Supply chain management best practices [Third ed.] 9781119738237, 1119738237

Citation preview

Supply Chain Management Best Practices

Supply Chain Management Best Practices Third Edition

DAVID BLANCHARD

Copyright © 2021 by David Blanchard. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 7622974, outside the United States at (317) 572-3993, or fax (317) 572-4002. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www. wiley.com. Library of Congress Cataloging-in-Publication Data Names: Blanchard, David, 1958- author. Title: Supply chain management best practices / David Blanchard. Description: Third Edition. | Hoboken : Wiley, 2021. | Revised edition of the author’s Supply chain management, c2010. Identifiers: LCCN 2021010995 (print) | LCCN 2021010996 (ebook) | ISBN 9781119738237 (hardback) | ISBN 9781119738213 (adobe pdf) | ISBN 9781119738190 (epub) Subjects: LCSH: Business logistics. Classification: LCC HD38.5 .B476 2021 (print) | LCC HD38.5 (ebook) | DDC 658.5—dc23 LC record available at https://lccn.loc.gov/2021010995 LC ebook record available at https://lccn.loc.gov/2021010996 Cover design: Wiley Cover image: (c) Kentoh/Shutterstock 10 9 8 7 6 5 4 3 2 1

  and Grace To Nancy, Julia,

Contents

Preface

xv

Acknowledgments

xix

PART 1

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

CHAPTER 1

If Supply Chain Is the Answer, Then What’s the Question? 3

1

You Knew This Job Was Dangerous When You Took It 3 The Big Picture 5 The Supply Chain’s Back Story 7 Roadblocks on the Supply Chain Path 9 Separating the Good from the Best 10 Notes 13 CHAPTER 2

Anatomy of a Supply Chain

15

Aerospace: Changing the Game, for Better or Worse 17 Consumer-Packaged Goods: The Moment of Truth 18 Food and Beverage: Cutting Out the Middleman 20 Healthcare: Driving Out Waste 21 Industrial Products: Diversity in the Supply Chain 23 Oil and Gas: Managing the Managers 24 Pharmaceuticals: Innovation in Real Time 24 Retail: It’s Amazon’s World—We’re Just Shopping in It 26 Notes 27

vii

viiiContents

CHAPTER 3

Supply Chain Metrics: Measuring Up to High Standards

29

How to Prevent a Supply Chain Heart Attack 30 What Makes a Supply Chain Leader? 31 Measure Satisfaction 33 Everybody’s Talking About Benchmarking 34 Do the Right Things 35 Setting Your Sights High 36 Supply Chain Checkup 37 Learn the SCOR 38 SCM for Dummies 39 Follow the Roadmap 40 Make It All Meaningful 41 Focusing on the Customer 42 Notes 43 PART 2

TRADITIONAL CORE PROCESSES OF SUPPLY CHAIN MANAGEMENT 45

CHAPTER 4

Planning and Forecasting: Headed for the Future

47

A Bias Against Good Plans 49 From Soup to S&OP 50 No Time Like the Real Time 51 End-to-End Integration 53 Analyze This 54 A Happy Ending 56 Notes 57 CHAPTER 5

Procurement: Go Right to the Source

59

A Formula for Success Managing the Changes Keep Your Friends Close and Your Suppliers Closer Looking Backward to See Forward Ensuring a Healthy Supply Chain It Seemed Like a Good Idea at the Time An Online Car Wreck A Rating Service for Buyers and Sellers

60 62 62 63 64 67 68 69

ix

Contents

Sustainable Sourcing Pays Off 70 Closing the Loop 71 Notes 72 CHAPTER 6

Manufacturing: Supply Chain on the Make

75

The Toyota Way 77 Nearly Perfect 79 Leaning into Quality 80 Don’t Settle for Occasional Improvement 81 The Value of Teamwork 83 Leaning in the Right Direction 84 Smart Manufacturing, Smarter Suppy Chains 85 Supply Chain in 3D 87 Collaborating on Product Designs 88 The Future of Manufacturing 90 Notes 92 CHAPTER 7

Transportation: Logistics à la Mode

95

Riding the Roads 96 Regulations and Deregulation 97 Fuel for Thought 98 A Capacity for Change 99 Know Thyself, and Thy Carrier, Too 100 Collaboration Is a Two-Way Street 101 A Carrier by Any Other Name 102 Automate to Consolidate 103 Autonomous Vehicles on Land, Sea, and Air 105 Do-It-Yourself Logistics 108 The Last Mile 109 Get It There on Time 110 Notes 111 CHAPTER 8

Distribution and Warehousing: Going with the Flow

113

Omni-Channel Surfing A Great Idea in Theory Virtual Inventory

114 116 117

xContents

Cross-Docking, Compliance, and Collaboration 119 Handle with Care 120 Saving on Labor 121 How to Better Manage Your Warehouse 122 Design for Supply Chain 124 Striking the Proper Balance 125 A Site for Sore Eyes 126 How Much Is Too Much? 127 A Quick Guide to Site Selection 128 The Three Deadly Sins of Warehousing 129 Notes 130 CHAPTER 9

Globalization: It’s a Not-So-Small World

133

Playing by Somebody Else’s Rules 134 Develop a Global Vision 135 Following the Plan 136 Friendly Nations 137 “Low Cost” Sometimes Means “Poor Service” 139 Total Cost of Supply Chain 140 Take a Look for Yourself 141 Finding the Next Global Hot Spot 143 The Need for Supply Chain Visibility 144 Shoring Up the Supply Chain 145 There’s No Place Like Home 146 Notes 147 CHAPTER 10

Customer Service: Keeping the Customer Satisfied

151

The Perfect Order The High Cost of Imperfection Every Day Is a Holiday One Good Return Deserves Another Supply Chain in Reverse Money in the Bank A Better Way to Sell Mouthwash A Nine-Step Program for CPFR

153 155 155 156 158 159 160 162

xi

Contents

Don’t Expect Collaboration to Be Easy 162 Respecting Your Partners 163 A Culture of Customer Satisfaction 164 How to Get the Most Out of a Relationship 166 Notes 167

PART 3

SUPPLY CHAIN STRATEGIES

169

CHAPTER 11

3PLs: When You’d Rather Not Do It Yourself

171

A Shift to the Supply Chain Side 172 Letting Somebody Else Do It 173 Supply Chain Essentials and Nonessentials 174 Finding Your Core Competency 175 The Same Set of Eyes 177 The Financial Impact of Outsourcing 178 Staying in Touch 179 Going Beyond the 3PL Model 179 Outpacing the Competition 181 Higher Demands, Higher Expectations 182 Notes 182 CHAPTER 12

Risk Management: What to Do When Absolutely Nothing Goes According to Plan

185

Reducing Your Vulnerability 186 Don’t Let Their Problems Become Your Problems 187 Shelter from Supply Chain Storms 188 Cybersecurity Blanket 189 Customs-Trade Partnership Against Terrorism 191 Getting Countries to Talk to Each Other 192 “It’ll Never Happen Here” 193 Taking Responsibility for Your Supply Chain 196 Securing the Supply Chain 197 Taking Steps Toward Effective Compliance 198 An Investment Worth Making 200 Business as Unusual 200 Notes 202

xiiContents

CHAPTER 13

Supply Chain Technology: If You’ve Got the Money, Somebody’s Got the Solution

205

Getting the Job Done with AI 207 The ABCs of RFID 209 Proactive Replenishment 211 In Search of Payback 213 Work the Bugs Out 215 A Block Off the Ol’ Chain 216 An Interconnected Collection of Technologies 218 Reinvent, Rethink, Reimagine 220 Notes 221 CHAPTER 14

Corporate Social Responsibility: Doing the Right Things for the Right Reasons

223

Champions of CSR 224 Corporate Irresponsibility 225 Who’s Minding the Supply Chain? 227 The Black Elephant in the Room 228 The Carbon Footprint of a Banana 230 Don’t Reinvent the Wheel 231 Bridge Over Muddled Waters 232 Eco-Friendly Strategies 234 Notes 236 CHAPTER 15

The Financial Supply Chain: Cash Is King

239

A Convergence of Talent 240 Zero Hour for Budgeting 241 Roll with the Changes 242 Supply Chain Finance: Part Strategy, Part Technology 243 Financials on the Rocks 245 Show Me the Money 247 Notes 248

xiii

Contents

CHAPTER 16

The Supply Chain Profession: What Keeps You Up at Night?

251

People Management 252 Talent Search 254 Hiring Problem Solvers 255 Training the Next Generation 257 Toy Stories 258 Gray Matters 259 How Diverse Is Your Supply Chain? 260 What Keeps You Up at Night? 263 The Secret to Supply Chain Success 265 Notes 266

About the Author

269

Index

271

Preface

W

hen I wrote the first edition of this book, the terrorist attacks of ­September 11, 2001, were still fresh in people’s minds and the world was still grappling with new security procedures that changed travel, ­security, and global supply chains in ways that nobody could have i­magined pre-9/11. The US Department of Homeland Security was as frequently ­mentioned in supply chain circles as the IRS is mentioned at accounting firms. It was pretty much accepted as gospel that the world as we knew it had been changed forever. Welcome, the saying went, to the New Normal, characterized by stringent security measures that would slow global trade to a near halt as cargo and passengers alike would need to be thoroughly screened at every land, sea, and airport. I wrote the second edition a few years later when the United States, and pretty much the rest of the world, was plunged in what came to be known as the Great Recession. The housing market had tanked, the stock market had crashed, unemployment had spiked, and the new “New Normal,” we were told, would be an economy of very modest growth. Supply chain professionals were being advised to go lean—not just following the ­ ­principles of continuous improvement, but preparing for an economy that might never fully bounce back. That brings us to this third edition, which was written while the entire world was grappling with the COVID-19 pandemic. At this writing, while we seem to have gotten past the worst of the virus, and while the rapid development and distribution of vaccines are bolstering hopes that the pandemic could soon be downgraded to just a really bad health situation, it’s unclear as to exactly when, or if, we’ll see what the Next Normal looks like. It’s safe to say that even after the impact of COVID-19 has faded somewhat into memory, there will always be another crisis or another “we’ve never seen anything like this before” moment on the global supply chain stage. *

xv

xviPreface

When you give a book a title like Supply Chain Management Best Practices, there’s not much mystery in what it’s going to be about. Throughout its 16 chapters, this book will identify some of the best supply chains in the world, describe in detail what it means to have a “best-in-class” supply chain, and offer suggestions—in the form of best practices—on how to build a world-class supply chain. This book is largely told through the experiences of supply chain practitioners and experts. The companies and the people referred to in this book are real, as are their accomplishments (and, in some cases, their failures). What sets this book apart from other supply chain books is that I have taken a journalist’s approach to the subject rather than an academic’s or a consultant’s. As the editorial director of a diverse group of trade publications, I’ve had access to supply chain professionals at companies of all sizes, in dozens of different industries. So in writing this book throughout its three editions, I have set out to tell the story of supply chain management through the eyes of the people who know it best. In the United States alone, companies spend more than $1 trillion every year on transportation, warehousing, distribution, and associated inventory management. The responsibility for managing that spending falls squarely on the shoulders of supply chain professionals. Their roles may differ from company to company, but their goals are generally the same: develop and position their companies’ supply chains so that they can compete and win in today’s global marketplace. Many of these professionals work for companies that consider supply chain management and its many subdivisions (e.g., planning, purchasing, transportation, warehousing) largely as cost centers or as the group to blame when deliveries are late or shelves are empty. Yet it’s an inescapable fact that many of the biggest and best-run companies got to their positions of dominance thanks to their adoption of best practices to manage their world-class supply chains. This book, then, is designed to help you figure out how you can get your own company on the “best practices” track. It will explain why there is so much interest in supply chain management today by offering numerous examples of companies that have found success by focusing on specific processes within their supply chains. Through anecdotes, interviews, case studies, research, and analysis, the book will explore the development of supply chain management by looking at some of the people and the businesses largely responsible for its momentum. Since the late 1990s, thanks to the industry consolidation in my own chosen field (media and publishing), I’ve worked for three different companies (Penton, Informa, and Endeavor) but the same group of publications. While I’ve covered such industry sectors as safety, corporate finance, and manufacturing, I’ve consistently maintained a supply chain beat for well over 20 years. In the course of writing the three editions of this book,

xvii

Preface

I’ve had the opportunity to visit manufacturing plants, distribution centers, major ports, third-party logistics operations, and various government offices throughout North America and Latin America, Europe, and Asia. In preparing this third edition, I have added a significant amount of new material and additional best practices to each chapter, with the goal of producing as timely and relevant a book as possible. The second edition was in print for over 10 years, so for this third edition I have updated the material wherever necessary, particularly in areas where the companies mentioned in previous editions have substantially changed their business model, have been acquired or otherwise no longer exist in their previous incarnation, or in some cases, when more recent examples made my points better. Best practices are not etched in stone, and what worked in 2007 or 2010 may have been improved upon, so I’ve replaced some case studies with more current examples. However, based on the feedback I received from course instructors who have used this book as a textbook and plan to do so in the future, I have kept the same basic structure to the book, and if the best practices mentioned in previous editions are still widely accepted and in use today, I have left those sections intact. And sometimes good stories are still good stories, even a decade later. * The book is organized into three parts. Part 1 opens with a brief introduction to supply chain management (Chapter 1), looks at examples of some bestin-class supply chains in a number of different industries (Chapter 2), and discusses ways to measure the performance of a supply chain (Chapter 3). Part 2 presents the traditional core processes of supply chain management. Chapters 4 through 10 follow the progression of plan, source, make, deliver, return, and enable, and related points in between, and discuss in detail the best practices being followed by specific trendsetting companies. Part 3 looks at best practices in strategic areas that have become increasingly important to supply chain management as we settle into the third decade of this century: third-party logistics (Chapter 11); risk management and business continuity, including a look at how supply chains reacted to the COVID-19 pandemic (Chapter 12); supply chain technology (Chapter 13); sustainability and corporate social responsibility (Chapter 14); and an allnew chapter on supply chain finance (Chapter  15). Finally, Chapter  16 focuses on the ultimate best practice: hiring and developing best-in-class supply chain personnel.

