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2010

The weather earlier this week prompted me to think about supply chain disruptions. Much of the country was effected by the storm—the likes of which has not been seen in decades. The resulting high winds, gusts, snow and tornadoes closed airports and interstates, and generally disrupted travel.

 

But while the weather usually only disrupts the supply chain for a few hours or possibly days, there is another disruption on the horizon. An article I read yesterday on the SupplyChainBrain website explains that this new, larger, disruption is, instead, a truck driver shortage.

 

How bad could the situation get? Tom Nightingale, chief marketing officer at Con-way, a freight transportation and logistics services company, believes that the truck driver shortages of 1983 and 2004 could be dwarfed by what’s potentially coming by 2012. In addition to an on-going driver shortage that delays some deliveries, new hours-of-service rules and Comprehensive Safety Analysis 2010 (CSA 2010) regulations that will kick in later this year are sure to make the situation more challenging.

 

The good news, is that if the economy is indeed rebounding, it will take up the extra capacity that the industry had during the recession. On the other hand, many companies slashed their fleets and workforces to weather the recession, and they are now feeling the consequences.

 

An article that ran in USA Today last month explains that many firms are struggling to beef up fleets and staff. Thousands of older drivers retired when they were laid off or saw their workloads cut. And despite unemployment hovering at around 10 percent, it’s difficult to attract younger workers to a job that typically means being away from home for weeks at a time and features a salary of approximately $38,000. The result, is that there are now 142,000 fewer drivers than there were in 2007.

 

Take that situation, and then factor in the impending government regulations, and the industry will see a dampening effect on capacity, Nightingale says. While its effect is somewhat nebulous, the hours-of-service regulation is sure to shrink capacity because it will limit the number of hours drivers can work. Secondly, and much more certainly, CSA 2010, which will make it tougher to hire drivers with poor safety records, could take as much as five percent of truckload capacity out of the marketplace, he says.

 

The result, say many analysts, is that that the industry could see a loss of 400,000 drivers by 2012. Nightingale even goes so far as to say the situation is of far greater magnitude than the crisis of 2004—and that’s when freight was abandoned on docks.

 

So, given all those factors, the critical issue for shippers then becomes identifying ways to best prepare for those conditions. Among other things, they need to negotiate fair contracts with providers right now. Nightingale says that customers who were willing to keep carriers busy at a fair rate in 2004 were much more likely to get service than those who tried to lowball their providers.

 

Additionally, shippers should avoid causing unproductive detention and demurrage. Drivers want to keep rolling, and shippers should be sensitive to that.

 

In the end, however, pricing power will shift from the shipper to the carrier. Will your organization be ready?

Thomas Paine, author of the pamphlet Common Sense and one of the Founding Fathers, once famously wrote “Character is much easier kept than recovered.” I think of that quote often because, in business, it’s just as easy to say that “customers are much easier kept than recovered.”

 

I read an article yesterday that ran on Bloomberg Businessweek’s Website that reminded me of Paine’s quote. According to recent research, the same principle even applies when there is a product recall. That is, if a company honestly admits a mistake and treats the customers fairly and honestly, then—in all probability—customers will be forgiving.

 

In September, brand relationship marketing firm the Relational Capital Group, collaborated with Dr. Nicolas A. Kervyn at Princeton University and independent market research provider Candice Bennett & Associates to conduct an online survey of 1,000 U.S. adults regarding several recent product recalls. The survey asked respondents questions regarding their beliefs about the handling of those recalls, as well as their purchase intent and loyalty for each recalled brand relative to its key competitors.

 

Everyone knows mistakes happen, and, in fact, 91 percent of those surveyed agreed that “despite modern technology and honorable intentions, even the best-run companies and brands can make mistakes that lead to product recalls.”

 

Here’s the interesting part: Almost all (93 percent) of the respondents believe that product recalls reveal the “true colors” of companies and brands, and present a unique opportunity for the company to demonstrate that it cares more about the safety of its customers than its own profits. Moreover, 87 percent of the respondents agreed that they are more willing to purchase from, and remain loyal to, a company that handles its product recall in an honest and responsible way.

 

Now, there’s a lot of psychology involved about how humans perceive honesty and others’ intentions, and then make judgments about those perceptions. However, it comes down to this: While customers will forgive short-term lapses in competence, they will not forgive what they perceive as fundamentally dishonorable intentions.

