Hitting the Mark: Supply Chain Best Practices
A look back at 2003, when companies took aim at improving supply chain systems and security, cutting costs, and providing excellent customer service.
Pressure to increasingly reduce costs, improve service, and comply with new supply chain security requirements made 2003 a challenging year for logistics and supply chain professionals.
“When the dotcom bubble burst, it brought with it an economic implosion that made most of 2003 look like an episode of Survivor,” notes Richard J. Sherman, president of Gold & Domas Research, a supply chain technology and marketing firm based in Austin, Texas.
“Not wanting to be the next one voted off the island, most companies focused their efforts on cost reduction and operating efficiencies,” he says. “While much was said about strategic initiatives, more was said than done.”
2003 was largely a year of survival for a significant number of companies, agrees William H. Drumm, president, Establish Inc./Herbert W. Davis and Company, a supply chain management consulting firm located in Fort Lee, N.J.
“For the most part, U.S. manufacturers and industry in general are still trying to recover. They’re still in economic recovery/survival mode. A lot of expertise has been taken out of the system, so there has not been a lot of thinking, strategizing, planning, or changing,” Drumm notes.
As a result, logisticians in many companies currently have a tactical rather than strategic focus, says Rick D. Blasgen, senior vice president of integrated logistics for ConAgra Foods Inc., Schaumburg, Ill. Because many companies are operating with lean inventories, “hour-to-hour execution is paramount,” requiring complete focus of energy to do it well, he explains.
In addition, a number of companies are still digesting acquisitions they made in previous years, concentrating on integrating cultures, systems, and processes “instead of focusing on innovative ideas and solutions from a supply chain standpoint,” he says.
Despite the challenges, supply chain winners in 2003 were creative and innovative—finding ways to collaborate and work smarter by leveraging the power of technology.
Here’s a look back at the year that was and a preview of what’s ahead in the logistics/supply chain arena.
SC TECHNOLOGY 2003
“The much-heralded software industry consolidation was replaced by software industry attrition,” explains Rich Sherman. “Due to limited software spending, the market leaders scooped up the few big deals of the year. Software vendors with a large customer base survived on maintenance and service revenues while many systems companies simply faded away or were acquired in a flurry of fire sales as investor fatigue set in.”
While many users postponed spending on systems, others continued to invest in their enterprise, logistics, and supply chain systems. More than 25 percent of respondents to the 2003 Logistics Cost and Service Database study, conducted by Establish Inc./Herbert W. Davis and Company, report changes in enterprise resource planning and warehouse management systems. Nearly 20 percent report changes in forecasting and visibility systems.
For logistics/supply chain managers, both the economy and heightened competition in technology mean more options, better pricing and services, and, in particular, more technology for small to mid-size businesses, Sherman says. “Not just more technology,” he explains, “but more sophisticated and comprehensive applications than they have seen in the past.”
One technology at center stage in 2003 was Radio Frequency Identification (RFID), thanks to decisions by Wal-Mart and the Department of Defense mandating that suppliers meet RFID requirements by January 2005.
“RFID was certainly the most over-hyped technology in logistics this year, with Wal-Mart firing the shot heard ’round the world,” Sherman says. “Most companies will discover that RFID is bar code on steroids, and implementation across the supply chain will progress slowly but steadily, beginning at the container and pallet level.”
“The ultimate benefit of RFID is not in doubt, just the timing,” writes AMR Research analyst Kara Ramonow in Alert Highlight, Oct. 23, 2003. “With the many issues, immature technology, and enormous costs without much (immediate) benefit, manufacturers can’t tag every pallet, case, and carton sent to Wal-Mart and the DoD by January 2005.”
“Logisticians believe that an automated way to gather logistics data and information and move it through the supply chain, supporting increased inventory velocity, is a great thing,” Blasgen says. “Putting it into operation, however, will be difficult.”
Major hurdles to widespread implementation include cost and limited ROI. “The early adopters will have to embrace RFID and begin to build the model that will give other companies returns down the road. This will take time,” Blasgen says.
