Supply Chain MythBusters

What constitutes a myth? Etymologically, the word is derived from the Greek mythos, which translates to “story.” How do myths apply to logistics? In the multi-layered reality of today’s global supply chain, many trends or “stories” make the rounds at industry conferences and company water coolers alike.

Sometimes these “myths” take on a life of their own without substantial empirical evidence to tilt the scales of opinion one way or the other. But businesses that are best able to interpret shifting story lines and separate truth from reality stand a better chance of anticipating and managing supply chain change and using it to their advantage.

With a little help from industry experts, Inbound Logistics decided to bring some truth to the table in order to validate or debunk three popular supply chain suppositions.

While supply chain myths may not be as fun to explore as the urban legends the MythBusters gang investigate on the Discovery Channel—Can a penny dropped from a skyscraper kill a pedestrian below? Could chatting on your cell phone while filling your gas tank cause the pump to explode?—their fact or fiction status is crucial to the logistics industry.

THE MYTH: SUPPLY CHAIN MANAGEMENT IS MAINSTREAM

We’ve all seen the advertisements on television and in popular print media championing the new age of global trade and the importance of supply chain management. But to what extent does this increasing commercial appeal reflect the true penetration of supply chain management in U.S. business culture?

Some observers see the increasing speed and flexibility of domestic logistics and transportation systems as an example of how pervasive supply chain best practices are and how adept businesses have become at coordinating product movement within their global supply chains.

One example is the changing dynamics of holiday shipping season for expediters such as Memphis-based FedEx Freight.

“During the holiday season, peak shipping for LTL carriers used to occur in July; by September they were finished,” recalls Debra Phillips, managing director of communications for FedEx Freight.

“Even four or five years ago, our peak days fell in September. But in the past few years, our peak shipping day has been in November. This reflects how much the LTL and supply chain industries have changed.”

The argument is that shippers, particularly during their peak seasons, have become more adept at managing their supply chains. Previously, retailers stocked product months in advance to accommodate the holiday rush, but today they are in sync with consumer buying habits and can wait longer to ship products thanks to streamlined, sophisticated supply chains.

Accordingly, they have evolved their logistics capabilities to the point where they can use postponement strategies and ultimately better match supply to demand, suggests Phillips. Suppliers no longer push inventory to warehouses as safety stock; consignees, rather, match demand signals to supply lines with such control that they can accurately fulfill inventory needs within a much tighter time frame.

This is clearly an example of inbound logistics at its core and supply chain practice at its best. But does it indicate that supply chain management is mainstream?

Not according to Cindi Perdue Hane of BAX Global, Irvine, Calif. “Numerous examples of superb cross-functional planning and supply chain management exist, and companies derive significant benefits from this approach. But the reality for most companies is that holistic supply chain management has failed to keep up with the complexity of operations,” she says.

Giving credence to this claim is a recent global supply chain benchmark report, Industry Priorities for Visibility, B2B Collaboration, Trade Compliance, and Risk Management from Boston-based research firm Aberdeen Group.

“Although regulatory pressures and the immaturity of logistics networks in low-cost countries receive extended press attention, these factors are not what keep supply chain executives up at night. Much more concerning to them is the continued lack of critical supply chain process visibility due to manual-driven processes,” the report states.

“The lack of visibility is especially crippling to large enterprises—$1 billion or more in revenue—79 percent of which cite this as a major concern,” it adds. That visibility is still a major concern for a large number of big companies—and therefore likely an even greater concern for small and medium-sized businesses—implies supply chain management is far from mainstream.

While many supply chain managers have successfully convinced corporate executives that supply chain management is a holistic process that integrates multiple logistics and transportation functions across many different silos, this mindset has not radiated too far outside the four walls.

One need only look at the lack of national leadership driving transportation infrastructure improvements in congested ports and major distribution nexuses to know that the importance of supply chain management to the overall U.S. business community is still largely misunderstood.

Within this context, government and state agencies must keep up with the complexity of global supply chain management, explains logistics consultant Rosalyn Wilson in the 17th annual State of Logistics report.

“To ensure the success of the logistics industry’s efforts and to make maximum use of resources, we need leadership on a national level,” she says.

“Investment decisions should be made to maximize the benefits of improvements that will reduce the transportation bottlenecks and freight exchange points throughout the system in the next three years,” she says.

THE VERDICT: MYTH BUSTED

Undoubtedly, supply chain management has come a long way in recent years and is very much a part of the corporate fold. But to argue that it is mainstream is still farfetched. (Check back with us in three years.)

Clearly, examples of supply chain excellence abound—we write about them every issue. But there are many more examples of logistics ambivalence and inefficiency that go unnoticed and will never see the light of day, let alone the light of Inbound Logistics’ office.