 

So what’s the bottom line for businesses? Chris Malone, the article’s author and chief advisory officer of the Relational Capital Group, says that genuinely inadvertent mistakes offer a rare opportunity. Considering the fast pace of innovation and product development cycles today, true differentiation from competitors and durable customer loyalty is difficult to achieve. When a company transparently and courageously admits a significant mistake to protect its customers’ interests, it leaves a powerful and lasting impression on customers because that isn’t something they see very often.

 

What this then boils down to, is customer service. If customers don’t like the way they are treated—whether it’s the way a product recall is handled or it’s an individual issue—they will take their business elsewhere if they can. I know that’s what I do—and I’ll wager you do the same thing.

 

Do you consider yourself a “customer for life” of any companies? I know I do. I won’t say who those companies are, but I believe that when I dealt with them, they treated me fairly and made a situation right. And, it indeed left a lasting impression. That kind of customer service just makes common sense.

 

How about your company? How does it treat customers during product recalls?

Does your company attract and retain talented supply chain professionals with a business background?

 

The reason I ask is that I’m intrigued by Kevin O’Marah’s First Thing Monday post yesterday, in which he discussed both the demand for and supply of supply chain professionals.

 

Last week, O’Marah, GVP at research and consulting firm Gartner, moderated a panel at a conference in Singapore where panelists talked openly about the urgency to find and develop people prepared to think of the supply chain in value creation terms, rather than just functionally. Even more interesting, is that backstage, many executives conceded that they struggle to retain staff once they’ve gotten them up to speed. This is especially true in booming supply chain centers like China and India.

 

O’Marah sees two trends taking place. The first is geographical. While good supply chain jobs are available at many prestigious American companies, those jobs typically are based overseas. Consequently, students from countries such as Asia, Latin America and Africa who are graduating with MBAs here in the United States, would rather stay in the U.S. to round out their own international business experience than go straight home.

 

Secondly, and what seems to be the larger issue, there is a mismatch of sorts between a surplus of people with narrow technical skills and a shortage of those with broader business skills. Gartner sees a trend for executives without supply chain backgrounds to take the lead of supply chain groups as businesses focus on growth. There’s a good reason for that too: Broad business process expertise as well as organizational savvy comes from integrating knowledge of disciplines like finance and marketing into supply chain strategy.

 

Unfortunately, this type of career path seems all too rare, O’Marah wrote. Indeed, he asks: Whatever happened to the traditional model where great companies bring in new people and train them the way IBM, GE or Procter & Gamble always have?

 

The workforce challenge seems even more daunting for those in the A&D industry who struggle to retain young professionals. The results of a survey conducted last summer by Aviation Week and sponsored by Hitachi Consulting, show a marked increase in voluntary attrition rates of young professionals across the industry--from 15.7 percent in 2008, to 21.85 percent in 2009.

 

A&D companies should examine the underlying loyalty issues behind this loss of younger workers--who can bring new approaches to problem solving--and try to address those issues using proven retention programs, says Lee Palmer, Hitachi Consulting Aerospace and Defense Industry National Leader. If this attrition trend for younger workers continues to rise the next few years, combined with an economic uptick that could trigger workers of retirement age to leave the workforce, the industry could be in a serious predicament with gaps on both ends of the employment spectrum, Palmer says.

 

There—possibly—are already problems stemming from a loss of engineering and creative talent. With a reported 179 patents granted in 2009--down from 478 in 2008—Hitachi Consulting questions whether this is the result of the industry’s overall contraction and a function of spending cuts, or if instead, it’s a leading indicator of an industry-wide crisis in the culture of innovation, which is the lifeblood of the A&D industry, Palmer says.

 

What do you see? Is broad business experience valued more highly than expertise in a narrow skill set at your organization?

Seeing all the trucks while I was driving on a long trip last week reminded me of the important role transportation plays in the supply chain. At times, it seems to be overlooked, but transportation is a strategic element; moving inbound materials from supply sites to manufacturing facilities, repositioning inventory among different plants and distribution centers, and delivering finished products to customers. Consequently, failure to fully leverage transportation will most likely result in lost opportunities.

 

This morning, I ran across an article, which had previously run on the Supply Chain Management Review website, that explores the topic. The author--Dr. Theodore P. Stank, Associate Dean for Executive Education and Dove Professor of Logistics, University of Tennessee—wrote that benefits which should result from world-class operations at the points of supply, production and customer locations will never be realized without also having superior transportation planning and execution capabilities. For instance, there isn’t much value in having inventory positioned and available for delivery if it cannot be delivered when and where it is needed cost effectively.

