Supply Chain Roundup: The Hottest Trends of 2006
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When it comes to the supply chain, 2006 was a year of mixed outcomes. The cost of fuel skyrocketed, causing considerable pain in the transport sectors and in industries heavily dependent on petroleum-based materials. Companies hedged their bets by embracing strategies such as shifting to alternate modes and relocating distribution centers.
By year's end, fuel prices had mitigated somewhat. And thankfully, there were no horrific natural disasters or catastrophes to rival Hurricane Katrina or the 2005 tsunami in Asia-Pacific.
"Overall, no major earth-shattering developments or changes occurred in the field of supply chain management during 2006," says Dr. Thomas Speh, Rees Distinguished Professor at the School of Business, Miami University of Ohio.
"On the negative side, we did little to solve U.S. infrastructure congestion problems. And we're still a long way away from achieving collaboration and functional integration within companies.
"On the positive side, top companies are making progress in being responsive to customers. They are using better information to direct that responsiveness," Speh adds.
To gain perspective on what transpired in 2006, Inbound Logistics asked thought leaders from various positions in the supply chain sector to comment on the year's key logistics trends.
Managing supply chain risk, globalization, and new technologies are among the top issues supply chain professionals faced last year—and will likely deal with again in 2007.
Here is what our roundup participants had to say.
The Whiplash Phenomenon
Supply chains today are suffering from whiplash brought on by extreme external events. To make matters worse, these events now occur in increasingly compressed time cycles.
Take oil for example. During 2006, oil incurred large price increases and decreases. This see-sawing has tremendous implications for companies' cost structures, causing the price of anything petroleum-based—such as packaging—to skyrocket.
Uncontrollable external factors don't only affect cost structures, however; they also impact supply chain performance. Supply chains today must be able to react effectively, but most are not designed to address volatile short-term swings.
Supply chains are usually designed for efficiency and low cost, assuming that sources of supply, transportation, and other operational elements are predictable and reliable.
Companies must get a grip on the new realities of unpredictability, and learn to operate effectively in this new paradigm. This is easy to say, but hard to do. Businesses are likely to struggle with supply chain whiplash for some time.
Demographics dilemma. U.S. companies had an increasingly tough time this year finding, attracting, and keeping warehouse workers and truck drivers.
There are two basic reasons for this. First, the United States faces a rapidly aging population, meaning fewer people with the ability and/or desire to do this kind of work are available.
The older population—age 65 and up—numbered 36.3 million in 2004 (the latest year for which data is available), according to the U.S. Department of Health and Human Services' Administration on Aging.
They currently represent 12.4 percent of the U.S. population, about one in every eight Americans, but are expected to grow to be 20 percent of the population by 2030. At that time, about 71.5 million older persons—more than twice the number in 2000—will live in America.
Second, the number of people that aspire to be truck drivers or warehouse workers is shrinking. Our children are better educated than previous generations and want to pursue other kinds of careers.
So where will this industry get the labor it needs? Do we import it? This is a tough issue for our field and will only get tougher. Burgeoning geopolitical influences. Our supply chains have embraced the world. As a result, they are more susceptible to the changing dynamics of geopolitics.
Take a company sourcing materials from North Korea, for instance. Say President Kim Jong Il ramps up his country's nuclear missile launch program, and the United States retaliates by imposing trade sanctions that embargo the import of a key component the company sources from North Korea. Does it have a plan in place to immediately switch sourcing to another country?
Businesses must be more geopolitically savvy than ever before. They must identify and assess geopolitical risks, factor them into sourcing decisions, and prepare contingency plans in the event of a sudden shift in political winds.
Energy Issues Are Here to Stay
There are two aspects to the energy problem: rising costs and how they affect supply chain service and delivery models, impacting the makeup of the supply chain. A number of companies are redefining their supply chains, perhaps sacrificing speed for reliability and lower costs.
Of equal importance is the question of whether we are using energy efficiently within the supply chain. Energy sustainability is as important as energy costs to supply chain professionals.
Using domestic suppliers helps some companies solve energy issues. But this is not possible in the apparel industry. To bring supply sources closer, we'd have to rebuild the apparel manufacturing industry in the United States because it doesn't exist any longer. That is simply not feasible.
At Limited Brands, we are re-thinking our supply chain to be effective and competitive as well as sustainable. We may ship more goods by rail rather than over the road, for example, because rail is energy efficient.
Smarter supply chains. Technology makes it possible for us to have information about what is going on in our supply chain at all times. We have technology that lets us view the supply chain holistically rather than sequentially, so we can move toward being a demand-driven business.
