The Evolution of Inbound Logistics--Choosing Inbound: Natural Selection

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Companies that assume control of their inbound supply chains reap rewards.

For years, consultants, service providers, and educators have touted the benefits companies can achieve by taking control of their inbound supply chains from suppliers. For large organizations, not only can savings run into the millions, but the reliability of production operations can also greatly improve.

Despite its benefits, many companies have yet to tackle inbound transportation management. In many cases, hesitancy stems from the obstacles of an entrenched organizational structure.

"The biggest problem companies have with managing inbound freight is crossing functional barriers—for example, getting transportation managers to work with purchasing," says Robert Murray, president of Princeton, N.J.-based consulting firm REM Associates.

"For years, purchasing managers were removed from supply chain activities and were used to working on buying issues, vendor relationships, and costs in a different way. They were looking for the lowest unit cost and best service from vendors," Murray adds.

More recently, however, the "lowest landed cost" philosophy of managing the inbound supply chain is gradually supplanting this traditional structure.

Businesses are factoring in all costs, especially inbound transportation and inventory carrying costs, rather than basing decisions on purchase price alone.

"Companies need to perform a grass-roots analytical assessment to identify inbound supply chain costs," Murray advises. "They need to look at the cost of product, transportation, storage, inventory carrying costs, and service levels required to support production.

"Once they consider all these factors, they can create a unified structure that minimizes costs while maintaining required service levels."

Creating this unified structure and process framework can prove difficult because most companies have grown through acquisition. They may have different systems, as well as other locations using varied processes.

To best maximize inbound supply chain management, companies often adopt common processes across different business components and use information systems to integrate all these processes and provide visibility and management capabilities across the enterprise.

Unbundling Cost

In segmented, stove-piped companies, collecting volume, vendor, and transportation data from across the entire organization presents a challenge. In many cases, for example, buyers know the dollar amount they spend but don't know how that translates into freight volume.

"The single toughest issue is determining the cost of inbound transportation," observes Murray. "It's usually buried in the product price."

Businesses need to pinpoint what they are dealing with if they want to manage their inbound. He recommends asking: "Who is the carrier? How much actual weight do you move? Is it palletized, slip-sheeted, or floor-loaded? What are the pickup requirements?"

Data Difficulties

Obtaining transportation cost information from vendors isn't necessarily easy. In some cases, businesses are better off collecting volume and requirement data from carriers rather than vendors.

But once companies are able to aggregate this information and leverage greater control over inbound transportation and costs, they can begin moving toward new levels of supply chain sophistication.

"Inbound logistics enables a successful demand-driven, lean world," says Lorne Jones, distribution industry executive at Sterling Commerce. "Agile manufacturing operations require agile logistics operations. In a demand-driven world, control of inbound logistics is key. Without it, a consignee has little or no visibility into what's coming."

Connectivity is the enabler. In the past, companies had to manage an EDI system with many connection points to carriers. Today, carriers and consignees need only a single connection point.

"The inbound logistics team needs visibility to determine where they can get their hands on inventory," Jones explains. "If they can see their product, it becomes inventory they can deploy—even though it's not yet on the books."

As such, a total landed cost approach becomes possible only if the enterprise has complete visibility into all aspects of its inbound freight movements.

H.J. Heinz learned this firsthand recently when it rolled out Sterling Commerce's transportation management system (TMS) to gain better control over inbound costs.

For Toyota Industrial Equipment Manufacturing (TIEM), managing inbound flows—within its U.S. manufacturing facility and among suppliers—is just another day in the life of the Toyota Production System.

Heinz Catches Up with Inbound

When H.J. Heinz Company, the $2.5- billion global food company, launched a project to overhaul its inbound transportation in August 2006, its procurement organization managed the inbound freight flow, which consists of raw materials, ingredients, and packaging.

"We had many prepaid arrangements with suppliers," recalls David White, inbound transportation manager with Heinz North America.

Heinz began its inbound freight management overhaul with a thorough evaluation of data. "We wanted to level set where we were vs. where we wanted to be," White says. "That was important because we didn't want to begin taking control of inbound randomly.

"We wanted to understand the upstream and downstream ripple effects our changes might have. So we needed to identify how much we were spending on inbound freight."

The data collection process took several months. Heinz had to identify where its inbound data resided—with suppliers, carriers, or other parties. It had to understand the network as it existed in its current state, identify its mode mix, and examine the breakdown between temperature control and dry freight.

