Gauging Change

For better or worse, short-term memory is an unavoidable reality of operating in a global marketplace.

With change as unpredictable as it is constant, and managing variability tantamount to increasing velocity, shippers and service providers are inclined to look ahead, outside the box, and around corners to differentiate themselves from the market.

But sometimes staying ahead of the curve is equally contingent on knowing when to slow down and survey the road—past, present, and future.

Businesses and government pressing the pedal to the metal without heeding clear warning signs are traveling a precarious course—one where change remains absolute and progress becomes relative.

The past year presented several doses of reality that placed global shippers, transportation companies, and government agencies squarely in the present.

A U.S. economic downturn and softening capacity conditions served as a backdrop for two days in August that rattled the U.S. transportation industry and global supply chain: First, the I-35 Mississippi River bridge collapse; then one day later, Mattel’s recall of one million toys.

Collectively these supply chain flash points gave public and private sector interests a much- needed wake-up to the status of U.S. transportation infrastructure, while delivering a crash course in the shifting rules of engagement for global transportation and trade.

“We’re seeing a new phenomenon, a new normal defined by permanent volatility,” reports Brooks Bentz, associate partner for Boston-based Accenture Supply Chain Management.

To look at it another way, “in today’s market there are three constants: change, growth, and trouble,” observes Scott Szwast, director of global marketing, UPS Supply Chain Solutions, Alpharetta, Ga.

By expanding and deepening supply chains to leverage labor and production cost economies, businesses have added infinite touchpoints and layers of complexity to their extended enterprise—factors that impede velocity as well as reliability and responsiveness.

The challenge for businesses today is figuring out how to balance the service and time demands of their customers with the volatility of the marketplace.

Part and parcel of this task is properly evaluating where supply chains are most vulnerable, then identifying means to fund projects, processes, and partnerships that can fill these gaps.

The past year provided plenty of quantifiable evidence that illuminated the former, while laying the gauntlet for government and industry leaders to address the latter.

The Importance of Partnerships

As early as last fall, the U.S. economic compass began angling south as trucking companies felt the telltale signs of a downturn.

Consumer spending, retail import volumes, and freight demand dropped as housing prices fell, interest rates increased, and energy costs remained statically high.

This forecast set the tone for much of 2007, leaving motor freight carriers with the unwelcome task of fighting for freight, and shippers with a welcome reprieve to wrangle over pricing.

“As the market fluctuates, the capacity/cost pendulum swings according to demand,” says Bentz.

“But many shippers are missing an opportunity to create partnerships that are reliable in both good times and bad. Shippers can hammer carriers now because they have leverage. But this perpetuates the boom-and-bust model. When capacity becomes tight, carriers gain the upper hand again.”

Unlike past economic downticks in the United States, other global economies suffered few residual effects in 2007. Solid economic growth in China and Europe, in particular, placed U.S. manufacturers in a unique position as they balanced the impact of a sluggish domestic economy with increasing competition from global companies.

Manufacturing and retail market leaders have become adept at exploiting shifting supply/demand dynamics to strategically align their businesses for global growth—for example, reverse engineering inbound supply chains to export product to emerging consumer markets.

But not all companies have had the wherewithal or inclination to look beyond the domestic scope and target these opportunities. Some companies still have their “heads in the sand,” Szwast says.

Others, with a bit more foresight, rely on contingency plans to manage risk and address supply chain disruptions as they occur.

On the domestic front, economic, capacity, and pricing fluctuations present a cyclical bullwhip that shippers continue to wrestle with as they look to negotiate contracts and lock up capacity. Creating longer-term partnerships that make economic sense remains a recurring challenge for global businesses, regardless of market variability.

With so much emphasis placed on the importance of partnerships, what is really lacking is leadership, observes John Tracy, president of Tracy-Hayden Associates, a South Orange, N.J.-based logistics and operations consultancy. “The idea of a true partnership must run much deeper than surface level.”

Technology is often the catalyst for initiating a rich level of collaboration. Some global businesses are leveraging IT solutions to drive visibility deeper into the supply chain to increase communication among offshore suppliers and logistics partners.

But for other companies, IT’s real potential has been fleeting. Simply applying technology to tactical problems doesn’t necessarily fix strategic gaps or drive better cooperation; and, in some instances, these failures have exposed businesses and their supply chains to considerable risk.

“Companies have invested heavily in technologies that drive costs down and visibility up. But many companies are still not in control; they don’t have their boots on the ground,” observes Tracy. “Technology is an aid, not a fix. In some cases the risk is not being managed because of technology.”

