Supply Chain Roundup 2004: What worked. What didn't. What's next?
Supply chain management received a great deal of attention in 2004. What does it all mean for the logistics industry? Here, a look back at the year's top trends, including homeland security, RFID, using data to improve results, transportation capacity constraints, the war, and more.
Logistics hit the big time in 2004.
Harvard Business Review published a six-article series on the 21st century supply chain. Wal-Mart ran primetime ads on network TV featuring Dave, a distribution center manager, describing the retail giant's supply chain network. Logisticians in Florida and other hard-hit states pulled together to deliver the goods needed to recover from an unprecedented season of hurricanes and tropical storms. The war in Iraq further highlighted the critical role of logistics, and the Defense Logistics Agency established a Contingency Support Team in Baghdad to support the multi-national forces in Iraq.
On the homeland security front, the World Customs Organization and the U.S. Department of Homeland Security committed to cooperate on the U.S. Customs and Border Patrol's (CBP) Container Security Initiative (CSI), launched in January 2002. CSI now has 32 ports operational in Europe, Asia, Africa, and North America. Governments representing 20 countries have signed up to implement CSI, according to CBP. CSI pre-screens containers deemed to pose a risk at the port of departure.
In November, the European Union and CBP agreed to adopt measures that will strengthen maritime container security. One component is a pilot project that will focus on exchanging information on shipments moving through both the United States and the EU.
The Department of Homeland Security's Operation Safe Commerce also gained momentum during the year. A collaborative effort among the federal government, the business community, and the maritime industry, Operation Safe Commerce is a pilot program that analyzes security in the commercial supply chain, identifies security gaps, and tests solutions to close those gaps.
"Projects varied in terms of depth and combination of solutions deployed to address supply chain security concerns," notes Graham Napier, president and CEO of TradeBeam Inc., a provider of global trade management solutions based in San Mateo, Calif. "Some point solutions addressed nuclear weapon detection concerns primarily, while others addressed more holistic concerns."
Each pilot had a different scope. For example, TradeBeam was involved in a few pilot projects monitoring goods as they traveled from origin points in China, the Philippines, and the U.K. to destination points in America. The TradeBeam solution provided the supply chain event monitoring for the shipments, tracking more than 30 events such as whether a container was opened, disappeared from visibility for more than a specified amount of time, or was tampered with.
The pilot had positive results, Napier says. "We learned there was truly an opportunity for security and commercial interests to find a balance—to improve security and generate a return on investment for commercial customers."
Garnering a sizable amount of media attention in 2004 was radio frequency identification (RFID) technology, especially Wal-Mart and the U.S. Department of Defense's RFID initiatives.
During the year, DoD and Wal-Mart "announced that they would be executing with Electronic Product Code (EPC) Generation 1 product, including Class 1 and Class 0," says Tom Pounds, vice president of corporate development and product strategy for Alien Technology, a supplier of RFID technology headquartered in Morgan Hill, Calif. "Wal-Mart and DoD both sent a clear signal that they'd be moving forward with EPC-based standards, and that they would like to see a standard that comes together as a single EPC Class 1 Gen 2 standard."
Pounds anticipates that the standard will soon be brought to an affirmative vote of the EPCglobal, making it a candidate specification—a key step in its final adoption.
Among the other major RFID developments in 2004:
Tag prices come down
"Tag prices started to make a significant move downward," Pounds says, dropping significantly from last year's average price of 40 to 50 cents per tag.
For example, this year Alien Technology announced tag prices of less than 20 cents in order quantities of about one million tags. Next year probably won't see another 60-percent reduction in tag prices, but Pounds anticipates continuing declines. He predicts that the sought-after nickel-per-tag price will be reality by perhaps 2008.
RFID hardware is shrinking in size
Readers have shrunk from large units "the size of a dictionary or laptop computer with antennas and long cables," says Pounds, "to the footprint of a credit card."
Over time, reader modules will shrink into chips, enabling another breakthrough in reader functionality and cost reduction. "Within two years at the most, we'll start to see RFID reader functionality in PDAs and cell phones," he predicts.
WMS vendors get into RFID
A number of warehouse management system (WMS) vendors in 2004 made important strides with RFID implementation tools and the ways in which their solutions use RFID-generated data to drive their applications.
