Sourcing Globally Now That The Rules Have Changed

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During the 1980s and 1990s, manufacturers saved billions of dollars in inventory and other carrying costs by instituting effective just-in-time (JIT) supply chain management and production processes. These efforts were based on the fundamental assumption that, while global supply chains might experience short-term hiccups, they would run pretty much as expected.

September 11, 2001, proved that notion wrong.

The terrorist attacks on New York and Washington, D.C., are causing the U.S. government and importers to rethink global trade on a massive scale.

"Sept. 11 heightened the idea that there could be major disruptions in the supply chain and that they could have costly and even catastrophic effects," says Joseph Martha, a principal with Mercer Management Consulting, Cleveland. For example, immediately following the attacks, Ford Motor shut down five of its U.S. plants, in part because it could not get enough engines and drivetrain parts from suppliers in Canada.

Aftershocks from the Sept. 11 terrorist attacks in the United States continue to play out in the worldwide logistics community. "With the Bush administration budgeting $8.8 billion for transportation security in 2003, no single factor has as much prospect to change the way transportation is managed as the aftereffects of Sept. 11," says Jerry McNerney, an analyst with Boston-based AMR Research. "Security concerns will require improvements to the process by which freight is moved, especially across international borders.

"With the trend to outsource more manufacturing to Asia, and bottlenecks already an issue at West Coast ports," he says, "a fundamental requirement will be instituting more efficient ways to manage documentation, ensure custody, and provide visibility into each shipment."

Carriers, shippers, and related stakeholders are just beginning to assess present and future effects of Sept. 11-related legislation and government initiatives. U.S. consignees importing goods from overseas will feel the proposed changes. Many, says McNerney, will be prompted to upgrade their technology infrastructure with an eye toward gaining better visibility into shipments, and improving inventory management and service reliability.

Others will rethink their inventory strategies. "Some companies are beginning to buffer inventories to a degree," Martha reports. "After all, what's the cost of carrying inventory compared to the cost of shutting down a factory or multiple factories due to parts shortages? Are the inventory savings worth that cost? Probably not."

In addition, companies are reassessing their sourcing patterns and supply lines in light of operational risk. Supply chain managers are in the thick of this discussion.

"Some U.S.-based companies are now looking to move at least some of their supply sourcing closer to home," Martha notes. "Companies that had set up plants or suppliers in the Far East are considering moving a portion of that supply source closer to the United States—to Mexico and the Caribbean for example. Once these companies started looking at the Far East in terms of total logistics cost and length of supply lines, they realized that although Mexico may be more expensive from a production standpoint, the logistics costs are lower and it's faster to replenish from there vs. bringing in goods from the Far East."

U.S. companies also may view closer geographic proximity as a significant plus in the risk management column.

Hardening our Borders

Several government initiatives impact import/export operations directly. These include:

C-TPAT. In April, the U.S. Customs Service launched the Customs-Trade Partnership Against Terrorism (C-TPAT), a joint initiative between government and business designed to protect the security of cargo entering the United States. C-TPAT requires importers to take steps to assess, develop, and communicate new practices that ensure tighter security of cargo and enhanced security throughout the entire supply chain. In return, participants' goods and conveyances receive expedited processing into the United States.

U.S. Customs is clamping down on incoming freight, says Robert Bonner, U.S. Customs commissioner. "Customs is hardening our borders and using its targeting systems, its frontline people, and its detection technology to do all we can to make sure that terrorists and terrorist weapons do not enter our country," he says. "And Customs is doing this, mindful of the need to ensure that this heightened security does not choke off the flow of trade that is so important to the U.S. economy. If a business takes steps to secure its cargo against terrorism, we will give it the 'fast lane' through the border."

Businesses must apply to participate in C-TPAT. Membership is available to importers, carriers, brokers, warehouse operators, and manufacturers. To date, nearly 300 importers have agreed to participate in the program. Over the coming year, U.S. Customs will expand the C-TPAT program to include the entire import community.

CSI. Earlier this year, U.S. Customs launched a second major effort called the Container Security Initiative (CSI). Under this program, U.S. Customs will partner with other governments to identify high-risk cargo containers and to pre-screen those containers at foreign ports before they embark for U.S. ports. Pre-screened cargo from foreign CSI ports will not have to be screened again when it reaches U.S. ports.

U.S. Customs intends to place inspectors at the world's top 20 "mega-ports" to execute the program. To date, three Canadian ports—Halifax, Montreal and Vancouver—as well as Antwerp, Bremerhaven, Hamburg, Le Havre, Rotterdam and Singapore have agreed to participate in CSI. U.S. Customs plans to implement a similar program for air cargo.

Boosting Security at Seaports

In addition to its CSI program with other nations, U.S. Customs has taken other steps to bolster security at the seaports of the United States. "First," says Bonner, "we are making it mandatory for carriers to file electronic manifest information in advance, before they arrive at U.S. ports. This information must be accurate and complete, and it must be timely.

"Second," he continues, "we have revamped our risk-targeting criteria with input from intelligence agencies, so that it takes into account all available information that can help us address the increased terrorist threat. We have been applying this revamped risk-targeting criteria to all incoming containers through our Automated Targeting System."

