Trends-August 2006

The Supply Chain Planning (SCP) market has stabilized and is poised for compounded annual growth of 2.4 percent over the next five years, according to ARC Advisory Group.

The market will grow from $1.05 billion in 2005 to more than $1.18 billion by 2010 (see chart), predicts the Dedham, Mass.-based think tank in its report, Supply Chain Planning Worldwide Outlook: Market Forecast and Analysis Through 2010.

Continuing contraction within the industry will account for some of this growth as larger Enterprise Resource Planning (ERP) and Supply Chain Management providers acquire and consolidate smaller niche SCP players, finds the report.

“ERP suppliers continue to gain market share at the expense of best-of-breed suppliers. This is because of the superior installed base of ERP suppliers, the lower price point associated with SCP functionality offered by ERP vendors, and the perceived ease of integration attributed to a holistic enterprise solution offered by a single- solution provider,” reports Clint Reiser, analyst for supply chain management at ARC Advisory Group and the principal author of the study.

SCP solutions developers have also noted increased interest from the automotive sector and distribution-intensive industries such as consumer packaged goods and food and beverage.

These demand spikes are partially due to the relocation of production facilities to low-cost regions and globalization factors such as outsourced manufacturing, longer supply chains, and a greater number of trading partners, ARC finds.

In addition, many suppliers are seeing considerable demand from retail industries looking to improve the scalability of forecasting and replenishment processes.

Standardized architectures—such as J2EE, Microsoft .NET, and XML—are also helping businesses facilitate integration because they are easy to scale and cost less to deploy. These architectures can take advantage of packaged services to reduce development risk and time-to-market for prospective buyers.

Carrier Relationships 101

Retail businesses may blame lost profits on soaring fuel costs, but they can also point the finger at themselves for poorly managing their carriers, according to a benchmarking report by the Supply Chain Consortium.

The survey, which polled 100 retailers and retail suppliers, found that nearly one third were off-target concerning their carrier shipping rates.

For example, 82 percent of ocean shippers report that their rates are better than other shippers with similar volume and service requirements. Because only 50 percent of shippers can realistically have better-than-average rates, this means 32 percent of those asked were overly optimistic about their sourcing successes.

The Carrier Sourcing Strategies and Tools report also offers shippers the following tips to more effectively bid, negotiate, and manage their carrier bases:

• Bid methodologies should be flexible and offer carriers the opportunity to propose solutions that best fit their capabilities and network.
• Collect the data carriers need to aggressively bid on your freight. Leverage the characteristics of your freight that are attractive to carriers.
• Build trusting relationships with carriers. For incumbent carriers, measure performance in an open and equitable fashion.
• Understand that shippers achieve higher levels of service and better supply chain integration by focusing on core carrier programs.
• Keep in mind that ocean and air transportation pose unique challenges for developing trusting carrier relationships.

Best Practices from HP: Smarter, Cheaper Transportation

Picture this meeting: A logistics executive for a major consumer electronics company tells the hip, all-black-clad product/packaging design team why the box for its hot new laptop should be shaped a certain way. The exec is not talking about design principles, packaging trends, or market research—he’s talking about logistics. And the design group is listening.

Sound too good to be true? Not at Hewlett Packard. The consumer electronics giant has embraced a rigorous cost-cutting and strategic logistics overhaul that has spurred collaboration in some unlikely places, including package design that caters to shipping and distribution demands.

“We realized if we improve packaging—make it more dense, for instance—we could fit more laptops on a plane, instead of trying to buy more capacity,” explains John Frasca, HP’s director of global logistics procurement. “This idea results in significant dollar-per-unit cost reductions, and we can apply it to all transportation modes.”

As part of its quest to improve supply chain efficiency and become, as CEO Mark Hurd puts it, “a lean, mean competitor,” HP also announced plans to integrate its global operations division into the imaging and printing, personal systems, and technology solutions units—a move that should yield substantial savings and give each business unit greater accountability over its full range of operational activities.

IL connected with Frasca recently to dissect the changes HP has made to its logistics and transportation strategies, and how they have impacted the company.

He offers these four cost-cutting tips for designing a forward-thinking global transportation network.

1.Design for logistics. Getting its logistics and design packaging groups to collaborate has helped HP understand what design elements—such as packaging size, weight, and product dimensions—are favorable and unfavorable in relation to shipping needs.

“As part of the process, we took members of our design team to the airport to show them what a unit load device looks like, and explain what happens when they design something that overhangs a pallet,” explains Frasca. The lightbulbs went on after that, he says. The “design for logistics” idea is now embedded in both teams, and appears as a procurement metric on HP’s balanced scorecard.

Fostering this type of collaboration can be tough, as people are often resistant to change, Frasca admits. In addition, this approach means companies must consider redesigning packaging for products that are already on the market as well as bringing design for logistics into new product launches.

“Depending on where you are in the product’s lifecycle, it may make sense to redesign the package to be more favorable to the shipping mode you’re using,” he explains.

2.Leverage outbound spend to reduce inbound transportation costs. HP’s annual spend on outbound transportation alone is nearly $2 billion. But that buying power was not helping HP with its inbound transportation costs until recently.

“It is crucial to leverage outbound spend to get the most competitive rates on inbound transportation,” Frasca notes. Easier said than done, of course, as carrier loyalty programs and business relationships also come into play when selecting transport partners. Did HP’s new rate-focused approach ruffle carrier feathers?

“I positioned this change to our providers as upside for them—they have access now to business they didn’t have access to before,” he explains. Though Frasca declined to name a dollar figure, leveraging its outbound spend has helped HP significantly reduce inbound transport costs and boost the bottom line.

3. Offer business units and customers multiple transportation choices. Because its customers range from individual consumers buying one laptop to retail giants such as Best Buy and Circuit City ordering its full product lineup, HP needs to be flexible about transport options.

“By offering our retailers and direct customers a number of transit-time options, we are able to manage our logistics costs positively while maintaining the customer experience,” notes Frasca.

Collaboration again comes into play. HP sat down with key retail procurement executives to determine individual transportation timetables.

“We asked retailers, ‘Instead of trying—and sometimes failing—to deliver orders in five days, what if we deliver in seven days 99 percent of the time?'” Frasca says. Meeting this predictable standard helps cut costs but more importantly, Frasca explains, secures a positive customer experience.

4. Use transportation modeling to optimize product flow. “It is crucial for companies to look at how they physically move shipments to find opportunities to consolidate those movements and take advantage of economies of scale,” says Frasca. HP does that through extensive use of transportation modeling.

“We looked at the number of U.S. airports we use to receive goods from Asia, for example,” Frasca says. ” We’ll ask, ‘Is it best to use 12 airports? What if we use six airports, or four, or just one? Will that positively or negatively affect our customer reliability, turnaround time, and cost?’ Then we work with the software to construct an actual model of what that looks like.”

By performing this type of modeling throughout all modes of transport in its global shipping network, Frasca and his team experienced some important “a-ha” moments, such as realizing that shifting product volumes necessitate continuing evaluation of product flow. “Sticking with ‘that’s how we did things yesterday’ isn’t always the best approach,” he says.