In addition, "Large software and application providers such as Microsoft, IBM, and SAP have been hard at work over the last year, and I predict we'll see even more progress next year," Pounds notes. The year also saw the retail, defense, and pharmaceutical sectors focus significantly on RFID initiatives.
The Wal-Mart Initiative
Wal-Mart's RFID initiative, along with those of other major retailers, has been a major driver of RFID implementation in the consumer goods industry.
Progress toward meeting Wal-Mart's requirements is somewhat spotty, notes Steve Banker, service director for supply chain management at ARC Advisory Group, Dedham, Mass. "The impression many pundits convey to the public is that all Wal-Mart SKUs bound for three of the retailer's Texas distribution centers from the top 100 suppliers will be RFID-tagged starting Jan. 1. This is incorrect," Banker says.
"In fact, during a set of negotiations between the retail behemoth and its top 100 suppliers, Wal-Mart showed more flexibility than many anticipated," he notes. ARC's findings are based on its RFID best practices study involving 24 companies actively investing in Electronic Product Code RFID.
Here's a progress report on Wal-Mart's mandate, according to ARC: One company will not start RFID-tagging until mid-2005; other suppliers will be shipping in quantities of less than a dozen; and one large supplier will ship more than 700 SKUs starting Jan. 1.
DoD and RFID
Like Wal-Mart and other major retailers, DoD is taking a lead role in driving RFID implementation.
"RFID is important to the military," notes Col. Peter J. Talleri (USMC), commanding officer of the 2d Supply Battalion, Camp LeJeune, N.C. "It enables us to implement knowledge-enabled logistics, provides automated visibility of assets to support the warfighter," and provides actionable information.
RFID technology helps streamline the supply chain from the supply room to the foxhole, Talleri says.
Because of its previous operational experience with active RFID, the 2d Supply Battalion was selected to participate in an RFID pilot project with DoD's Defense Distribution Depot in Susquehanna, Pa., the Defense Logistics Agency's eastern Strategic Distribution Platform. The 2d Supply Battalion supports the Marine combat troops deployed out of Camp LeJeune. The pilot, which began in October 2004, will be evaluated in early 2005.
As part of the pilot, the Susquehanna Depot writes unique electronic license plates on passive EPC Class 1 RFID tags, applies them to shipments of parts at the case and pallet level, and ships the product to the 2d Supply Battalion at Camp LeJeune. The Battalion receives the inventory using RFID readers. The electronic license plate is tied to a registry that interfaces with military automated information systems.
Components of the pilot include sending the Advance Ship Notice (ASN), receiving each shipment, reading the passive RFID tags, receiving the shipments automatically, and, in the near future, updating inventory levels.
Several loads have successfully been shipped and received using RFID technology. The pilot allowed participants to work through coordination efforts and make some changes to information systems.
As a result of the passive RFID test, the 2d Supply Battalion at Camp LeJeune now has the capability of reading passive and active RFID tags, as well as 2D bar codes. Talleri expects this capability to improve shipping and receiving accuracy, streamline the supply chain, and improve asset tracking.
Talleri wants to build on the lessons learned during the RFID passive tag pilot. "Building the license plate and tying it to a global registry is the hard part," he says.
His group is working with a vendor to explore taking RFID to the tactical level, which would involve rewriting the passive RFID tags on shipments going to the battlefield. Tying the tags to satellite trackers on military trucks carrying the shipments has the capability of providing end-to-end visibility of assets in support of the warfighter.
"When the trucks pull out, we'll be able to look at a map, see their position, and identify the inventory on each truck," Talleri says.
FDA and RFID
In mid-November, the Food and Drug Administration announced a new initiative to improve the safety and security of the U.S. drug supply through the use of RFID technology. FDA published a Compliance Policy Guide for implementing RFID feasibility studies and pilot programs contributing to the safety and security of the U.S. drug supply. The Guide is expected to spur pilot programs that involve RFID tagging of certain products, especially those that have been identified as likely to be counterfeited.
Several pharmaceutical manufacturers also announced steps they would take to implement RFID:
Pfizer will add passive RFID tags to cases and retail packages of Viagra, which it calls "one of the most recognizable and counterfeited medicines in the United States."
Pfizer says it will begin planning for the RFID project immediately, and expects to start shipping Viagra with RFID technology by the end of 2005.
