supply chain planning, event management, and performance metrics.
As the geographic scope and number of companies involved in a supply chain grow, the ability to monitor activities exceeds manual capabilities. Hence, supply chain event management tools are becoming more important, and more organizations are turning toward these solutions to help them detect, evaluate, and resolve issues before they snowball into major problems. Some systems have built-in work flow rules that suggest solutions to the exception or initiate action based on established guidelines. Although they were once considered stand-alone applications, event management and visibility solutions are today increasingly integrated into other applications.
As the ERP systems branch out to include supplier relationship management, customer relationship management, and other supply chain components, the connections between SCIS and ERP grow stronger. Supply chain members can access the organization through the ERP system to assess inventory availability, production schedules, and delivery information. In short, the ERP system provides a mechanism for supply chain members to efficiently share information so that visibility is improved, transactions are completed with more speed and accuracy, and decision making is enhanced.
The benefits of XML are numerous—it is a simultaneously human-readable and machine-readable format, it supports multiple languages, its plain text file displays are unencumbered by licenses or restrictions, and it is platform-independent and thus relatively immune to changes in technology. XML is gaining traction in the supply chain because it supports the integration of various information systems, is less complex than EDI, and eliminates the need for value-added networks, which reduces cost while speeding data transmission.
• Who will lead our implementation effort? Senior management must assign people with expertise in supply chain processes and software functionality to direct SCIS implementation. Team members must be given the authority to make boundary-spanning technology decisions. They must also be given the ability to manage the implementation process without interference.
• How will technology support our business needs and processes? Senior management must ensure that their implementation team takes the time to document current processes and identify desired capabilities before embarking upon software reviews. Having a business plan prior to dealing with vendors will ensure that solutions support this plan rather than the business having to adapt to proposed solutions.
• What is the status of our existing data? It is critical to assess data quality, relevance, and completeness to ensure that the needed information is available.
• How well does our existing system integrate with suppliers and customers? SCIS will fall woefully short on vital capabilities if they are unable to communicate with supply chain partners in an efficient manner. Systems structures and capabilities should be mapped to identify where compatibility challenges exist. Senior management must use this knowledge to support improved linkages of SCIS with key partners.
What external issues must our systems address? Given the financial and product flow data contained within most SCIS, such systems have a major impact on an organization’s ability to comply with government mandates such as Sarbanes-Oxley regulations. The SCIS must also provide visibility of orders from suppliers through customer delivery so that the organization can monitor and control its operations, its inventories and other assets, and its financial results. Visibility is also imperative for participation in international security initiatives such as the Customs-Trade Partnership Against Terrorism (C-TPAT).
RFID technology has been available for decades and is widely used for aircraft identification, toll collection, and library book tracking. However, supply chain applications did not receive much attention until major organizations like Walmart took an active interest in RFID. In 2005, the company issued mandates for major suppliers to tag select pallets and cases. The rollout was expected to gain momentum, but as of 2010 only 600 suppliers and a limited number of Walmart and Sam’s Club distribution centers and stores were using RFID tags to capture key data.
Initial results of RFID tests were positive. Users noted that out-of-stocks decreased, theft was reduced, and inventory level information could be quickly captured. Still, numerous issues—the high cost of RFID tags, read reliability problems related to liquid and metal products in particular, tag durability, and the economic downturn—limited deployment of the technology. Also, the technology has not always provided noteworthy benefits over less costly alternatives such as barcodes.
Despite these challenges, industry experts are convinced that RFID will gain widespread acceptance. As the economy improves, cost and performance problems are mitigated, and future enhancements are made, RFID spending is expected to increase dramatically. The prospects of faster return on investment for RFID implementations, greater product visibility and traceability, and process automation will further propel RFID to the forefront of technology initiatives.
Supply chain capabilities are emerging with data collection and transmission tools leading the way. An add-on feature turns an iPod Touch into the EasyPay Touch that has a barcode scanner and a credit card magnetic strip reader. It can be used for point-of-sale checkout and price lookup. Industrial add-on scanners have been developed so that smartphones and tablets can be used in distribution operations instead of higher cost handheld data terminals. Supply chain execution and event management tools are also going mobile with basic visibility and traceability functionality for smartphones starting to appear in the marketplace.
Transportation capabilities must align with the company’s goals. In its 2009 annual report, Amazon.com states that it seeks to be Earth’s most customer-centric company and strives to provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service. To hit the targets, Amazon.com needs to partner with carriers that deliver customer orders consistently and quickly, provide shipment visibility, and charge reasonable shipping rates.
Intentional tradeoffs should be made between transportation and related activities (e.g., procurement, production, and inventory management) to optimize supply chain efficiency. For example, retailers can hold lower safety stock levels if the cost of more frequent, faster deliveries does not exceed the inventory carrying cost savings. Similarly, manufacturers can employ lean production strategies if lot sizes can be minimized without creating excessive transportation costs.
Motor carriage is the most widely used mode of transportation in the domestic supply chain, ranging from the smallest delivery van to the largest tractor-trailer combination. The sophisticated U.S. highway network permits trucks to reach all points of the country. This accessibility combined with the industry’s excellent service capabilities, has made trucking the mode of choice for high-value, time-sensitive goods.
The trucking industry is highly competitive and made up of 502,000 private, for hire, and other U.S. interstate motor carriers. There are no significant cost economies of scale that make it impossible for small carriers to compete. Most expenses are incurred as the result of moving freight; thus, trucking is a high-variable-cost, low-fixed-cost business.
Much of the freight moved by the trucking industry is regional in nature, moving within a 500-mile radius of the origin. The trucking industry is comprised of for-hire and private fleet operations. Private fleets primarily transport freight that is owned by the organization that is operating the trucks.
Motor carriers face daunting challenges in the future—rising costs, labor issues, and competition. Trucking companies are able to pass along rising fuel and insurance costs during economic expansions, but cannot always do so if capacity exceeds demand. A shortage of truck drivers will only become more serious as current drivers retire. Finally, competition will remain fierce, with customers expecting near-perfect performance.
Railroads transport more tha.9 billion tons of freight annually despite a lack of direct accessibility to all parts of the supply chain. Rail service is perceived as being a slow, inflexible, and inconsistent mode.
The industry is dominated by seven Class I railroads (revenues in excess of $379 million). None of these major rail carriers services the entire country by itself; they work together via interline agreements to provide coast-to-coast rail service. This mode requires a large investment in terminals, equipment, and trackage to begin operation; the accompanying huge capacity allows railroads to be a decreasing cost industry. As output (ton-miles) increases, the average per-unit production cost decreases.
Rail transportation is primarily used for the long-distance movement of low value raw materials and manufactured products but they also handle some high-value goods, primarily automobiles and intermodal containers filled with imported finished goods. In fact, intermodal volume is rising faster on a percentage basis than traditional rail freight.
The rail industry faces a number of challenges moving forward. Capacity is an ongoing concern. With the track infrastructure remaining largely unchanged, additional freight, crews, and equipment cannot dramatically impact system delays.
The advent of e-commerce, the growth of global supply chains, and initiatives to reduce inventory and order cycle time have contributed to a sustained increase in demand for air transportation. While air cargo transportation remains a small and specialized mode in terms of tonnage, U.S. spending was $33 billion in 20 Worldwide, air cargo industry revenues are approaching $594 billion, and freight traffic is projected to grow at an annual rate of 6.1 percent over the next 20 years.
The FAA activity report identifies 88 carriers that are engaged in air cargo, 22 of which are considered major carriers. The air carrier cost structure consists of high variable costs in proportion to fixed costs, somewhat akin to the motor carrier cost structure. Like motor and water carriers, air carriers do not invest heavily in facility infrastructure or byways. The government builds terminals and provides traffic control of the airways. Air carriers pay variable lease payments and landing fees for their use. Equipment costs, though quite high, are still a small part of the total cost. Air transportation is used to ship small quantities of high-value, low-weight, semi-finished, and finished goods.
The air cargo industry faces numerous obstacles to profitable growth, including cost issues, competition, and security challenges. The rising cost of fuel directly impacts the success of the industry. The growth of next-day trucking services is putting pressure on the domestic air cargo industry. Air carriers may find it difficult to pass along increased costs in the face of this growing competition. Finally, the industry is under pressure from costly security mandates, which are estimated to have an annual impact of more than $4 billion on the industry.
Water transportation is a major facilitator of international trade. $115 billion worth of freight and 4.7 percent of the total ton-miles annually is moved via water transportation. Globally, water carriers dominate all other modes, garnering approximately half of the international freight revenue and handling nearly all tonnage. Although very slow and limited by the natural infrastructure, domestic water carriers offer tremendous capacity per vessel, efficient fuel consumption, and low cost.
The economics of water transportation is similar to that of airlines as these carriers require no investment for the right-of-way and government entities known as port authorities provide unloading and loading services, storage areas, and freight transfer facilities. The water carriers pay user fees for these port services only when used. Large oceangoing ships require significant capital investments, but cost is spread over a large volume of freight transported during the lengthy life span of most ships.
The domestic carriers compete vigorously with railroads for long-distance movement of low-value, high-density, bulk cargoes that mechanical devices can easily load and unload. However, water carriers handle a wider variety of goods. Every conceivable type of cargo is transported via international water carrier, from low-value commodities to imported automobiles.
The major challenges faced by carriers in international water transportation relate to capacity, trade imbalances, environmental concerns, and security. Capacity shortages can be a problem when the global economy is growing, but the problem shifted to excess capacity during the global recession. Also, the imbalance of international trade between export-dominant Asian countries and import-dominant North America can create equipment availability problems at the origin and port congestion problems at the destination. The industry must also work to reduce carbon dioxide emissions as ships burning low-grade fuel account for 4.5 percent of all global emissions of this greenhouse gas. Security is a multifaceted challenge that must be addressed. Piracy is a growing problem.
Pipelines handle 5.2 percent of U.S. freight tonnage. This is a unique mode of transportation as the equipment is fixed in place and the product moves through it in high volume. Pipelines effectively protect the product from contamination and also provide a warehousing function. Pipelines provide the most economical form of transportation with the lowest cost per ton of any mode.
