October 2008 | News | Trends

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The New York City Department of Education (DOE) is learning the fundamentals of transportation and vendor management the hard way—and it shows.

Facing a $300-million budget deficit, this past spring the DOE decided to revamp its decades-old milk purchasing arrangement and consolidate suppliers, according to the June 18, 2008, edition of the New York Post.

"Our primary goal is to derive the best price," said Eric Goldstein, who manages the department's milk vendor contracts.

Instead of vendors bidding individually for milk contracts at New York City's 1,000-plus public schools, the DOE's purchasing program now requires dairies to compete for a "borough's worth of schools"—which amounts to six contracts (Brooklyn's schools are split in two).

The justification? Buying in bulk increases competition and economies of scale, reduces paperwork, and saves the schools money.

The milk vendors see it differently. They argue that contracts will become more expensive as suppliers factor in extra truck, labor, and fuel costs. In the past, dairies bid on schools that were along existing milk runs, deliveries they could simply plug into daily routes and schedules.

Under the new system, those still vying for this business will have to add trucks, drivers, and routes to serve more stops across a much larger, and arguably more inefficient and congested delivery network.

With today's high fuel prices, vendors estimate the DOE's "improved" purchasing program will cost taxpayers $10 million more annually, or $50 million over a locked-in five-year contract.

Shared Knowledge Equals Shared Gain

This lesson aside, businesses have been gradually shifting the way they integrate their supply chains to drive visibility into inventory movement and create better efficiencies across functional divides.

The current economic climate only raises the importance of looking beyond "shelf purchase price" to probe underlying cost structures, digest and disseminate this data throughout the chain, and identify areas for improvement. The natural synergies that exist between logistics disciplines bear recognition, then action.

Tying together transportation and procurement, for example, provides incentive for businesses to place purchase orders in the hands of the people coordinating inbound moves.

Deeper visibility into the purchasing function, and therefore greater capacity to capture, track, and forecast demand signals, enables transportation managers to plan and consolidate loads and optimize asset utilization.

Breaking down walls inspires innovative strategies—and vice versa. This is a core tenet of inbound logistics.

Conversely, when businesses—and school districts—optimize one function without optimizing another, fail to understand how changes in one area can ripple out to others, or lack control over transportation execution, the consequences can yield far greater problems.

The communication breakdown between the DOE and local dairies is not all that uncommon in the broader scope of supply chain management, and outside the media's prying eye.

Nor are the consequences. Businesses that apply cosmetic fixes to hemorrhaging cost bleeds, and fail to consider broader symptoms or repercussions, optimize "dis-ease" and dysfunction elsewhere.

In this case, the DOE gains greater internal control over purchasing at the expense of losing control over transportation pricing, which it has little control over anyway. Even if fuel prices drop, extra delivery miles ultimately raise costs.

The department also sets a negative precedent by putting the squeeze on suppliers, rather than working together to explore a suitable compromise.

Integrated Logistics 101

This "public-facing" drama plays out as many private sector enterprises take a completely different approach to reducing costs: deconsolidating distribution networks and creating shorter transportation legs to better rationalize mode selection and fuel economy.

As an example, Procter and Gamble (P&G) recently announced a major shift in distribution within its global supply chain. As one of the world's largest consumer goods manufacturers, P&G operates production facilities across the globe and knows a few things about meeting speed-to-market demands economically and efficiently.

To reduce transportation distances and costs, the manufacturer is locating production and distribution facilities closer to demand and holding more stock in the system.

"Supply chain design is now upside down," said Keith Harrison, P&G's global product supply officer, in a June interview with Financial Times. "The environment has changed. Transportation cost will create an even more distributed sourcing network than we would have had otherwise."

P&G recognizes the bi-directional consequences shifting sourcing dynamics and transportation pressures place on the global supply chain. Turning convention on its ear, the company is taking a holistic approach to creating what it believes will be a more sustainable distribution network for pulling product to market.

Consider another example on a smaller scale. Ken Westfield, strategic sourcing manager for The Gorman-Rupp Company, an industrial pump manufacturer, collaborates with his transportation department to squeeze out costs.