Acknowledgments

T

he genesis for writing this book came largely from a need to clean up my office. I’ve been writing about supply chain management for a long time, dating back to the days when nobody even used the words “supply chain,” and being a pack rat, I have several filing cabinets’ and countless jumpdrives’ worth of notes, interview transcripts, research studies, surveys, press kits, and article clippings, as well as several shelves stuffed with ­reference books. One day, staring at my daunting collection of supply chain stuff, the thought occurred to me: “Surely, there’s got to be a book somewhere in all of this.” And indeed there was—in fact, with this current edition there have been three, and my collection of book material shows no sign of shrinking. I mention this to dispel the myth that every book emerges fully formed from the divinely inspired mind of the author. Nothing could be further from the truth. This book evolved over time from the writing and editing I’ve done for the past three decades, especially the two decades I’ve spent in editorial management of various supply chain publications—including Supply Chain Technology News, Logistics Today, Material Handling & ­Logistics, and IndustryWeek—for Penton Media/Informa/Endeavor Business Media. Throughout my tenure with the company (the corporate owner of the magazines changed over the years, but I stayed put), I’ve also edited several other publications not necessarily supply chain–focused but whose readers were heavily influenced and impacted by the vagaries of the supply chain, such as EHS Today and Business Finance, and this book reflects my awareness of how the supply chain’s influence continues to spread throughout all areas of an organization. This book also references the reporting of many fine journalists who have worked with me and for me, and many of the insights on the ­following pages originated with them (and are duly noted throughout the book). In alphabetical order, I’d like to acknowledge and publicly thank Mary ­Aichlmayr, Peter Alpern, Tom Andel, Jill Jusko, Jonathan Katz, Brad Kenney,

xix

xxAcknowledgments

Bill King, Jennifer Kuhel, Steve Minter, Roger Morton, Helen Richardson, Adrienne Selko, Sarah Sphar, John Teresko, Perry Trunick, Laura Walters, Clyde Witt, and Nick Zubko for their contributions. It’s always good to thank your bosses, so thanks to those I’ve worked for at Penton/Informa/Endeavor since the late 1990s, namely Newt Barrett, Dave Madonia, Teri Mollison, Ron Lowy, Steve Minter, Pat Panchak, Karen Field, Travis Hessman, and John DiPaola. And special thanks to Bob Rosenbaum, not only because he had the good sense to hire me, but because he showed me that it was possible to write a supply chain book in the evenings and on weekends without completely losing your mind. Not to single anybody out, but I also have to thank Nick Lester, Dick Green, Craig Shutt, Andy Horn, Steve Kane, and Paul Beard—just because. I’m especially indebted to all the supply chain professionals who shared their experiences and insights with me, and in particular I’m eternally grateful for the collected wisdom and insights of the Material Handling & Logistics Editorial Advisory Board. And of course, this book wouldn’t have been possible without the good graces of the fine folks at John Wiley & Sons, and for this third edition I’d like to thank in particular Sheck Cho, Susan Cerra, and Samantha Enders. Finally, special thanks go to my parents, Jack and Dottie Blanchard, for their lifelong support. My dad passed away while I was writing this third edition, but his spirit fills every page. Thanks to my friends and family, especially my siblings and my son-in-law Joe, who supported me throughout the writing process and offered endless encouragement. I want to thank my daughters, Julia and Grace, for being there with me along every step of this trilogy-writing journey. Over the course of these three editions they’ve grown from young girls into difference-making young women who constantly inspire me. And most of all, I’d like to thank my wife and soulmate Nancy, who gives meaning to my life every day. WEATSIA!

Supply Chain Management Best Practices

Blanchard9738237_flast01.indd xxi

07 Apr 2021  05:22:49 pm

Blanchard9738237_flast01.indd xxii

07 Apr 2021  05:22:49 pm

PART

1

Introduction to Supply Chain Management  

CHAPTER

1

If Supply Chain Is the Answer, Then What’s the Question? Flashpoints A supply chain is the sequence of events that cover a product’s entire lifecycle, from conception to consumption. A “one size fits all” supply chain strategy is doomed to failure. Although the modern concept of supply chain management dates back to the early 1980s, very few companies have fully embraced it. Building a best-in-class supply chain requires money, time, talent, energy, focus, commitment, and guts.

You Knew This Job Was Dangerous When You Took It Imagine, if you will, a typical day in the life of a supply chain professional. Your boss comes into your office with one of those looks you’ve come to dread—furrowed brow, deep-set eyes, concerned scowl. He looks you straight in the eye and asks you why it costs so much to transport your company’s products to your customers. You can tell by the expression on his face that he doesn’t want to hear about fuel costs or industry consolidation or next-day delivery expectations from your customers. It’s your job to worry about that stuff, not his. And right now, even though your budget projections say you’ll have to spend at least 5% more on transportation this year than you did last year, your boss tells you in no uncertain terms that he expects you to keep the increase down to 2%, or less. Preferably less.

3

4

Introduction to Supply Chain Management

As you stand waiting for the Keurig machine to brew your much-needed second cup of coffee for the morning, your director of sales approaches you with a sheepish smile and asks if you can arrange for an extra thousand widgets to be made and shipped to a big customer by the end of next week. Actually, she doesn’t really ask you so much as tell you, since she’s already promised the customer that it will happen. She leaves before you get the chance to ask if she’s charging the customer double the normal price since it’ll cost you at least twice the normal rates to source the parts used to make the widgets from your offshore supplier, plus the cost of expedited delivery. On top of that, production will have to schedule an extra shift to get that many widgets made that quickly. Later in the morning, while you’re patting yourself on the back because you managed to find a domestic source for most of the widget parts, your boss asks you to shepherd your company’s Internet of Things (IoT) initiative. The Department of Defense (DoD), another big customer, has started using IoT technology to keep better track of its inventory. Your boss wants you to figure out how IoT is going to help your company and result in more business from the DoD. Your boss waves off the list of questions that immediately come to your mind; he wants you to answer those questions yourself, provide him with regular updates on your progress, and map out an implementation plan that results in a decent return on investment within a year—no easy accomplishment given that the start-up costs on sensors and other hardware alone could quickly add up to $1 million for a limited trial. For all his many faults, though, your boss is a fair man, and recognizing the extra burdens he’s been laying on you, he invites you to lunch. Before your salad arrives, though, he’s already launched into a harangue about automation. Your competitors have been getting to market faster and are spending less money to do it, and he’s convinced it’s because they’ve deployed automated guided vehicles in their warehouses. So when you get back to the office, he wants you to figure out which type of warehouse robot can manage your facility better, faster, and cheaper for you. Your customer service levels, needless to say, cannot change in the slightest, unless of course they actually improve. And make sure the union steward knows this technology investment won’t lead to any layoffs. Oh, and one more thing, your boss adds as you get up to leave the restaurant: He wants you to schedule another trip to Asia (your seventh trip there in three years). It’s time, he says, to get serious about this corporate social responsibility stuff, and he wants you to oversee an audit of your offshore suppliers. Most of your afternoon is spent trying to mend some fences down in the information technology (IT) department. Your chief information officer has made it clear that absolutely nobody is going home today until somebody can figure out why the supply chain planning system still isn’t fully

If Supply Chain Is the Answer, Then What’s the Question?

5

integrated with the inventory management system—and why manufacturing keeps making 12-inch widgets when the sales plan calls for 18-inch versions. Toward the end of the afternoon, your plant manager asks for “a little bit of help” calculating what the plant’s carbon footprint is. You get the unmistakable feeling that he wouldn’t mind one bit if you figured it out for him. As you finally shut down your computer and get ready to call it a day, your head of human resources pops her head in your doorway and tells you she hasn’t had a bit of luck yet finding a global trade expert, so it looks like you’ll have to keep filling in for a while longer. Hearing the tail end of that conversation, your boss walks with you out to the parking lot and reminds you he still needs to see your contingency plan in the event an outbreak of a disease nobody even heard of a month ago spreads throughout the region where one of your key suppliers is located. Oh, and a big storm is developing in the Atlantic Ocean, and another one of your supplier’s plants is right in the storm’s path. Fortunately, you’ll be able to monitor the situation from your home throughout the evening, thanks to the cloud-based supply chain alert dashboard app your company has purchased for you. At the end of the day, after you’ve kissed your spouse goodnight and laid your head on your pillow, you drift off to sleep secure in the knowledge that the distance between you and your supply chain is no further than the smartphone 12 inches away from you on your nightstand.

The Big Picture Admittedly, the preceding example represents a rather extreme and timecompressed scenario, but on any given day, a supply chain manager has to deal with numerous situations quite similar to those just described, with the expectation that costs will be minimized, disruptions will be avoided, customers will be satisfied, and the profitability of the company will be enhanced. No pressure, right? Maybe we’re getting ahead of ourselves, though, so let’s start at the beginning: What exactly is a supply chain? There are plenty of definitions for the term, and we’ll look at a couple of them, but this question gets asked so often because the answer tends to change depending on who’s doing the telling. It’s like that old fable about the blind men who stumble on an elephant and try to tell each other what the elephant is like: The man holding the elephant’s leg thinks the animal looks like a tree; the man holding the tail thinks an elephant resembles a rope; a third man who grabbed a tusk thinks the whole animal must look like a spear. Each of their answers is partly right, but anybody who has actually seen an elephant smiles at the story because they know these blind men are missing the big picture.

6

Introduction to Supply Chain Management

The funny thing is, those kinds of faulty assumptions are made all the time about supply chains. For instance, since online retailer Amazon’s supply chain is based on a model of guaranteed deliveries and free shipping, that’s become the de facto model for all online retail companies, or for that matter, for any company in any industry. However, while Amazon can deploy its own warehouse robots and trucks to ensure your new desk lamp arrives by Thursday, ExxonMobil relies on an entirely different distribution network to move its products from pipeline to refinery to tanker to gas station. So, the idea that “one supply chain strategy fits all” is as wrong-headed as thinking that an elephant looks like a tree. A supply chain, boiled down to its basic elements, is the sequence of events and processes that take a product from dirt to dirt, in some cases literally. It encompasses a series of activities that people have engaged in since the dawn of commerce. Consider the supply chain General Mills manages for every box of cornflakes it sells: A farmer plants a certain number of corn seeds, cultivates and harvests a crop, sells the corn to a processing facility, where it is baked into cornflakes, then is packaged, warehoused to a distributor, transported to a retail store, put on a store shelf, sold to a consumer, and ultimately eaten. If the cornflakes are not sold by the expiration date on the box, then they are removed from the retailer’s shelf and disposed of. A supply chain, in other words, extends from the original supplier or source (the farmer and the seed) to the ultimate customer (the consumer who eats the cornflakes). So whether you’re talking about an Intel semiconductor that begins its life as a grain of sand or a Ford Explorer that ends its life in a junkyard where its remaining usable components (tires, seat belts, headlights) are sold as parts, everything that happens in between those “dirt-to-dirt” milestones encompasses some aspect of the supply chain. APICS Supply Chain Council, an organization that develops industry benchmarks and metrics, came up with a way to summarize the concept of supply chain management in just six words: plan, source, make, deliver, return, and enable.1 While it’s difficult to find a consensus in any field, let alone a field that intersects with so many disparate disciplines, that sixword definition has been accepted as the basic description of what a supply chain looks like and what its core functions are. (The Supply Chain Operations Reference, or SCOR, model is discussed in Chapter 3.) For those who like a little sizzle with their steak, another industry group, the Council of Supply Chain Management Professionals (CSCMP), is a bit more descriptive with its definition: “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities.” That includes coordinating and collaborating with channel partners, including suppliers, intermediaries, third parties, and customers. In short: “Supply

If Supply Chain Is the Answer, Then What’s the Question?

7

chain management integrates supply and demand management within and across companies.”2

The Supply Chain’s Back Story As noted, the concept of working with suppliers and customers is as old as commerce itself, but the modern idea of a “supply chain” is fairly recent, probably dating back no further than the late 1950s to the pioneering research conducted by Jay Forrester and his colleagues at the Massachusetts Institute of Technology (MIT). A half century ago, Forrester began studying supply pipelines and channel interrelationships between suppliers and customers, and he identified a phenomenon that later came to be known as the bullwhip effect. Forrester noticed that inventories in a company’s pipeline (i.e., supply chain) tend to fluctuate the further they are from the ultimate end user.3 The idea of the bullwhip effect remained largely a curiosity until the 1990s, when computers were fast enough, powerful enough, and affordable enough that researchers could not only gain an understanding of the bullwhip effect, but also design software programs that could circumvent it. Supply chain management as a discipline basically evolved out of Forrester’s quest to understand and ultimately control these increases in demand fluctuations. Although he didn’t use the exact words “supply chain” to describe his findings, “Forrester and his group should really get the credit for supply chain management,” asserts Edward Marien, long-time director of supply chain management programs (now retired) at the University of Wisconsin.4 At some point in the early 1980s, the concepts of transportation, distribution, and materials management began to merge into a single, allencompassing term: supply chain management. The term apparently first appeared in print in 1982 and has been attributed to Keith Oliver, a consultant with Booz Allen. In any event, in 1985, Harvard professor Michael Porter’s influential book, Competitive Advantage, illustrated how a company could become more profitable by strategically analyzing the five primary processes on which its supply chain5 framework is built: 1. Inbound logistics. These are the activities associated with receiving, storing, and disseminating inputs to the product (material handling, warehousing, inventory control, transportation scheduling, and returns to suppliers). 2. Operations. This refers to the activities associated with transforming inputs into the final product form (machining, packaging, assembly, equipment maintenance, testing, printing, and facility operations).

8

Introduction to Supply Chain Management

3. Outbound logistics. These are the activities associated with collecting, storing, and physically distributing the product to buyers (finished goods warehousing, material handling, freight delivery, order processing, and scheduling). 4. Sales and marketing. Within a supply chain context, these are the activities that induce buyers to purchase a product and enable them to buy it (advertising, promotions, sales force, quoting, channel selection, channel relations, and pricing). 5. Service. This refers to the activities associated with providing service to enhance or maintain the value of the product (installation, repair, training, parts supply, and product adjustment).6 Like Forrester before him, Porter saw that companies could significantly improve their operations by focusing on interrelationships among business units. These interrelationships, he wrote, are “tangible opportunities to reduce costs or enhance differentiation in virtually any activity in the value chain. Moreover, the pursuit of interrelationships by some competitors is compelling others to follow suit or risk losing their competitive position.” As a result, according to Porter, it is critically important for companies to focus on horizontal strategy—a coordinated set of goals and policies across distinct but interrelated business units. This horizontal strategy, which is a succinct way of describing supply chain management, represents the essence of corporate strategy.7 Although their work was separated by more than two decades, both Forrester and Porter saw that a vertical strategy—the idea of compartmentalizing every department and group into unconnected silos—was counterproductive to a company’s long-term growth and health. Curiously, more than three decades after Porter’s work, companies are still trying to figure out how to get their managers to cooperate across departments and functions, share resources, and cross-sell products to promote the entire company’s bottom line.8 The terms may change throughout the years, but the underlying goal of supply chain management has remained constant: Articulate exactly what a company’s supply chain looks like and what it encompasses. ■■ Identify specific bottlenecks that are slowing down the movement of information, goods, and services. ■■ Put the right processes in place to get the right products delivered to the right place on time. ■■ Empower the right people so they can accomplish all of the above. ■■

If Supply Chain Is the Answer, Then What’s the Question?