The U.S. has the largest network of energy pipelines of any nation in the world. Pipeline costs are predominantly fixed. Pipeline operators must build their own right-of-way, which is a rather expensive proposition. Variable costs in the industry are very low as little labor is required to operate the pipelines and limited fuel is needed to run pumps. The construction of a pipeline becomes cost effective when product flows continuously, allowing the fixed costs to be spread over a high volume of goods.
The vast majority of products moved by pipeline are liquids and gases, the economically feasible products to flow via this mode. The pipeline industry is comprised of for-hire and private carriers that maintain their own infrastructures. For-hire carriers of liquid products can move different products through their system at the same time, separated by a batching plug that maintains the integrity of individual products. Private carriers include petroleum and natural gas companies that use pipelines to move product to and from their refineries, processing plants, and storage facilities.
The ongoing issues for the pipeline industry are safety and security. Compared to other modes, pipelines have enviable safety and environmental records with spills amounting to only one gallon per million barrel-miles. However, vigilance is critical because pipeline accidents can quickly become catastrophic events. Pipeline operators must also be cognizant of security risks and should maintain contingency plans to deal with hurricanes or terrorist attacks.
Intermodal transportation service refers to the use of two or more carriers of different modes in the origin-to-destination movement of freight. The primary benefits of intermodalism include the greater accessibility that can be created by linking the individual modes; the overall cost efficiency that can be achieved without sacrificing service quality or accessibility; and the fact that intermodal transportation facilitates global trade.
There is strong evidence that intermodal transportation has grown in importance and volume. The number of containers flowing around the world from U.S. ports has increased from 5 million TEUs in 1990 to 2 million TEUs in 20 Experts predict that this trend will continue as the global economy recovers. Domestic flows of intermodal freight have also risen over the same 20-year period. For example, the U.S. rail system moved 8.2 million containers and 1.6 million trailers in 20
Much of this intermodal growth can be attributed to the development of standardized containers that are compatible with multiple modes. Other factors that have contributed to the growth of intermodal transportation include better information systems to track freight as it moves through the supply chain, development of intermodal terminals to facilitate efficient freight transfers between modes, and new generations of ocean vessels, railcars, and truck trailers that handle greater quantities of intermodal freight with greater ease.
A recurring issue in the intermodal transportation market is congestion. Transfer points are not as flexible and can get clogged with freight. Equipment shortages, transfer facility congestion, and labor issues create delivery delays and supply chain disruptions. Infrastructure investment, equipment purchases, and operator hiring will be needed to prepare for the anticipated growth of intermodal transportation.
FOB terms determine where the buyer’s responsibilities begin and where the seller’s responsibilities end. If the terms are FOB origin, title (ownership) to the goods changes hands at the origin—usually the shipping point or seller’s distribution center loading dock. From that point on, the goods belong to the buyer, and any loss or damage is the responsibility of the buyer. If the terms are FOB destination, the title transfers at the destination—typically the buyer’s unloading dock. The seller has total responsibility for the goods until they are delivered to the buyer.
A related issue is the responsibility for carrier payment. In general the seller pays the carrier for the transportation service cost under FOB destination terms, while the buyer pays the carrier under FOB origin terms. However, exceptions to these guidelines do occur. The option for Freight Prepaid or Freight Collect should be specified with the FOB terms. In cases where the seller has more clout with carriers, it is wise to have the seller negotiate transportation rates under the Freight Prepaid option. Freight Collect is typically used when the buyer has more power with carriers.
Incoterms facilitate efficient freight flows between countries. As described by the International Chamber of Commerce, Incoterms are international rules that are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of the most commonly used terms in international trade. They address matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. These terms of sale decisions help to clarify the following questions:
• Who will be responsible for control and care of the goods while in transit?
• Who will be responsible for carrier selection, transfers, and related product “flow” issues?
• Who will bear various costs – freight, insurance, taxes, duties, and forwarding fees?
• Who will handle documentation, problem resolution, and other related issues?
The most recent update, known as Incoterms 2010, is an effort to simplify these trade terms. The number of Incoterms options has been reduced from 13 to 11, seven of which apply to all modes of transportation and four of which apply only to water transportation. Among other changes, Incoterms 2010 have been clarified so that they can apply to both international and domestic freight.
Taking control of freight through Incoterms allows organizations to leverage their purchasing power with specific carriers to achieve lower rates, coordinate inbound and outbound flows, and consolidate freight to achieve greater efficiencies. Other potential benefits include the ability to manage risk, achieve greater freight visibility, and ensure available equipment capacity.
All modes provide the same basic service of moving freight from point to point in the supply chain. However, the modes serve different customer requirements and goods in terms of value, tonnage, and ton-miles. The reason for the different uses is that each mode has unique attributes and capabilities that impact its ability to serve specific customer requirements.
Numerous studies have been conducted over the years to identify the most important performance capabilities in modal selection. These studies commonly identify accessibility, transit time, reliability, and product safety as the key determinants in choosing a mode. Of course, cost is another critical consideration in modal selection.
Accessibility determines whether a particular mode can physically perform the transport service required. Accessibility considers the mode’s ability to reach origin and destination facilities and provide service over the specified route in question. The geographic limits of a mode’s infrastructure or network and the operating scope that governmental regulatory agencies authorize also affect accessibility. Accessibility problems often eliminate a mode from consideration during the selection process.
• Accessibility advantage: Given the road networks in most countries, motor carriage is more accessible to sellers and buyers than any other mode for domestic transportation.
• Accessibility disadvantage: Air, rail, and water. All face accessibility limitations due to infrastructure issues. Still, all three modes serve virtually every major market thanks to intermodalism.
Transit time is the total elapsed time that it takes to move goods from the point of origin to the destination (i.e., door to door). This includes the time required for pickup activities, terminal handling, linehaul movement, and customer delivery. Companies typically monitor average transit time for their service providers. Transit time is impacted by the speed of the mode and the ability of the mode to handle pickup and delivery responsibilities.
• Transit time advantage: Air transportation is very fast for the linehaul move but loses some velocity as pickup and delivery activities must be handled by truck. Motor carriage is also relatively fast because it can provide more direct movement from origin to destination far more often than any other mode.
• Transit time disadvantage: Rail, water, and pipeline are extremely slow with average transit speeds of 22 miles per hour, 5-9 miles per hour, and 3-4 miles per hour, respectively.
Reliability is a critical issue. Many companies feel that transit time reliability is more important than speed as it impacts their ability to plan supply chain activities. Reliability refers to the consistency of the transit time provided by a transportation mode. It is easier to forecast inventory needs, schedule production, and determine safety stock levels if it is known with some certainty when goods will arrive.
Reliability is measured by the statistical variation in transit time.
Modal reliability is impacted by a variety of factors including equipment and labor availability, weather, traffic congestion, freight-handling requirements, number of terminal stops involved, and other factors. Internationally, reliability is impacted by distance, port congestion issues, security requirements, and border crossings, especially when the two countries do not have a proactive trade agreement.
• Reliability advantage: Motor carriers and air carriers, as they are the most reliable (variability relevant to average transit time).
• Reliability disadvantage: Water carriers and rail carriers. With capacity and congestion challenges, they have become less consistent. As a result, some customers have reduced their use of these modes when possible.
Product Safety Safety is critical to the achievement of customer service, cost control, and supply chain effectiveness. From a safety standpoint, goods must arrive at the destination in the same condition they were in when tendered for shipment at the origin. Proper precautions must be taken to protect freight from loss due to external theft, internal pilferage, and misplacement, as well as damage due to poor freight-handling techniques, poor ride quality, and accidents. Safety is often pursued through substantial protective packing.
• Safety advantage: Air transportation and motor carriage have the best reputations for product security. Their equipment provides excellent ride quality and protection from the elements. Faster transit times also reduce the opportunity for theft and other mishaps.
• Safety disadvantage: Rail and water face significant challenges to maintaining product integrity. Goods moving via rail encounter a great deal of vibration, swaying, and jarring. Water transportation often exposes goods to the elements, excessive movement, and rough handling during the loading and unloading processes.
Cost The cost of transportation is an important consideration in the modal selection decision, especially when a low-value commodity needs to be moved. Transportation costs include the rate for moving freight from origin to destination plus any accessorial and terminal fees for additional services provided. Examples of these additional costs include inside delivery to a retailer located inside a mall, packing freight in crates for international delivery, or setting up a delivery of furniture in a residential location. A number of factors are taken into consideration when freight rates are developed, including weight of the shipment, distance from origin to destination, nature and value of the product, and the speed required.
• Cost advantage: The cost of transportation service varies greatly between and within the modes. In general, pipeline, water, and rail service are low cost transportation methods. The tradeoff, of course, is slow speed, which forces a company to hold a greater level of inventory to meet demand during these longer transit times.
• Cost disadvantage: Motor carriage and air transportation are high-cost modes compared to the others. On average, motor carriage is about 10 times more expensive than rail, and air service is more than twice the cost of motor carriage.
Given the varying capabilities and cost of each transportation mode, it is obvious that modal selection is not a quick and easy process.
Discuss the elements of carrier selection, and how it differs from mode selection.
* Carrier selection is a specialized purchasing decision that typically will be made by a logistics, transportation, or traffic manager who has expertise and experience in the purchase of transportation services. After the modal decision has been made, attention turns to selecting the individual transportation service providers within the mode. Like the modal decision, carrier selection is based on a variety of shipment criteria and carrier capabilities: transit time average and reliability, equipment availability and capacity, geographic coverage, product protection, and freight rates.
A major difference between modal and carrier selection is the number of options. Modal selection involves six primary options, but the carrier selection may involve fewer or many more alternatives. In the case of rail transportation, many markets are only served by a single carrier and the choice is limited. At the other extreme is truckload transportation where dozens of carriers serve a particular market.
Another difference is the frequency of the decision. Carrier selection requires more active and frequent engagement of the transportation buyer than does the more long range modal selection decision. This engagement does not focus on choosing a new carrier for each freight move; it focuses more on the transportation buyer remaining vigilant and managing the performance of chosen carriers. It is critical to monitor each carrier’s service level and freight rates on an ongoing basis. Should carrier performance deteriorate, it may be necessary to select new service providers.