Mattel’s recall of nearly one million units of Chinese-manufactured Fisher Price toys spurred by fears of lead contamination, followed less than two weeks later by an additional 18 million units, presented a perfect example of the pervasive problems that can occur when businesses don’t have the offshore visibility to mitigate pain points before they swell beyond control.

“Businesses operating globally are challenged with creating partnerships that delve much deeper than the traditional relationship between an outsourcer and its supplier,” notes Tracy.

“If a company sources components and parts from 14 different suppliers, what is its vision into that network? What is its oversight? Does it have total trust in that network?”

Mattel’s mass recall was by no means an isolated event. Lenovo and Sanyo, Menu Foods, Ford Motor Company, Foreign Tire Sales, Gerber, and Nokia were among other companies that faced similar circumstances in 2007.

The influx of lead-tainted children’s toys garnered attention from media outlets and U.S. government watchdogs alike. In November, the House Committee on Energy and Commerce introduced the Consumer Product Safety Modernization Act of 2007, which outlines provisions for improving and reforming the nation’s consumer product safety system.

While government intervention was necessary, the problem runs much deeper for global manufacturers and retailers simply because product recalls have severe consequences on down the line—to the bottom line.

“Out of necessity, companies will have to implement a more stringent approach to sourcing. The risk of recalls is just too high in terms of retrieving and processing expenses, and even more costly when it comes to potential damage to the brand name and consumer loyalty,” says Gil Hobson, vice president of sales and client services for Carolina Logistics Services (CLS), a Winston-Salem, N.C., service provider that specializes in reverse logistics and asset recovery.

Recalls at Warp Speed

With consumers sensitized to concerns about product integrity, retailers and manufacturers have to be equally aware of how to ensure their products meet regulatory standards, then be responsive enough to locate and dispose of inventory when recalls occur.

“When dealing with a recall, everything must happen at warp speed—retrieving product from store shelves, capturing data at the lowest level of detail collected, and reporting progress daily to government agencies,” says Rodney Bias, vice president of regulatory compliance for CLS.

As U.S. companies continue to rely on offshore manufacturing partners to expand their production capacity, quality issues are becoming more prevalent.

Problems are compounded when the source is located in a country that does not share the same level of regulatory guidelines as the United States. While the flurry of product recalls has been blamed on lack of government oversight, businesses are equally culpable.

“Companies need to evaluate their processes to ensure that they are accomplishing their business goals and protecting the public from risk. Government needs to take a more active role in helping to identify causal factors and work with businesses to develop better measures to protect the public. This process should be collaborative, not ‘us versus them,'” observes Bias.

As 2007 painfully revealed, many “big” companies still don’t have the resources to monitor all their suppliers effectively, especially on a global scale.

The potential threat to profitability will force manufacturers to establish better protocol for managing offshore suppliers, or give greater consideration to areas where they source product, as well as incent retailers to drive visibility from vendor to store shelf.

Alternatively, companies will continue to rely on partnerships with global third-party logistics providers to audit and inspect goods at point of origin and serve as a forward line of defense in the supply chain.

Transportation Tipping Point

While a soft domestic market and the product recall debacle illuminated the importance of supply chain partnerships, the Mississippi River bridge collapse in Minneapolis cast a wider spotlight on the lack of leadership among U.S. state and federal authorities.

The I-35 Minnesota bridge tragedy gave public face to an infrastructure crisis that has been looming for some time—a concern widely voiced by transportation industry pundits and largely ignored by U.S. government and transportation authorities.

That the Minnesota tragedy occurred during the buildup to the 2008 presidential election was timely, though to date the concerns of the transportation industry have been little more than a side note to political discussions.

“Congress is growing increasingly aware that infrastructure deserves attention. The bridge collapse brightly shined the light on U.S. infrastructure problems, for a short time,” says Bentz.

Ivan Figueroa, global logistics manager for Radiant Systems, a POS hardware and software manufacturer and developer based in Alpharetta, Ga., shares a common sentiment from a unique perspective.

Aside from his responsibility for managing Radiant’s offshore distribution network, Figueroa also serves as a councilman for the City of Johns Creek, Ga.

“In Georgia, transportation infrastructure is a major topic of discussion,” he says. “The soccer moms at the school carpool lane and the drivers at truck stops along I-75 ask the same question: ‘How can we fix these roads and improve traffic?’ The key, of course, is money.”

Georgia, in fact, faces a $51-billion transportation funding shortfall through 2035—a disparity that the Georgia Department of Transportation recently reported will lead to worsening congestion and deteriorated highways and bridges. Similar concerns exist elsewhere.

“When a topic such as bridges and underlying infrastructure is covered in the media, people talk about it. When it is not, their focus shifts elsewhere. We’ve become a sound-bite society with a short attention span,” adds Figueroa.