9

Roadblocks on the Supply Chain Path Although the concept of supply chain management entered the public consciousness nearly 40 years ago, to date relatively few companies have fully embraced the idea. Even though many of the best-known manufacturing and retail companies in the world are as celebrated for their supply chains as they are for their brands, it’s rare to hear of a company attempting fullscale supply chain projects, and of those that do, many are stymied by various roadblocks that make them question whether the end result will be worth the aggravation. Consulting firm Accenture teamed up with Stanford University and global business school INSEAD to try to figure out why that should be. Of the companies they studied, it turns out that more than half encountered unexpected problems in the course of their supply chain transformations. Exacerbating the situation is the fact that these problems aren’t easily solved: Technology implementations didn’t work as promised. The supply chain movement faced a moment of crisis when the Internet bubble burst, taking many supply chain technology vendors (and even more vaporware companies) with it. Companies that should have known better assumed that establishing a website was a ticket to instant riches, and they embraced the Internet with a giddy “gold rush” fervor. They spent millions on ill-advised “end-to-end” projects that had no timeline for deliverable payback, and they got badly burned in the process. To this day, despite the numerous (and often breathless) articles in mainstream publications about the Internet of Things, blockchain, machine learning, and other disruptive technologies, many companies remain extremely cautious about investing in any kind of envelope-pushing supply chain solution. ■■ Projects cost too much and never came close to meeting service targets. This problem predates the supply chain. The list of unfinished and underimplemented enterprise resource planning (ERP) projects is a lengthy one, and unfortunately there are plenty of similarly out-of-control supply chain projects to add to that list. Many of these enterprise-wide initiatives end up being a bottomless money pit of costs with no end in sight and no discernible benefits. ■■ Supply chain projects were inconsistent with a company’s current business strategy. The unfortunate reality is that many companies don’t have a well-defined business strategy. Trying to plug a supply chain initiative into an uncertain and continually shifting corporate plan can wear out even the most patient project managers. ■■

10

■■

Introduction to Supply Chain Management

It was too difficult to manage change internally and externally. For a supply chain project to succeed, employees first need to be convinced that sharing product and transactional data between their own divisions is a good thing. Too often, companies will fail in their attempts at collaborating with key supply chain partners because their own internal groups don’t cooperate with each other. You have to be able to trust your own people before you can hope to collaborate with other companies.9

Breaking down these inter-departmental silos is still largely an unrealized goal, even after all these years. In a survey of 300 retail and consumer goods CEOs conducted by consulting firm PwC, only 18% said they have eliminated operational silos at their companies—this despite the fact that retailers today succeed or fail largely on their ability to connect consumers with the products they want, at any time, via any channel.10 (We’ll examine this trend, known as omni-channel retailing, in greater detail in Chapter 8.) In fact, as supply chain consultant Lora Cecere has observed, one big problem is that the supply chain itself has become a silo. With the growth of supply chain departments and organizations, it’s become easier for the other areas of a company to throw anything vaguely related to supply chain management over the wall and expect the supply chain people to fix it. As Cecere explains it, “For some, in the process, [supply chain] can become a dirty word. In a functional organization, the definition of a supply chain as yet another function becomes a problem, not a part of the solution.”11 The Accenture study, incidentally, looked at companies that ultimately found a way to successfully launch and complete their supply chain initiatives. You can well imagine that at companies that have had far worse luck with their projects, many managers close and lock their doors behind them every time they see a supply chain project leader walking toward their offices.

Separating the Good from the Best There’s no getting around it—supply chain management is just plain difficult. No single company has all the answers, and what’s more, most companies ask virtually the same questions. So why are some companies celebrated for their supply chain successes, while other companies seem to be stuck in a rut? What distinguishes a best-in-class supply chain from every other supply chain? Daniel Stanton, author of Supply Chain Management for Dummies, says there are clear differences between good supply chains and bad ones:

If Supply Chain Is the Answer, Then What’s the Question?

11

“A good supply chain will always give your customers what they want for a price that they’re willing to pay, while leaving a sufficient profit margin for your company.” That definition, he admits, sounds a bit simplistic, as he hastens to add that “actually designing and managing a supply chain that can profitably meet your customers’ expectations is tricky.”12 So what’s the secret to supply chain success? As this book will illustrate, every top-performing company—no matter what industry it competes in—has aggressively attacked its inventory problems, committed resources to improving its customer service levels, and partnered with its key suppliers to take control of its supply chain. Every single one of them. Top-performing supply chains, quite frankly, do things a little differently from everyone else. According to Debra Hofman, an analyst with Gartner, best-in-class companies share these three traits: 1. They aim for balance. These companies may not be the very best in every category, but they are consistently good enough in all areas that they add up to be best-in-class. 2. They increase demand visibility. Having a high level of forecast accuracy is the key to reaching perfect order fulfillment, which is the holy grail of customer service. 3. They isolate high costs. The best companies know where they hold their costs and why, so that’s where they focus their best practices and technology investments.13 Karen Butner, who leads the IBM Institute for Business Value, boils it all down to one common factor: “Top supply chains all have the ability to respond quickly to shifts in demand with innovative products and services.”14 When it comes to best practices, supply chain success requires commitment at the highest corporate levels. It should surely come as no surprise that Tim Cook, CEO of Apple, used to manage the company’s end-to-end supply chain, or that prior to becoming chair and CEO of General Motors, Mary Barra ran her company’s global product development, purchasing, and supply chain. Mike Duke, former CEO of Walmart, had previously run the retail giant’s logistics department. These companies all live or die by their supply chain proficiency, so having a chief executive who understands the interplay between every corporate department, as well as the interrelationships with both customers and suppliers, just makes sense. “Emerging supply chain leaders are those who can handle the day-today work of plan-source-make-deliver while simultaneously seeing further

12

Introduction to Supply Chain Management

over the horizon,” observes Kevin O’Marah, chief content officer with supply chain research firm SCM World. “This means understanding where the business’s strategy is likely to hit a wall or, better still, what confluence of trends might create a sustainable profit opportunity down the road.”15 Bruce Tompkins, president of supply chain consulting firm MonarchFx, who has worked with many supply chain professionals over a four-decade career, offers these five characteristics of great supply chain leaders: 1. A calm demeanor. 2. Experienced at solving relevant problems. 3. Learner—somebody who has “a good working knowledge of supply chains in general and [their] company specifically,” he says. 4. A good listener. 5. Collaborator. “Great leaders don’t do things all by themselves, and set the speed for the entire organization,” Tompkins observes. “They know how to use the people around them to get things done as a team or group.”16 Booz Allen, the consulting firm that first popularized the term supply chain management, reports that companies with CEO-level support for their supply chain projects have nearly twice the annual savings in customer service costs as companies where the responsibility is lower in the organization. In a survey of senior executives, Booz Allen concludes, “Without guidance and oversight from the CEO and the company’s full leadership team, the supply chain’s performance often does not live up to expectations.”17 Best practices don’t just happen by throwing a lot of money at your supply chain problems. Improvements come through strategies that identify and track key supply chain processes early and often. As J. Paul Dittmann, director of the University of Tennessee’s Office of Corporate Partnership, has observed, very few companies actually have a documented supply chain strategy.18 “Such a strategy,” he suggests, “starts with assessing the future needs of their customers. The strategy development process then determines the new supply chain capabilities the company will need in the future to meet its customers’ needs. Unfortunately, most supply chain organizations are so consumed with the daily battles of cutting cost, managing inventory, and delivering good customer service that they don’t plan properly for the future, sometimes with disastrous results.” Indeed, whenever companies experience the first hint of trouble, whether it’s the onset of an economic recession or a new competitor that seemingly sprang up overnight, the supply chain strategy is often shelved, where it sits collecting dust for many years. In short, building and maintaining an end-to-end supply chain organization takes money, but it also takes time, talent, energy, focus, commitment

If Supply Chain Is the Answer, Then What’s the Question?

13

from senior management, and a lot of guts to pull it off successfully. However, those are the qualities that the best-run companies in the world share, and it’s why they’re on top. As Dittmann says, “supply chain is the frontier of competition.” In the next chapter, we’ll look at specific examples of how some well-known companies in a number of different industries are managing their best-in-class supply chains.

Notes All website citations throughout this book were confirmed in November 2020. 1. “Enable” was added to the SCOR model in 2012 and basically refers to the management of the other five processes; in other words, supply chain management itself. 2. www.cscmp.org. 3. Forrester spells out many of his theories in the book Industrial Dynamics (Cambridge, MA: MIT Press, 1961). 4. David Blanchard, “Moving Past the Problems Can Be Problematical,” Chief Logistics Officer (October 2003), 5. 5. Porter actually uses the term value chain rather than supply chain, but the difference is mainly one of semantics. 6. Michael Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985), 39–43. 7. Ibid., 318–319. 8. Carol Hymowitz, “Mind Your Language: To Do Business Today, Consider Delayering,” The Wall Street Journal (27 March 2006), B1. 9. Blanchard, “Moving Past the Problems Can Be Problematical.” 10. “Retail CEOs Need to Remove Organizational Silos,” Material Handling & Logistics (24 February 2016), www.mhlnews.com. 11. Lora Cecere, “Don’t Make Supply Chain a Dirty Word!” Forbes (10 December 2013), www.forbes.com. 12. Daniel Stanton, Supply Chain Management for Dummies (Hoboken, NJ: Wiley, 2018), 73. 13.  Debra Hofman, “The Secret to Supply Chain Excellence Is Balance,” AMR Research Alert Highlight (22 April 2004), 1. 14. Karen Butner, “Scoring High on the Supply Chain Maturity Model,” presentation delivered at Supply Chain World, Dallas, TX (27 March 2006). 15. Kevin O’Marah, “Supply Chain Leaders Making the Move to CEO,” Forbes (21 April 2016), www.forbes.com. 16. Bruce Tompkins, “5 Traits and Examples of Great Supply Chain Leaders,” Tompkins International (8 April 2020), www.tompkinsinc.com. 17. Peter Heckmann, Dermot Shorten, and Harriet Engel, “Supply Chain Management at 21,” Chief Logistics Officer (August 2003), 19–24. 18. J. Paul Dittmann, “What’s On the Minds of Supply Chain Professionals Today?” IndustryWeek (1 June 2009), www.industryweek.com.

CHAPTER

2

Anatomy of a Supply Chain Flashpoints Best-in-class supply chains share many common characteristics, no matter what industry they’re in. It takes a coordinated team effort to build, maintain, and sustain a wellrun supply chain. Best practices don’t just happen—somebody has to champion them, devise them, and then apply them.

Supply chains are defined as much by their similarities as by their differences. While there may not appear to be much in common between, say, a multibilliondollar big-box retailer and a single-site mom-and-pop shop, in fact both companies operate on the same principle: When you’re out of stock, you’re out of business. With out-of-stock rates averaging 10% (in some product categories, it can be considerably higher), having products on the shelves is the be-all and end-all of retail life. So retailers of all shapes and sizes—whether they’re mass discounters the size of a small country like Walmart or a modest chain of three comic book stores—are naturally inclined toward adopting best practices that will maximize their revenues (e.g., rapid replenishment) while minimizing their costs (e.g., demand planning). The story is much the same for manufacturers, distributors, nonprofits, service industries—in short, any organization that makes or moves products, whether physical or digital, has common supply chain challenges.

15

16

Introduction to Supply Chain Management

According to Jim Tompkins, chairman of supply chain consulting firm Tompkins International, top-performing supply chains share the following seven characteristics: 1. They have a clear supply chain strategy as their foundation. This strategy is based on a deep understanding of the company’s business strategy. 2. They are adaptable and quick, which allows them to compete in today’s dynamic environment. 3. They are transparent, have clearly stated performance expectations, and have a culture of accountability to their customers. 4. They are focused on continuous improvement throughout the supply chain, and aim at peak-to-peak performance. 5. They know their strengths and their weaknesses, and participate in benchmarking activities. 6. They have an end-to-end perspective, focusing on the supply chain activities of plan-buy-make-move-store-sell (Tompkins’ tweak of the SCOR model’s basic definition of the supply chain as plan-source-makedeliver-return-enable). 7. They have a global, rather than regional, focus.1 In short, the best-run organizations have developed world-class supply chains that extend from their customers’ customers to their suppliers’ suppliers, and all points in between. As this chapter illustrates, many of the best practices of one industry can be tweaked so that they’ll work for another industry as well. Best practices tell only part of the story, though. For one thing, best practices are not etched in stone. Thanks to advances in technology and changes in customer expectations, what might have been considered bestin-class not that long ago (for instance, next-day delivery) is now considered as a standard option for delivering products to customers, and if 3D printing technology continues to evolve, instant (or almost instant) delivery could become not only achievable but routine. The best practices in this chapter, then, are meant to provide a flavor for what companies have done and are doing to expand the possibilities of supply chain management, but they’re certainly not meant to be the last word. What’s undeniable is that behind every successful supply chain organization is a team of dedicated and influential change agents. Or, to put it more simply, a supply chain wins or loses based on the quality of the people who manage it. With that in mind, let’s look at some of the most innovative efforts at supply chain management in several industries and at some of the people who have spearheaded their companies’ best practices efforts.

Anatomy of a Supply Chain

17

Aerospace: Changing the Game, for Better or Worse It’s only fitting that we should start by looking at the Boeing Co., as the aerospace giant’s 787 Dreamliner project is not only a game changer when it comes to pushing the boundaries of what’s possible with a fully connected supply chain, but it’s also an example of what can go wrong when a company’s supply chain reach exceeds its grasp. Boeing’s goal with the Dreamliner was nothing short of evolutionary: Rather than merely talking about an extended enterprise that involved key partners in every step along the supply chain, Boeing would actually do it. Namely, Boeing the airplane maker would become Boeing the airplane assembler, outsourcing the entire production of its new aircraft to suppliers, and then finishing the plane at the final assembly stage. On the face of it, that doesn’t sound radically different from what the major automakers do, locating Tier 1 suppliers in close proximity to the assembly plants. However, while an automobile might be built with as many as 8,000 to 10,000 parts, an airplane might have three million parts or more. In addition, while in the past Boeing had used outside suppliers to build roughly 50% of its planes, its plan for the Dreamliner was to outsource 70% of its fabrication, with much of the major components coming from outside the United States. Engines, for instance, would come from both Ohio and the UK; wingtips from Korea; trailing edges from Australia and Japan; center fuselages from Italy; cargo access doors from Sweden; and passenger entry doors from France. In fact, Boeing went so far as to develop a cargo plane—the Dreamlifter—to transport the larger parts, such as wings and fuselage, to the final assembly plant in Everett, Washington.2 The reason for outsourcing so much of the production work is the realization that the best process skills in aerospace oftentimes lie outside Boeing’s factories, says Mike Bair, former head of the Dreamliner program. The new plane would involve not only a new supply chain plan, but also the development of lightweight composite materials and fuel-efficient engines, new production processes, and an interior architecture that would set new standards for passenger comfort. The Dreamliner became the fastest-selling commercial aircraft in history, based on preorders. However, orders do not necessarily mean deliveries.3 Due to numerous setbacks and supply chain problems, Boeing was not able to deliver any Dreamliners by its initial target date of May 2008. Nor were they able to fill any orders in 2009, or 2010. As it turned out, the first 787  wasn’t delivered to a customer until September 2011. The company admitted that it was “more difficult than we anticipated to complete the structural work on the airplane out of sequence in our Everett factory.” In The Supply-Based Advantage, consultant Stephen C. Rogers explains that the never-ending delays weren’t due to a flawed supply chain strategy;

18

Introduction to Supply Chain Management

instead, it was the unprecedented nature of the project itself that led to the problems. “The supply chain structure for the Dreamliner took best-inclass supply chain thinking and applied it from the design phase through to production,” he observes. However, “the scale and scope of the task was enormous when considering the sheer number of parts, amount of innovation, number of subcontracting tiers, and geographical dispersion of the contractors. No company ever managed such a project before.” Since nearly three-quarters of the work was being done by suppliers, naturally most of the production problems were on the supplier end as well, and as Boeing quickly discovered, a game-changing initiative like the Dreamliner requires extreme supply chain management. In response, Boeing instituted a more intense supplier support and monitoring system to address breakdowns in the supply chain. Rogers points out, “The key [for Boeing] is to manage what counts and find ways to extend resources through the use of suppliers. This is easier said than done since many Tier 2 and Tier 3 suppliers have allegiance to the Tier 1 supplier, not the company that is buying the chain’s combined output. Why? Because the relationship is typically tier to tier, not across multiple tiers.”4 Assessing Boeing’s troubles launching the Dreamliner, consultant Suman Sarkar observes that by distributing the production of the aircraft across numerous countries, Boeing found itself facing various language, culture, and coordination challenges—and these challenges were compounded by Boeing’s engineers making multiple design changes at a moment’s notice. “Unless a supplier had worked with Boeing before, it became difficult for suppliers to manage this constant change philosophy,” Sarkar says. “Implementing change takes time when you are working with suppliers in different parts of the world. In a rush to meet the deadline for launch, corners were sometimes cut, which resulted in post-launch problems.”5 Ultimately, the aerospace giant ended up acquiring some of its key suppliers, which increased Boeing’s involvement in the production stages by transforming its outsourcers into in-house providers. As a result, the company’s reliance on a very old-fashioned (but time-tested) best practice— buying out a supplier—trumped its game-changing strategy. While Boeing is still dogged by quality problems (exacerbated, according to a 2019 New York Times investigation, by “a culture that often values production speed over quality”),6 the company has succeeded in upping its monthly production of Dreamliners to 14.