The type of service provided within a mode impacts carrier selection. Most carriers have their roots in one of two types of service—direct service or indirect service—between which customers must choose.
Within a mode, most carriers have the capabilities to provide a similar level of service, but these service levels can and do vary greatly from one transportation company to another. Also, since the cost structures are essentially the same for carriers in a given mode, their rates tend to be aligned for a given movement.
Given this similarity, transportation rates tend not to be the most important criterion in carrier selection.
Service performance is the key determinant for this decision. Carrier selection research suggests that reliability of on-time delivery and on-time pickup, technical capabilities, carrier response to emergencies, information sharing, freight damage experience, carrier financial stability, and total transit time are among the most important criteria to transportation service buyers.
Carrier selection strategy commonly focuses on concentrating the transportation buy with a limited number of carriers. Using a small group of carriers helps the organization leverage its purchasing dollars for lower overall rates, build relationships with service providers who gain a better understanding of freight flows and requirements over time, and effectively monitor performance of the carrier base. In many cases, the core carriers become an indispensable extension of the organization’s transportation management team; they are able to manage freight flows across the supply chain with limited direction or oversight. The ability to rely on the transportation expertise of trusted core carriers also allows the organization to focus its attention on other supply chain issues.
The bill of lading is created by the shipper of the goods and is either negotiable or nonnegotiable. A straight bill of lading is nonnegotiable, and the carrier must deliver the goods only to the specific receiving organization and destination in return for freight charge payment. An order bill of lading is negotiable and serves as a title to the goods listed on the document. The owner of the goods has the right to transfer title to the goods to another party and reroute the shipment to a location other than the one listed on the bill of lading.
Bills of lading also differ by type of move and whether the transportation is domestic or international.
The freight bill is the carrier’s invoice for the fees the carrier charges to move a given shipment. The freight bill lists the shipment, origin and destination, consignee, items, total weight, and total charges. The freight bill differs from the bill of lading in that the freight bill sets forth the charges applicable to the shipment while the bill of lading sets forth the terms of the shipment and is a document of title.
A freight claims form is a document that the transportation buyer files with the carrier to recoup monetary losses resulting from the carrier’s failure to properly protect the freight. The shipper must file in writing freight claims with the carrier within a timeframe specified in the contract. Freight claims can be filed for visible damage or shortages that are detected when the product is received and inspected, for concealed losses that are not discovered until packages are opened, or for financial losses due to unreasonable delays.
Carrier liability is limited if the shipper elected to send the goods under a released value in exchange for lower freight rates. Carriers are not liable for freight claims if the damage is attributable to some uncontrollable factor, such as a natural disaster, military attack, extreme fragility, etc.
The planning capabilities of TMS assist transportation buyers and managers with the key pre-shipment decisions discussed earlier. These individuals cannot adequately evaluate the thousands of potential lane/mode/carrier/service/price combinations in their supply chains without technological help. TMS tools allow organizations to consider a vast array of transportation options in a matter of minutes versus hours or days of manual design activity. In addition, freight planning tools can be linked to order management systems, warehouse management systems, and supply chain planning tools to gain timelier, more comprehensive information. With this knowledge, better supply chain decisions and tradeoffs can be made.
• Critical TMS planning applications include routing and scheduling, and load planning.
TMS execution tools help transportation managers streamline some of their shipment activities. With multiple shipments needing delivery each day, manual processes are susceptible to errors, missed deadlines, and customer service failures. Various TMS capabilities automate repetitive activities to reduce labor costs and accuracy problems. For example, standardized templates can be used to ensure that complete and accurate shipment data are provided in transportation documents. Other tools post detailed shipment information to a shared network or a Web site to promote shipment visibility and provide greater freight control.
• Three of the key execution tools include load tendering, status tracking, and appointment scheduling.
TMS analytical tools provide organizations with the ability to make postshipment evaluations of carrier performance, customer service, and network cost. The data required for analysis can be spread across the entire supply chain in a variety of documents and information systems. It is critical to collect these data in a timely fashion so that the KPIs can be measured, performance assessed and benchmarked, and corrective action taken. TMS help organizations assemble and make sense of the vast array of transportation data that are generated by freight movement.
Two useful analytical applications are performance reporting and scorecarding, and freight bill auditing.
• Protecting against uncertainty – Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes.
• Allowing quantity purchase discounts – Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can hold the additional quantities until needed, reducing the purchase cost per unit.
• Supporting production requirements – If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution.
Promoting transportation economies – Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements.
Another key tradeoff must be made between distribution and inventory. Generally, the more DCs and warehouses, the higher the total inventory carrying costs will be. As facilities are added to a fulfillment system, the amount of inventory will increase in total, but at a decreasing rate. This move toward decentralized inventory inhibits the ability to adopt a risk pooling strategy as each facility must hold additional safety stock.
The tradeoff between distribution operations and customer service is another important issue. More distribution facilities in the supply chain create better service for customers. Buyers are more comfortable if they know the supplier has a DC within a day’s drive from their operations. Decision makers must balance the value of better service levels with the additional costs of operating facilities and carrying inventory.
Tradeoffs must also be made at the facility level between the primary resources available to distribution managers—space, equipment, and people. Space allows for the storage of goods when supply and demand are imbalanced. Warehouse equipment, including materials-handling devices ranging from racks to conveyor lines, supports the efficient movement and storage of product within the distribution facility. People are the most critical distribution resource, playing multiple roles in the facility over different schedules. Their capabilities can be increased through training, while their numbers can be quickly increased to handle demand surges.
On the downside, it is expensive to deliver small quantities to buyers (reduced transportation efficiencies), and there is limited safety stock readily available to protect against demand surges. Furthermore, many companies are not capable of fulfilling orders for case and individual unit quantities. Thus, it is important to consider product characteristics, demand volume and variability, and related issues before making the decision to establish a direct shipping strategy.
Properly planned distribution facilities can address the shortcomings of direct shipping. These facilities, including traditional warehouses, DCs, and cross-docking facilities, provide the supply chain with additional capabilities. Warehouses and DCs can hold goods in anticipation of customer orders, provide a buffer of safety stock to protect against contingencies, and handle small quantity orders efficiently from transportation and fulfillment standpoints. Cross-docks can provide a high-velocity alternative to direct shipping at lower transportation cost with product mixing capabilities.
Of course, it is necessary to analyze the inventory, transportation, and service tradeoffs before choosing between direct shipping and the use of distribution facilities. The ultimate answer may be to employ a combination of the two strategies to ensure distribution efficiency and customer satisfaction.
The drawback of centralized inventory is the long distance to customers, which typically extends lead times and results in higher transportation costs. Despite these drawbacks, manufacturers of high-value, low-weight products such as prescription pharmaceuticals often rely on one strategically placed inventory pool. The transportation costs associated with next-day and second-day order delivery are offset by the reductions in inventory carrying costs, the enhanced visibility of product flows, and the improved control over order-filling processes, product pedigree issues, and recall events.
The alternate inventory positioning strategy is to hold product in multiple customer- facing positions. Stocking inventory regionally or locally helps to reduce customer delivery costs and order cycle time. Product is positioned closer to demand points and can be readily dispatched to meet customer requirements. This decentralized inventory strategy works well for high-volume, low-cost products with low demand uncertainty such as laundry detergent, pet food, and cereal.
The decentralized inventory strategy is not without challenges. First, more facilities are required to stock the product, leading to higher handling costs, the risk of product damage, and the potential for product pilferage, not to mention the additional expenses of running the facilities. Also, average inventory levels will rise as each facility will have to hold safety stock to cover demand variation within the region. To combat these issues, some organizations have shifted toward more centralized distribution systems with fewer stocking points. Which inventory positioning strategy is best? There is no single answer, and many organizations use both strategies.
Private DCs are internal facilities owned by the organization producing or owning the goods. The focus of the facility is to store goods and distribute them to customers. Owning and operating facilities provide the organization with greater control over fulfillment processes and inventory. Also, economies of scale can be achieved if the volume of activity is high enough. If this is the case, the cost per unit delivered to the customer is less, and the retailer can charge a lower price or maintain a higher profit margin. Private facilities are company assets that can be depreciated and can also provide a source of income by renting or leasing excess space to those who need storage facilities.
In order to make a private distribution cost-effective, the facility needs high product throughput, requires stable demand, and should be located in or near a dense market area. Additionally, the organization must have distribution expertise, the resources to build facilities, and the desire to operate them. If these attributes are not present, the firm should look to third party logistics (3PL) service providers to handle distribution and warehousing
Public warehousing is the traditional external distribution option. A public warehouse rents out space to individuals or firms needing storage capacity. Additional service offerings vary by 3PL provider. Some provide a wide array of services including packaging, labeling, testing, inventory maintenance, delivery, data processing, and pricing to different types of customers. Others focus more on providing short-term storage solutions for specific types of goods—general merchandise, refrigerated goods, household goods, and bulk storage. Public warehousing capacity is often rented on a short-term, transactional basis without significant commitments or unique service requirements.
Contract warehousing is a customized version of public warehousing in which an external company provides a combination of distribution services that the organization itself has traditionally provided. These 3PL providers dedicate space, labor, and equipment to a client’s specific product needs with the goal of providing integrated, accurate distribution services. These facilities can meet the specialized handling requirements for critical products such as pharmaceuticals, electronics, and high-value manufactured goods. The customized nature of contract facilities leads to strong relationships between the 3PLs and a small group of highly important clients.
These external distribution services should be considered for several reasons. First, buying the services on an as-needed basis alleviates capital investment in private distribution facilities. Second, short-term commitments for 3PL capacity maintain maximum distribution network flexibility. Another benefit of outsourcing distribution responsibilities is that you do not have to manage the personnel issues (hiring, training, benefits, etc.) associated with owning and operating the facility. Essentially, distribution becomes a variable cost activity that is run by 3PL experts who can often leverage their investments and capacity across multiple customers.
Product protection is another key objective. The layout must accommodate the physical characteristics of the products being handled. For example, hazardous materials such as explosives, flammable items, and oxidizing items must be separated from other items so as to eliminate the possibility of damage. Also, high-value goods must be safeguarded against pilferage, and temperature-sensitive products must receive proper refrigeration or heat. Finally, distribution personnel should avoid stacking or storing light or fragile items near other items that could cause damage.