Because of the cost of RFID tags and equipment, “the technology provides marginal improvement over bar coding for logistics, at least for the time being,” Sherman says.
In addition, Blasgen notes, it may not solve the problem at hand. While supporters say that RFID will reduce out-of-stocks on the store shelf, “more often than not, when a consumer can’t find a product, it’s not because it isn’t in the warehouse. It’s because the product didn’t get stocked from the back room,” he says.
Implementing RFID technology isn’t the only challenge. Logisticians will have to grapple with the masses of data that RFID technology will generate. “All that data has to be stored and turned into actionable information,” Blasgen says.
For example, when a pallet of Butterball turkeys moves from point of manufacture to a forward warehouse, “will the data that’s generated be actionable?” Blasgen asks. “Then look at the data that’s generated in the four walls of the warehouse, and when the turkeys are shipped to a consolidator, then to a store. All these moves require data to be transacted at high speed in real time,” he says. How the data will be used remains to be seen.
Despite questions about RFID’s cost and effectiveness, the Wal-Mart and DoD directives mean the new year will see significant resources focused on RFID, Blasgen predicts. Hybrid implementations that incorporate both RFID and bar-code technology “will be the rule for 2004,” Sherman suggests.
While Blasgen says it’s important for consumer products companies to move ahead on the RFID front, he advises starting with a pilot program rather than disrupting current operations. Don’t work for a CPG company? Keep abreast of RFID developments and changing cost/benefit tradeoffs for your operation.
“You can move forward with some things now while the technology progresses and details get worked out,” according to AMR’s Ramonow. “Current application infrastructure can be addressed now while waiting for the technology to mature. Existing systems will need to know about the information on the ePC (electronic Product Code.
“Therefore,” she says, “your ERP, supply chain, and warehouse applications will need to become RFID-aware so they can provide data to the tagged pallet/case/carton, as well as leverage the information internally.”
Tekelec Trades Up
A different type of technology helps Tekelec, a leading developer of telecommunications signaling and switching solutions, extend its global reach. The fast-growing company is expanding into Brazil, Mexico, Singapore, Russia, and Eastern Europe. Headquartered in Calabasas, Calif., Tekelec has multiple research and development facilities with sales offices around the world, serving customers in more than 27 countries.
“We have a small export group with two employees doing the documentation and making sure all shipments are declared properly and move through the customs process seamlessly,” says John Marossy, assistant vice president for Tekelec. “Our goal is to get the paperwork surrounding each transaction right the first time.”
Tekelec began searching for an international trade tool that would help it do just that.
“We wanted a total web-based approach, and didn’t want to buy or support any hardware to bring a tool in-house,” Marossy recalls.
In addition to an innovative, responsive supplier, he says, “we were looking for a good business match, for a company that would be around for a while.” The importance of this became infinitely clear during Tekelec’s selection process, when one of its top three contending trade tool vendors closed its doors.
After carefully evaluating 10 potential systems, Tekelec selected Open Harbor’s global trade management tool and implemented it in the United States this fall. The system enables export specialists to query the system, enter a classification number, and determine the duties and taxes required for a particular shipment.
With Open Harbor’s real-time data and content, Marossy says, “I get up-to-the-minute changes in regulations” and information on federal security initiatives.
In addition, the system performs restricted party screening, which checks transaction parties against government-restricted parties, embargo, and sanction lists. When orders are entered into Tekelec’s system, they are sent to the Open Harbor system, which runs an automated check and provides a pass or fail rating. The new trade solution provides full recordkeeping and a clear audit trail.
In addition, “it gives us one place to go for information instead of having to dig through multiple reports,” Marossy says.
Providing visibility to taxes and tariffs by country, the tool enables Tekelec to calculate the impact of duties and taxes on customers. “This enables us to work with customers to craft deals,” which can be in the millions of dollars, Marossy says.