Purdue Pharma L.P. will integrate RFID tags on labels for 100-tablet bottles of OxyContin shipped to Wal-Mart and H.D. Smith, two of its largest customers. Purdue plans to expand the implementation to all bottles of OxyContin tablets as RFID tag availability allows.
GlaxoSmithKline will begin using RFID tags in the next 12 to 18 months on at least one product deemed by the National Association of Boards of Pharmacies as likely to be counterfeited. GSK says it has already implemented RFID tags on some consumer healthcare products and plans to tag pallets and cases to Wal-Mart's Texas distribution centers in late January.
Applying RFID technology to the pharmaceutical supply chain is also the target of an industry initiative called Project JumpStart, which brings together a collection of companies working together voluntarily rather than as the result of a mandate.
Manufacturers such as Abbott Laboratories and Johnson & Johnson, pharmaceutical wholesalers such as McKesson Corporation and Cardinal Health, and retailers such as CVS Pharmacy and Rite Aid, plus industry associations, are participating in the initiative. Consulting firm Accenture is the project manager.
"We started with seven companies and did an eight-week feasibility study," reports Lyle Ginsburg, managing partner of technology innovation for Accenture's Products Operating Group, Chicago. "Fast forward to where we are today, and we've had up to one dozen companies involved. We have tagged tens of thousands of products from the manufacturers, shipped them to wholesale distributors, on to retail pharmacies, and back."
One test involved nine companies, 10 products, and 16 business scenarios in 15 project locations. Nearly 13,500 units of product were successfully tagged, shipped, received, handled, tracked, and traced using RFID tags and EPC reader technologies.
In another example, Walgreens received prescription products from several manufacturers and a distributor with RFID tags placed on bottles and cases, demonstrating the ability to track and trace bottle-level movement of product throughout the supply chain. The next phase is moving from a proof of concept initiative to making RFID part of production.
While suppliers to Wal-Mart and DoD, plus a number of pharmaceutical companies, made significant progress on the RFID front, that's not true across the board, reports Dale Jeffries, president and COO of Radio Beacon Inc., Toronto, a warehouse management system vendor that serves primarily small and medium-sized businesses.
"In 2004, most small and medium-sized companies ignored RFID. A few started some pilot projects just in case," Jeffries says. "But most have been waiting to find out what they were going to be made to do rather than what they could do with the technology."
Because the data being captured through RFID technology will be at the pallet and carton level in 2005, "we have enough computer memory to meet those requirements," Jeffries says. "There's some concern that we don't have sufficient capacity at the item level."
Determining how to apply all the data to optimize the supply chain is one of the major challenge for logisticians in the new year—and beyond.
Unilever Foods North America, the manufacturer of household name brands such as Lipton, Hellmann's, and Country Crock, understands full well the benefit of using data to improve performance. Applying such data in 2004 enabled Unilever Foods to make significant progress toward achieving its goals for improved delivery performance and transportation management processes.
About a year and a half ago, the company shifted emphasis from focusing on traditional metrics, such as case fill and order fill, to include metrics related to the hand-off of product to the customer, such as on-time delivery to the buyer and to the dock. These metrics measure requested versus actual delivery performance, taking into account the occasions when delivery is rescheduled because of the warehouse's inability to receive, or a carrier's inability to deliver on that date.
The new measurements revealed that performance was not where it should have been, notes Mike Raehl, Unilever Foods' director of transportation services. The result was "a focused effort to improve our transportation performance."
When the company examined the issues, it became clear that "we didn't have good data on how products moved through the order cycle. We needed much greater visibility, especially of critical events that are indicators of service to the customer," Raehl says.
The transportation management system (TMS) Unilever Foods used was not able to provide the level of data and analysis that was required. Raehl looked at other options, benchmarking transportation management systems across the industry.
Working closely with Unilever's corporate information technology department, Raehl and his team decided that the new tool would be web-enabled and delivered through the application service provider (ASP) model.
"This would avoid the large up-front IT expenditure, so that we could move forward without the expense, and just pay a per-transaction fee," Raehl says.
The team ultimately selected LeanLogistics' OnDemand TMS, which is integrated with SAP for order feed and EDI data. It is being implemented in phases—the load-tendering process in late summer, and event tracking capabilities in late fall.