 

Dr. Stank covers a great deal of material, but I was particularly interested in his thoughts on lane operation decisions--or daily operational freight transactions. This is where transportation managers, who have real-time information about product needs at various system nodes, must coordinate product movements along inbound, interfacility, and outbound shipping lanes to meet service requirements at the lowest total cost.

 

Decision-makers who are good at managing information can take advantage of consolidation opportunities, while ensuring that products arrive where they are needed, in the quantities they are needed, just in time to enable other value-added activities, Stank says. At the same time, they realize transportation cost savings. 

 

The primary opportunities associated with lane operation decisions include inbound/outbound consolidation, temporal consolidation, vehicle consolidation, and carrier consolidation. If managers have access to inbound and outbound freight movement plans, they are able to identify opportunities to combine freight to build volume shipments, Stank says. An inbound shipment may arrive from a supplier located in Philadelphia, for example, on the same day that a production order for a customer in Wilmington, Del., becomes available to move. If transportation planners know about the two events far enough in advance, they can arrange for the inbound carrier to also haul the outbound load to Wilmington.

 

Additional savings are possible because, in many cases, the inbound carrier would be willing to negotiate lower roundtrip rates to avoid deadhead miles on the backhaul, says Stank. This is particularly true in the previous example if the carrier and/or driver are headquartered in the Philadelphia area. If this happens to be a heavy traffic lane, the firm may also consider strategically sourcing a core carrier in this region to capitalize on the opportunity.

 

Similarly, less-than-volume-load (LVL) shipments moving to the same geographic region on consecutive days may be held until sufficient volumes exist to justify a full load on one carrier with multiple stops, Stank says. By avoiding the LVL terminal system, the detained freight often arrives at the same time or earlier than the original LVL shipment—and at a lower cost.

 

Let me know if your company fully leverages transportation potential—or if you have some good suggestions for roadtrip music.

There are many reasons for Wal-Mart’s success, but one of them certainly is its approach to the supply chain. By constantly squeezing costs out of its operations, the retailing giant is able to pass the savings on to its shoppers, which in turn, draws more shoppers into its stores.

 

The company’s adoption of RFID, cross-docking and other activities readily come to mind as cost-savings practices. Wal-Mart also is taking over U.S. trucking operations from some of its suppliers in an effort to transport goods more economically. And in other countries, the company is eliminating distribution middlemen to further cut costs.

 

Now comes word of a new Wal-Mart initiative. The company already has enormous purchasing clout. But to further that advantage and reduce costs even more, Wal-Mart is adopting a collaborative sourcing program that enables consolidating its purchasing of raw materials with that of its suppliers. Products already being purchased with suppliers include sugar, which goes into the company’s store-brand soda and five-pound bags, and paper, used in Wal-Mart’s back-office printers.

 

Leaders at Wal-Mart realize that the company buys the same raw materials that its suppliers buy, all over the world, Hernan Muntaner, vice-president for international purchase leverage at Wal-Mart, said in an article that ran in Business Week last week. Adding the volume together of what Wal-Mart bought and what suppliers bought, and then purchasing from just one supplier obviously allows reducing the cost, he says.

 

The article notes that Wal-Mart already has achieved benefit. In Chile, where Wal-Mart has 259 locations, the retailer teamed up with a paper supplier and was able to cut Wal-Mart’s own paper costs by 2.5 percent as a result of the greater bargaining clout.

 

A British soda maker and Wal-Mart also teamed up to purchase sugar. The result: The soda company paid 14 percent less for sugar while Wal-Mart’s sugar costs also fell. Wal-Mart then used those savings to lower the price of bags of its own house brand of sugar.

 

So far, only manufacturers of private-label goods sold under Wal-Mart’s house brands have joined in the collaborative sourcing. But that’s really just the tip of the iceberg.

 

Ultimately, the plan is for Wal-Mart to team up with a company like food and beverage producer PepsiCo to buy potatoes jointly for a lower price than either company can get on its own, says Muntaner. That would allow both companies to earn more money on the products they sell in Wal-Mart’s supermarkets.

 

That level of collaboration between Wal-Mart and a branded-product manufacturer hasn’t happened yet—and I have to wonder if it ever really will. Perhaps the biggest obstacle is that collaboratively purchasing raw materials such as sugar with Wal-Mart would require the branded-product manufacturer to share critical information about pricing and volume.

 

Maybe I’m wrong on this, but I don’t think manufacturers of house-hold name products are willing to share detailed information about their purchasing programs and pricing data with Wal-Mart. That type of information is, and has been, too closely guarded.

 

What do you think of Wal-Mart’s strategy?