Proper use of automation and materials-handling equipment is an important goal. Both offer great potential to improve distribution efficiency. Careful planning should include consideration of the risks of investing in automation—obsolescence due to rapid technological change, market fluctuations, and return on the large investment. Mechanized materials-handling equipment generally works best when items are regular in shape and easily handled, when order selection is the middle range of activity, and when product moves in high volumes with few fluctuations.
Another objective is process flexibility. The facility design should not be so permanent as to limit the facility from handling new product lines and providing value added services when new requests emerge. For example, reconfigurable racking and multifunctional materials-handling equipment can prevent the building from becoming obsolete if demand patterns change significantly.
Continuous improvement is the ultimate facility objective. An organization should not design an initial layout and then assume that it will work perfectly. Goals and standards for costs, order-handling efficiency, and customer service must be set and monitored on a regular basis. If measurements reveal that optimal facility performance is not being achieved, steps must be take to improve productivity.
The final facility consideration is product placement within the facility. Before order fulfillment operations begin, goods must be located or slotted in the facility. Slotting is defined as the placement of product in a facility for the purpose of optimizing materials-handling and space efficiency. The main objective of slotting is to minimize, or in some instances even eliminate, travel and the amount of time that a stock-keeping unit is handled. This is important because travel and other nonproductive tasks can account for up to 60 percent of distribution labor hours.
At the receiving operation, the inbound carrier is scheduled to deliver the goods at a specific time so as to improve labor productivity and unloading efficiency. The goods are unloaded from the delivery vehicle onto the receiving dock. During the process, receiving clerks check the goods in to ensure that they match the purchase order and packing slips. Once on the dock, the goods are sorted by SKU, stacked on pallets to the correct ti-hi (where ti is the number of cartons stored on a layer and hi is the number of layers on the pallet), and secured using tape or shrink-wrap. The delivery is also inspected for damage and shortages. Problems are noted on the carrier’s delivery receipt, and the receipt is signed. Prior to transfer, the items are tagged with pallet labels that assign storage locations in the facility or designate the goods for direct transfer to the shipping dock if needed to immediately fill a customer order.
The put-away operation focuses on the physical movement of product from the receiving dock to assigned storage locations in the facility. Forklift operators check the pallet configuration to validate quantities and product safety, verify the storage location on the pallet label, pick up the pallet, and scan the bar code on the pallet label. The product is moved to the proper storage location (or sometimes the picking location, if the product is new or the slot is empty) and placed in the rack. After the process is completed, inventory records are updated to reflect receipt of the item, its storage location, and availability for customer order.
The order-picking process focuses on the selection of goods to fulfill customer orders. Order fulfillment personnel travel through the facility from pick slot to pick slot and pull the requested quantity of each product identified on the pick list. The pick list may be generated as a paper checklist, labels that are placed on the carton, a computer display, or a voice-activated picking system. Once picked, the items may be labeled and put on a conveyor system for transfer to the shipping area or assembled on a pallet or cart designated for the customer. If the latter method is used, the order fulfillment personnel transfer the order to the shipment staging area and prepare it for delivery. The items are secured to the pallet or cart by means of tape, stretch wrap, or strapping, and a shipping label is created and attached. Finally, the complete customer order is staged in a predesignated area for loading onto the appropriate outbound delivery vehicle.
The replenishment operation plays an important supporting role for order picking, moving product from storage locations in the facility to the designated pick slots. These storage locations are often inaccessible to the order fulfillment personnel, and specialized equipment is needed to retrieve the product. Replenishment forklift operators focus on keeping an adequate supply of product in each pick slot. When a pick slot is empty, the order fulfillment personnel will have to make a second trip to retrieve the required quantity of product. These additional trips are labor intensive and may cause split deliveries or delay the dispatch of customer orders. Hence, it is critical to synchronize order-picking and replenishment activities, shifting personnel back and forth between the functions as needed.
The final movement process occurs at the shipping operation. In some facilities, empty trailers are dropped at shipping dock doors and loaded as orders arrive from the picking operation. In other operations, a “live” loading process takes place when the outbound carrier arrives at the shipping dock. The goods are moved from the staging area to the loading dock, counted and inspected as required, and loaded into the carrier’s vehicle. The carrier signs the bill of lading that has been prepared by the shipper, indicating receipt of the goods, and departs from the facility.
Many aspects of distribution performance can be evaluated. Important issues include cost efficiency, inventory accuracy, order fill rates, and capacity utilization, among others. KPIs can be used to evaluate current performance of internal and 3PL operations versus historical results, internal goals, and customer requirements. They can also be used to benchmark results against those achieved by competitors, world-class organizations, and other links in the supply chain.
The two primary categories of distribution KPIs include customer-facing measures and internal measures. Both internally and externally focused KPIs are needed to evaluate the success and impact of a distribution operation.
Customer-facing KPIs must target reliability of the distribution processes to provide accurate, complete, and timely fulfillment of orders.
Order accuracy and order completeness KPIs are important to both the customer and the organization. Simply stated, customers want to receive the exact products and quantities that they ordered, not substitute items, incorrectly shipped items, or wrong quantities. These KPIs are measured as ratios of correct received to total ordered. Order accuracy evaluates the number of items ordered delivered correctly versus the number ordered. Order completeness is typically evaluated by an order fill rate KPI which compares the quantity received to the quantity ordered. Continuous monitoring of these metrics is important, as is fast reaction when problems are discovered.
Timeliness is a critical component of customer service. You may think of timeliness as being a transportation issue, but the distribution operation also plays a key role in delivering goods to customers on schedule. Order picking, preparation, and shipping each impact order cycle time. If these processes are not completed in a timely fashion, it may not be possible for the transportation system to make up the lost time. Therefore, it is very important to monitor the time required to process orders, from initial receipt until release to the transportation provider. Setting goals and measuring KPIs related to order processing time average, range, and standard deviation will direct attention toward improvement of order fulfillment velocity.
Industry-leading companies are now evaluating the combined impact of these KPIs via a metric called the perfect order index (POI). This measure indicates that four basic elements are in place to promote successful fulfillment of customer orders. To be considered a perfect order, the right items must be (1) delivered to the right place; (2) at the right time; (3) in defect-free condition; and (4) with the correct documentation, pricing, and invoicing. A service failure on any component means that the order is not counted as perfect and indicates a need for improvement.
Understanding what is spent to process each unit in a customer’s order highlights the impact of distribution on the overall cost of goods. This KPI also provides a baseline from which cost improvement efforts can be made.
Asset utilization is a very important aspect of private distribution facilities. Organizations spend significant sums of money to build distribution facilities and outfit them with materials-handling equipment and technology. If the facility sits half empty, the company has wasted time and money on a poorly utilized asset. Space utilization is measured as a percentage of capacity used to capacity available in cubic feet or storage slots. An oft-cited goal is to consistently use 80 to 85 percent of a DC’s capacity, which provides some available space for peak season volume.
Equipment utilization KPIs can be used by managers to assess the need for additional forklifts, conveyors, and related equipment. Spending on new equipment should not occur unless comparisons of equipment up time (number of hours equipment was available to use versus total hours required) and utilization (number of hours used versus total hours equipment was available) reveal a real need. These KPIs provide an objective indication that equipment is effectively used, sitting idle, or offline for repair.
Resource productivity impacts distribution cost and the ability of the operation to maximize throughput on a consistent basis. With distribution costs averaging nearly 10 percent of a sales dollar, productivity improvements will have a notable impact on the bottom line of the profit and loss statement. Productivity is measured as the ratio of real output to real input. An example of this is the number of units processed per labor hour, a widely used productivity KPI. Productivity KPIs and goals help distribution managers evaluate facility performance, estimate how much volume can be handled by the facility, and schedule labor. These easy-to-measure KPIs also provide early warning signals of distribution problems that must be addressed.
Resource efficiency measures compare distribution activity completion time versus expected time. Engineered standards are created by breaking down a task into small elements that can be timed by a stopwatch. Allowances are added for fatigue and personal needs to determine an accurate, standardized measure of time for an operation. Efficiency is then measured as a ratio of actual time required for task completion to the engineered standard time allowed for the task. This KPI can be used to evaluate an individual employee’s ability to accomplish key tasks and the overall efficiency of operations. The engineered standards can be used by management to set and communicate objective efficiency standards for each distribution function.
A WMS is more than a simple database that provides stock location information. Instead, it is an integrated package whose components often include radio-frequency (RF) communications, dedicated localized computer hardware, and the necessary applications software. The detailed setup and processing within a WMS can vary significantly from one software vendor to another; however, the basic logic will use a combination of item, location, quantity, unit of measure, and order information to determine where to stock, where to pick, and in what sequence to perform these operations.
Beyond the main functionalities, WMS can also provide value-added capabilities and support a variety of supply chain activities. Advanced systems generate performance reports; support paperless processes; enable integration of materials-handling equipment, picking systems, and sorting systems; leverage wireless communication tools; and support automatic identification equipment data collection. Other value-added capabilities include the following:
• Labor management—The ability to link WMS with a related labor tracking module allows the organization to create assignments based on engineered time standards, monitor the productivity of each employee, and audit the quality of their work. These labor-reporting capabilities support performance analysis and the use of incentive programs, and they help identify employees in need of additional training.
• Task interleaving—This process involves mixing dissimilar tasks such as put-away and replenishment. In large warehouses, WMS-based task interleaving can greatly reduce travel time, not only increasing productivity but also reducing wear on the lift trucks and saving on energy costs by reducing lift truck fuel consumption.
• Systems integration—the ability to interface the WMS with the enterprise resource planning (ERP) system, order management systems, and transportation management will provide a strong flow of information across the organization and the supply chain. Inventory availability, order status, advanced shipping notification, and delivery tracking are a few of the critical visibility benefits created by integration. This shared information can be used for distribution planning purposes.
• Activity-based costing/billing—Financial functionality is an important WMS capability for understanding costs and assigning expenses to distribution customers. Primarily designed for 3PL operations, activity-based billing allows them to calculate billable fees based on specific activities. For example, 3PL providers can assign transaction fees for each receipt and shipment transaction, as well as fees for storage and other value-added activities.