For many businesses, operating within the global supply chain is an ongoing challenge, and one that is often outsourced to logistics experts; credit outsourcers for recognizing the need for help and 3PLs for meeting their needs with innovative solutions.

Beyond that, for many companies, outsourcing supply chain management is not considered a strategic move—it is merely a cost/benefit analysis.

THE MYTH: RFID IS THE KEY TO VISIBILITY

Radio Frequency Identification (RFID) has been one of the most compelling and oft-discussed topics within the world of logistics and supply chain management over the past five years. Few people will argue that it hasn’t been hyped to the point of exhaustion, and fewer still can offer a definitive answer as to when or if it will reach its blue-chip potential.

“There certainly is hype around RFID. But it has been tempered by reality—the expectations and the predicted speed of adoption have been overstated,” says Chris Kelly, director of RFID for technology provider Intermec, Everett, Wash.

But one thing is clear to Kelly. “RFID’s future is not a myth. RFID has been on the horizon for a while, making a strong impact because big supply chain players—namely Wal-Mart, Best Buy, and the Department of Defense—have mandated suppliers to become RFID-compliant,” he says.

Industry has watched this dynamic evolve for the past several years without widespread traction elsewhere in the supply chain. What gives?

According to some observers, continuing investment in RFID technology, the ratification of the Gen2 standard in December 2005, and its initial market presence in early 2006, are thawing earlier resistance and giving supply chain players more reason to consider RFID investment and implementation.

Costs have dropped, and manufacturers are engineering tags that perform effectively in a variety of environments. As a result, more businesses see the potential to drive real value by using RFID.

Boeing, for example, is working with aircraft parts suppliers to tag more than 2,000 parts to achieve end-to-end inventory visibility from its suppliers all the way to its airline customers, reports Kelly.

The automotive industry is utilizing reusable RFID tags on containers and totes to track product as well. But most importantly, it’s not only big companies with capital and clout that are driving adoption.

Take, for instance, Los Angeles, Calif.-based Paramount Farms, a supplier of almonds and pistachio nuts. Paramount implemented an RFID system to improve efficiency and productivity, and has achieved significant results.

With demand for almonds doubling over the last decade, Paramount realized it needed a better system for capturing and aggregating data and speeding throughput.

In concert with a new automated database system, the farm integrated Intermec’s RFID application, using 11 handheld computers, three access points, and three RFID tag readers to keep track of product and make sure its picking operation was as fluid as possible.

Since installing the new system, Paramount’s receiving department has reduced leased trailer usage by 30 percent, while also improving information flow and accuracy.

“The scope of our pistachio receiving operations at harvest is huge,” says Andy Anzaldo, director of grower relations at Paramount. “We receive 400 loads a day, each about 50,000 pounds gross weight.

“That means we receive, record, weigh, pre-clean, sample, and process 20 million pounds per day. At this volume, the importance of our grower receiving system cannot be overstated. It is one of the most critical points in our supply chain.”

While maturation within the RFID space is allowing for experimentation among companies such as Paramount Farms, the question still remains: Is RFID technology the ultimate key to supply chain visibility? Answers vary.

“While I do agree that RFID is an important advancement in technology, I don’t believe it is the key to supply chain visibility,” says Bobby Kaemmer, vice president of IT firm Cadre Technologies, Denver, Colo. It is simply another, albeit much faster, method to collect information, he suggests.

“RFID is a valuable technology that enables companies to collect large volumes of data in a short time. It is, however, the same data businesses collect today via other methods such as traditional radio frequency, batch data collection, and manual updates,” Kaemmer says.

“Therefore, RFID does not dramatically change the landscape nor does it improve visibility; it simply increases the speed with which data can be collected.”

Conversely, Davison Schopmeyer, senior director of the RFID professional services organization at Atlanta, Ga.-based software provider Manhattan Associates, thinks RFID is the key to better visibility—with one caveat.

“RFID alone is not the solution to visibility,” he says. “RFID is an enabling technology; it cannot exist without the help of applications and universal standards. The real silver bullet is how companies utilize RFID.”

Supply chain visibility is about taking available data and turning it into information that helps organizations make effective business decisions, Schopmeyer argues. RFID technology delivers visibility at a new level of detail that helps trading partners optimize inventory.

But he also considers, as others have, that RFID is the next iteration of bar-code scanning. Conceivably, this evolutionary history opens the door to newer and better technologies down the road.

“RFID’s status now is similar to how bar codes were perceived 20 years ago. Bar codes’ original value was perceived only in their ability to reduce labor costs during the store checkout process. The benefit not originally quantified was the new information that bar codes made available,” he adds.

The next two to three years will be critical, as RFID technology continues to evolve and more companies adopt RFID applications and design and build infrastructure and systems with it in mind, says Intermec’s Kelly.