How will these initiatives affect U.S. consignees and shippers? They may cause shippers to change the terms of their shipping arrangements, according to Richard Bank, a partner with the Washington, DC law firm Thompson Coburn.

"Shippers and consignees must cooperate closely with carriers on providing accurate information about shipments," Bank explains. "This may mean a review of freight all kinds (FAK) contract terms, or revising the past practice of massing suppliers into single shipments.

"If you're a receiver or shipper and have freight moving in consolidated shipments, your security-related Customs issues may be multiplied," he continues. "If your shipment moves as part of a shipment with other importers, and those importers have not fulfilled the new Customs security information requirements, then the entire shipment may be held up. Customs won't allow a box to come into this country unless everyone is in compliance. And if five or six shippers share a single box, the process can get pretty complex. So you may choose not to consolidate your freight with that of other consignees to ensure that it doesn't get held up at the outbound or inbound port."

Shippers, carriers and consignees may want to review the service-related terms of their contracts—particularly in JIT operations—to reflect possible delays and unexpected occurrences resulting from new governmental and inter-governmental requirements.

"One thing is certain," Bank says. "U.S. Customs will pay more attention to inbound freight, and will look especially closely at the character of the shipper."

Turning to Technology

Faced with this panoply of new supply chain complexities, U.S.-based companies are taking steps to better manage their inbound supply chain flows. Now more than ever, says McNerney, "channel masters are looking to wrestle control of inbound logistics from their shippers to gain operational control and cost efficiencies."

This trend is one reason why companies spent $844 million on transportation management systems (TMS) in 2001, McNerney suggests in a recent AMR Research report.

"There is now an effort to better manage the inflow by switching to collect freight terms that use an optimal transportation network based on volume and sourcing efficiencies across the entire enterprise," he notes.

Companies in specific vertical sectors are deploying a variety of logistics software tools. In the automotive sector, for instance, software vendors such as SynQuest and Blinco Systems are working with OEMs and third-party logistics providers to create an inbound logistics plan that synchronizes the supply chain by coordinating costs, physical constraints, and demand. This plan is then handed off to the TMS application. The consolidation of inbound logistics can save users as much as 30 percent of the inbound cost.

Similarly, U.S. retailers are looking for ways to slash inventory costs and accelerate velocity. Retailers are using services such as those provided by Transplace to optimize shipments through improved consolidation, co-loading, and collaboration between products, brands, and competitors. Better inbound shipment planning helps retailers trim inventories, reduce the size needs of their distribution centers, and obtain volume discounts in transportation services across the entire business.

Another issue—vendor compliance—is tremendously important in the retail/garment trade. Retailers, who hold the power in the supply chain, are shifting the burden of labeling and other value-added functions to their suppliers. They require factories to be responsible for all aspects of carton and garment labeling/tagging. If factories fail to comply, they face chargebacks or invoice deductions.

Linking to InfoChain

Several major U.S. retailers and their suppliers have turned to InfoChain Express (ICE), a web-based application service from Avery Dennison, to address these issues. (L.L. Bean and J.C. Penney's participated in the ICE initial pilot test.) InfoChain Express extracts the data necessary for factories and service bureaus to produce the appropriate labels and tickets for orders. It also supports on-site bar- code scanning and validation of picking/packing accuracy, and facilitates production of electronic packing lists and advance shipping notices (ASNs). Downstream from the factory, ICE users can track orders and receive updates in real time.

"InfoChain Express can help ensure 100-percent data accuracy," says Chris Pfister, Avery Dennison's marketing and alliance manager for the solution. "It helps with vendor compliance and supply chain visibility, and cuts down on lost data/lost orders that can cause higher costs and weeks of delays."

Companies such as DuPont, Lowe's, and Sears, Roebuck & Co. are addressing inbound logistics management issues with other new IT solutions.

Dupont Sourcing and Logistics recently acquired G-Log Inc.'s Global Enterprise Transportation software to manage the transport of goods across business units, subsidiaries, joint ventures, and affiliates. G-Log's web-based transportation solution helps DuPont optimize and manage shipments globally and regionally.

Building a centralized logistics database to support more than one million multi-modal, multi-leg worldwide shipments annually will be the first step in the solution deployment. In addition, G-Log's technology will enable DuPont customers and businesses, freight forwarders, customs brokers, third-party logistics companies, and carriers to more accurately predict delivery dates and track shipments.

Lowe's, the $25-billion home improvement chain, is working with Celarix Inc. to create a collaborative global community that will connect the company's entire supplier network, including more than 700 international factories and multiple service providers. Lowe's merchandising, inventory, and logistics departments have access to all shipping and order information—giving the entire organization real-time, end-to-end supply chain visibility from the time products leave the manufacturing plants until they arrive at Lowe's distribution centers.

"By implementing Celarix' real-time web-based solution, we will be able to improve communication with our trading partners, reduce inventory in the pipeline, and increase efficiency with more accurate information on shipments," says Dean Tracy, Lowe's director of import logistics.