He expects that automating international trade processes will significantly reduce time now spent manually typing documents and modifying paperwork to meet customers’ requirements.
“Using tools that streamline processes will allow us to grow and help eliminate the need for additional overhead,” Marossy notes. “I’d rather not staff extra employees to type paperwork when an integrated tool can streamline the documentation efficiently and accurately.”
Finally, the international trade tool will enable Tekelec to integrate its worldwide offices onto a single information-sharing platform, rather than having to rely on phone calls and e-mails.
“I like the fact that we can integrate our offices worldwide on one platform without the need to invest in additional capital equipment,” Marossy says.
SC Planning Tools Pay Off
Advanced tools make mature supply chain planning practices even more effective, according to a benchmarking study conducted by The Performance Measurement Group, a subsidiary of management consulting firm PRTM, and co-sponsored by SAP. Supply chain planning practices by themselves yield significant results.
Companies with mature supply chain planning practices in place “are 38 percent more profitable than average companies,” survey findings reveal.
These companies also enjoy other significant advantages, including:
- 22 percent less inventory.
- 28 percent inventory cost advantage.
- 14 percent shorter order fulfillment times.
- Six percent better delivery performance to committed delivery date.
- 11 percent higher delivery performance to requested delivery date.
- 44 percent lower obsolescence of raw materials, work-in-progress, and finished goods.
Add advanced planning tools to mature SC planning practices, and the results get even better, as reflected in these findings:
- 27-percent increase in profitability.
- An additional six-percent inventory performance advantage.
- A 35-percent greater inventory cost advantage.
- An additional 18-percent reduction in order fulfillment lead times.
- 40 percent lower obsolescence.
Despite the benefits such tools can provide, nearly two-thirds of study participants rely on functionally oriented legacy planning systems and stand-alone material requirements planning systems, while others use enterprise resource planning systems that lack overall planning data visibility. Only about one third of study participants use more mature planning systems such as advanced planning and scheduling, according to the study.
And, some companies that have implemented advanced planning systems don’t re-engineer their planning process so they aren’t able to reap the full benefit from the technology, notes Jakub Wawszczak, a director in PRTM’s Global Supply Chain Practice.
Global toy manufacturer Mattel Inc., headquartered in El Segundo, Calif., is not falling into that trap, according to Scott Strickland, associate partner with IBM Business Consulting Services. Strickland described Mattel’s experiences at the Manugistics 2003 user conference in Washington, DC, this fall.
Planning is critical in the toy industry, which adds long lead times of 12 to 16 weeks to a highly seasonal sales cycle plus uncertainty regarding sales volumes. In addition, Mattel’s 70-plus-percent product turnover means planners develop demand forecasts for new products with no sales history.
Mattel, which had historically based its forecasting on how many units were shipped, sought to change to a model where forecasts are based on point-of-sale data.
“Using point-of-sale data removes the wild fluctuation of on-hand inventory,” Strickland notes. “It will enable the company to be more pre-emptive in meeting future retail requirements, which will enable future collaboration.”
The toy company worked with IBM to rethink its forecasting and fulfillment processes. In a pilot program at Mattel UK, the following new forecast types were developed:
- Evergreen. These forecasts are for those products, such as Scrabble, that have two or more years of sales history.
- Mimic. These forecasts for new products use demand history built from those of similar products, for example, basing the forecast for a new Beach Barbie doll on that of Rio or Malibu Barbie.
- Profiled. These forecasts, for unique and completely new products, are, in effect, “best guesses” because there is no similar demand history on which to draw.
- Fixed quantity. These are for products, such as collectibles, which are produced in a fixed quantity.
After evaluating other planning tools, Mattel selected the Manugistics Demand Module to build forecast models. The pilot project started in July, after retailers had ordered their product for the 2003 holiday season, so the impact of the new planning model and software won’t be seen until next year. But the expected benefits include improved order fill rates, fewer lost sales, improved inventory turns, and improved inventory quality through reduced obsolescence, according to Strickland.