The bottom line, however, is that visibility solutions utilize a variety of data capture tools and methods. RFID won’t change that, says Gary Frantz, director of corporate communications for transportation provider Con-way.

“RFID will become part of the mix and can help improve the latency and immediacy of the data, but it’s not the be-all, end-all tool for visibility,” he says.

THE VERDICT: MYTH BUSTED

The substance behind the RFID hype is finally emerging, but we’re still not sold on RFID being the key to global visibility. Myriad criteria are involved in creating visibility, from capturing and aggregating data—which RFID does the best—to filtering and rationalizing this information, then disseminating it to appropriate partners.

RFID certainly has the potential to play a major role in this process and in some instances it already has. But in the current context, it is not the definitive means for achieving visibility and is still too limited in its market presence to have a revolutionary impact. Its time will come, but the question remains: When?

THE MYTH: CHINA IS THE PLACE TO BE

One common Chinese proverb that supply chain insiders are inclined to quote is a fitting place to start any discussion of China: In China, everything is possible, and everything is difficult.

“Doing business in China presents a lot of obstacles, notably a patchwork of government regulations, taxation, road systems, and customer demand,” says Tom Escott, president, Schneider Logistics, Green Bay, Wisc. “We believe it will be a big market down the road; however, at the same time, we harbor no illusions as to the pace at which that market will develop.”

The pace of change in China and the control its government has in stimulating economic development, especially in the areas of manufacturing and logistics, has paved the way for tremendous trade growth between Asia and the United States.

U.S. companies continue to outsource manufacturing to China and even the threat of rising costs, capacity constraints, and congestion issues along China’s more developed coastline are assuaged by transportation improvements in untapped inland areas.

Major transportation corridors are developing in China—between Shanghai and Beijing, for example—and similar progress has occurred in connecting cities north and south, and to a lesser extent, east and west.

While many global enterprises perceive China’s potential purely as an outsourcing option, consideration for its consumer growth is increasing.

“Some shippers look at China’s burgeoning consumerism as another draw. Its aggressive growth on the manufacturing front has yielded greater prosperity and created a domestic consumption market.

“China is becoming a consumer market with a larger middle class and growing demand for automobiles, consumer products, and other retail goods,” says Escott.

Further validating China’s importance, major 3PLs and transportation companies such as Schneider are making inroads there to help develop infrastructure as well as source new business opportunities.

“Both industry and government are making a concerted effort to modernize China. This dovetails with the recognition that 3PLs are important to enhancing the level of logistics expertise there,” Escott notes.

But even with these positive signs, the lack of a national distribution network is an impediment to growth. Retailers in Shanghai, for example, are forced to source locally, notes Escott. Other experts predict even greater problems for retailers and manufacturers relying on China as a primary sourcing location.

“The future of global trade definitely includes China. But it also includes India, the United Arab Emirates, and Turkey,” says Cindi Perdue Hane, director of strategic planning and marketing for BAX Global, Irvine, Calf.

“It is exciting to participate in the development of these markets and see barriers to trade start to erode. But risks still exist. Smart companies weigh the risks and rewards of doing business in these emerging countries and design their supply chains accordingly.”

These risks are feasible cause for concern, finds a recent Deloitte Research study, China at a Crossroads. The report points to seven potential dangers of doing business in China:

1. Financial system
2. Currency revaluation
3. Overheating economy
4. Faltering economy
5. Transition from state ownership to privatization
6. Trade conflicts
7. Income disparities

The report adds: “China’s growth has been excessive, fueled by foolhardy investments made by loss-making, state-owned enterprises. This excessive growth is part of a larger problem of financial weakness—exacerbated by China’s exchange rate and monetary policies—both of which are driven by an understandable desire to avoid unemployment and the concomitant social implications.”

This has created inflation, a greater likelihood for an economic slowdown, and at worst, the potential for a major fiscal crisis. For companies operating in China, “the medium-term road ahead could be bumpy, but long-term success is likely,” the report adds.

With these challenges in mind, it is clear that the great potential of China requires a long-term commitment. “Our goal is to approach the future in China with patience and develop the logistics expertise and infrastructure necessary to support growth. With patience comes success,” says Escott.

THE VERDICT: MYTH STANDS

Another Chinese proverb says: It is impossible to add much weight with a single morsel; it is hard to travel afar with a single step. U.S. businesses will continue to take small steps as they look to add more weight to their global footprint and ensure that supply lines are diversified and resilient to unforeseen economic, social, or natural disasters.

That said, their first leap will likely be China. Why? China’s pace of development is unmatched, and the government has made logistics and transportation infrastructure and education a priority. Global 3PLs and U.S. businesses will follow their lead.