• Multifunction distribution—A strong WMS will support a variety of distribution methods, shipment sizes, and the execution of value-added services. The ability to support traditional case pick distribution and cross-docking, retailer orders and individual consumer orders, and light assembly and kitting operations creates flexibility for the distribution operation and the supply chain.
Improved productivity, efficiency, and accuracy are key WMS benefits. By keeping track of item locations in the facility, the WMS reduces wasted efforts associated with warehouse personnel hunting for an item. This improves labor productivity, reduces the number of personnel required, and improves the order-picking accuracy. The WMS also provides essential information that enables businesses to quickly make accurate decisions that are based on up-to-date information. In addition, these systems improve space utilization by determining the optimal storage patterns to maximize space utilization. Finally, the WMS provides improved managerial control and effectiveness through point-of-work confirmation, accountability, performance measurement, and what-if scenario planning.
Of initial importance is the formation of a logistics/supply chain network transformation team to be responsible for all elements of the network design process. This team will first need to become aware of overall corporate and business strategies and the underlying business needs of the firm and the supply chains in which it is a participant.
Also in this step, it is important to establish the parameters and objectives of the network design or redesign process itself. Issues pertaining to the availability of needed resources in the areas of funding, people, and systems must be understood at an early stage in the process. An additional topic to be addressed early on is the potential involvement of third-party suppliers of logistics services as a means of achieving the firm’s logistics objectives.
Step 2: Perform a Logistics/Supply Chain Audit
The logistics/supply chain audit provides members of the transformation team with a comprehensive perspective on the firm’s logistics process. In addition, it helps to gather essential types of information that will be useful throughout future steps in the redesign process such as: customer requirements and key environmental factors; key logistics goals and objectives; profile of the current logistics/supply chain network; understanding of key logistic/supply chain activities and processes; benchmark, or target, values for logistics/supply chain costs and key performance measurements; identification of gaps between current and desired logistics/supply chain performance, and key objectives for logistics/supply chain network design.
Step 3: Examine the Logistics/Supply Chain Network Alternatives
The next step is to examine the available alternatives for the logistics/supply chain network. This involves applying suitable quantitative models to the current logistics system as well as to the alternative systems and approaches under consideration. The use of these models provides considerable insight into the functioning and cost/service effectiveness of the various possible networks.
Also, at this point in the network design process, it is critical to understand the geographical parameters of the logistics/supply chain under study.
Step 4: Conduct a Facility Location Analysis
Once a general configuration of the desired logistics/supply chain network has been recommended, the next task is to carefully analyze the attributes of specific regions and locales that are candidates for sites of logistics facilities, distribution centers, cross-docking operations, etc. These analyses will have both quantitative and qualitative aspects.
The effort in this step will be facilitated by the formation of a location selection team, which will collect information on specific attributes as well as to examine potential sites in terms of local factors such as topography, geology, and facility design.
Step 5: Make Decisions Regarding Network and Facility Location
The network and specific sites for logistics facilities recommended in Steps 3 and 4 should be evaluated for consistency with the design criteria that were identified in Step 1. This step should confirm the types of change that are needed to the firm’s logistics network and should do so in the context of overall supply chain positioning.
Step 6: Develop an Implementation Plan
Once the overall direction has been established, the development of an effective implementation plan, or “blueprint for change,” is critical. This plan should serve as a useful road map for moving from the current logistics/supply chain network to the desired new one.
A particular region’s or area’s quality of life is difficult to quantify, but it does affect the well-being of employees and the quality of work they are expected to perform. The quality-of-life factor is more important to companies that must attract and retain a mobile professional and technical workforce capable of moving to any location. Quality of life variables include: climate, housing costs, health care and environment, crime, passenger transportation, education, recreation, the arts, and economic opportunities.
• Strategic positioning of inventories, such that fast-moving, profitable items may be located at “market-facing” logistics facilities. Slower-moving, less profitable items may be located at more regional, or national, facilities.
• Aside from a general trend toward the elimination of many wholesaler/distributor operations, companies are moving to greater use of “customer-direct” delivery from manufacturing and other upstream supply chain locations. Many times, this bypasses and diminishes the need for complete networks of distribution facilities.
• There is a growing use of and need for strategically located cross-docking facilities that serve as transfer points for consolidated shipments that need to be disaggregated or mixed into typically smaller shipments for delivery to individual customers. An example of this would be the consolidation of multiple-vendor shipments into full trailer loads being shipped to retail stores or points of use. Applied to inbound movements, this concept can significantly reduce the need for inbound consolidation facilities.
• Due diligence for location and site selection decisions is placing great emphasis on access to major airports and/or ocean ports for import and export shipments.
Greater use of providers of third-party-logistics services, who may assume part or all of the responsibility for moving a firm’s products to its customers, and/or moving its inbound parts and materials to its manufacturing process. In the global setting, many of these companies are developing specialized abilities to facilitate the movements of import and export shipments.
• Short-term horizon. Unless modeling features are designed, implemented, and used with a long-term perspective, significant suboptimization is likely to occur.
• Too little or too much detail. Too little detail can make it difficult to implement results due to insufficient information; too much detail can create unnecessary complexity, making it difficult to understand the results and more difficult to implement effectively.
• Thinking in two dimensions. While the use of two-dimensional maps certainly helps to provide insight into supply chain problems, the geometry of the networks may ignore cost and geographical dispersions of demand. Over significant distances, and particularly for global supply chain analyses, the curvature of the earth may distort distance calculations, in which case needed adjustments must be made.
• Using published costs. Many published costs tend to represent “list” prices that need to be modified to reflect what may result after significant negotiations occur between buyers and sellers of transport services.
• Inaccurate or incomplete costs. Analyses based on insufficiently accurate information lead to invalid results; inaccurate cost forecasts result in suboptimal allocations of resources, typically leading to seriously flawed strategies.
• Fluctuating model inputs. Given the prevailing uncertainties in many of the relevant inputs to today’s network design models, it is important to conduct sensitivity analyses to be aware of the potential wide swings in key model inputs.
• Use of erroneous analytical techniques. The selected techniques and approaches should be matched with the level of precision desired; the identification of modeling objectives is an important forerunner to the selection of the techniques to be utilized.
Lack of appropriate robustness analysis. Since most or all model inputs have at least an element of uncertainty, it is important to understand the consequences that could result from variation in actual behavior of key model inputs; robustness analysis can help to assure the practicality and validity of the results from the selected analyses.
This technique assumes that the raw materials sources and finished goods markets are fixed and that a company knows the amount of each product it consumes or sells. The technique then superimposes a grid upon the geographic area containing the raw materials sources and finished goods markets. The grid’s zero point corresponds to an exact geographic location, as do the grid’s other points. Thus, the company can identify each source and market by its grid coordinates.
The technique defines each source and market location in terms of its horizontal and vertical grid coordinates, and performs mathematical computations to find the ton-mile center. This equation will generate the least-cost location if transportation rates for raw materials and finished goods are the same. But transportation rates vary among commodities, and the ton-mile center equation does not reflect differences in the costs of moving commodities. The transportation rate pulls the location toward the location of the commodity with the higher rate. The higher rates of finished goods will draw the least-cost location toward the finished goods market and thereby reduce the distance the company moves these higher-rated goods. This will increase the distance the company transports lower-rated raw materials. Thus, the analysis must be refined to incorporate the transportation rates of different products.
The grid technique’s strengths are in its simplicity and its ability to provide a starting point for location analysis. Computationally, the technique is relatively easy to use. A company can generate the necessary data from sales figures, purchase records, and transportation documents (either the bill of lading or the freight bill). More exact market and source location coding is possible, as is modifying the rate-distance relationship quantification. A computer can easily handle such refinements.
The grid technique also provides a starting point for making a location decision. Although transportation cost is not the only locational determinant, use of the grid technique can help at the early stage in the network design process by helping the decision maker to focus on an area or areas that are logistically advantageous.
The grid technique has limitations that the decision maker must recognize. First, it is a static approach, and the solution is optimum for only one point in time. Changes in the volumes a company purchases or sells, changes in transportation rates, or changes in raw materials sources or market locations will shift the least-cost location. Second, the technique assumes linear transportation rates, whereas actual transportation rates increase with distance but less than proportionally. Third, the technique does not consider the topographic conditions existing at the optimum location; for example, the recommended site may be in the middle of a lake. Fourth, it does not consider the proper direction of movement; most moves occur along a straight line between two points, not “vertically” and then “horizontally.”
A noted exception to the preceding rate structure is the blanket rate. The blanket rate does not increase with distance; it remains the same from one origin to all points in the blanket area. The carriers establish such rates to ensure a competitive price for a product in a given area, thereby ensuring demand for the product and its transportation. An example of a blanket rate would be the same rate on wine traveling from the West Coast to all points east of the Rocky Mountains, enabling the West Coast wine to compete with imported wines entering the East Coast.
The blanket rate eliminates any transportation cost advantage or disadvantage that companies associate with a given location. The blanket rate, then, is a mutation of the basic rate-distance relationship that eliminates the transportation rate as a locational determinant; it is the exception rather than the rule in transportation rates.
A specific blanket area is the commercial zone, the transportation definition of a particular city or town. It includes the municipality itself plus various surrounding areas. The commercial zone rates that carriers quote to a particular town or city also apply to points in the surrounding area within the commercial zone.
The commercial zone’s locational impact appears near the end of the location decision process when a company selects a specific site. If the specific site is beyond the limits of a municipality’s commercial zone, rates that apply to the city do not apply to the site. Also, a site outside the commercial zone reduces carrier availability, especially the availability of motor carriers that define their operating scopes in terms of point-to-point operations.
In addition to the public relations value of such corporate policies, some evidence suggests that when corporations work with their suppliers to reduce waste, reduce pollution, and improve overall “eco-efficiency,” they have also been able to improve product quality, cut production times, and increase productivity. The discussion of closed-loop supply chains is an indication of a more proactive approach by companies to be environmentally responsible and use these strategies to enhance their overall financial viability.