Unilever is implementing the TMS carrier by carrier and facility by facility. Five distribution centers and three plants went live with the TMS in August, while five additional plants will go live in January. The TMS will be used to handle the appointment process at Unilever's shipping locations. "We didn't have any record of when loads were being picked up at DCs," Raehl says.
That data is a key element in improving delivery performance, enabling Unilever to target predictable events that affect service. For example, a carrier's failure to pick up on time is an indicator of the shipment not arriving on time.
Better data will enable Unilever to have "much more informed relationships with carriers," Raehl notes, and "much more objective conversations with carriers as to how well they are performing." This will lead to greater on-time delivery for customers.
Better data will also help Unilever cope with transportation capacity constraints. Unilever will be able to track, for example, carriers' reject rates, and analyze how many shipments are rejected, or which lanes have the highest probability of loads being accepted as tendered.
This is particularly important today, with transportation capacity such a widespread concern. "Customers, carriers, our distribution centers—all see the strain on carrier capacity," Raehl says. "We all have to be more efficient to resolve the capacity shortage. The new TMS enables us to be more efficient, and to be a more carrier-friendly shipper."
Like Unilever Foods, Mohawk Industries, a leading carpet and flooring manufacturer based in Calhoun, Ga., finds that it pays to work with carriers, especially during times of capacity constraints.
"We manage all our inbound and outbound truckloads through one database," says Stan Brooks, the director of transportation for Mohawk. Transportation planners match up loads with the company's private fleet and its core carriers.
For example, when using intermodal service, "we'll load containers to the West Coast, then turn around and load them back with inbound raw materials," Brooks explains.
In addition, if Mohawk hasn't matched a carrier with a backhaul, the carrier can log on to Mohawk's private trading community and gain visibility of available loads.
Collaborating with carriers this way is win-win, Brooks notes. "Carriers don't have to worry about getting a backhaul in some cases. Because they know they'll get a backhaul from us, the carrier may lower its front-haul costs," he says. It also helps head off potential capacity problems.
"We have a saying here that you create your own capacity" by collaborating with carriers, Brooks says.
Transportation capacity constraints aren't expected to ease any time soon. Factors such as increased freight volume, the uncertainty surrounding the Hours of Service regulations, and consolidation and failures of motor carriers are exacerbated by a shortage of truck drivers that promises only to worsen as the labor pool ages and the profession becomes less attractive to potential drivers. This is especially true for over-the-road opportunities.
Just ask Christopher Smith, an LTL driver for ABF Freight Systems, who operates out of Farmington, Utah.
"I started out driving for a reefer truckload carrier, and did that for three years while attending college," he says. Smith began driving for ABF when he was 24, delivering LTL freight during the week and working for the truckload carrier on the weekends.
"I knew that LTL was where I wanted to go," he says. Smith, who is finishing his degree in civil engineering at the University of Utah, has been driving for ABF for 11 years. A city driver, he drives the 3 p.m. to 11:30 p.m. shift.
Long-haul driving offers unglamorous working conditions. In addition, "it's a tough lifestyle," he says. Drivers are away from home for days at a time, in effect, living in their truck. Drivers of sleepers can have a particularly challenging time, constantly working in close quarters with another driver.
But that's not all. "When I was young, truck drivers were more respected" than they are today, Smith says. That's true of the general public, and it's also true of shippers and receivers. Drivers are pressured to hurry to their destinations only to sit and wait for hours before they can unload.
Long hours and poor working conditions make the TL driving job unattractive. "You may be making $6 to $7 an hour if you count the time away," Smith says. "I know people working warehouse jobs today earning $10 to $12 an hour who used to drive over-the-road. They could earn $50,000 a year—if they wanted to live in a truck.
There are steps carriers can take that could improve the situation, Smith says. One approach is to shorten hauls by using a regional network in a "meet and switch" environment.
"For example, a driver could make a run from Salt Lake City over to Reno, meet up with another driver, and switch loads." Creative solutions must be found, Smith says. "It's up to the trucking companies and their customers, who put a lot of demand on the carriers."
That's why, in 2005, forward-thinking shippers will work with their carriers and third-party logistics providers to tackle transportation capacity constraints. It's all part of 21st century supply chain management.