Consumer-Packaged Goods: The Moment of Truth There is a defining moment of truth for every customer who enters a retail store, and it comes when the customer selects a specific product for

Anatomy of a Supply Chain

19

purchase. If there is one thing retailers and their consumer packaged goods (CPG) suppliers fear more than anything else, it’s the dreaded empty shelf. When you consider that the out-of-stock rate for retailers averages around 10%, there’s a lot of money not being spent by frustrated consumers. When Procter & Gamble Co. formed its Consumer-Driven Supply Network, it set some lofty goals for its supply chain transformation efforts: reduce inventory by 50%, trim out-of-stocks by 50%, and achieve 20% savings in logistics costs. Reaching those goals required addressing such key areas as product availability, shelf quality, and on-time delivery. “Time is money—the longer and slower the supply chain, the more costly it is,” explains consultant Patrick Arlequeeuw, formerly P&G’s vice president, global business services. “When you take time and cost out of the supply network, you increase flexibility and responsiveness.” Instead of a long, slow chain from raw materials to the finished product on the shelf, P&G set out to create a network of suppliers, manufacturers, and retailers that would facilitate real-time information flow between all these partners, starting with what’s happening at the shelf, he says.7 What that means is that P&G moved from the traditional CPG model of producing to a forecast to producing according to demand, with the goal of replenishing products as soon as they’re purchased. Part of that strategy depends on technology that can receive point-of-sale data from the retailer and convert it into a replenishment order. For instance, P&G synchronizes item data with key retail customers, which helps eliminate unnecessary transcription work while reducing out-of-stocks. Equally important to that strategy is having an idea of what consumers want even before they enter the store. To that end, P&G regularly surveys its end consumers and works directly with its retailer customers to continuously improve its service levels. The Consumer-Driven Supply Network is “based on a vision of using a consumer purchase to trigger real-time information movement throughout the supply network,” explains Arlequeeuw. “This requires a fundamental change in how supply networks are designed. It means looking at the supply system from the shelf back and determining what is required to deliver the desired consumer experience.” By focusing on its supply chain strategy, P&G has been able to drive consumer needs deeper into the supply network, while increasing its responsiveness and flexibility. Digital transformation is one of the current buzzwords of the 2020s, but P&G’s interest and investment in transformational supply chain technologies dates back many decades. The company, for instance, helped pioneer the development of the electronic product code back in the 1990s, an important milestone along the road to the emergence of radio frequency identification (RFID) as a business-oriented solution. In more recent years, P&G has launched initiatives involving such technologies as the Internet of Things, robotics, augmented reality, and artificial intelligence.

20

Introduction to Supply Chain Management

As Bob Herzog, P&G’s senior director of planning, points out, “The commercial leadership of our company recognizes that the digital transformation we have in supply chain planning is a competitive advantage.” The company’s North American supply chain group is responsible for 16,000 SKUs, 45,000 orders planned per day, and 2,800 vehicles shipped out every day, and the group oversees a supply network of 30 manufacturing plants and 1,200 suppliers. Using concurrent planning, an AI-based technique that synchronizes schedules and events across organizational departments and throughout the supply chain, allows P&G’s planners to run scenarios for their product lines several times a day. “By knowing what’s happening sooner and responding faster to it, it allows us to do in just minutes, or at most in a few hours, what used to take us multiple days to do,” Herzog explains. “We can respond to customer requests on the spot, taking time out of the supply chain and winning at the moment of truth for our partners.”8

Food and Beverage: Cutting Out the Middleman According to an industry study, more than 80% of the manufacturers and retailers in the United States are outsourcing at least some of their logistics operations to a third-party logistics provider (3PL).9 Be that as it may, dairy producer Land O’Lakes believes it has gained a significant savings on its freight costs by bucking the 3PL trend. As a result of bringing its logistics operations back in-house as well as participating in a collaborative transportation network, the nation’s leading butter producer has been able to shave as much as 20% off its annual freight costs. Those savings came in several ways. For one thing, Land O’Lakes no longer had to pay administration fees to a 3PL, which were running as much as $20 per load. Considering that the company might ship out 30,000 truckloads per year, that adds up to a hefty savings right there. Also, by eliminating the 3PL from the equation, Land O’Lakes was able to negotiate its own transportation rates with the motor carriers—in effect, cutting out the middleman—and in the process reclaimed logistics as one of its core competencies.10 Land O’Lakes’ use of a web-based collaborative network also enables it and other participants—manufacturers, retailers, and carriers—to plan, execute, and settle their inbound and outbound truckload and less-thantruckload (LTL) transportation. That allows the company to be more proactive about getting the level of customer service it needs from the trucking companies. It wasn’t so much that the 3PL wasn’t equal to the task, but Land O’Lakes preferred to execute on its own freight strategy, which could happen only by bringing the transportation process back in-house.

Anatomy of a Supply Chain

21

The collaborative network it uses consolidates and updates information about routes, loads, and schedules from all of the members’ in-house logistics scheduling systems. One advantage to using a collaborative network is the ability to set up tours—sharing truckload capacity with other network participants. For instance, Land O’Lakes is involved with another consumer goods company on a backhaul pilot project. The two companies are partnering to share loads with the goal of reducing empty miles—those periods of time when a truck is traveling from one destination to another without carrying any freight. In the packaged foods industry, trucks are often empty as much as 25% of the time spent moving between stops. If, for instance, Land O’Lakes has several truckloads of refrigerated freight per week going from Chicago to Philadelphia, and another member of the network community has a similar number of weekly truckloads going from Philadelphia to Chicago, then both companies stand to benefit by sharing the available capacity and eliminating empty “deadhead” miles. There is some risk involved in such a partnership, admits Yone Dewberry, Land O’Lakes’ chief supply chain officer. “If we accept a return shipment from the other shipper, there is the chance that delays associated with that shipment could lead to that truck not being available when it is needed.” The key to making such a partnership work for all parties, Dewberry says, is real-time shipment visibility.11 Land O’Lakes is also working with Uber Freight on a project utilizing freight-hailing technology to match suppliers with available trucks using an app similar to the one passengers use to hail taxi-like car rides from parent company Uber. For a single lane between the Texas cities of Fort Worth and Nacogdoches (a distance of roughly two hundred miles one-way), Land O’Lakes posts all available loads to the Uber Freight app, where carriers and drivers can see all the details of the freight and can book loads directly from their phones or computers. This type of lane optimization is saving the company both time and money.12

Healthcare: Driving Out Waste In 1968, the United States spent 6.2% of its gross national product on healthcare, or roughly $58 billion. Fifty years later, in 2018, that percentage had climbed to 17.7%, amounting to a staggering $3.6 trillion. Based on projections, by 2028 the percentage could climb to 19.7%, and the total amount spent on healthcare could rise to $6.2 trillion. Clearly, the idea of cost management doesn’t seem to have found a home in the healthcare industry.13 But that could be changing, at least if supply chain professionals and lean proponents are successful in convincing skeptics that the waste and inefficiencies that characterize hospitals and healthcare systems don’t have

22

Introduction to Supply Chain Management

to continue. And part of that convincing will come by way of supply chain technology, in particular track and trace methods developed by standards body GS1. In 2010 five large healthcare systems—Geisinger Health System, Intermountain Healthcare, Kaiser Permanente, Mayo Clinic, and Mercy— banded together to launch a collaborative effort called the Healthcare Transformation Group, to drive the adoption of GS1 product identification standards and to share best practices across the healthcare supply chain. (In 2019 another healthcare system joined the group—Franciscan Missionaries of Our Lady Health System.) The group’s efforts have focused on getting the manufacturers who supply the healthcare industry to use GS1 standard bar codes or labels on their products, and to date roughly seven out of every 10 suppliers to the industry are compliant with those standards. One of the big problems, however, isn’t the manufacturers but the hospitals themselves. “Healthcare is the only industry in the world that has not converted to a data synchronization-common format that uses bar coding to track products through the system,” points out Brent Johnson, vice president of supply chain with Intermountain Healthcare, a not-forprofit system of 24 hospitals throughout Utah, Idaho, and Nevada. There is a distinct lack of trust between the hospitals and their suppliers, Johnson says, which he hopes is starting to improve. “We’d like to break down the barriers between us and the suppliers, and through increased trust and collaboration continue to not only reduce costs but improve outcomes and quality.” Gaining that trust at Intermountain began, Johnson explains, by adopting lean practices to drive out waste from the healthcare system’s cost structure. “We started by simplifying our supply chain, which meant we had to take over the contracts from third parties and distributors.” Intermountain alerted roughly 150 suppliers that instead of sending their products to a distributor, they needed to start shipping them directly to Intermountain. The next step, Johnson continues, was to hire inventory control specialists from outside the healthcare industry who were experts at managing inventory from the suppliers’ factories all the way into Intermountain’s warehouse. Doctors and nurses would often order products they were familiar with and believed were essential to patient care. However, many of those products were commodities, so by enlisting input from nursing product committees, Intermountain was able to reduce the number of SKUs it was ordering by more than half—from 13,000 to 5,000. The healthcare system also built a Supply Chain Center, which includes a distribution center, materials management, logistics, and administration facilities, and is powered by various supply chain technologies, including warehouse management software, an automated conveyor system, and a cubing and dimensioning system to

Anatomy of a Supply Chain

23

create a more efficient process at the loading dock. Within two years the center helped reduce supply chain costs by $80 million.14

Industrial Products: Diversity in the Supply Chain The business case for diversity, equity, and inclusion has been supported by numerous studies, such as McKinsey & Company’s research, which says that public companies having the most gender, ethnic, and racial diversity are more productive, more profitable, and enjoy more revenues from new products and services.15 When it comes to diversity, not only does 3M, a publicly-held industrial conglomerate, have a very diverse product line— serving the automotive, construction, consumer, high-tech, energy, government, healthcare, safety, and transportation markets—but the company sees a very real advantage in having a diverse workforce as well, one that openly encourages experimentation and creativity.16 “At 3M, we want our employees to reinvent themselves and their career at one company,” says Kathie Karls-Bilski, HR director for 3M Supply Chain. Referencing the numerous industry sectors the company serves, she observes, “You can reinvent yourself and your career without ever leaving 3M, to the benefit of both your own personal growth and our company’s.” That kind of an open environment gives 3M an advantage when seeking to hire talent from the Millennial generation. “As Baby Boomers leave the workforce and Millennials make up a more significant part of it, many manufacturers believe that this generation will change manufacturing,” and in fact, she says, that change is already under way as supply chains are becoming more digitized. “Millennials’ ability to transform organizations’ slow processes into fast, effective business success will help manufacturing and supply chains grow for years to come,” Karls-Bilski says.17 As a company, 3M focuses on four priorities—Portfolio, Innovation, Transformation, and People and Culture—all of which are seen as key to 3M achieving long-term growth and value creation. The company, which employs over 93,000 worldwide, has set a goal of doubling its pipeline of diverse talent in management roles by 2025. As of 2020, 3M’s workforce diversity was at 42%, which the company says represents 29% progress toward its goal.18 According to analyst firm Gartner (which ranks 3M as having one of the Top 25 supply chains in the world), 3M is creating a new global operating model that will give each of its business segments the authority to develop strategy, optimize its portfolio, and prioritize resources. As part of that effort, 3M is consolidating its supply chain (which includes manufacturing) under its enterprise operations organization to become more efficient throughout its end-to-end supply chain.19

24

Introduction to Supply Chain Management

Oil and Gas: Managing the Managers Multinational oil and gas companies like Royal Dutch Shell manage supply chains that are said to flow both upstream and downstream. Shell’s upstream supply chain includes all activities involved in the exploration and production of the raw materials, such as offshore and oil field drilling. The downstream supply chain involves the refining process and the delivery of finished products such as motor oil and gasoline to the end customer. In the course of its business, Shell routinely uses third-party logistics providers (3PLs) to manage various logistics activities for its upstream operations. However, the development of unconventional gas resources (such as shale gas) was becoming too costly, was taking too much time, and was proving to be far too dangerous for the typical pool of logistics providers. Too many different 3PLs and local carriers were involved in the transportation of the gases, making both supply chain planning and execution inconsistent. The answer for Shell was to team up with consulting firm Accenture to develop a fourth-party logistics provider (4PL) solution. A 4PL basically manages all the 3PLs under contract to a company, the difference being that the 4PL only has one client—in this case, Shell. The 4PL, known as Logistics Management Services (LMS), was tasked with developing long-term relationships that would give Shell access to top experts in transportation, logistics planning, technology, and safety. Rather than having the unconventional gas operations spread among various silos (procurement, planning, production), LMS brought oversight to the entire process. The payoff was impressive: Shell reduced its logistics costs by 25% due to better asset utilization, and eliminated roughly two million highway miles thanks to better transportation planning and scheduling. Fewer trips also helped reduce the truck drivers’ exposure to safety hazards.20 Shell is also implementing various advanced supply chain technologies throughout its operations. For instance, the company is using analytics-based track and trace technology to gain better inventory visibility throughout the procurement, transportation, and disposal of engineering materials.21 Shell also uses artificial intelligence–based predictive maintenance in several applications—both upstream and downstream—that alert the company when equipment will fail before it actually fails.22

Pharmaceuticals: Innovation in Real Time Pharmaceutical giant Johnson & Johnson is best known for its consumer brands, from Benadryl to Listerine to Motrin to its eponymous baby powder. But given the company’s aggressive spend every year on research and development (over $11 billion in 2019), it’s fair to say the company’s supply