If you’re like most people, you probably saw “lanthanum” and “neodymium,” and wondered: “What?”

 

I read two thought-provoking articles earlier this week that explained what they are—rare earth metals, by the way--and why they are important. More importantly, the articles pointed out the perils of relying too heavily on a single supplier.

 

It turns out that lanthanum and neodymium, along with 15 other rare earth metals, are increasingly used to produce items that range from lightbulbs to wind turbine equipment. Lanthanum, for example, is used in hybrid car engines while neodynium is used in wind turbines’ electric generators.

 

Why they matter is the interesting part. As an Associated Press story that ran on The Washington Times website explains, China and Japan have had a diplomatic spat, and as a result, China—which mines 97 percent of the global supply of rare earth metals—recently stopped shipping the metals to Japan. Chinese officials have denied the ban, but the act caused governments around the world to wonder if they could be next.

 

China hasn’t always been the primary supplier of these metals. The U.S. led the world in rare earth production until the late 1980s. Since then, however, China has grown to dominate the market by undercutting other producers with lower prices.

 

Indeed, an article that ran on TheAtlantic.com notes that in the past, most of the world’s rare earth metals were mined and refined in Mountain Pass, California. Additionally, the process of restarting production could begin at any time.

 

However, the company that controls the pass, Molycorp, said it would take about $500 million to start mining again—which obviously is a roadblock. Furthermore, the Government Accountability Office has determined that it might take 15 years for the entire production chain to be back on-line.

 

Although shipments appear to have resumed to Japan, The Times reports that the issue has become a political priority in Japan, where the auto industry has invested heavily in hybrid and electric cars—which are among the biggest consumers of rare earth metals. Japan’s Ministry of Economy, Trade and Industry outlined five main areas of focus, including speeding development of rare earth alternatives, turning Japan into a major global center for rare earth recycling and helping manufacturers install equipment to reduce rare earth consumption.

 

Major Japanese companies also are working to diversify their rare earth sources. For instance, Toyota Motor Corp. announced it has set up a rare earth task force, and an affiliated trading company, Toyota Tsusho Corp., established a rare earth mining joint venture in Vietnam two years ago. The company expects the Vietnam mine to begin supplying minerals to Japan in 2012, The Times reports. Toyota Tsusho has also invested in a similar project in India, which should begin operating next year. Additionally, Toshiba Corp. and Sumitomo Corp. have each launched rare earth joint ventures in Kazakhstan.

 

South Korea—where tech companies Samsung Electronics Co. and LG Electronics, Inc. are headquartered—now has plans of its own as well. Those plans call for spending 17 billion won ($15 million U.S.) by 2016 as part of a long-term plan that seeks to secure 1,200 metric tons in rare earths reserves, according to the Ministry of Knowledge Economy.

 

And in the U.S., legislation to jump-start domestic rare earth production appears to be gaining momentum, as reported by The Times.

 

At a Senate subcommittee hearing, lawmakers expressed concern that the U.S. was so reliant on China. David Sandalow, assistant secretary of energy for policy and international affairs, told the hearing there were “potentially very serious implications” if the U.S. lost access to rare earth metals.

 

The loss could interrupt the development of clean energy technologies, Sandalow said. He added that it also could interrupt commerce.

 

Clean energy technology is a growing industry with a great deal of potential, so it’ll be interesting to see how events continue to play out.

Jim Fulcher

Cash is King

Posted by Jim Fulcher Oct 5, 2010

You’ve probably heard the expression “Cash is King” before. Maybe not as much in business context, but you know the saying.

 

I saw an article that ran in Supply & Demand Chain Executive (SDCExec) today, however, in which the author--Sanjiv Mahajan, director of materials management at Sara Lee Corp.—used the expression, and wrote that given the recession over the last two years and the current economic uncertainty, cash is indeed king. Mahajan says supply chain managers must squeeze as much cash out of their supply chains as possible to help improve their companies’ financial health.

 

Mahajan wrote about several areas where supply chain managers are able to squeeze more cash out of the supply chain. The one I found most interesting, however, was inventory optimization.

 

One of Mahajan’s examples is to implement inventory postponement and package on-demand in plants and warehouses. A company can also hold inventory at a work-in-process level in the bill of materials, and differentiate when you get an order, Mahajan says. This limits the SKUs that have to be held in inventory, which then enables reducing inventory levels and associated carrying costs. For instance, if a company sells identical items to different retailers in different packages, they can hold the inventory prior to packaging it--a lower level in the bill of material--and then pack it on-demand.