In some cases, Heinz had a great level of detail regarding its spend, but overall data ran the gamut from very transparent to very complex.

Patterns Develop

Obtaining the inbound freight cost data was only the beginning. As Heinz delved into deeper detail, it began to see patterns of continuous moves and round-trip freight, and where it could use dedicated carriers to manage business that had steady volume and low seasonality.

"We started to gain a clearer view into the way our network works, and saw the easiest and greatest opportunities for making the network more efficient with minimal service interruption," White says.

Throughout its inbound transportation reengineering, Heinz gave highest priority to service issues, such as transportation to the company's 26 frozen- and dry-production plants, as well as to its customers.

"While everything is a cost exercise, no cost savings is great enough to risk sacrificing service," White notes.

Heinz looked at its suppliers from the standpoint of total direct-material spend. "We focused on our top 100 direct material suppliers," White explains. "Chances are good that these are the companies with which we do a high volume of transportation."

As Heinz began to assume control over its inbound transportation, it became apparent that the company needed an information system that could manage these movements and provide total visibility.

"We didn't have great visibility into our carriers' service levels on inbound shipments," White recalls.

Capturing that information manually proved to be a labor-intensive process. The food company also needed a TMS that would provide complete visibility into inbound freight and enable it to take advantage of cost-savings opportunities.

After an extensive search process, Heinz selected Sterling Commerce's TMS solution. "We were looking for a TMS that had a background in managing inbound raw materials for manufacturing companies," White says.

Managing Inbound End to End

Heinz also required that the TMS provide freight payment, auditing, and claims management functions, as well as have the flexibility to work with a full range of suppliers.

"We wanted an end-to-end solution that managed our inbound transportation from the time our supplier tells us the material is available to the time the delivery is made," says White. "We also wanted to manage by exception rather than on an overall-data basis. A network the size of Heinz is almost impossible to manage any other way.

"It's like when the red oil light comes on in your car and you know you have an issue. When that exception light comes on in my system, I know I need to pay attention to it."

Heinz went live with the TMS solution in July 2007. Implementing it was a "game change" for the company, White believes.

"For the first time, we are utilizing our carriers more efficiently and getting full visibility into our costs and physical movements," he says. "We gain control, and that lets us provide better service to our plants."

TPS Today: Refurbishing an Old Model

Some things never change. At Toyota Industrial Equipment Manufacturing's (TIEM) Columbus, Ind., facility, the Toyota Production System (TPS) lives on.

As the U.S. materials-handling arm of Toyota Industries Corporation, TIEM produces more than 100 units of assorted Class I, IV, and V lift trucks on an average day.

True to its legacy, "TIEM doesn't build generic models," says Bruce Nolting, vice president of logistics, production control, purchasing, sales and service parts for Toyota Industrial Equipment Manufacturing.

"About 40 percent of our products are specially designed and require unique components to build—anywhere from five to 25 customized parts."

While he acknowledges TIEM is not as evolved as its automotive parent, it is moving in that direction as it continues to fine-tune the Toyota Production System.

For each of its three production lines, it runs multiple models of trucks. TIEM custom-manufactures forklift trucks in line, so it depends on a sophisticated pull system to transport components and parts inbound from suppliers as needed.

"We design, order, and kit components, then send them to the assembly line one by one," explains Nolting. So making sure suppliers are in sync with production is important.

The kanban system makes it all possible. TIEM teaches all its different suppliers—from casting to machining and all parts in between—to produce quantities in smaller lot sizes while training them in the nuances of the system.

In turn, suppliers use this daily order system to drive their own production schedules and to manage on-hand inventory of finished goods.

"Among our 65 local suppliers, we make very few changes," observes Nolting. "We have developed long-term relationships with them largely through sharing this production model. As is often the case, they see the advantages of implementing the TPS and ask us to teach them how to take their operations to the next level."

TIEM has even gone so far as to regularly bring in TPS gurus from both the material handling and automotive manufacturing sides to visit with suppliers and review their progress.

While TIEM's supply base remains fairly static, its inbound transportation needs are routinely in flux, depending on sales demand and corollary inventory needs.

The lift truck manufacturer's supply base varies from local (within a 250-mile radius) to global—Japan, where its parent company operates. The majority of its local vendors use kanban to communicate and receive demand requirements and TIEM schedules multiple deliveries per day into its milk run system.