Anatomy of a Supply Chain

25

chain is as dependent on technology as it is on logistics—or more accurately, the two go hand-in-hand. “We see ourselves as not only a healthcare company but also as a technology company because technology is dramatically changing the landscape of what’s possible for us,” says Kathy Wengel, executive vice president and chief global supply chain officer for Johnson & Johnson. And one of the biggest change agents for J&J is the Internet of Things (IoT), a technology that lets connected devices communicate with each other, using sensors, radio frequency identification (RFID), performance data, and of course the Internet itself.23 Wengel oversees a global supply chain that has 300,000 SKUs, services 250,000 customers, places 100,000 orders per day, and involves nearly 100 manufacturing facilities and more than 300 distribution centers. Under Wengel, J&J’s supply chain group works with the company’s R&D department on strategies to innovate, make, test, and deliver every product the company develops. As she explains, the supply chain group’s efforts aren’t just based on where to locate factories or how to optimize the company’s logistics networks, but include strategizing on how technology will help change J&J’s innovation capabilities. For instance, the company’s vision care business is using IoT technology to manufacture contact lenses using one-third the production space, and at twice the rate as previously. J&J is also using IoT to enhance its tracking and tracing capabilities throughout the supply chain by gathering data at any stage of a product’s lifecycle, from its raw material origins through the manufacturing process, into a package, onto a truck, delivered to a hospital, and scanned into an inventory system. “IoT gives us the ability to make decisions on real-time data in an industry that has often used separate testing that happens over days or weeks,” Wengel says. IoT provides J&J the reassurance that each node of the supply chain is where it should be and is arriving when it needs to be there. One of the selling points of IoT technology is its ability to have machines “talk” to each other, and to that end the company is able to use data collected by machinery in one of its facilities to produce an HIV medication by using an integrated quality process. “This process,” Wengel explains, “collects and aggregates data in real time and then processes it using online multivariate analysis and machine learning. This enables us to make process corrections in real time so that we produce only acceptable product, enhance its quality, and improve speed and efficiency.”24 As one of the world’s Top 25 supply chains (at least, according to analyst group Gartner), J&J’s supply chain efforts are focused on three areas: fasttrack product innovation; supporting omni-channel distribution, regional shifts, and delivery to final destination; and developing well-segmented end-to-end supply chains.25

26

Introduction to Supply Chain Management

“Technology is dramatically changing the landscape of what’s possible for us—in how we can approach problems of global health through Big Data and analytics and being able to look at patient populations in different ways, all the way through to how we design smart products that use technology on an ongoing basis to improve the patient or the customer outcome,” Wengel explains.26

Retail: It’s Amazon’s World—We’re Just Shopping in It How does a company that launched as recently as the mid-1990s on a simple model of selling books via a website rather than through traditional brickand-mortar retail stores wind up as the most valuable brand in the world, dominating not just in online retailing of virtually every product imaginable, but also in online streaming (movies, music, TV), electronic devices (e-readers, smart speakers), groceries (both online and brick-and-mortar), cloud services, book publishing, and even logistics? How is it possible for a company in a niche that barely existed just a generation ago to grow so much in stature that it’s now responsible for half of the $500 billion e-commerce market in the United States? How does an unknown company go from ground zero to displacing the biggest 800-pound-gorilla—Walmart—as the most valuable retailer in the world (at least as far as market cap)?27 Of course we’re talking about Amazon, and the answer is simple: technology, specifically supply chain technology. Amazon’s meteoric rise to the top came by following the same basic playbook Walmart followed in its own ascendancy: leveraging logistics and supply chain technology to reshape the entire retail landscape in their own image. Amazon’s first big foray into technology came in 2012 when it paid $775 million (which was considered a risky investment at the time but seems like quite the bargain now) to acquire Kiva Systems, a manufacturer of warehouse robots. By 2020, Amazon had more than 200,000 robots deployed throughout its warehouses and fulfillment centers. Also by 2020, the company had been approved by the Federal Aviation Administration to operate its Prime Air fleet of delivery drones, signaling the beginning of Amazon’s trial runs of customer deliveries via drone. Just as Walmart reinvented retail best practices when it started opening stores in small towns and locating regional distribution centers close to its stores, Amazon is taking that basic concept and adding its own spin to it: Rather than opening stores in cities and towns both big and small, Amazon just keeps building more warehouses. Flush with the unprecedented demand for its services in the wake of the COVID-19 pandemic, the online retail giant announced plans to open 1,000 warehouses that would be closer

Anatomy of a Supply Chain

27

to neighborhoods (rather than locating them on the outskirts of towns, where most distribution facilities tend to be found). “Amazon is winning mind-share and wallet-share by making shopping convenient, easy, and frictionless for customers,” says Russ Meller, vice president, solution design and research and development with consulting firm Fortna. “They are shifting customer expectations around convenience, speed, price, and selection. They’re moving e-commerce away from the store, computer, and the phone, and integrating it seamlessly in our lives. All you have to do is ‘just ask’ Alexa,” Amazon’s voice-activated device that makes ordering a product from the retailer as simple as just saying it out loud. Powering Alexa, Meller explains, is “an artificial intelligence engine and platform for commerce that could eliminate brand from the equation and stack the deck in favor of Amazon’s private label offerings.”28

Notes 1. Jill Jusko, “Building a Better Supply Chain,” IndustryWeek (August 2009), 26–28. 2. www.seattlepi.com/boeing/787/787primer.asp. 3. John Teresko, “The Boeing 787: A Matter of Materials,” IndustryWeek (December 2007), 34–38. 4. Stephen C. Rogers, The Supply-Based Advantage (New York: Amacom, 2009), 144–148. 5. Suman Sarkar, The Supply Chain Revolution (New York: Amacom, 2017), 42. 6. Natalie Kitroeff and David Gelles, “Claims of Shoddy Production Draw Scrutiny to a Second Boeing Jet,” The New York Times (20 April 2019), www.nytimes.com. 7. Helen L. Richardson, “Building a Better Supply Chain,” Logistics Today (April 2005), 17–25. 8. Bob Herzog spoke at the Kinexions 2019 conference (16 October 2019), video posted at www.kinaxis.com. 9. John Langley Jr. and Infosys, 2020 Third-Party Logistics Study: The State of Logistics Outsourcing (University Park, PA: Penn State University, 2020), 9. 10. David Blanchard, “Inbound for Glory,” Supply Chain Technology News (April 2003), 1, 11. 11.  Steve Banker, “Land O’Lakes Uses Visibility and Velocity to Combat Supply Chain Variability,” Forbes (1 November 2019), www.forbes.com. 12. www.uber.com. 13. “Health Care Costs 101: US Spending Growth Relatively Steady in 2018,” California Health Care Foundation (May 2020), www.chcf.org. 14. David Blanchard, “Leaning into the Supply Chain,” IndustryWeek (September 2014), 24–28. 15. Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, et  al., “Diversity Wins: How Inclusion Matters,” McKinsey & Company (19 May 2020), www.mckinsey.com. 16. David Blanchard, “Top 25 Supply Chains of 2017,” IndustryWeek (19 June 2017), www.industryweek.com.

28

Introduction to Supply Chain Management

17.  Steve Minter, “Will Millennials Change Manufacturing?” Industry Week (28 ­December 2017), www.industryweek.com. 18. www.3m.com. 19. Mike Griswold, Dana Stiffler, Stephen Meyer, et al., “The Gartner Supply Chain Top 25 for 2020,” Gartner (May 2020), www.gartner.com. 20. “Shell: Achieving a Step Change in Logistics Performance through the Design and Deployment of a First-in-Industry 4PL Logistics Solution,” Accenture (2015), www.accenture.com. 21. www.e2open.com. 22. Steven Norton, “Shell Announces Plans to Deploy AI Applications at Scale,” The Wall Street Journal (20 September 2018), www.wsj.com. 23. David Blanchard, “The Healing Power of the IoT,” IndustryWeek (September/ October 2016), 26–28. 24. www.jnj.com. 25. David Blanchard, “Top 25 Supply Chains of 2018,” Material Handling & Logistics (25 June 2018), www.mhlnews.com. 26. David Blanchard, “Mentoring and Technology Offer a Healthy Outlook for J&J,” IndustryWeek (2 January 2017), www.industryweek.com. 27. Lauren Thomas and Courtney Reagan, “Watch Out, Retailers. This Is Just How Big Amazon Is Becoming,” CNBC (13 July 2018), www.cnbc.com. 28. David Blanchard, “The Shape of Logistics Things to Come,” Material Handling & Logistics (September 2017), 12–19.

CHAPTER

3

Supply Chain Metrics Measuring Up to High Standards Flashpoints Statistics are a vital part of managing a supply chain. The smarter you are at measuring performance metrics, the better your supply chain will run. Benchmarking lets you know exactly how good (or bad) your company is doing. Keeping a supply chain scorecard will help you set and achieve attainable targets.

It’s probably just a coincidence, but the rise in popularity of supply chain management occurred at the same time as the emergence of sabermetrics. No, you’re not going to find that term defined in any business management journal; sabermetrics is the application of statistical analysis and research to the game of baseball. When personal computers became affordable in the early 1980s, supply chain analysts and sabermetricians alike fell in love with databases and spreadsheets that could crunch months’ worth of product forecasts and decades’ worth of box scores in minutes, rather than days. These days, “keeping a scorecard” is as much a part of the supply chain language as it is sports talk. To paraphrase John Thorn, coeditor of Total Baseball, statistics are not just a cold-blooded means of dissecting profit-and-loss reports in order to examine a company’s performance; rather, statistics are a vital part of the

29

30

Introduction to Supply Chain Management

supply chain. The supply chain may be appreciated without statistics, but it cannot be understood without them.1 To continue the sports analogy, in the fall of 2018, the only event in which cosmetics manufacturer Coty seemed to be excelling was poor planning. Camillo Pane, Coty’s CEO, had to explain why various supply chain disruptions cost the company $60 million in its latest quarterly report. Much like a beleaguered baseball manager explains away a loss by pointing to the team’s failure to execute on a late-inning play at home plate, so too did Coty find a convenient scapegoat: He blamed it on the supply chain.2 Specifically, Pane singled out the problems Coty had in realigning its distribution centers in the United States and Europe after acquiring several dozen brands from Procter & Gamble. He also cited unanticipated product shortages at key suppliers. He even resorted to the time-tested standby of blaming the weather—specifically, on production interruptions resulting from Hurricane Florence. The distribution centers couldn’t match the pace of the orders coming in. Pane didn’t dwell on his role in acquiring the P&G product lines or approving the go-live dates of the distribution centers, much as a baseball manager tends to gloss over whether he rushed a player to the big leagues before he was ready, but within a week of announcing the supply chain disruptions Pane resigned. Simply put, Coty was having major league problems fulfilling its orders. And Wall Street responded promptly, as Coty’s share price dropped 22% when the disruptions were announced.3

How to Prevent a Supply Chain Heart Attack Now, here’s an example of how sabermetrics-style supply chain analysis can frame Coty’s problems as part of a trend that goes far beyond the cosmetics industry. Two researchers—Vinod Singhal of the Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario— looked at more than 800 announcements of supply chain problems from public companies over an eight-year period (1992–1999).4 These problems included things like inventory write-offs, parts shortages, shipping delays, and the like. The researchers then tracked the price of these companies’ stocks one year before and two years after the announcement. So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107%, return on sales fall 114%, and return on assets decrease by 93%. And that’s not all: These companies also typically saw 7% lower sales growth, 11% higher costs, and a 14% increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.

Supply Chain Metrics

31

“The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years,” Singhal explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company’s health. It doesn’t really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51% drop. Retailers experience an average decrease of 42%, while high-tech manufacturers will see a 27% decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150% for small companies, 86% for large. “When people talk about supply chain management, they may agree that it’s important, but they’re not investing in solutions,” Singhal points out. However, even when companies do spend on solutions, they’re not necessarily spending wisely. “One reason supply chain problems occur is because there isn’t enough slack in the system,” Singhal notes. “As companies try to make their supply chains more efficient, they take away slack because it’s expensive.” The answer, though, isn’t to throw a lot of money at your supply chain problems. It’s to get smarter at identifying and tracking key performance indicators that might signal potential glitches early on. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices. It’s been said that “the most neglected pathway to increasing shareholder value runs through the supply chain.” In the book The New Supply Chain Agenda, the authors state, “Supply chain excellence drives shareholder value because it controls the heartbeat of the firm—the fundamental flow of materials and information from suppliers through the firm to its customers.” The problem is, there are way too many companies whose supply chains are “crippled by the lack of a strategy, the absence of talent, a misapplication of technology, internal and external silos, and a basic lack of discipline in managing change.” So Coty is hardly alone when it comes to supply chain problems resulting in a severe hit to a company’s market value.5

What Makes a Supply Chain Leader? Here’s the good news: Whereas the Singhal/Hendricks study exposes the vulnerability of poorly managed supply chains, another study conducted by

32

Introduction to Supply Chain Management

Accenture (in partnership with INSEAD and Stanford University) reveals that companies identified as supply chain leaders have a market cap up to 26 percentage points higher than the industry average.6 That begs the question: So what makes a supply chain leader, anyway? That’s where the statistical approach comes in. If you can measure the performance of your supply chain, then you’ll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won’t get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don’t necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation. Since 2005, analyst firm Gartner has attempted to quantify the qualities that define “best-in-class” with its annual ranking of the top supply chains. Part of this list is based on a vote from a community of supply chain practitioners and experts, and like most popularity votes, nobody will ever agree with every choice.7 However, the list also factors in three financial metrics that Gartner believes best indicate the overall effectiveness of a company’s supply chain: three-year return on assets (net income/total assets), inventory turnover (cost of goods sold/quarterly average inventory), and three-year revenue growth. In 2016, Gartner introduced a corporate social responsibility (CSR) metric as well, based on third-party data. The analyst firm assigns a score to the popular vote as well as to the metrics, and then comes up with a composite score for all the companies (mostly manufacturers and retailers) under consideration. In the previous edition of this book, we remarked on how inventory turns were the best indicator of a world-class supply chain, at least based on the rankings of the Top 25 Supply Chains of 2009. In that year, three high-tech giants led the way with the most inventory turns: Dell had 46.2, Apple was close behind with 45.5, and IBM had 20.0 turns. Not coincidentally, Apple and Dell also finished at the top in the overall rankings, with IBM finishing in fourth (consumer packaged goods manufacturer Procter & Gamble claimed the third spot). However, a decade later, the rankings look quite a bit different. Dell and IBM didn’t even make the list, while Apple and P&G were moved to a separate list of what Gartner calls “Supply Chain Masters,” i.e., companies so consistently proficient in their supply chain management that they tended to finish in the top five slots year after year after year (and thus, perhaps, made the list a bit too predictable). None of the companies in the Class of 2019 came anywhere close to Dell’s 46.2  inventory turns. Chinese online

Supply Chain Metrics

33

retail giant Alibaba had the highest inventory turn mark among the Top 25 at 23.4 (Alibaba didn’t even crack the Top 10, though, finishing at 13). The next-closest was Starbucks at 12.7 turns. In 2019, the company at the top of the list was consumer packaged goods manufacturer Colgate-Palmolive, whose inventory turns were strictly average at 5.0, but whose return-on-assets score was one of the very best among the Top 25, at 19.9%. Illustrating how the supply chain metrics landscape has changed in just 10 short years, one of the key metrics propelling Colgate to the top spot was its perfect 10.0 CSR score, earned in part due to its “no deforestation” policy. According to Gartner, following are the top 10 supply chains of 2019: 1. Colgate-Palmolive 2. Inditex 3. Nestlé 4. PepsiCo 5. Cisco Systems 6. Intel 7. HP 8. Johnson & Johnson 9. Starbucks 10. Nike8