Technology allows us to dive back into the supply chain, determine inventory and shipment status, and make changes based on real-time information. At any moment, we can decide to re-engineer based on our competitive position.
The availability of usable information across the supply chain enables us to be more adaptive. We aren't simply doing the same things faster; we are conducting different and more intelligent actions.
Because of the Internet and how easy it is to bring information together, we can collaborate in new ways across functions, and in doing so, continue to improve the organization. We're evolving to a structure of multi-functional teams organized around a process or a block of business.
Supply chain at risk. Limited Brands has spent a lot of time making its supply chain more efficient, redefining it to be leaner. In doing so, we assumed the supply chain would work on a continuum, and we developed a great dependency on it. Today, that continuum is constantly at risk and may be broken at any time.
Most good organizations have plans for dealing with supply chain risk and problems such as port capacity shortages. They've spread their network around so it can handle some bumps, but as supply chains become global it gets harder to anticipate what may occur around the world.
Limited Brands produces apparel in Jordan, Israel, Sri Lanka, Indonesia, China, and elsewhere, and disruptive events in those countries may go well beyond the ability of our alternative supply chain models to adjust.
When we think about our business strategies, we have to educate ourselves on potential risks. And we have to think in terms of multiple businesses in the extended supply chain managing this risk together.
This is a struggle because businesses are separate organizations. How do you build a model for the good of many when it may require you to do things that seem to be at odds with your internal competitive view?
The Big Get Bigger
The international freight forwarding and third-party logistics industry has witnessed multiple organizational and compositional transformations during the past few decades.
As a result of a continuous stream of massive mergers and takeovers, the world's 10 biggest 3PLs, freight forwarders, and carriers account for an increasing share of the total volume of shipments handled and revenue generated in their respective industries.
In recent months, several multi-billion-dollar acquisitions occurred among the biggest players in the logistics industry. Notable among these acquisitions are the following:
- FedEx Corp. purchased Watkins Motor Lines
- Koninklijke Frans Maas Groep accepted a buyout offer from DSV
- Brink's agreed to sell BAX Global to Deutsche Bahn
- Deutsche Post World Net purchased Exel
- PWC Logistics acquired GeoLogistics
- UPS acquired Overnite Corporation
- Yellow Roadway completed a takeover of USF Corporation
- TUI (parent of Hapag-Lloyd) acquired CP Ships
- AP Moller-Maersk purchased P&O Nedlloyd
- Kuehne + Nagel acquired ACR Logistics
This wave of increasing industry consolidation seems unstoppable. Perhaps we will one day see the evolution of a totally integrated service provider that includes a freight forwarder; 3PL; shipping line, airline, rail, and other modal operations; trucking and inland logistics; and terminal operations in ports and airports—a mega-integrator.
There are signs that the mega-integrator phenomenon is a likely prospect. The two German strongholds, Deutsche Post World Net and Deutsche Post, along with Danish shipping giant AP Moller-Maersk are gaining strength every year.
This has caused concern for other industry players, prompting some reactive responses. The major industry players will likely continue to look for complementary "add-ons" to fill gaps in their integrated door-to-door service package.
It is interesting to consider a few "what if" scenarios for future integration and consolidation activity. What kind of business landscape will emerge and what kind of competitive threats and opportunities will be created if, for example, Maersk takes over TNT, or if Hapag-Lloyd forges a strategic alliance with DPWN or Deutsche Post?
While many pundits are skeptical about the evolution of total package mega-integrators, it is still worthwhile to evaluate such a possibility and to assess the implications of such industry consolidation.
Business Intelligence Hits the Supply Chain
Business intelligence (BI) is a broad category of application programs and technologies that gather, store, analyze, and provide access to data to help enterprise users make effective business decisions. BI applications include decision support, query and reporting, online analytical processing, statistical analysis, forecasting, and data mining.
Until recently, information that percolated up the integrated supply chain IT architecture to the executive control panel or dashboard largely reflected the internal workings of the corporation. But the latest versions of BI provide a middleware layer that allows information from suppliers and customers to populate a company's internal data warehouse.
Essentially, a new kind of strategic execution software is emerging that combines increased data warehouse capacity, easy-to-use ad hoc query tools, and tremendous online analytical processing algorithms. This intelligent technology will have an important effect on enterprise performance management.