After discovering vendors controlled most inbound freight movements, he began working with his traffic coordinator to better vet carrier terms and specify transportation instructions in purchase orders.

This collaborative effort allows Gorman-Rupp's purchasing and transportation departments to source the right parts at better rates, thereby optimizing the whole.

This level of visibility and collaboration was evidently lacking when the DOE and local milk vendors came to the table—if they even got that far. In the department's defense, consolidating purchasing power is an appropriate action given the economy and New York City's fiscal problems.

But without regard for transportation, especially when fuel prices are exorbitantly high, this disconnect will likely leave vendors with an axe to grind and taxpayers with a sour taste in their mouths.

Food Chains Gone Bad

When food and beverage recalls run wild, they do so at a heavy cost to the enterprise, according to a recent study conducted by AMR Research.

The report, developed in conjunction with Lawson Software, a Minneapolis/St. Paul IT vendor, found that 40 percent of surveyed companies with a recall in 2007 incurred losses of at least $20 million, while more than half reported losses in excess of $10 million.

The study, Traceability in the Food and Beverage Supply Chain, polled food and beverage manufacturing companies in the United States as well as France, Sweden, and the United Kingdom.

The figures are remarkable given recent consumer sensitivity to food product safety and quality and the fact that traceability processes and systems are widely available to mitigate such exceptions before they spiral out of control.

The disjuncture appears to be in recognizing when there is a problem and being able to respond quickly. Food and beverage companies report it takes an average of 14 days to sense the need for a recall, then 34 days to act on it. By that time, less than 40 percent of affected product can be collected because the rest has already been consumed or thrown out.

"Despite a perception among food companies that they're doing a good job managing product quality, the staggering cost of recalls proves business-as-usual isn't working," says Rob Wiersma, industry strategy director for Lawson. "Food producers can be much more proactive in managing food safety to improve product quality and reduce supply chain risk."

While the food and beverage industry has been slow to adopt modern traceability software, companies appear to recognize a need for change.

More than 75 percent of those surveyed plan to spend money this year to improve their sense-and-respond time to quality alerts as well as invest in track-and-trace capabilities.

Forwarding Regression

Perhaps reflecting an impending worldwide recession, growth in the global freight forwarding market slowed to its lowest rate in four years during 2007, according to the latest figures published by UK-based industry analyst, Transport Intelligence.

Its research also reveals, however, that despite worldwide economic uncertainty, the market has remained resilient, returning low double-digit growth.

Among other key findings in the company's Global Freight Forwarding 2008 report:

Airfreight forwarding growth dropped sharply, by almost five percentage points to 7.5 percent, as the market cooled significantly. This was a result of lower volumes due to the economic slowdown and the migration of some traffic to less expensive sea freight.

Sea freight forwarding continues to grow at a similar rate as the previous year, registering a 14.3-percent increase in 2007. China's trade is developing at a strong pace and was one of the key drivers of this growth. U.S. exports partly mitigated weakness on the import side, and Asia Pacific-Europe trade volumes grew markedly.

Of the main forwarding markets, Europe and Asia Pacific performed best, while North America—specifically the United States—dragged down overall growth. The credit crunch and a downturn in consumer confidence particularly affected imports into the region.

On the plus side, exports picked up due to the weak dollar. Weakening economic indicators suggest Europe will be the next market to follow the United States' dubious lead.

To Be (Or Not To Be) Prepared

Large corporations might do well to familiarize themselves with The Scouts' Motto: Be prepared.

With supply chains increasingly protracted and the challenges of bringing product to market magnified by such length, anything out of the ordinary can have considerable ripple effects throughout an enterprise.

Despite a litany of devastating natural disasters over the past five years, many companies are ill-prepared for such catastrophes and are not overly concerned about the potential business impact, according to the 2008 Natural Disaster Business Risk Study, commissioned by FM Global, Johnston, R.I., one of the world's largest business property insurers.

The findings are based on the responses of 100 financial executives from U.S.—and Canada-based corporations with at least $1 billion in annual revenue.

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