Measure Satisfaction When it comes to measuring overall supply chain performance, companies typically focus on benchmarking metrics, such as those established in the Supply Chain Council’s SCOR model, which we’ll look at later in this chapter. Delivery performance, fill rates, perfect order fulfillment, cash-tocash cycle time, inventory turns—these are some of the standards by which supply chains are judged, to determine whether they’re best-in-class, fairto-middling, or knocking on death’s door. So let’s take a look at how some top-performing companies are tracking their supply chains. Automaker Hyundai, for instance, uses its parts distribution operation to build customer loyalty. The company’s goal is to provide high levels of customer service while keeping its costs as low as possible. In this case, the customers are Hyundai dealers, and through dealer satisfaction surveys the company has learned that order fill rate is the number-one driver of satisfaction among its dealers. So to ensure that it’s keeping its customers happy while keeping its costs down, Hyundai measures the facing fill rate, which is the order fill

34

Introduction to Supply Chain Management

rate from the warehouse assigned to the dealer. The higher the fill rate, the higher the level of dealer satisfaction. Concurrently, the company can reduce its transportation costs—the goal is to ship parts out of an assigned warehouse on a dedicated delivery schedule. If Hyundai needs to ship parts from another warehouse outside that delivery route, it most likely will need to use an expedited carrier, which is much more expensive. Hyundai’s facing fill rate on orders is about 96%, which is considered good for the automotive industry. The automaker also measures the fill rate for its entire warehouse network, which is 98%, also a high score for automakers. But the company wants to get that fill rate even higher, to reduce its use of premium transportation. Transportation costs, however, are just part of the total supply chain cost, which also includes inventory and productivity costs. Hyundai monitors the amount of inventory it carries at any given time, with the understanding that best-in-class for the automotive industry won’t necessarily equate to another industry’s goals, such as the high-tech industry. Automakers carry a deep inventory of parts because their vehicles are designed to last for years. Computer makers, on the other hand, have comparatively small inventories of parts since high-tech products are often considered obsolete after just a few months. To stay on top of current automotive industry trends, Hyundai belongs to an independent automotive and heavy equipment group that collects performance and cost metrics from member companies and provides benchmarking services.9

Everybody’s Talking About Benchmarking Hyundai has recognized two crucial facts that many companies unfortunately tend to gloss over when they try to evaluate their supply chain performance: (1) It’s important to benchmark your supply chain against your peers to get a real-world evaluation of how good (or bad) you’re doing, and (2) it’s just as important that you recognize the limitations of a benchmark. The biggest danger in benchmarking is assuming too much from any single study. Many benchmarking studies encompass companies and organizations of all shapes and sizes. Typically, if a company is better than the average, it declares victory and moves on. And if it’s worse than the average, the usual rationalization is that it’s being benchmarked against other industries, so it’s not going to do as well in comparison. In short, the metrics end up being dismissed as irrelevant. This happens more often than you might think because while a lot of attention has been given to the idea of benchmarking, there’s not much evidence that many companies are actually doing it.

Supply Chain Metrics

35

Penn State’s Center for Supply Chain Research, one of the nation’s bestknown supply chain programs, once sent out a survey to more than 1,200 supply chain executives asking how satisfied (or unsatisfied) they were with their supply chain benchmarking efforts, and they received barely a 10% response. Even members of the Supply Chain Council’s SCOR board—a group whose very existence revolves around promoting the adoption of supply chain standards—initially ignored the survey, presumably because they thought they were being asked to fill out another benchmarking survey.10 According to the Penn State study, the number-one reason why companies don’t undertake supply chain benchmarking actually isn’t that these efforts take a lot of time to conduct (that was the number-four reason)—it’s due to a lack of resources. Without enough people (and the right people) to participate in benchmarking activities, and without a sufficient budget, a company’s efforts to benchmark its supply chain are doomed before the project even gets started. The number-two reason is that internal measures and processes are difficult to define. If you don’t know what you want to measure, then how can you discern if what you’re doing is up to industry standards? As the saying goes, you can’t manage what you can’t measure. The third most prevalent deterrent to benchmarking is the difficulty in identifying proper benchmarking partners. The prevailing attitude toward benchmarking is that the whole exercise falls somewhere in between “optional” and “pointless,” observes Jim Tompkins, chairman of supply chain consulting firm Tompkins International. But nothing, he emphasizes, could be further from the truth. “While traditional, backward-looking ‘rate and rank’ benchmarking is marginalized by the speed and scope of change, the need for process benchmarking—the identification of global best practices and adapting them to a different product or industry—is more important than ever,” Tompkins says. “These ideas are the potential disruptors that each company must either defend against or adapt in order to gain competitive advantage and create a disruption of their very own.” While some companies think of benchmarking as an exercise in continuous improvement, forward-thinking companies now look upon it as “the source for ongoing, transformational change.”11

Do the Right Things Looking again at the Penn State study, it turns out that more than 90% of the companies who do benchmark are using the results to encourage improved supply chain performance. Reduced operating costs, improved customer service, and improved productivity top the list of accomplishments tied to benchmarking.

36

Introduction to Supply Chain Management

“Benchmarking is the process of identifying, sharing, and using knowledge and best practices,” observes Joe Walden, executive director of the University of Kansas’s Supply Chain Leadership Center, “which means you’ve got to admit that someone else does something better than you, and that you can learn something from them.” According to Walden, the key to benchmarking is understanding what you’re measuring as well as why you’re measuring it. “If you’re not measuring from the standpoint of the customer,” he says, “then you’re not measuring the right things.” The right things, Walden explains, include customer order cycle time, dock-to-stock time, fill rates, personnel turnover, training programs, and reverse logistics. “Benchmarking is not industrial tourism,” he says, noting that if your sole motivation is to learn what your competitors are up to, you’re missing the whole point. Benchmarking should be used to identify how your industry defines best-in-class, and then to perform a gap analysis. Once you’re able to determine the difference (i.e., gap) between where you are and where best-in-class is, then you can take the necessary steps to improve your performance.12

Setting Your Sights High Although companies typically benchmark themselves against competitors or at least similar companies within their industry, sometimes it’s possible to gain that competitive advantage Tompkins mentioned by looking completely outside the usual suspects. ConAgra Mills, for instance, one of the largest grain producers in North America, looked well beyond the agricultural industry to improve its customer service by studying the airline industry. When he was promoted to president of ConAgra Mills in 2010, Bill Stoufer’s background included stints managing the company’s transportation and logistics, sales, and supply chain operations. So being well versed in best practices within various departments of his own company, he found a way to better maximize production capacity by looking completely outside of process manufacturing. As Stoufer (who has since retired) notes, agriculture and air transportation aren’t necessarily completely dissimilar. “If a plane leaves with empty seats, they miss the opportunity to maximize their business. It’s the same within the milling business.” ConAgra’s “empty seats” problem was that some of its flour-producing plants were operating at capacity, while others were not. Since both industries share the same goal—minimizing unused capacity without overcommitting resources—ConAgra turned to an airline best practice of using analytics to predict future market conditions. The solution has allowed the company to focus on producing its most profitable products, and has increased capacity utilization by 3% to 5%.13

Supply Chain Metrics

37

Predictive analytics can also pay off while benchmarking transportation. As Kevin Zweier, vice president of transportation with supply chain consulting firm Chainalytics, explains, “Benchmarks that are modeled in a predictive software platform allow [companies] to assess the difference between transportation rates they are paying, on a lane-by-lane level, against the overall market’s rates for the same lanes.” Having access to freight market intelligence, which offers companies deeper insights into the freight transportation markets, allows companies to operate more effectively by ensuring their products “are moving at the best rate for the desired service level.” These model-based benchmarks, Zweier points out, give supply chain and transportation managers key information that can help them negotiate better rates when going to bid.14 (See Chapter 4 for more discussion of freight market intelligence.)

Supply Chain Checkup How do you know that you need help in the first place, though? Benchmark studies and process maps are both expensive and time-consuming, and many companies whose earnings put them well outside of the Fortune 500 realize that their supply chains aren’t all they ought to be, but they are still hesitant as to what to do about it. Consultant Mike Donovan of R. Michael Donovan & Company offers a relatively short but challenging checklist that provides a basic assessment of how healthy your supply chain might be. If you answer “no” to any of the following questions, or even worse, if you don’t even know the answers to some of these questions, then the time to get serious about fixing your supply chain problems is right now: 1. Do your order fill rates meet management’s specific and measured customer service strategy? 2. Are your delivery lead times competitive and predictable? 3. Do all of your supply chain departments agree on which products are made-to-stock and which are made-to-order? 4. Do sales and manufacturing share equally in determining the mix and investment in inventory? 5. Are the appropriate calculations being used, rather than “rules of thumb,” to establish the desired mix and levels? 6. Are management’s inventory investment plan and customer service objectives being compared against the actual results that are achieved? 7. Are short-term forecast deviations being monitored and adjusted, and is long-term forecast accuracy continuously improving? 8. Is your inventory accuracy consistently above 98%?

38

Introduction to Supply Chain Management

9. Are you able to avoid carrying excess safety stock buffers? 10. Are your excess and obsolete inventories being measured, and are they less than 1% of total inventory?15

Learn the SCOR The best-known and most detailed supply chain performance metrics are encompassed in the Supply Chain Operations Reference (SCOR) model, which was created in 1995 and has been continuously refined ever since by APICS’ Supply Chain Council. The SCOR model provides an industrystandard approach to analyze, design, and implement changes to improve performance throughout six integrated supply chain processes—plan, source, make, deliver, return, and enable—spanning the full gamut from a supplier’s supplier to a customer’s customer and every point in between. The SCOR model is aligned with a company’s operational strategy, material, workflows, and information flows. As explained by Peter Bolstorff and Robert Rosenbaum in Supply Chain Excellence, a handbook on using the SCOR model, the six SCOR processes encompass the following measurable activities: 1. Plan: Assess supply resources; aggregate and prioritize demand requirements; plan inventory for distribution, production, and material requirements; and plan rough-cut capacity for all products and all channels. 2. Source: Obtain, receive, inspect, hold, issue, and authorize payment for raw materials and purchased finished goods. 3. Make: Request and receive material; manufacture and test product; package, hold, and/or release product. 4. Deliver: Execute order management processes; generate quotations; configure product; create and maintain a customer database; maintain a product/price database; manage accounts receivable, credits, collections, and invoicing; execute warehouse processes, including pick, pack, and configure; create customer-specific packaging/labeling; consolidate orders; ship products; manage transportation processes and import/export; and verify performance. 5. Return: Defective, warranty, and excess return processing, including authorization, scheduling, inspection, transfer, warranty administration, receiving and verifying defective products, disposition, and replacement. 6. Enable: Manage all supply chain processes and activities, including business rules, data and information, assets, contracts, human resources, regulatory compliance, procurement, risk, and technology.

Supply Chain Metrics

39

The SCOR model provides a supply chain scorecard (or SCORcard, if you will) that companies can use to set and manage supply chain performance targets across their organization. Given the attention and scrutiny Wall Street applies to the supply chain’s impact on a company’s financial performance, being able to measure exactly how well each process is doing is one of the key steps on the road to developing a best-in-class supply chain. Therefore, one of the main roles of the SCOR model is to provide a consistent set of metrics a company can use to measure its performance over time as well as compare itself against competitors.16 Supply chain metrics have three main objectives, according to Shoshanah Cohen and Joseph Roussel, authors of Strategic Supply Chain Management: 1. They must translate financial objectives and targets into effective measures of operational performance. 2. They must translate operational performance into more accurate predictions of future earnings or sales. 3. They must drive behavior within the supply chain organization that supports the overall business strategy.17

SCM for Dummies SCOR is a multilevel process reference model, moving from Level 1 (operations strategy) to Level 4 (phased implementation). The SCOR model combines business process reengineering with benchmarking, best practices, and process measurement into an all-encompassing framework for executing a supply chain project. According to consultant Peter Bolstorff, executive vice president of the Association for Supply Chain Management and one of the original developers of the SCOR model, SCOR is most successful when solid project management is combined with technology expertise for implementation in a series of six steps: 1. Educate for support. Find a project champion (Bolstorff describes this person as an “evangelist”) within your company who has the passion to lead a supply chain project. At the same time, identify a key executive to actively sponsor the project. Both of these people must be willing to learn SCOR from top to bottom and be enthusiastic about sharing their knowledge throughout the organization. 2. Discover the opportunity. Form a business case that justifies investment in a supply chain project. A key outcome from this step is a project

40

Introduction to Supply Chain Management

charter, Bolstorff notes, which sets up the supply chain project in terms of approach, budget, organization, communication plan, and establishing clear measures for success. 3. Analyze. In this step, you articulate the value proposition of the project in terms of cash-to-cash cycle time, inventory days, order fulfillment, and other performance factors. The intent here is to define the supply chain opportunity according to the company’s profit-and-loss statement. 4. Design. The two key components in this step are material flow and work/information flow. According to Bolstorff, some of the questions you’ll want to ask are: “What are my material flow problems and what’s it worth to solve them?” and “How does work and information flow impact material flow?” Define the work first, and then the information that moves the material. 5. Develop. The design team shifts to become an implementation team assigned to specific tasks. The goal, as Bolstorff explains it, is to create a master schedule for the projects that will take your supply chain from its present state (“as is”) to its optimal state (“to be”). 6. Implement. Based on the master schedule for each change, prepare and transition your company for the changes as you begin implementation of the supply chain transformation.18

Follow the Roadmap Assuming your company has decided that it wants to pursue a SCOR project, what do you do next? For Imation, a manufacturer of data storage products, adopting the SCOR model began by informing everybody in the company— from the president to the salesclerks and all positions in between—what impact the supply chain initiative was going to have on the business. The next step was to create a supply chain program office to coordinate the various activities, as well as to keep costs in line with goals.

At a Glance SCOR The Supply Chain Operations Reference (SCOR) model, developed by APICS Supply Chain Council, provides a standard methodology for managing supply chain projects centered on six measurable processes: plan, source, make, deliver, return, and enable.