Many transportation insiders would likely argue that Congress suffers from a similar memory lapse as attention to bridge spans and other neglected transport infrastructure waxes and wanes.

“If there was ever a time to draw attention to this issue, now would be appropriate with the impending election. But, thus far, it has not been an issue in any of the political debates,” says Tom Finkbiner, CEO of Quality Distribution and chairman of the Board of Directors of the Intermodal Transportation Institute (ITI) at the University of Denver.

He cites two reasons for the government’s lack of action to date:

“First, politicians don’t understand the issue; second, government regulators and the bureaucracies that support and control transportation infrastructure are siloed—railroad, highway, air, ocean, freight, and passenger constituencies operate vertically. These agencies aren’t talking with each other.”

The need for more collaboration between government agencies has been a recurring theme for some time, especially in areas such as security, economic development, and transportation.

Historically, many state and local offices have been forced to go it alone and plan their own strategies for improving infrastructure, including selling toll roads and bridges to foreign corporations to fund improvement projects.

A Call for Leadership

But often their limited perspective and reliance on political constituencies and leaders ignorant of the importance of transportation and logistics has presented major obstacles.

A voice of reason was largely absent. Now, the private sector is answering this call for leadership.

As an example, Michigan lawmakers recently attempted to pass legislation extending a six-percent sales tax on warehousing and logistics services.

Businesses such as Evans Distribution Systems have been vocal about the potential impact this service charge would have on an economy that is intrinsically tied to the automotive industry and consequently warehousing and logistics activities; and has the highest unemployment rate in the country.

The bill was ultimately repealed, but its impact still resonates. “We learned a valuable lesson over the last few months. Our industry definitely needs to be more involved in government affairs,” says John A. Evans, president of the Melvindale, Mich.-based 3PL.

On the transportation side, collaboration between the government and private sector has been equally patchy.

“Social Security, downsizing military bases, and where you spend money on highway and transportation infrastructure is the third-rail for partisan politics—touch it and you’re dead,” says Finkbiner.

One solution to this national impasse, he suggests, is creating a commission that oversees Congressional decision-making regarding transportation funding initiatives.

He likens such an approach to the development of the Base Closure and Realignment Commission (BRAC) in 2005, which helped the Pentagon and government vet and carry out military base closures.

“An independent commission flew cover for Congress, made recommendations for closures, then gave Congress a ‘thumbs up or thumbs down’ provision without the power to amend their recommendation,” he says.

Fiddling with Finagling

Having an independent commission along the lines of the BRAC model would eliminate some finagling among bureaucrats with mixed interests, while prioritizing and expediting funds for critical transportation needs.

Finkbiner and Ted Prince, a fellow ITI board member, recently issued a paper—Leveraging the Freight Network: 10 Steps to Improved Modal Connectivity—that addresses some of these concerns.

They point to the importance of addressing and embracing intermodal as a fundamental part of a national freight transportation policy, along with highways, railroads, and other transportation modes.

Highways have their constituency for funding with fuel taxes and the railroads conceivably will get their own with the bipartisan Freight Rail Infrastructure Capacity Expansion Act currently on the docket in Congress, notes Finkbiner.

“But intermodal, in this paradigm, is orphaned—and as a connector between modes, it is just as important,” he says.

Supply Chain As Change Agent

The events of the past year have brought the importance of transportation and logistics and the repercussions of supply chain failures to the attention of the broader public. Now the bar has been raised for public/private discourse to address these fundamental problems.

At this year’s Council of Supply Chain Management Professionals (CSCMP) conference in Philadelphia, keynote speaker and former Hewlett-Packard CEO Carly Fiorina spoke of the value of supply chain management as a change agent within the corporate enterprise.

One task today’s global businesses face is growing an organizational and supply chain culture that is open and adaptable to new ideas and strategies as consumer demand and market variability allow.

As Fiorina pointed out, the supply chain cuts across verticals and therefore creates an interface for effecting change throughout an organization and its extended enterprise.

Thinking laterally can similarly help U.S. government integrate modal and political silos to respond more effectively to critical transportation needs and national security concerns.

But people—and by extension, corporations and government—are generally resistant to change. Without leadership that can see the bigger picture, look beyond the four walls of the enterprise, then execute ideas and strategies within and across verticals, public and private sector interests are destined to fail.

Managing change in a global world requires this type of purview.

For many businesses, the past year provided some relief in terms of securing capacity and perhaps extra incentive to invest capital in equipment, technology, and partnerships to better manage their supply chain.

For others, it presented a painful reminder of how complacency and reactivity can thwart progress.

For all, 2007 provided a call to action for more leadership—within the enterprise, within the supply chain, and most importantly, within government.

Without that leadership, history may repeat itself.