Previously, logistics technology users had to ask a systems administrator to run special queries to gain information about the operations of the extended enterprise. Now any user can run those same queries in seconds from the desktop. This moves valuable information out to the user, providing deeper insight into the company's business than was possible in the past.
Today's BI tools enable external supply chain data coming into the organization to fuse with data from various internal enterprise systems. This data merging not only provides a higher level of visibility into corporate transactions, but also delivers insight into deeper patterns that companies might have missed before.
How do companies use this deeper level of insight? Wal-Mart, for example, receives massive amounts of real-time data from both corporate transaction systems and from its stores. It can monitor a sales promotion's performance in real time at store level.
If the promotion is not meeting expectations, within one hour Wal-Mart can identify which stores are lagging, and direct those stores to rearrange displays or showcase product differently in order to stimulate sales.
China's New Internationalization
The internationalization of China-based enterprises is accelerating. China's emerging global enterprises already account for one third of global direct investment outflows from all developing countries, according to research presented at last spring's Pacific Asia Forum for Trade and Development in Guadalajara. If you factor in Hong Kong strategic investment, the total combined capital stock of overseas investment by Chinese companies rises to $350 billion.
Factor in, too, a U.S. $1-trillion currency reserve maintained by the Chinese government that helps stimulate overseas dollar-denominated corporate investments. Then look at the level of sophistication Chinese companies are showing: Shenzhen manufacturers, for example, are setting up permanent sales offices and "trade pavilions" in North America and Europe to go direct to the customer and manage the entire order-taking and fulfillment process.
Finally, witness the scope of investment in public trade facilitation infrastructure in China. In Tianjin, for example, 13 square miles of sea are being dredged to create a logistics city.
The combined effect of these developments is that China is moving well beyond the role of being the dominant low-cost manufacturer/global supplier. It is becoming an orchestrator of extended enterprise relationships and complex multi-dimensional supply chain flows all over the world.
While at the moment China is having problems merging these new assets, technology, and infrastructure into critical mass, in five years, the country will solve all these issues. At that point, China will have the capability to launch two-way supply chain flows from infrastructure platforms that are far more advanced than anything the United States has.
Growing influence of financial management on logistics. As logistics and supply chain management departments gain access to the corporate boardroom, we are starting to adopt decisionmaking and management approaches modeled after those used in the finance and insurance sectors.
Companies are beginning to manage the supply chain as an investment portfolio. They are scrutinizing supply chain decisions from a more rigorous return on investment/risk management viewpoint.
A New Take on Inventory
Traditional inventory management practices are becoming obsolete because of increasing global supply chains, contract manufacturing, dynamic product lifecycles, and multi-channel distribution. A recent Aberdeen study finds that the majority of companies (63 percent) still look at inventory as a cost-related item, but 27 percent view inventory as a way of gaining market share through superior service and product availability.
Visionary companies are leveraging inventory as a competitive weapon and have been managing it on a network basis instead of at a facility or company level. These companies use inventory to optimally position supply when and where it is most needed and most profitable. By segmenting their customer channels and products, these businesses attain significantly higher return on assets than their competitors.
These companies tie their demand management and sales and operations planning processes closely with the inventory process.
They achieve increased supply availability in response to the most profitable demand, resulting in increased customer service levels and market share gains. They achieve top-line revenue increases through inventory management even in situations where their competitors are facing a flat market.
Companies achieve still greater improvements when they apply technology—such as supplier collaboration or multi-echelon inventory optimization tools—to these inventory practices. In fact, these technology-enabled companies achieve 20 percent to 30 percent improvement in key performance indicators from their inventory management initiatives.
Also, companies increasingly use network design strategies for more than merely identifying where to build facilities and warehouses. They have started thinking about where and how much inventory to place in their warehouses, along with how to redesign distribution networks to mitigate transportation time, cost, and capacity constraints.
These practices are in the minority, however. Despite globalization and the dynamic nature of customer requirements, half the companies in the Aberdeen study look at their network design only once every two to five years.
Inventory collaboration and collaborative forecasting are driving the best improvements. Supplier collaboration technology is helping companies execute these strategies by:
- Providing real-time views to information such as on-hand inventory, forecasts, current and future production schedules, and order commitments. This helps suppliers plan efficient replenishment processes.
- Providing shared status dashboards to warn of impending problems.
- Letting a company's materials managers and purchasing agents see shipment notifications and perhaps even supplier in-process activities.
With visibility to in-transit inventory, for instance, a materials manager can understand that even though on-hand inventory has dipped below its minimum target, a shipment is on its way so no action needs to be taken.