Supply Chain Metrics

41

Ultimately, Imation determined that it could reach its goal by integrating its supply chain project roadmap with its annual business strategy and planning processes. This required strategic transformations in four key areas: customer behavior, product flow, system utilization, and collaboration. For customer behavior, for instance, Imation used the SCOR model to produce a set of invoices illustrating typical customer buying behavior as well as the policies driving that behavior. As Bolstorff describes it, for Imation it was critical that the company was able to understand the invoice elements that were driving gross-to-net sales, such as deductions, terms, programs, and credits, as well as the impact of warehousing and transportation costs, order processing, purchasing, and planning. Using the invoice exercise as a starting point, Bolstorff notes, Imation’s supply chain team modeled a material flow strategy that would accommodate customer needs while supporting the company’s competitive requirements. This type of exercise was also used to model (1) product flow, which focused on postponement—delaying final customization of a product until the last possible moment—as a key best practice; (2) system utilization, which overhauled Imation’s overly complex pricing practices; and (3) a collaborative planning, forecasting, and replenishment (CPFR) initiative, which aimed at improving return on investment by working more closely with Imation’s retail customers to effectively manage inventory. “The SCOR project roadmap,” Bolstorff explains, “can be effectively used at multiple performance levels: eliminating deficiencies, establishing a continuous improvement process, and defining strategic supply chain investments to support competitive advantage.”19

Make It All Meaningful Whether your company adopts the SCOR model or chooses a less structured approach to tracking its supply chain, at some point you’re going to have to put all that data you’ve been gathering into context, and that might prove to be even more difficult than setting up the metrics in the first place. “The toughest part of establishing measures is making them meaningful in the right way,” admit consultants Mike Ledyard and Kate Vitasek, faculty members of the University of Tennessee’s Vested program. Even if you have an elaborate system of scorecards that measures every group within your company’s supply chain, it’ll just be an empty show of sound and fury if you can’t link the performance measures to actionable plans linked to specific company goals. “Measures must be aligned to strategy,” they note, “but it’s important that the measurements be linked to logistics execution. Without that vital link and ample communication, the people performing

42

Introduction to Supply Chain Management

the logistics tasks in your organization won’t see the value or the connection between what they do and the larger corporate or division strategy.” According to Ledyard and Vitasek, before getting too caught up in measurements and metrics, every supply chain professional needs to answer two key questions: 1. Will you change your behavior, or ask others to change their behavior, based on this measure? 2. Does the potential benefit gained from this information exceed the cost of obtaining it? Citing advice from the late management guru Peter Drucker, Ledyard and Vitasek observe, “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” And that, they say, sums up the wasted effort of the measurement trap—merely collecting measures for collection’s sake, without a clear plan as to how you plan to meet your company’s overall objectives and goals.20 It’s better by far to follow a path similar to that trod by high-tech giant IBM. To evaluate the performance of its suppliers, IBM devised a detailed scorecard that tracks how each supplier is performing and how well they deliver to Big Blue’s requirements. IBM would routinely review scorecards with suppliers, including transportation providers, to identify where improvements might be needed. If those improvements didn’t happen, then IBM would use the scorecard itself as justification for no longer considering that supplier a vendor of choice. Such an approach eliminates any ambiguity as it was quite clear to all parties involved what the expectations were.21

Focusing on the Customer Returning to our opening observation about baseball statistics, just as sabermetricians appear to have an endless appetite for creating even more ways to measure a player’s performance (why be content with charting a player’s batting average when you can also chart things like his batting average on balls in play and weighted runs above average?), so too are supply chain professionals never really satisfied with using the same set of metrics from year to year. For instance, the Warehousing Education and Research Council (WERC) conducts an annual study examining which metrics are most frequently used to measure operational performance in warehouses and distribution centers (DCs), and that list can be quite fluid. In the DC Measures study for 2019 (which highlights that year’s 12 most popular metrics), several metrics appeared in the top 12 that were far down

Supply Chain Metrics

43

the list the previous year. The “number of orders shipped complete per customer order” appeared at number 2 in 2019, whereas it had been at number 34 in 2018. Similarly, the “percent of orders with on-time delivery” metric was the number-4 choice in 2019, but the number-33 choice in 2018. Both of those metrics, according to WERC, are customer-facing metrics and are used to measure a company’s performance at achieving perfect orders. In the previous 16 years of the DC Measures study, “perfect order” metrics had never appeared in the Top 12, illustrating a shift in focus toward operations and away from employees. As the study notes, metrics focused on supply chain talent tend to rise or fall in relative importance based on the state of the economy and the availability—or lack thereof—of employees in key areas, like warehousing.22 “The appropriate metrics to manage and measure the success of a company’s operation vary significantly by industry, by individual company, and by the scale of the business,” observes Tan Miller, director of Rider University’s Global Supply Chain Management Program. “What does not vary, however, is the universal need of all companies to employ a well-structured, hierarchical framework to organize and manage their metrics.”23 As Miller explains, a hierarchical supply chain performance measurement framework (HPMF) has three levels: strategic, tactical, and operational. “In an HPMF, it is the scale of an operation or activity that a particular metric monitors which determines its place in the hierarchy. Metrics that measure the performance of an entire major functional area, such as distribution, are considered strategic, while metrics that monitor major subfunctions, such as warehouse operations and transportation, are categorized as tactical. And finally, metrics that monitor subfunctions of subfunctions, such as the receiving operation in a warehouse, are considered operational.” The goal of such a framework, Miller says, is to align all of a company’s supply chain activities to achieve a desired mission and objective. As the WERC study illustrates, companies’ objectives can shift significantly as market conditions themselves shift—for instance, as customers demand shipments in smaller lots but delivered more quickly than before, companies have to adapt by improving their perfect order metrics, which concurrently means placing less emphasis on other metrics (such as workforce measurements). In any event, the better a company understands its capabilities—and can frame those capabilities into a meaningful context— the better it can measure its performance in the areas that are most important to its customers.

Notes 1. John Thorn, “Sabermetrics,” Total Baseball, 3rd ed. (New York: HarperPerennial, 1993), 620.

44

Introduction to Supply Chain Management

2. Jaewon Kang, “Coty Stumbles Amid Supply-Chain Disruptions,” Wall Street Journal (7 November 2018), www.wsj.com. 3. Kim Bhasin, “Coty CEO Frustrated with Supply Chain Snags at Beauty Brands,” Bloomberg (7 November 2018), www.bloomberg.com. 4. David Blanchard, “Chain Reactions,” Logistics Today (March 2004), 6. 5. Reuben E. Sloane, J. Paul Dittmann, and John T. Mentzer, The New Supply Chain Agenda (Boston: Harvard Business Press, 2010), 4–5. 6. David Blanchard, “Moving Past the Problems Can Be Problematical,” Chief Logistics Officer (October 2003), 5. 7. In the interests of full disclosure, as a participant in Gartner’s peer panel, I am one of the voters in the Top 25 rankings. 8. David Blanchard, “Top 10 Supply Chains of 2019,” IndustryWeek ( July/August 2019), 24–27. 9. Helen L. Richardson, “Building a Better Supply Chain,” Logistics Today (April 2005), 17–25. 10.  David Blanchard, “The Trouble with Benchmarking,” Logistics Today ( June 2005), 7. 11. David Blanchard, “More Supply Chain than You Can Imagine,” Material Handling & Logistics (September/October 2019), 11. 12. Blanchard, “The Trouble with Benchmarking.” 13.  David Blanchard, “As ConAgra Mills Sows, So Does It Soar,” IndustryWeek (December 2011), 44. 14.  Kevin Zweier, “The Wisdom of the Market Is Your Guide to Transportation Rates,” Material Handling & Logistics ( January 2015), 24–25. 15.  Sarah R. Sphar, “A Supply Chain Check-up,” Supply Chain Technology News (October 2001), 34. 16. Peter Bolstorff and Robert Rosenbaum, Supply Chain Excellence: A Handbook for Dramatic Improvement Using the SCOR Model, 3rd ed. (New York: Amacom, 2012), 9–12. 17.  Shoshanah Cohen and Joseph Roussel, Strategic Supply Chain Management (New York: McGraw-Hill, 2005), 186–187. 18. Peter Bolstorff, “Supply Chain Management for Dummies,” Supply Chain Technology News (October 2000), 51–53. 19. Peter Bolstorff, “Keeping Your Focus,” Supply Chain Technology News (December 2000), 43–48. 20. Mike Ledyard and Kate Vitasek, “Don’t Measure What You Won’t Change,” Logistics Today ( June 2004), 37–38. 21. Richardson, “Building a Better Supply Chain.” 22. Joseph Tillman, Karl Manrodt, and Donnie F. Williams Jr., “WERC DC Measures: 2020 Snapshot in Time,” Warehousing Education and Research Council (2020), www.werc.org. 23. Blanchard, “More Supply Chain than You Can Imagine.”

PART

2

Traditional Core Processes of Supply Chain Management  

CHAPTER

4

Planning and Forecasting Headed for the Future Flashpoints Accurately forecasting product demand is the most important measure of a company’s supply chain operation. Having too much inventory is not better than having too little. A supply chain plan is only as good as the information that goes into it. Supply chain data analytics offer a way for companies to gain a better understanding of the current state of their operations, and to identify how to achieve better outcomes.

Every supply chain program, good or bad, launches from a plan. It’s the ability to forecast and analyze product demand, consumer buying patterns, and economic trends that separates the winners from the losers. In reality, any kind of a forecast is going to involve the black arts of predicting the future, a process that inevitably will result in some errors even under the best circumstances. It’s not an issue of what happens if a forecast goes wrong—it’s more an issue of by how much. The history of supply chain management includes some notoriously bad plans—plans so far off the mark that they’ve become legendary in the “whatwere-they-thinking?” category. The bigger the company is, the more spectacular are its supply chain glitches since the ripple effects can extend well past the four walls of the company to include suppliers and customers. And as we saw in the previous chapter, the bigger the supply chain glitches, the bigger the hit a company takes to its share price and ultimately, its bottom line.

47

48

Traditional Core Processes of Supply Chain Management

The main reason companies struggle with their forecasts is the fickleness of the marketplace. Try as hard as they might—and they’ve been at it for centuries—manufacturers and retailers still haven’t been able to consistently figure out exactly how much of a product consumers are going to buy. Accurately forecasting product demand is probably the single most important—and most challenging—measure of a company’s supply chain proficiency. Improving forecast accuracy has gotten a lot of attention, but as meteorologists have always known, you can be right most of the time, but it’s the one time you’re wrong that gets a lot of people upset. When analyst firm AMR Research (which has since been acquired by Gartner) studied forecast accuracy at several dozen manufacturers, it turned out—not surprisingly—that errors are very much a fact of life within the supply chain. Forecast errors at bulk chemical producers, for instance, range from 10% to 24%, for a median error rate of 11%. That’s actually pretty good, though, since consumer goods companies get it wrong from 14% to 40% of the time, or an average 26% error rate. Consider that for a minute: One time out of every four the forecast is wrong. It’s even worse in the high-tech arena. The error rate ranges from an outstanding 4% to a horrific 45% rate (with a median rate of 28%). That’s right—at some high-tech companies, they’re getting it wrong nearly half of the time.1 Case in point: Some years ago, Cisco Systems Inc. had a royal doozy of a glitch, one that has become the stuff of supply chain legend, so to speak. Cisco’s glitch was centered squarely on the failure of its supply chain plan. As the leading manufacturer of networking routers and switches, Cisco was one of the most influential companies driving the dot-com boom of the late 1990s and early 2000s. In the spring of 2001, Cisco was riding as high as any high-tech company had ever ridden, having reported a profit for 40 quarters in a row. With a culture that literally knew nothing but growth, naturally enough Cisco’s planning systems—which were considered state of the art—kept forecasting more of the same.

At a Glance Supply Chain Planning Supply chain planning coordinates assets to optimize the delivery of goods, services, and information from supplier to customer, balancing supply and demand. Supply chain planning solutions allow companies to create what-if scenarios that weigh real-time demand commitments when developing forecasts.

Planning and Forecasting

49

Unfortunately, the inevitable bursting of the dot-com bubble happened to coincide with a severe slump in the telecom industry, both of which had a direct impact on Cisco’s business. The decade-long uptick had finally peaked, and demand for Cisco’s products began to slow. Problem was, the company’s supply chain didn’t seem to recognize “make less this month than we did last month” as a viable plan. Instead, the planners kept following the system’s advice to “make more.” You can imagine what kind of havoc that played, not only on Cisco’s system inventory but on that of its suppliers as well. Cisco had helped popularize the concept of contract manufacturing, where outsourced (or contract) suppliers built the routers and switches and then shipped them direct to Cisco’s customers. Now, all of a sudden, Cisco’s customers didn’t want or need any more networking equipment—in fact, they already had too much. But Cisco’s supply chain plan kept steadily insisting “make more.” The most important test of a supply chain plan is accuracy, and it became clear that Cisco was flunking that test.

A Bias Against Good Plans Cisco’s supply chain planning suffered from a common malady that afflicts many companies: bias. It’s a pattern of behavior within a company where different departments focus on their own individual priorities, often disregarding the overall health of the company in favor of propping up their own silos. A good supply chain plan will fail every time, for instance, if employees are incentivized to avoid stock-outs and as a result keep building up the safety stock. Because employees are not being penalized for making too much—in some companies, the only unpardonable sin is to be caught short—the importance of the overall supply chain plan ends up taking a backseat to the size of one’s weekly paycheck. When it comes to protecting and keeping their jobs, employees learned long ago that management will rarely punish those who tell it what it wants to hear.2 In Cisco’s case, forecasting growth had been the right answer for more than 10 years, so it seemed the most natural thing in the world to keep going forward, even when it started to look like the boom days were over. “There’s a growth bias built into the business of forecasting,” explains venture capitalist Ajay Shah, a former director of Solectron, one of Cisco’s major suppliers and one of the companies that got caught up in the undertow when too many unwanted electronics products started to flood the marketplace. “People see a shortage and intuitively they forecast higher.”3 That kind of growth bias leads to the unwritten rule of forecasting demand that says, “Err on the side of needing more, not less.”

50

Traditional Core Processes of Supply Chain Management

Forecasts need to make sense, adds Si Gutierrez, senior director of supply chain with TDK InvenSense, a maker of motion and sound sensors, and a veteran of several other high-tech companies. A big part of forecasting for electronic device and chip manufacturers involves an analysis of general economic conditions. Gutierrez uses the cellphone industry as an example: “If the forecast says we’ll need 20% more chips, we ask, ‘Does that make sense, given current market conditions?’ Everyone can agree that’s a reasonable expectation for total market growth. The challenge comes in meeting with major players in the industry. Everyone wants to win and everyone’s planning for success, so they add 30%. But not everyone wins. If you add up all the players in the industry, you might double a realistic forecast,” he explains.4 Ultimately, in the wake of the economic downturn in 2001, Cisco ended up with far more products than it could ever sell. How much more? The company wrote off $2.2 billion worth of unsalable, unusable inventory and reported a $2.6 billion quarterly loss. Although Cisco had gained the reputation of being the supply chain poster child for the New Economy, it reacted to the supply chain glitch in a typically Old Economy fashion: The company laid off 8,500 employees.5

From Soup to S&OP How does a company overcome the inherent bias that seems to trip up even the best-laid plans? When Mike Mastroianni joined Campbell Soup, he saw many of the same cultural inhibitors to good forecasts that had stymied Cisco’s planners. Brought in to oversee a sales and operations planning (S&OP) initiative at the world’s leading soup maker, he found a supply chain that was focused too much on managing internal costs and not enough on customer service. “For Campbell’s, like a lot of companies, manufacturing was king,” remembers Mastroianni, formerly Campbell’s vice president of planning and operations support and currently vice president of global supply chain planning with medical device manufacturer Medtronic. Manufacturing was in a position to second-guess the forecasts, thanks largely to the fact that some people had worked in that department for decades and had a historical perspective on how the market fluctuated. Mastroianni’s mission, however, was to realign the supply chain to facilitate the introduction of new products. “Campbell’s had become complacent,” he says, and to turn things around, forecast accuracy had to get a lot better.6 The average error rate of forecasts in the consumer packaged goods industry is 26%, but Campbell’s wasn’t going to get too far if it merely maintained the status quo. “We decided to focus in on forecast accuracy, which

Planning and Forecasting

51

meant we had to change the behavior of bias,” Mastroianni explains. “People used to get their heads handed to them” for missing their numbers, so they tended to overforecast. As a result, they drove inventories up, as well as the costs of obsolescence, warehousing, expedited shipping, and everything else that was affected by overly optimistic forecasts. How is a forecast created? No, they’re not made up out of thin air, as some wags have observed. Campbell’s, like many other companies, uses a traditional S&OP consensus process, which triangulates among sales, marketing, and demand planning. These three groups get together to agree on a number. That forecast number ultimately ends up going to the general manager for endorsement. “Instead of aiming for a single demand figure, progressive companies have turned to forecasting a range of potential outcomes,” explains Yossi Sheffi, director of the MIT Center for Transportation & Logistics. “They estimate the likely range of future demand, and use the low end and high end to guide contracting terms and contingency plans.” The goal of this range forecasting is to get companies to widen their planning horizons.7 Even after consensus planning, though, the odds are pretty good that a company is not going to hit that number, which makes it all the more important that a system of open and ongoing dialogue is in place.