Fueled by the growing sense of urgency for environmental action among scientists, consumers, and most governments around the world, the concept of closed-loop supply chain has gained momentum on a global scale. International organizations such as the United Nations and the International Standardization Organization (ISO) initiate frameworks and tools to promote integration of environmental thinking into business practices. For example, the United Nations University/Institute of Advanced Studies launched Zero Emissions Research Initiative (ZERI) in 1994, which was renamed Zero Emissions Forum in 19 ZERI promoted the concept that all industrial inputs can be completely converted into a final product and that waste products can be converted into value-added inputs for another chain of production.
Similarly, ISO first published ISO 14001 in 1996, specifying the operational requirements for an environmental management system that can guide the environmental activities of organizations in most industries.
Many additional traditional examples of reuse, recycling, and so forth could be offered to make the case that reverse flows have been a part of the business operations of some companies for many years. The recent increased focus on reverse flows is attributable to the significant increase in the need for reverse flows.
According to some experts, a large percentage of what is sold may be returned. No one has an exact measure, and the percentage will vary among industries, but it is estimated that returns can range from a low of about 3 percent to a staggering 50 percent in some sectors. As the preceding data indicate, returns are a significant issue in some industries, and this trend appears to be increasing.
The following are eight categories of reverse flows:
1. Products that have failed or are unwanted, damaged, or defective but that can be repaired or remanufactured and resold
2. Products that are old, obsolete, or near the end of their shelf life but still have some value for salvage or resale
3. Products that are unsold from retailers, usually referred to as overstocks that have resale value
4. Products being recalled due to a safety or quality defect that may be repaired or salvaged
5. Products needing “pull and replace” repair before being put back in service
6. Products that can be recycled such as pallets, containers, and computer inkjet cartridges
7. Products or parts that can be remanufactured and resold
Scrap metal that can be recovered and used as a raw material for further manufacturing
• Reverse logistics—The process of moving or transporting goods from their final forward destination for the purpose of capturing value or for proper disposal.
• Closed-loop supply chains—Designed and managed to explicitly consider both forward and reverse flows activities in a supply chain.
While these two terms are sometimes used interchangeably, they do have differences. Reverse logistics involves the processes for sending new or used products “back up stream” for repair, reuse, refurbishing, resale, recycling, scrap or salvage. The items in a reverse logistics system are usually returned to a central location for processing.
The closed loop supply chain, on the other hand, is explicitly designed and managed for both flows. In the closed-loop supply chain, the manufacturer is proactive in the processes, and the emphasis is on reducing cost and capturing value. The ultimate goal is for everything to be reused or recycled (i.e., nothing wasted).
Examples of closed-loop supply chains are Xerox’s program for cartridge returns, the original system for the rental movies by Netflix, and the system designed by RedBox. Kodak’s program for single-use cameras and the closed-loop supply chain for commercial tire retreading are two additional examples.
A variety of reasons for customer returns can be given, including defective or unwanted items, warranty problems, recalls, and misshipments. Given the potential magnitude of such returns, managing the product return process can have a substantial impact on a company’s profit and loss statement. The internal channel for return flows will differ depending on the reason for the return.
Recycling and environmental concerns are frequently viewed simultaneously because of their association with regulatory policy at the local, state, and federal level. Social concerns stimulate the development of more environment friendly products, new standards, and publicly provided recycling programs. It may be surprising to some individuals, but corporations play an active role in this area as part of their focus on ethics and social responsibility.
In reverse logistics systems as well as closed loop supply chains, economic benefits have become an important emphasis for businesses and even some nonprofit organizations. The potential for viewing reverse flows as a value stream as opposed to a waste stream was identified in a study published over 30 years ago and further amplified in a White Paper published by the Council of Logistics Management. Both studies pointed out that economic benefits can be the primary driver for the establishment of explicit reverse flow processes not otherwise required by customer service (product returns) and governmental requirements. In other words, recycling for reuse and remanufacture has the potential to be a profitable scenario and a value stream. This has become particularly true in industries that have experienced increasing cost of raw materials, such as the steel industry.
From a manufacturing perspective, it may appear to be more costly to remanufacture or refurbish the materials obtained through reverse flows systems than to produce a new product from basic materials or components. Frequently, much of the additional cost is associated with the returns process. Time and distance are often the major cost contributors associated with capturing returns and their residual value. Interestingly, transportation expense is the largest cost component of reverse flows and frequently represents 25 percent or more of the total cost. Using transportation management tools and technology to improve and monitor the transportation network can lower this cost through better scheduling of pickups and deliveries and consolidation of loads to achieve scale economies.
One of the major challenges is the estimation of the total cost of the return flow processes. Some companies are using activity-based costing (ABC) as a tool to delineate the true costs associated with reverse flows. Quantification of the costs must include all costs associated with the returns processes. Conversely, accounting for the actual cost savings associated with the materials from reverse flows is important for the tradeoff analysis to determine the economic value added (or the lack thereof).
Once the evaluation for economic value has been completed, it is important to consider the barriers that may impede the implementation of the reverse flows program. These barriers may be internal or external and may including the following:
• Priority relative to other issues and potential projects or programs in the organization
• Inattention or lack of “buy-in” from top-level management in the organization
• Financial resources necessary for operations and asset infrastructure
• Personnel resources required to develop and implement the reverse flows program
• Adequacy of material and information systems to support the returns program
• Local, state, and federal restrictions or regulations
The strategic and tactical issues identified earlier for making a reverse flows program a value stream, as opposed to a waste stream, have led some companies to consider a third-party logistics company once the potential program has been rationalized and economically justified. The growth in number and sophistication of 3PLs in the last two decades has made this a very viable option. In fact, some 3PLs specialize in returns and reverse systems.
• Avoidance—Producing high-quality products and developing processes to minimize or eliminate returns
• Gatekeeping—Checking and screening merchandise at the entry point into the reverse flows process to eliminate unnecessary returns or minimize handling
• Reducing reverse cycle times—Analyzing processes to enable and facilitate compression of time for returns to enhance value recapture
• Information systems—Developing effective information systems to improve product visibility,
reduce uncertainty, and maximize economies of scale.
• Returns centers—Developing optimum locations and facility layouts for returns centers to facilitate network flow
• Remanufacture or refurbishment—Preparing and repairing a product for resale as is usually done in closed loop supply chains to maximize value recapture
• Asset recovery—Classifying and disposing of returned items, surplus, scrap, and obsolete items to maximize returns and minimize cost
• Pricing—Negotiating the best price for products being returned and resold
• Outsourcing—Considering a relationship with a third-party organization to handle and manage reverse flows in cases where existing personnel, infrastructure, experience, or capital may not be adequate to implement a successful program
• Zero returns—Developing a policy to exclude returns by giving a returns allowance or “destroying” the product in the field
• Financial management—Developing guidelines and financial procedures to properly account for charges against sales and related financial issues when items are returned by customers
Essentially, this principle suggests a departure from traditional approaches to customer segmentation based on industry, product, or trade channel to an approach that segments customers based on logistics and supply chain needs. Examples would include service requirements, fulfillment priorities, frequency of service, etc.
Principle 2: Customize the Logistics Network
Rather than design logistics and supply chain capabilities to meet the average service requirements of all customers, this principle stresses the need to develop supply chain approaches that are responsive to the needs of individual customer segments.
Principle 3: Listen to Signals of Market Demand and Plan Accordingly
In contrast to traditional forecasting approaches that sometimes result in multiple departments creating separate forecasts for the same products, the objective here is to see that demand planning is responsive to and aligned with market signals such as point-of-sale information.
Principle 4: Differentiate Products Closer to the Customer
When successfully implemented, this principle helps to improve customer service via fewer stockouts and also takes significant inventory carrying cost out of the supply chain. By postponing product differentiation to the latest possible moment and by gaining greater understanding and control of cycle times, supply chain efficiency and effectiveness will be positively impacted.
Principle 5: Source Strategically
Although customers of all types should have fact-based knowledge of the cost of purchased products and services, over the long term, suppliers’ cost experiences will be passed along to customers in terms of higher prices. Excellent supply chain management requires customers and suppliers to work together in a creative, positive way to meet overall supply chain objectives.
Principle 6: Develop a Supply Chainwide Technology Strategy
The priority here is to replace inflexible, poorly integrated transactional systems with enterprise-wide systems.
Principle 7: Adopt Channel-Spanning Performance Measures
When individual companies in a supply chain ask the question: How are we doing? The response should be in the context of the overall supply chain.
The authors offer a few thoughts as to what supply chain managers can do to get their CEOs thinking about SCM more in terms of growth than cost reduction. The first step is to communicate the relationship between supply chain competency and growth. A recent study conducted by the MIT Center for Transportation and Logistics did this effectively, finding that “…focusing supply chains on achieving customer objectives rather than reducing near-term costs and inventories can have a greater impact on a company’s financial performance. Leading enterprises integrate elements of supply chain management with customer-facing and revenue-generating capabilities. Essentially, this requires that supply chain management be viewed as central to the enterprise, rather than as an overlooked back-office function. Also, SCM must be viewed as a competitive differentiator that helps to ensure profitable growth.
Define the benefits of collaboration—Participants need to understand and quantify the benefits of collaboration to the overall supply chain and then recognize how individual participants will benefit from the collaboration.
Make the investment—Individual participants in a collaborative effort must be willing to invest to make collaboration a reality and to consider investments that may need to go beyond the borders of their own organizations.
Earn trust and create mutual ownership—All partners in the collaboration need to become vested in the collaboration efforts and develop a sense of ownership in the initiative. This ownership needs to go well beyond any formal contract that may pertain to the relationship, as collaborations that are constrained by the terms of a contract are likely to fail.
Dedicate “A” players—Involvement of the “best and brightest” people in the involved organization will greatly assist in achieving the goals of a collaborative relationship.
Simply stated, this strategy refers to the extent to which the supply chain approach of a particular company may be different and unique and thus differentiate it from those of competing organizations. The basic concept underlying differentiation is to see that supply chain capabilities are viewed by customers as being sufficiently effective and unique to distinguish an organization in the marketplace. At the same time, those customers may hopefully be willing to pay a premium price for the product or service offerings that are involved. While supply chain capabilities may have been regarded traditionally as part of the “augmented” or “value-added” product or service, successful organizations today may count supply chain excellence as part of their core capabilities.