"We arrange the trucking, work with our milk run logistics provider, and build loads as efficiently as possible. We operate seven milk runs a day, signal to our suppliers daily, and give them our production forecast and deliveries three to five days out," says Nolting.

By forecasting expected demand up to five days out, TIEM presents suppliers with time windows picking up and delivering parts. When it delivers a kanban (order) it requests immediate notification from that supplier on whether it can produce that amount.

Depending on demand and needs, TIEM can then work with the supplier to aggregate components within the four- to five-day forecast. For example, if a supplier can only produce 250 parts one day, when 300 are needed, they can make up the balance the next day.

Sequence of Events

Mid-month, TIEM sets its production sequence for the next month, while also sending an advanced notice of parts needs to suppliers.

This serves to give its partners a preliminary idea of forecasted demand as well as allowing TIEM to level its production schedule and maintain a continuous flow of different parts.

"We look at our product mix and orders that we have received. Then, before we set our sequencing, we level these models over time," offers Nolting. "We level several different components, depending on factors such as our own internal production capacity."

In this way, TIEM automatically flattens its production output and spreads out part needs and deliveries over days rather than batching orders.

"Leveling can help accommodate our Takt-time (time required to produce a component on one vehicle) so we can maintain that flow over a set period," Nolting says.

"In some cases specialized trucks take longer to manufacture—so we may produce one out of every five trucks and spread production out over the day," he adds. "This levels our pull, which levels our kanban to our suppliers, and levels our suppliers' production schedule."

TIEM uses similar standards for managing suppliers outside its 250-mile milk run radius who ship daily deliveries of truckload quantities.

"We source counterbalances from a company in Texas, and signal to them what daily deliveries should be. When we receive a daily load in the afternoon, another delivery for the next day is already on the road," says Nolting.

For other parts coming in from overseas, the transportation leg becomes vitally important. TIEM generally sources critical parts such as engines from its parent company in Japan.

Toyota Japan controls its own local supply base, which supports TIEM's U.S. facility as well as a sister production factory in France. The Japanese headquarters collects TIEM's inventory orders and dispatches requirements to its local suppliers.

"We send our parent company in Japan a monthly order," says Nolting. "Our March order for Japanese parts goes out the first week of January—so there is a 45- to 60-day lead time for parts coming from overseas."

TIEM receives a container schedule the last week of every month with the number of containers in route. It can then set an unpack schedule. Toyota Japan coordinates and negotiates transportation with its ocean carrier partners.

"These containers come in from the West Coast through Chicago—we bring them to our facility from Chicago using a third-party logistics provider, on a container-by-container schedule," adds Nolting.

Because of the distance, Japan's different production timeframes (due to holidays, for example), and possible demand fluctuations, TIEM manages the safety stock level for those types of parts.

"From month to month we adjust our Japan parts safety stock levels—we increase or decrease the inventory depending on the circumstances. Ultimately, our goal is to minimize our backlog, reduce lead time to customers, and manage parts inventory accordingly," says Nolting.

Taking TPS Up a Notch

One of the great benefits of using TPS today, and applying it with technology, is that it gives manufacturers such as TIEM greater flexibility in managing demand fluctuations, without holding excess inventory and impacting work flow.

"For example, if a paint booth goes down at our facility so we can't paint truck frames, and we know it will be down for more than two hours, we have the visibility and capacity to contact our suppliers and tell them to hold shipments," observes Nolting.

Because some of its major steel suppliers are less than two hours away, TIEM can eliminate that inventory from being stored in its facility.

With control over inbound transportation, and by planning demand needs out four to five days in advance, it can work with suppliers to make up for the discrepancy within that window.

Efficiency on the Final Line

Moving forward, the manufacturer is also looking to task suppliers with kitting parts farther back in the supply chain to create efficiencies on the final assembly line.

"A vendor might supply 15 different part numbers—the same type of part but for different model trucks," Nolting explains. "To support our level production plan, we signal to suppliers the delivery sequence for various components required to match our model mix.

"So for truck #879, we signal two part numbers; and for truck #880, we signal two additional part numbers—we give them instructions by part number and in what sequence trucks are being produced," says Nolting.

Essentially, TIEM is signaling parts deliveries truck to truck to support the assembly processes. This way kitted parts are coming to the dock in sequential order and can then go straight to the line, rather than parts coming in for all trucks that will be produced that day.

Many of its critical parts are currently moving in this type of sequential rhythm, and TIEM hopes to bring this next level of sophistication to all of its moving parts.

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