Sears, Roebuck and Co. has deployed the collaborative sourcing supply and international logistics and customs modules of QRS Corporation's sourcing application for its import operations. The program helps the $41-billion retailer communicate electronically with more than 3,500 vendors.

Through the QRS system, Sears gains real-time access to current information needed to expedite purchasing and shipping processes. The retailer also gains visibility into its import operations, allowing it to better manage inbound flows.

Striking a New Balance

To prosper in the much-changed global landscape of supply chain management, manufacturers, retailers, and suppliers have no choice but to adapt and institute new practices. Joe Martha and his colleagues at Mercer Management Consulting offer some advice in the areas of inventory management, sourcing, and transportation:

Inventory management. Companies will need to carry more buffer inventory in order to hedge against supply and production line disruptions. Retailers should think about the timing and frequency of their replenishments. Rather than stocking up across the board, however, companies should focus on the most critical parts or those that come from a single international source.

Sourcing. Businesses should be more selective about where their critical parts are coming from, and consider the reliability of their delivery logistics in this new environment. The sourcing strategy will have to vary by location, because the issues raised by sourcing from Mexico, for example, are very different than those in Canada.

In addition to working more closely with existing suppliers, companies should investigate purchasing from domestic, even regional suppliers in order to minimize trans-border shipping delays.

Transportation. Manufacturers and retailers should consider broadening their shipping arrangements, looking to alternate modes or carriers as backup. Companies would also benefit from more thorough knowledge of security and customs operations along the borders, so they can adjust delivery routes daily if necessary.

"Each of these temporary solutions, of course, raises challenges," observe Martha and colleagues writing in a white paper entitled And Now, Just-in-Case Operations. "Sorting out which tactics will work best for a given company requires, first, determining which parts and components are critical or could gum up the rest of the operation. Then, companies should assess their options based on factors such as the cost and service impacts of shifting to different forms of transportation, domestic suppliers, or different plants.

"Besides these pressing short-term issues, there are longer-term considerations as well. Supply disruptions, greater security, and the attendant delays are not likely to disappear in six months or even a year or two. Business operations have become less predictable.

"Over the longer term, then, manufacturers, retailers, and suppliers will have to adapt for new contingencies," says Martha, "and examine their supply chain design in light of new tradeoffs."

A Snapshot of Complexity

Columbia Sportswear Company, headquartered in Portland, Ore., is one of the largest outerwear brands in the world and the leading seller of skiwear in the United States. The company recorded net sales of $124.2 million for its second quarter ended June 30, 2002, an increase of 2.2 percent over the $121.5 million in net sales for the same period last year. Columbia Sportswear employs more than 2,000 people around the world and distributes and sells products in more than 50 countries and to over 10,000 retailers. The company also operates one retail store and eight outlet stores in the United States.

Columbia's far-flung global sourcing and supply chain operations are a study in complexity. Here's a look.

Columbia faces a host of challenges on a day to day basis—all of which have the potential to directly or indirectly affect the company's profitability. The company's quarterly earnings release announced some of these challenges:

  • Trade disruptions.
  • Political instability in foreign markets.
  • Quotas and tariffs.
  • Supply chain disruptions caused by potential service interruptions.
  • Business disruptions and costs arising from acts of terrorism or military activities around the globe.
  • Dependence on independent manufacturers and suppliers.

Columbia, according to Rick Carpenter, vice president of manufacturing operations, has a staff of sourcing, development, and production people in the United States and Asia who manage vendor relationships and transactions for apparel and footwear coming out of their assigned regions.

"They are strategically set up to maximize our coverage of various countries," Carpenter says. For the most part, terms of trade are on an FOB package basis, whereby Columbia manages and coordinates the logistics of moving these goods from consolidators to the company's U.S. distribution center in Portland. Other distribution centers are located in Canada, where Columbia leases and manages the building; France, which opens this December; Japan, with third-party ownership; and Korea, owned by Columbia.

With many of its contract factories in China, Columbia manages most of the logistics. "We buy the materials and trims, and coordinate their distribution to our factory partners in many regions of the country on an as-needed basis to support our production commitments," explains Carpenter. "That's one way we've chosen to work with local factories in China that we feel gives us more control over our supply chain."

The majority of the company's products move via ocean, about 20 percent travels by air, and the remainder ships direct from manufacturers to large customers in full containerloads. Columbia has long-term contracts and rate agreements with a select number of logistics service providers.

What are Columbia's greatest supply chain challenges? The manufacturing vice president lists them as follows:

  • Where can Columbia gain efficiencies in its supply chain?
  • How can the company get better visibility into its inbound shipments?
  • How can it do a better job controlling and auditing supply chain operations?

"We want to be able to look across our entire supply chain and see not only what's going on, but identify areas for business process improvement," Carpenter says.

Columbia works closely with its carriers and logistics service providers to gain better inbound shipment visibility.

"There's no question that technology is playing a big part in making our supply chain more efficient," Carpenter says. "We all strive to be more efficient, our customers demand more of us in terms of flexibility and responsiveness, and we demand more from the manufacturers we contract out to, so we can stay as competitive as possible. This is an ongoing process of continuing improvement."

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