 

Another idea is to implement a supplier-owned managed inventory initiative. This practice is quickly becoming not a differentiator, but an order qualifier for many suppliers, Mahajan says. The idea isn’t to shift the inventory upstream, but to make a company’s suppliers work with them to reduce it. Once a supplier owns the inventory, they will work with the customer to reduce it, Mahajan says.

 

If a company doesn’t already use cross docking in warehouses, they should investigate its practicality. In this practice, a third-party logistics provider synchronizes in-bound and out-bound movements in the warehouses. The idea, of course, is to never actually take possession of inventory, but, instead, to receive it, and turn around and ship it out on another waiting truck. Most 3PLs have built this expertise, which was once the forte of a few pioneering companies, Mahajan says.

 

Another of Mahajan’s suggestions is to apply simple ABC analysis to analyze inventory. First, identify As, Bs and Cs by value—that is, volume x cost/unit. The idea here is to control the As (make every A every day or week, depending on cycle times), and loosen the Cs (which are usually the problem) to balance investment with service levels. This will reduce inventory as well as improve service levels, Mahajan explains.

 

Finally, it’s in a company’s best interests to define what should be made to-order and what should be carry in-stock. Many companies just make everything to-stock because that’s what they have always done, Mahajan says.

 

What they should do instead, is institute a program to periodically examine profitability, velocity and volatility of inventory by SKU. Then, based on the analysis, they can make decisions about what should be produced to-stock and what should be produced to-order. As a rule, Mahajan says, make the higher velocity, higher margin SKUs to-stock. On the other hand, it’s best to demand a higher price and lead time for slower-moving and lower-margin products, and then make them to-order.

 

What do you think? Have you adopted some of these practices? If so, did it improve cash flow?

A long time ago, I worked for a business owner who always said the number one priority was to keep current customers. Sure, gaining new customers was important too, but customer satisfaction was the primary objective.

The result was that business continually grew. Sometimes it would level off for a little while, but business very rarely declined—and even then, it always bounced back quickly.

Looking over the findings of a new Sterling Commerce survey reminded me of that former employer because the primary business concern cited by the survey’s participants is losing customers/customer volume.

The survey, conducted by Edge Research, asked 300 information technology, sales and supply chain decision makers in the manufacturing and logistics industries about their main business concerns. When asked about their primary concerns, 46 percent of the respondents cited risk of losing customers/customer volume, and 41 percent cited demand/channel volatility.

Lora Cecere and Trevor Miles have posted quite a bit in recent months about volatility, and Cecere spoke about it in length in a Kinaxis webinar as well. Interestingly, the majority of the survey’s participants echoed their thoughts. In fact, 82 percent of the respondents indicated that managing volatile demand—specifically, unexpectedly accelerating or decelerating demand--would be a priority in 2011. Furthermore, the most prominent information “black hole” among companies was real-time demand (39 percent), followed by supplier issues/problems (34 percent).

What’s behind those concerns? For one thing, a continued reliance on manual processes for both customer and supply chain collaboration hampers companies’ ability to manage volatile demand and gain real-time demand signals. Consider this, for example, for both customer and supplier collaboration, most of the respondents still use manual processes to monitor changes, exceptions and disruptions to planned activity. For customer collaboration, only 24 percent of the respondents had implemented highly automated processes to gain “visibility of order and shipment status.” And for supplier collaboration, a highly automated process has been implemented by just 24 percent of the respondents to gain “visibility of order and shipment status.” 

On the other hand, that situation appears to be poised to change. According to the survey results, manufacturers and logistics companies do plan to address those informational black holes and supply chain volatility by implementing solutions that are much more precise and automated--enabling them to, in turn, reduce risk. 

For instance, 40 percent of the respondents plan to implement supply chain synchronization solutions that will enable them to deliver seamless customer experience from the moment an order is placed until its ultimate fulfillment—regardless of the way it was placed. Additionally, other solutions--such as vendor managed inventory and available-to-promise capabilities that deliver more precise views of inventory at multiple levels in the supply chain--will be implemented by 35 percent of the survey participants.

Manufacturers know they need to be faster to new markets, to innovate with new products and to deliver on order commitments, but they also need very lean, agile supply chains, says Richard Douglass, global manufacturing and logistics industry executive, Sterling Commerce. Building a smarter, dynamic business network is at the center of addressing these challenges, and the survey results point out that manufacturers face a number of obstacles in the collaboration needed for that network.

What about you? Are there customer demand and supplier risks informational black holes at your company? If so, do you plan to implement new solutions to address those obstacles?