2001: Year-End Roundup
Terrorist attacks. War. An uncertain economy. Despite these challenges, 2001 also will be remembered for innovative logistics strategies, significant gains in logistics collaboration, and a new respect for the critical role supply chain management plays in U.S. competitiveness.
Terrorist attacks, war, an uncertain economy and the resultant retrenching have been in our hearts and on our minds during the last quarter of 2001. Yet this year has also seen the implementation of innovative logistics strategies, significant strides in supply chain collaboration, and increased awareness of the critical nature of the supply chain.
"The year has been like the downside of a roller- coaster," observes William C. Copacino, global managing partner of Accenture's Supply Chain Management practice. The economy's long, steady ride up was followed by a swift, steep descent.
"We had been in an up economy for an unprecedented 10 years. So our supply chain functions were designed to support an expanding business base," notes Robert E. Murray, president of REM Associates, a logistics and operations consulting firm based in Princeton, N.J.
That all changed when the U.S. economy softened, then tilted into recession. "When the economy turned around, many of our supply chain activities had to respond to a retracting business base," Murray says. Companies began to rethink the way they did business. "The corporate mindset went from planning and expanding—from moving more products into more markets—to a mindset of fewer markets, fewer products, and eliminating divisions rather than adding them."
"When the economy was roaring and sales were easy, there wasn't as much emphasis on improving effectiveness and efficiency as there is today," says Joseph C. Andraski, senior vice president of OMI International, Neshanic Station, N.J. "Companies' sales growth overshadowed their inefficiencies. Now that sales have dropped, supply chain inefficiencies have become glaring."
As a result, companies are re-examining their entire supply chains with an urgency that hasn't been seen in some time. "There has been a retrenchment in terms of service levels as well as supply chain assets, such as distribution facilities," says Murray.
Cost pressures have led companies to reorient their thinking, emphasizing cost at the expense of service. "In the past year, a very important focus for most supply chain managers has been transactional or ABC costing," Murray says.
New Rules, New Methods
Logistics innovations all but stopped after Sept. 11, when suddenly the focus was on survival, not supply chain efficiencies. "After the terrorist attacks, everybody just hibernated for a month or so, going back to the methods with which they were most comfortable," notes Jim Davidson, president, NTE Inc., Downers Grove, Ill.
But the uncertain economy "has forced people to look for new ways to do business," exploring collaborative initiatives and new ways of using technology.
Some of the initiatives that companies are working on today include:
Collaborative karma. In the past year, "the idea of collaboration commerce has come on strong," notes Andraski, a long-time active participant in the food industry's collaborative initiatives. He serves today as a board member of the Voluntary Inter-Industry Commerce Standards (VICS) committee and vice chair of the CPFR committee of VICS.
"As companies realize that doing business through confrontation has resulted in impediments, they are thinking about doing business in a more collaborative way," Andraski says.
The efforts are paying off. "Every pilot program has seen an increase in sales for both trading partners, and every trading relationship that has grown out of a pilot program has seen an improvement in profitability as well a inventory reduction," he says.
As a result, "we're moving further down the path of collaborative commerce, which includes CPFR, collaborative transportation management, planning, and engineering," he says. In fact, the number of companies that are engaged in collaborative commerce is substantially greater today than it was at the beginning of the year, according to Andraski.
Shifts in modes of transportation. Pressure to reduce costs has led "a number of large-volume customers to take a new look at modal conversion," says Richard M. Rogan, executive vice president of sales and marketing for The Hub Group, Lombard, Ill. "These companies have established formal conversion programs and set formal goals on migrating from over-the-road to intermodal transportation."
The Hub Group is providing some very large shippers with intermodal transportation. Some of these companies, Rogan says, "are literally starting their maiden voyage into the use of intermodal transportation."
Use of e-transportation tools. While some of the shine may have rubbed off transportation exchanges, NTE's Davidson reports that companies are increasingly looking to e-transportation tools as a "low-risk, low-impact" way of harnessing the power of the Internet.
"Companies looking for ways to gain incremental advantage are considering opportunities such as private communities and trading exchanges," he says. Many companies are easing their way into e-business, however, beginning with "lower-cost ways of getting results that have low human impact and fairly fast implementation," Davidson reports.
Tapping Existing Technology
At the beginning of 2001, it seemed as if "a new supply chain software company was starting up virtually every week; funding was still plentiful," Bill Copacino recalls. "Stocks of B2B companies had been holding up reasonably well, and the whole area was still fairly robust. But, around February, there was a fairly significant shift."