SC COSTS 2003
Companies throughout the year continued to work hard to squeeze waste out of the logistics dollar, with logistics costs as a percent of sales revenue dropping 4.73 percent over last year. Logistics costs average 7.52 percent of sales revenue for all companies responding to the 2003 Logistics Cost and Service Database study.
“The biggest cost factor traditionally has been transportation—down 4.6 percent this year—but there has also been a significant reduction in inventory carrying costs as a percent of sales, according to Bill Drumm. These costs are down 3.9 percent over last year. Companies that reduce inventories often also reduce their transportation and warehousing costs.
“Yet, in some ways, companies are holding more inventory than they did before,” he says. Drumm cites two potential causes for this: longer supply chains due to offshore product sourcing, and companies building inventories in anticipation of the long-awaited economic upswing.
But inventory carrying costs are up 11.5 percent in dollars per hundredweight, and there are many opportunities to get rid of excess and obsolete inventory, Drumm notes. “Planning suffers when companies cut their logistics staff—it gets done by month instead of by week, or every other month instead of every month.”
In addition, despite the progress made in reducing transportation costs, there’s still plenty of potential for transportation optimization, Drumm says.
For example, with significant manufacturing shifts to Asia, “freight forwarders and ocean shippers have been called upon to get things set up and containers moving. And that has happened: the freight is flowing. But it’s not always done in the optimal way,” he notes.
Companies are continuing to eliminate assets by shrinking their distribution networks. Forty-four percent of respondents to the Davis survey downsized their network in 2003, compared to just six percent who reported building a new distribution center. Nineteen percent of respondents implemented direct shipping, with another 19 percent expanding their use of third-party logistics providers.
While companies in some industries tend to have branch warehouses across the country, “many manufacturers have just one, two, or three warehouses today,” Drumm says. “That doesn’t mean they have the right mix, it just means they downsized the network.”
As a result, he says, “network analysis is a big opportunity for 2004.” Companies that perform a network analysis may discover changes that can significantly reduce transportation costs. With transportation costs accounting for 35 percent of logistics costs, even modest improvements can make a big difference.
In addition to optimizing the domestic network, “we need to do network planning on a global basis to make sure the inbound logistics of material from offshore is done as effectively as possible,” Drumm says.
For many companies today, the long supply chain is having a significant impact on logistics operations in general. “With fewer resources and people, we now have a lot more to oversee and a lot more to manage,” Drumm says.
As a result, many managers who were in charge of shipping goods out of a few domestic warehouses are now responsible for bringing in product from abroad and shipping it out to more demanding customers.
“This is a lot harder than being in charge of shipping,” Drumm says. “While the task still involves shipping goods, it also requires greater scope and breadth, as well as more thinking and creativity.”
SC SECURITY 2003
Companies that do business internationally have to cope with more than just a longer supply chain. Other challenges include complying with several new security initiatives in 2003, including the Container Security Initiative and the Customs-Trade Partnership Against Terrorism (C-TPAT).
The 24-Hour Rule, which originally covered ocean freight only, has now been amended to require advance electronic information for all cargo shipments to the United States. The new rule requires notification be submitted:
- One hour prior to arrival in the United States for truck shipments, except 30 minutes prior to arrival in the United States for Free and Secure Trade (FAST).
- Two hours prior to arrival at a U.S. port of entry for rail shipments.
- Four hours prior to arrival in the United States for air and courier shipments, or four hours prior to “wheels up” from certain nearby locations.
Outbound shipments are also covered by the revised rule. Go online to www.cpb.gov for details.
That’s not all. Under the Food and Drug Administration’s new bioterrorism laws, advance notification will be required for human and/or animal food imports no more than five days before arrival and no later than two hours prior to arrival by road, four hours by air or rail, and eight hours before arrival by water.
In addition, under the FDA interim final rule, Registration of Food Facilities, “domestic and foreign facilities that manufacture/process, pack, or hold food for human or animal consumption in the United States must register with the FDA” by Dec. 12 this year.