To a large extent, differentiation materializes in some combination of price and service. Although supply chains may strive for differentiation in many ways, this section will elaborate briefly on elements of time-based strategies, ones that typically have short- and long-term positive effects on levels of customer service that are delivered by supply chains.
The value of time can be measured in a number of different ways. For example, adapting an inventory model to include alternative means of transportation can demonstrate that transportation choices that result in faster, more consistent transit times can help to reduce inventory and warehousing costs. Even though a faster mode of transportation may be more expensive, the net impact of savings in inventory and warehousing costs would be a reduction in total costs. This is an example of an effective strategy that is based on the tradeoffs between transportation, inventory, and warehousing costs. Coupled with improved speed and lessened variability of transit times, these impacts will help to reduce the length of the “cash-to-cash” cycle that is experienced. This metric is becoming one of the more sought-after measures of overall supply chain performance.
Reducing Cycle Time
Reductions in cycle time are based on three factors: processes, information, and decision making. If SCM is viewed as a series of processes, then those processes being performed faster will reduce cycle time, with the associated benefits already mentioned.
Another important source of reductions in cycle time is faster provision of information. The utilization of faster, more efficient forms of order transmission can significantly reduce the time needed to complete the transaction. Also, the use of contemporary information technologies is becoming increasingly attractive as technology costs have been declining significantly. The final factor in reducing cycle time is decision making. The critical issue is to empower individuals to make decisions relevant to their areas of expertise and responsibility.
Time-Reduction Logistics Initiatives
It is imperative for firms to develop the ability to know where all products may happen to be at any point in time. Interest has grown recently in the area of leveraging the power of effective demand planning and forecasting to more meaningfully move from “push” to “pull.” Recent interest in collaborative planning, forecasting, and replenishment (CPFR) also serves as an example of a highly useful, contemporary technology.
Increasingly, companies continue to change from the traditional push approach to a pull approach, which is a demand-responsive system. The switch requires a major change in corporate culture that is frequently difficult to achieve.
Overall, leading-edge companies have used a number of initiatives to improve their competitive position by reducing cycle time, thus producing significant benefits in terms of efficiency and effectiveness.
One class of assets that already receives significant attention is inventory, and major strategies are in place at many firms to reduce inventory levels without diminishing levels of customer service (or preferably, increasing levels of customer service). Initiatives such as just-in-time (JIT), vendor-managed inventory (VMI), and continuous replenishment (CRP) are examples of popular approaches.
One of the major trends in supply chain facility management is to more effectively utilize the capacity of various types of supply chain facilities. Whether they be supplier locations, plants, warehouses, distribution centers, or customer locations, the objective is the same – to see that these facilities are utilized to an extent that will produce close to optimal efficiencies. In addition, high priority is placed on making sure that all supply chain facilities create value not only for the individual organizations, but also for the supply chain in a broad sense
Equipment Utilization Strategies
Another area of asset investment for companies is logistics-related equipment such as materials-handling equipment used in warehouses and transportation equipment that is leased or owned by a company. As companies have reduced the number of warehouse facilities that they operate, there has been a natural reduction in the materials-handling equipment that is necessary. Also, the use of technology-based devices such as handheld computers, barcode scanning devices, radio-frequency communications in logistics facilities, and RFID has caused a general reduction in the need for additional assets to move and store product.
In addition, transportation equipment is an important area in terms of asset investment and has been another area of improvement for many companies.
Once a strategy that focused primarily on the commercial procurement of tangible, asset-based services such as transportation and warehousing, outsourcing now has grown into areas that are both strategic and customer focused. Thus, recent studies have cited growth in services available from the outsourced logistics sector such as freight bill auditing and payment, customer service, information technology, and light manufacturing and assembly. As a result, this increasingly popular alternative has led many firms to use the services of capable third-party logistics providers (3PLs).
The decision to utilize third-party or contract logistics companies has been fostered in part by the interest in reducing asset investment to improve asset productivity. The relevance of using a 3PL becomes even clearer as increasing numbers of businesses get involved significantly in global commerce.
There has also been a continuing trend toward the involvement of 4PL providers. Aside from managing a number of 3PL operations, a 4PL is looked to for the provision of competencies relating to knowledge availability, information technology, and skills in forming and sustaining successful supply chain relationships.
Well-Understood Goals and Objectives Members of the collaboration need to understand their individual organizational objectives and then be willing to share these openly with each other.
Trust and Commitment Widely recognized as a fundamental relationship building block, trust may be thought of as “reliance on and trust in one’s partner”.
Corporate Compatibility Of greatest importance here is that the relationship include a sharing of vision, goals, objectives, and cultures.
Communication Regular communication and sharing/use of information are central to an effective collaborative relationship.
Shared Decision Making and Ability to Reach Consensus on Matters of Importance Matters that are related to the success of the relationship should be treated jointly by all involved organizations.
Equitable Sharing of Gains, Losses, and Investments Although many organizations demonstrate a dedication to their individual objectives, successful collaborations require the development of mechanisms to share gains, losses, and investments.
Overall Benefits to Involved Parties Greater Than Could Be Obtained Alone To be sustainable over the longer term, successful collaborations need to create benefits for the involved parties that exceed what those organizations could accomplish individually.
Effective Measurements and Measurement Strategies A dedication by all involved participants in collaboration measurements and the development of measurement strategies will be a key to the success of the relationship. Essentially, key performance indicators (KPIs) that require ownership and commitment to the objectives by all involved parties are needed.
Strategic Plan for Collaborative Relationship Successful collaborations are not without their challenges and difficulties. Thus, the development of a strategic plan for the relationship itself should be of great value.
The greatest potential benefits of collaboration seem to be associated with business processes such as inventory management, customer order management, customer service, and supplier order management.
Financial vs. Non-financial Benefits of Collaboration
A question is whether the costs of collaboration are exceeded by the benefits – in essence, whether collaboration pays for itself. Although there certainly are pitfalls to avoid, there are significant opportunities to form collaborative efforts that are financially successful.
forces that they feel are shaping the business landscape. Their advice is that any business managers who ignore these forces do so at their peril. The concluding section of this text thus highlights these global forces that will define the coming era and provides a commentary indicating the direct impact and significance of each to the domain of supply chain management. The .global forces and their definitions are credited to McKinsey & Company, while the commentaries for supply chain management (SCM) have been added by the authors.
• The Great Rebalancing—The coming decade will be the first in 200 years when emerging-market countries contribute more growth than the developed ones. This growth will not only create a wave of new middle-class consumers but also drive profound innovations in product design, market infrastructure, and value chains.
_ SCM Commentary: This force places great pressure on supply chains to adapt their capabilities to respond to consumer and business needs in emerging countries and regions. This will require a rethinking and recalibration of generally accepted supply chain practices to the unique needs and requirements of these new markets and sources of supply.
• The Productivity Imperative—Developed-world economies will need to generate pronounced gains in productivity to power continued economic growth. The most dramatic innovations in the Western world are likely to be those that accelerate economic productivity.
_ SCM Commentary: Supply chain capabilities in developed countries and regions have been improving significantly in recent years. The pursuit of continued productivity improvements will require that market-leading supply chains step up the pace of innovation and the extent to which they differentiate themselves from competing supply chains.
• The Global Grid—The global economy is growing ever more connected. Complex flows of capital, goods, information, and people are creating an interlinked network that spans geographies, social groups, and economies in ways that permit large-scale interactions at any moment. This expanding grid is seeding new business models and accelerating the pace of innovation. It also
makes destabilizing cycles of volatility more likely.
_ SCM Commentary: In essence, this force sets the agenda for the future of global supply chains, and makes it essential that global supply chains must be functionally well-connected. Desirable results will include global shipment management and visibility, and the ability to create a single point of control for the functioning of global supply chains.
• Pricing the Planet—A collision is shaping up among the rising demand for resources, constrained supplies, and changing social attitudes toward environmental protection. The next decade will see an increased focus on resource productivity, the emergence of substantial clean-tech industries, and regulatory initiatives.
_ SCM Commentary: Supply chains of the future must be able to compete in a more complex business environment. Given that many of the basic assumptions about the way business is conducted are in the process of change, the ability of individual supply chains to be agile and responsive to these changes will be a key component of success.
• The Market State—The often contradictory demands of driving economic growth and providing the necessary safety nets to maintain social stability have put governments under extraordinary pressure. Globalization applies additional heat: How will distinctly national entities govern in an increasingly globalized world?
_ SCM Commentary: Considering the extent to which many levels of government are becoming more involved in regulating and controlling business practices, a clear key to success will be the ability of individual supply chains to function effectively in this new business environment. Given that many governmental decisions are made with the idea of moving toward social equity, the challenges to businesses and supply chains will become correspondingly more difficult. The long-term stability of our businesses and supply chains will continue to be directly related to their ability to create value for their consumers, customers, and stakeholders.
One of the outcomes of this new global era is an “attack” on traditional, hierarchical organizational structures. Businesses are being transformed into flatter, more horizontal, and more collaborative organizations that participate in more supply chains to add value and efficiency for consumers worldwide.
Some of the customary strategies used in the domestic market are also challenged. Reduced order cycle time, for example, has become an important part of supply chain management since it can lead to lower inventory levels for customers, improved cash flow, and lower current assets/accounts receivable. The increased length and complexity of the supply chain make it more difficult to achieve shorter lead times.
Also, demand-driven supply or pull systems which can lower inventory levels significantly are challenged by the longer distance and complexity of multi-layered supply chains. Other strategies such as compression and “lean” supply chains are also more difficult to achieve in the global environment. None of this discussion is meant to imply that companies should not be involved in globalization. Rather it is meant to provide understanding of the challenges necessary to improve the likelihood of success.
Ocean: Transport by ship is by far the most pervasive and important global shipment method,
accounting for two-thirds of all international movements. Ocean transportation’s major advantages are low rates and the ability to transport a wide variety of products and shipment sizes. The primary disadvantages include long transit times (slow speed), low accessibility, and higher potential for shipment damage. The pervasive use of containers has reduced damage and increased accessibility via connections with other modes (rail and truck) for inland origins and destinations.