As the economy worsened, companies "stopped spending money on technology, and shifted emphasis to harvesting and getting more out of technology they already had in place," he says. For example, a number of companies tried to leverage investments in supply chain planning software that wasn't implemented properly—or is still sitting on the shelf.
In addition, Copacino says, " now, we're seeing less emphasis on software itself, and more emphasis on making sure that processes are well thought out, that a company's core capabilities create enduring competitive advantage."
"People are investing more wisely in technology today," reports Susan Rider, vice president of eastern region sales for Manhattan Associates Inc., Atlanta. "They're looking for supply chain execution systems, for solutions that will give them visibility, and real-time business intelligence."
In addition, she says, "technology buyers have become much more educated," recognizing the need to carefully check out the financial stability of software vendors—some of whom are just barely hanging on.
Living in the Aftermath
Until the events of Sept. 11, companies didn't realize just how quickly their supply chains could be disrupted, says Rider. "People that didn't have visibility were lost because they didn't know where their in-transit items were."
She cites the case of a medical supply company that, pre-Sept. 11, guaranteed its customers 24-hour service by air. The grounding of air traffic forced the company to scramble to find alternate modes of shipping. The events of Sept. 11 vividly illustrated the fact that many companies did not have adequate contingency plans for warehousing and distribution, and were not prepared.
"In a lot of industries, people have to rethink their operating models post-Sept. 11," says Copacino. "We built our supply chains and designed operating models with the idea of fast and efficient flow of goods, particularly across borders. It will take supply chains some time to adjust to that. Operating models may need to be adjusted, perhaps not run as tightly, or companies may need to rethink their sourcing options."
The events of Sept. 11 have caused companies "to put an entire new emphasis on supply chain security and protectionism," notes Bob Murray. Companies are looking over their shoulders, evaluating how secure their operations are and how to prevent them from being compromised in the future.
Take the food industry, for example. "Food packaging will change. Food companies will have to provide more security in their production process, and build another level of security around inbound products coming into the food chain," Murray says.
On the outbound side, companies will have to move product in and out of warehouses and through transportation in a controlled environment to ensure that product has not been tainted before delivery to the customer. "These steps will require permanent changes in the supply chain, not a change that is made once and then goes away," Murray says.
Opportunities for Logisticians
For many companies, "service at any cost isn't an option any more," Murray says. In fact, he notes, a number of companies are pruning unprofitable customers and offering different levels of service to customers based on their profitability or revenue.
Be smart in how you cut costs and reduce service—and be alert to what your competitors are doing. Deteriorating or diminishing service creates some real opportunities for logisticians, says Terry Harris, managing partner, Chicago Consulting, Chicago. "If you are very alert, you can watch where your competitors are headed—see who is cutting their service—then move in to capture some business."
Operating in a Mature Marketplace
This is particularly important for companies that operate in a mature marketplace, Harris says. "If your organization is in a mature marketplace, the only way it can grow is by capturing your competitors' customers. In a diminishing market, if you're nimble and alert, you can see such opportunities clearly, then act."
Doing so requires knowing what kind of service improvement will cause your competitor's customer to switch, such as a day's shorter lead time or a fill rate that's five percentage points higher.
"It's a rare organization that looks for and acts on opportunities such as these," Harris says. Most are focused intensely on cutting costs, or are hampered by layoffs that have thinned the ranks of logistics professionals.
"Many logistics people are going to the office today with more work to do and fewer people to do it," he notes. "They hunker down, and don't pursue new and creative initiatives."
"The average or below-average companies and laggards are missing a lot of opportunities as they manage for minimizing functional costs as opposed to developing an operating model that creates a distinctive, differentiated supply chain," warns Bill Copacino.
The gap is widening between leading companies and average and laggard companies, Copacino says, as innovative, bold organizations capitalize on growth opportunities despite a down economy.
Strength Through Adversity
Yes, 2001 has been a tough year—but from the pain will come some gain, Bob Murray predicts. "2002 and beyond will produce a much healthier environment," he says. "The economy will rebound as it has in the past, and we'll be in a much stronger position when it does. We are building a stronger supply chain, a stronger security base, and more rational inventory levels. We've put in place rules that will improve inventory for the long-term."
Continuing to expand partnerships and collaborate with other organizations "will make the whole supply chain that much better," Murray says.
To be successful in a world of collaborative commerce, "logisticians have to embrace collaboration, and gain the knowledge and education they need to operate in this new world," Andraski says. Mobilizing for change and building a new business model are not easy tasks, he adds.
Businesses would do well to add increased collaboration and improved change management to their list of resolutions for the new year.