“Food” includes infant formula, fruits and vegetables, fish, dairy products, canned and frozen food, bakery goods, dietary supplements, candy and chewing gum. Facilities that must register include those that manufacture, process, pack, or hold food.
“The FDA regulations will be more invasive than the 24-Hour Rule,” notes Julie Chambers, director of the Managed Services Group, Menlo Worldwide Trade Services, Dallas. “A lot more information has to be presented with the advance notification regulation, requiring “information on individual shipments and individual product detail per shipment per product.”
Companies that are not in compliance will be given a four-month education period from the time the lack of compliance is noted, according to Todd Germain, Northern border network manager for Menlo Trade Services.
“The FDA and Customs will look at non-compliance from an intent perspective. If they feel that the intent is to subvert the regulation, they can and will impose criminal and/or civil penalties, and can bar someone from importing.”
Companies will have two ways to submit prior notice, which must be done electronically, Germain notes. First, companies can work with a customs broker that uses the Automated Broker Interface (ABI) to transmit entries electronically. Once numbers confirming receipt of the prior notice have been received, it goes into effect.
“There may be a gap between when the information was submitted and when the broker receives the response from the ABI,” Germain notes. As a result, many brokers are asking for an additional hour to submit the advance notification.
Secondly, companies not working with a broker that uses the ABI can use the Prior Notice System Interface web site, slated to be operational mid-December, Germain says. “This will require entering a prior notice request for each FDA product code or article of food.” An inbound container with 100 different articles of food, for example, would require 100 prior notices to be filed.
Germain advises companies that may be covered by the new FDA regulations to ensure that their customs brokers have access to ABI, fully understand the FDA rules, and have good processes in place.
“Make sure there is good communication,” he says, “and contingency plans in place in case systems go down.” Recognize that you’ll probably pay for the customs brokers’ services, and budget accordingly.
Even non-food companies may be affected by the FDA rules, he warns. “If you have a consolidated container with loose cargo—even if it’s mostly non-food items and one food shipment—the food shipment could be subject to detention,” requiring the entire container to be held up while the food is unloaded.
Building for the Future
The challenges facing logistics and supply chain professionals in 2004 are significant. Working with a lengthening supply chain, and continuing to squeeze waste out of the logistics dollar, requires creativity and strategic thinking at a time when staff and resources are stretched thin. “It takes thinking time and capability,” Drumm says.
To get the staff and resources you need, he advises, take an incremental approach. Pick a few high-impact areas, perform a mini-feasibility study to verify and validate the savings opportunities, and prepare a sound business case to justify the investment. “Once you get the staff and tools required to make those changes, you can then use them in other areas,” he explains.
To build logistics capacity, “you have to be persistent, passionate, and able to clearly articulate benefits in terms that your listeners can understand,” Rick Blasgen says. “Many corporate leaders are not logistics professionals—they’re brand-building people. So they don’t see the world as logistics people see it.”
In a food company, for example, corporate leadership is “trying to grow ‘share of stomach,'” he says. That’s why logisticians need to build awareness of the quantifiable contributions that logistics can make.
Also find ways to work closely with colleagues in sales and marketing, Blasgen suggests. “Say to them, ‘we have to work together to connect demand and supply like never before. We have to be in your shop understanding the demand that you’re creating—where and when—so that we can develop a solution that makes sense.'”
Blasgen also advises finding opportunities to collaborate with your partners to streamline the supply chain. But don’t stop there, he says. “Supply chain managers need to get out there and collaborate on ways to utilize transportation equipment more effectively,” especially when the Federal Motor Carrier Safety Administration begins enforcing its revised hours-of-service rule early next year.
While the economy appears to be on the mend, don’t expect your job to get easier. “The challenge is going to be more than keeping costs really low and getting products to the customer on time,” Drumm says.
“Delivering low cost and good service, in addition to handling additional volumes or technological requirements” will make you a supply chain winner in 2004.