Air: The fast transit times that air transport provides have had an impact on global distribution.
The speed of airplanes combined with a frequency of scheduled flights has reduced some global transit times from as many as 30 days to one or two days. These transit times have spurred the development of global freight services. These carriers offer door-to-door, next-day services for packages between most large American cities and a growing number of overseas points.
Motor: Companies will often use motor transport when shipping goods to an adjacent country—between the United States and Mexico or Canada, for example. It is very common in Europe, where transport distances are relatively short. Motor also plays a large part in intermodal shipments. The advantages of international motor transport are basically the same as those for domestic shipments: speed, safety, reliability, and accessibility to the delivery site. However, motor shipment across multiple national boundaries involves a number of different import regulations.
Rail: International railroad use is also highly similar to domestic rail use, but rail’s accessibility is much more limited internationally because border crossing points are scarce.
Supply chain planning applications and suites help organizations evaluate demand for materials, capacity, and services so that effective fulfillment plans and schedules can be developed. These planning tools assist with decisions regarding the number and location of facilities (network design), where to purchase materials (strategic sourcing), when to build goods (production planning and scheduling), and how to deliver the goods (routing and scheduling). Shorter-range planning tools that support sales and operations, production, and distribution planning can leverage accurate forecasts.
Supply chain execution tools and suites carry out key tasks from the time an order is placed until it is fulfilled. This order-driven category of software focuses on the day-today activities required to buy, make, and deliver the materials that flow through the supply chain. Supply chain execution doesn’t rely upon a single software program but consist of a group of tightly integrated tools that link well with supply chain partners’ systems to share relevant data and provide visibility. Successful implementation can provide users with improved inventory visibility, improved data accuracy, faster throughput and higher inventory turns, better control of transportation costs, and improved customer service.
Supply chain event management tools collect data in real time from multiple sources across the supply chain and track the inventory as it flows through the supply chain, providing graphical displays of expected and actual inventory levels and other key data at each location. As the geographic scope and number of companies involved in a supply chain grow, the ability to monitor activities exceeds manual capabilities.
Newer business intelligence tools have capabilities which are more dynamic, frequently delivering data from transactional systems across the supply chain to a data warehouse. In addition to the data collection and analysis capabilities, business intelligence software supports self-service reporting, performance scorecarding versus goals, development of dashboards and other graphical report displays, and activity monitoring in support of event management. Interest in business intelligence applications is rising, due primarily to a software vendor focus on increasing user-friendliness of the tools.
It is becoming more difficult to completely segment SCIS from enterprise resource planning (ERP) systems. Many of the supply chain software applications discussed above are growing increasingly reliant upon the type of information that is stored inside ERP systems which are multi-module application software platforms that help organizations manage the important parts of their businesses. The ERP system provides a mechanism for supply chain members to efficiently share information so that visibility is improved, transactions are completed with more speed and accuracy, and decision making is enhanced.
Transportation efficiency promotes the competitiveness of a supply chain. In terms of supply management, cost-effective transportation helps companies gain access to higher-quality, lower-priced materials and realize economies of scale in production. Likewise, low-cost transportation improves demand fulfillment opportunities. By keeping transportation expenses reasonable, the total landed cost of a product (its production costs plus transportation costs and related supply chain fulfillment costs) can be competitive in multiple markets. Not only must transportation costs be effective, but service capabilities must also be in line with customer requirements. Inexpensive transportation is of little value to a supply chain if the product does not arrive as scheduled and damage free to the correct location.
High-quality, customer-focused transportation has a direct impact on an organization’s ability to provide the “Seven R’s of Logistics”— getting the right product, to the right customer, in the right quantity, in the right condition, at the right place, at the right time, and at the right cost. Additionally, transportation can create supply chain flexibility. By working with carriers that offer a range of transit times and service options, organizations can satisfy supply chain demands for expedited, next-day service as well as more economical, standard delivery requests. In addition to the linking and customer service roles, transportation plays a key role in supply chain design, strategy development, and total cost management.
• Transportation service availability, capacity, and costs influence decisions regarding the number and location of supply chain facilities.
• Transportation capabilities must align with the company’s strategy.
• Intentional tradeoffs should be made between transportation and related activities (e.g., procurement, production, and inventory management) to optimize supply chain efficiency.
These inventory handling, storage, and processing facilities help supply chains create time and place utility. By positioning raw materials, components, and finished goods in production- and market-facing positions, goods are available when and where they are needed. Shorter lead times can be achieved, product availability increased, and delivery costs reduced, increasing both the effectiveness and efficiency of the distribution operations. In highly contested markets, these responsive capabilities can help a supply chain enhance its competitive position.
Enhanced customer service is not the sole rationale for inserting distribution operations into the supply chain. These facilities also help organizations overcome challenges, support other processes, and take advantage of economies of scale. These roles include the following:
1. Balancing supply and demand. Whether seasonal production must service year-round demand (e.g., corn) or year-round production is needed to meet seasonal demand (e.g., holiday wrapping paper), distribution facilities can stockpile inventory to buffer supply and demand.
2. Protecting against uncertainty. Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes.
3. Allowing quantity purchase discounts. Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can handle the quantities, reducing the purchase cost per unit.
4. Supporting production requirements. If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution.
5. Promoting transportation economies. Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements.
One important interaction that must be considered is the tradeoff between distribution and transportation operations. When a supply chain has no market-facing DCs or warehouses (product is sent directly from plants to individual customers), transportation costs will be very high. Organizations may benefit substantially from the establishment of one or several warehouses to reduce transportation costs. Why? Large shipments can be transported over long distances from plants to distribution facilities via truckload carriers; then the smaller shipments are delivered to nearby customers. However, there comes a point where you build too many warehouses and total costs increase. With so many facilities, operating costs will increase and transportation expenses will rise (inbound shipments will become less-than-truckload shipments which are more expensive than shipping full truckloads).
Another key tradeoff must be made between distribution and inventory. Generally, the more DCs and warehouses, the higher the total inventory carrying costs will be. As facilities are added to a fulfillment system, the amount of inventory will increase in total, but at a decreasing rate. This phenomenon tends to occur because each additional facility somewhat duplicates the safety stock maintained by others in the system. Supply chain leaders must be mindful of this interaction and regularly evaluate the tradeoff between smaller inventories versus more facilities.
Similarly, Internet retailers directly distribute goods to the end consumer without the need for retail outlets. Direct shipping avoids the need to build and operate distribution facilities, reduces inventory in the system, and often compresses order cycle time. Direct shipping works particularly well when customers place orders for truckload quantities or when product perishability is an issue. For example, it is better to have bread and milk delivered directly to a grocery store than to a DC as they are high-volume products and direct shipping maximizes product shelf life.
On the downside, it is expensive to deliver small quantities to buyers (reduced transportation efficiencies), and there is no safety stock readily available to protect against demand surges. Furthermore, many companies are not capable of fulfilling orders for case and individual unit quantities. Thus, it is important to consider product characteristics, demand volume and variability, and related issues before making the decision to establish a direct shipping strategy.
Properly planned distribution facilities can address the shortcomings of direct shipping. These facilities, including traditional warehouses, DCs, and cross-docking facilities, provide the supply chain with additional capabilities. Warehouses and DCs can hold goods in anticipation of customer orders, provide a buffer of safety stock to protect against contingencies, and handle small quantity orders efficiently from transportation and fulfillment standpoints.
Cross-docks can provide a high-velocity alternative to direct shipping at lower transportation cost with product mixing capabilities. Of course, it is necessary to analyze the inventory, transportation, and service tradeoffs before choosing between direct shipping and the use of distribution facilities. The ultimate answer may be to employ a combination of the two strategies to ensure distribution efficiency and customer satisfaction. Many companies, like Wal-Mart and Target, use a wide variety of distribution methods depending on product volume, size, and supplier proximity.
After assuming the materials sources and goods’ markets are fixed, and the number consumed or sold is known, a grid is superimposed over the geographic area containing the sources and markets. With the use of the grid, each source and market can be determined by its grid coordinates. The ton-mile center or center of mass can be calculated mathematically. The equation can be solved for the least-cost location, provided the transportation rates for materials and goods are the same. But this is seldom the case, so the ton-mile center equation does not show the cost differences for moving commodities. Higher finished goods rates draws the least-cost location to their markets; reducing the distance to transport the goods. This increases the distance to transport raw materials. Another equation takes into account different transportation rates.
The advantage of the grid technique is its simplicity and ability to provide a starting point for location analysis. There are number limitations to the technique. First, it is static, and the solution is only optimum for one point in time. Second, linear transportation rates are assumed Actual rates are tapered. Third, topographic conditions at the optimum location are not considered. Fourth, the proper direction of movement is not considered
The Supply Chain Management Applications Market
The SCM applications market is stabilizing and maturing while becoming increasingly dynamic at the same time. The fundamental drivers in market adoption of SCM applications relate to the maturity of firms as they work to become more demand driven.
The capability to accomplish value chain transformation comes from being able to accurately sense and translate demand into operations plans and processes, enabling firms to make correct decisions about prioritization of initiatives, investment in growth, selection of profitable customers, and reduction of value chain risk. As companies strive to achieve value chain transformations, the market for more traditional advanced planning and scheduling (APS) tools for core demand planning, supply planning, and manufacturing planning and scheduling is less dynamic.
Alternatively, applications that support more cross-functional processes are driving new and increased investment in many categories of SCM tools.
Consider the following:
• Demand-planning applications with innovative new capabilities are driving new market demand as well as causing firms to reevaluate existing demand-planning and forecasting implementations.
• The need to position inventory to improve performance at the retail shelf level in the face of increasingly variable demand or to buffer against variability in global supply networks is bringing advanced inventory optimization techniques and applications to the forefront.
• Evaluating sourcing options, simulating new product launches, and modeling competitor activities are driving new uses for network design software products.
The consideration of supply chain risk from demand risk and also the impact of supplier failures and network disruptions are leading to two outcomes: (1) the consideration of variability and uncertainty explicit in traditional planning processes and (2) the development of emerging tools to address particular supply chain risk issues in novel ways.
Global trade management (GTM) applications are gaining are growing in importance and impacting supply chain security, financial flows, and customer service.