No Time Like the Real Time One element driving Campbell’s need for better forecasts is its collaborative planning, forecasting, and replenishment (CPFR) efforts with key retail customers. “We were forecasting at a very high level, based on history,” Mastroianni recalls, but to get to a truly collaborative relationship with its customers, the company had to be able to restate its history more frequently than once a month. Because CPFR requires manufacturers and retailers to share point-of-sale data over the Internet in real time, inaccurate forecasts only hasten the distillation of bad information. “What fuels S&OP is facts,” he observes. That meant Campbell’s needed to put key performance indicators (KPIs) in place to hold people accountable as well as measure improvements in forecast accuracy. Mastroianni’s team turned to a real-time forecasting tool capable of creating daily, shortterm forecasts with 52 weeks of live data. Being able to forecast in real time made it possible for Campbell’s to track patterns that used to go undetected. The system might say, for instance, “Forget about the order today as it relates to your forecast. You need to be thinking about the next 7 to 14 days because, based on this current pattern, your next month is going to look like this,” he explains. “Or it might say, ‘You’re holding on to a forecast that just isn’t going to happen. So let it go, and produce to this lower number.’”

52

Traditional Core Processes of Supply Chain Management

Campbell’s learned, no matter how capable and experienced its planners are, their plan is only as good as the information that feeds it. The big “aha!” moment at Campbell’s came when the S&OP process illustrated exactly how broken many of the company’s processes were throughout the organization—from finance to commercialization to label design, custom pack planning, and transportation. S&OP provides a heightened level of transparency to the extent that, over time, as Mastroianni puts it, “the truth plays out.” By bringing all of Campbell’s business plans into a single, integrated set of plans—the end game of an S&OP initiative—the company was ultimately able to fix a dozen or more major processes.

At a Glance Sales and Operations Planning Sales and operations planning (S&OP) aligns all of a company’s business plans (customers, sales and marketing, research and development, production, sourcing, and financial) into a single, integrated set of plans. The end goal is a plan that more accurately forecasts supply and demand.

For instance, Campbell’s was able to improve by as much as 50% the weekly accuracy of the item-level signals sent to its manufacturing plants, which resulted in an immediate benefit: The company was able to better plan how many trucks it needs to replenish its distribution centers with product. That increased level of accuracy also paid off by reducing how often Campbell’s has to use expedited shipping to make up for not having the right products for its customers at the right time. Taking it a step further, Campbell’s leveraged its precision of accuracy to provide improved visibility to its warehouses and manufacturing plants. This has allowed the company to use its long-range planning capabilities to prebuy transportation with some of its carriers. Those forecasts have also been used for labor management, specifically to determine when Campbell’s needs to add extra crews to its warehouses and when to cut back.8 Chemical manufacturer Dow Chemical uses a variation on S&OP known as executive sales and operations planning (ES&OP), which focuses on forecasting decisions made by senior-level managers that are grouped using an aggregate market-based process. This technique allows Dow to forecast from 3 to 36 months ahead, the difference being that ES&OP looks at overall market performance rather than drilling down to look at specific products

Planning and Forecasting

53

or customers, explains Jacqueline Faseler, global director of supply chain sustainability. The idea, she says, is “to align the forecasting process with how the commercial and marketing organization thinks, whereas before we may have had businesses that tried to forecast what’s going to be made on an asset or a product. We try to look more at market trends [than at] external factors.” The payoff for Dow has been improved accuracy in its forecasts, which has helped its internal businesses focus on “bigger picture” market trends, Faseler says. “Businesses are not getting caught up in the details of what customer A, B, or C is doing next week or next month.” Instead, the ES&OP strategy “paints a higher-level picture, which forces the businesses to take a step back and analyze what’s going on. They can make decisions around balancing demand and supply that maybe before they never got to because they were so focused on trying to collect very detailed data.”9

End-to-End Integration One of the keys to an S&OP program is being able to integrate different departments and their various processes into one central plan, and that strategy can be applied in any company in any industry. At computer giant IBM, for instance, integration is not only a key best practice for the company, it’s even included in the name of its supply chain organization, the Integrated Supply Chain. IBM’s supply chain group comprises procurement, manufacturing, logistics, engineering, hardware operations, and sales support for all IBM products and services, overseeing $35 billion of supplier expenditures. The same group also oversees IBM’s environmental initiatives. Most of IBM’s supply chain planning is done internally, involving such departments as logistics, fulfillment, manufacturing, and engineering, as well as functional experts in the company’s business consulting and business transformation groups. Having all of these professionals in one organization allows IBM to tap into their expertise within each function, whenever needed, with that expertise fully integrated across the supply chain.10 Not surprisingly, technology has a lot to do with defining best practices within IBM’s supply chain planning and forecasting processes. “Supply chain leaders are masters of disruption management, but they spend a tremendous amount of time fighting fires they never saw coming,” explains Jeanette Barlow, IBM’s vice president of supply chain solutions. Digital technologies, especially artificial intelligence, can provide the kind of deep visibility companies need to build a smarter supply chain, the kind that can “proactively mitigate disruption and risk,” she says, “allowing them to focus more on the strategic needs of the business.”11

54

Traditional Core Processes of Supply Chain Management

Analyze This As software has become more sophisticated and hardware more powerful, so too have performance tools evolved that allow companies to not only gain access to the supply chain-related data in their various systems, but to extract meaningful information that can provide them with an overall look at the current state of their operations. Or at least, they try. Supply chain planning systems are often integrated with enterprise resource planning (ERP) systems, which tie together manufacturing, sales, distribution, and finance by collecting data from each area and using it to plan a company’s resource use—everything from employees to raw materials. All that planning, as you would imagine, involves a lot of data creation. One popular meme cited frequently is that 90% of all the data that’s ever been created was created within the past two years. It’s been estimated that 2.5 quintillion bytes of data are produced every day, and that number is only going to rise at an even more accelerated rate as the data created by machines and shared through the Internet of Things (see Chapter 13) grows exponentially. It’s fair to say that the era of Big Data has become the age of Humongous Data. That being said, it’s also fair to say that most of that raw data has limited to no value, at least until such time as something meaningful is done with it, and that’s where the practice of data analytics comes in. “Data is the new currency of business,” states consultant Greg Siefkin, “but data all by itself isn’t enough. To extract its value, business leaders need analytical tools and sophisticated algorithms to refine raw data into insights that can drive better business decision-making.” As he points out, supply chain operations historically have been numbers-driven and quite open to embracing meaningful metrics and analytical approaches to improving performance, such as the SCOR model (see Chapter 3). The methodical approach that tends to characterize supply chain professionals, Siefkin says, “creates an excellent foundation for cooperation between supply chain and data analytics professionals that can complement their respective skill sets by bringing together deep knowledge of business processes and advanced understanding of data modeling and analytics.” Easier said than done, of course. Leveraging data and bringing together all those skill sets, Siefkin explains, requires several steps: Obtaining access to relevant data. Integrating that data from wherever it currently resides. ■■ Harmonizing that data to ensure its quality. “Data quality,” he says, “is a real problem for many enterprises,” and less than half of organizations fully trust their data to make important business decisions. ■■ ■■

Planning and Forecasting

■■ ■■

55

Defining how the data will be used. Running the analytics and delivering the results in an insightful and usable format.12

Supply chain analytics are in an evolutionary stage, moving from the descriptive—where the data tells you what has already happened—to the predictive—where the data tells you what will happen given an analysis of similar past and likely future situations—to ultimately, the prescriptive— where the data tells you what you should do to achieve desirable outcomes. And thus, the tools available to supply chain professionals offer varying levels of capabilities, based on the needs of the user (and the price the user is prepared to pay for analytics expertise, which doesn’t come cheap). For instance, business intelligence software (which used to be known as decision support software) is similar in nature to artificial intelligence software in that both are rules-based, both focus on analytics, and both attempt to enhance human decision making. What business intelligence does, in a nutshell, is consolidate data from many operational areas of a company, analyze that data based on guidelines predefined by the company, and then present a dashboard-like overview of the company’s performance. The latest generation of these tools offers a look not only within the four walls of a company but in fact within the entire supply chain of customers, suppliers, and third parties.

At a Glance Business Intelligence Business intelligence software collects all relevant performance data (manufacturing, sales, sourcing, labor, etc.) into one place where it can be analyzed based on predefined business rules. The information can then be presented in a visually meaningful way. Even though companies have gotten quite good at collecting transactional data, many are still beginners when it comes to making sense of that data. That’s where business intelligence technology offers a helping hand. Here are some examples of companies that have gained new insights into their operations from business intelligence solutions: ■■

How are airlines able to ensure all their flights leave and arrive on time, that every seat is filled with a paying customer, that all luggage

56

Traditional Core Processes of Supply Chain Management

is accounted for, and that everything runs safely? That’s a tall order for any type of company, but with so many variables at play in the airline industry—weather, maintenance issues, limitations on service hours for flight personnel, air traffic patterns, to name just a few—it’s a tall order to coordinate so much data in real-time. WestJet, one of Canada’s largest air carriers, uses an analytics solution with visualization features and a dashboard presentation that provides as complete or as focused a look into the data as needed. For instance, airport managers can now receive situational dashboard reports that tell them at a glance exactly where every passenger’s luggage is at any time after a plane has landed. ■■ If you ever wondered what happens to the data retailers collect whenever you use a loyalty card, consider the situation with greeting card giant Hallmark Cards, which runs 2,000  Hallmark Gold Crown stores and has point-of-sale purchase information from millions of card holders. So far, so good, but merely knowing who bought what, and when, doesn’t always result in the right conclusions. Using business intelligence to create predictive models of consumer behavior, Hallmark discovered buying patterns that helped the company redirect its promotional efforts. For instance, instead of targeting once-a-year shoppers with Christmas offers, Hallmark found it was more effective to aim its online marketing efforts at customers who regularly visit its stores yearround. The company is now able to produce more customized direct marketing campaigns throughout the year, with better results. ■■ The US military relies on Lockheed Martin Missiles and Fire Control to develop and manufacture combat, missile, rocket, and space systems. Compiling and producing monthly financial reports was a tedious process that took two weeks to complete, taxing the resources of Lockheed Martin’s IT staff. Part of the problem was that everybody with input into the monthly reports, from corporate executives to administrative assistants, had to wait for the IT department to produce the specific information that each individual required. After Lockheed Martin adopted a business intelligence solution, employees no longer had to go running to IT for everything. Now individual users can get the data they need whenever they need it, and in a format customized to their needs. Instead of taking two weeks to close the books, Lockheed Martin can now do it in two to four days.13

A Happy Ending Improving its supply chain visibility has also proven to be the key to Cisco Systems’ rebound from its forecasting nightmares, which were described at the beginning of the chapter. The company’s turnaround began with a

Planning and Forecasting

57

dramatic paring back of suppliers (from 1,300 down to 600) and the concurrent outsourcing of logistics, subassembly manufacturing, and materials management. All suppliers and distributors can now tap into the same supply chain network, and as a result everybody has access to the same forecasts and is working off the same demand assumptions.14 Not only does the supply chain network save Cisco millions of dollars by eliminating paper-based purchase orders and invoices, but it also has improved on-time shipment performance. And by applying “analytical rigor” to its supply chain plan, the company can make better decisions sooner in the process, such as what to do if a key supplier can’t meet its commitments. By optimizing its supply chain plan, Cisco was able to remove emotions and bias from decision-making processes. Since then, the company has shifted its strategy from selling technology to selling business outcomes, a transition so complete that in 2020 Cisco was ranked as having the top supply chain in the world, according to analyst firm Gartner.15

Notes 1. Lora Cecere, Eric Newmark, and Debra Hofman, “How Do I Know That I Have a Good Forecast?” AMR Research Report ( January 2005), 9. 2. Laurie Joan Aron, “Nobody’s Perfect,” Supply Chain Technology News (September 2001), 13–15. 3. Scott Berinato, “What Went Wrong at Cisco?” CIO Magazine (1 August 2001), www.cio.com. 4. Helen L. Richardson, “Keep Plenty of Flex in Your Supply Chain,” Logistics Today (February 2005), 17–19. 5. David Blanchard, “High-Tech Companies Look to High-Tech Solutions,” Supply Chain Technology News ( June 2001), 5. 6. David Blanchard, “Food for Thought,” Logistics Today ( June 2006), 1, 12. 7. Yossi Sheffi, “Creating Demand-Responsive Supply Chains,” Supply Chain Strategy (April 2005), 1–4. 8. Blanchard, “Food for Thought.” 9. Jonathan Katz, “Forecasts Demand Change,” IndustryWeek (May 2010), 26–29. 10.  Helen Richardson, “Shape Up Your Supply Chain,” Logistics Today ( January 2005), 26–29. 11. MH&L Staff, “How to Leverage Digital Technology in the Supply Chain,” Material Handling & Logistics (7 June 2018), www.mhlnews.com. 12. Greg Siefkin, “Using Data to Improve Supply Chain Operations,” Material Handling & Logistics (November/December 2018), 26–28. 13. www.ibm.com; www.sas.com; www.informationbuilders.com. 14. Dean Takahashi, “Crunching the Numbers,” Electronics Supply & Manufacturing (11 November 2004), www.my-esm.com. 15. David Blanchard, “Top 25 Supply Chains of 2020,” IndustryWeek (25 June 2020), www.industryweek.com.

CHAPTER

5

Procurement Go Right to the Source Flashpoints The purchasing department should be managed as a strategic supply chain center rather than as merely a place to beat down costs. An effective way to stay on the same page as your suppliers is to share transactional information with them. Simplifying your product line can lead to a more efficient supply chain flow. Change management is a key enabler of effective cost containment efforts. Collaboration ensures that procurement savings don’t vanish before a company is aware of them.

While not necessarily used interchangeably, the terms procurement, purchasing, and sourcing all describe one of the main supply chain management processes. As Larry Paquette, author of The Sourcing Solution, describes it, the role of sourcing is “to locate the one company out there that can provide needed product better than anyone else.”1 In Essentials of Supply Chain Management, author Michael Hugos gets right to the point when he notes that, by tradition, the main activities of a purchasing manager are “to beat up potential suppliers on price and then buy products from the lowest cost supplier that [can] be found.”2 Any mystery about the role of the purchasing manager is dispelled immediately in the title of Patricia E.

59

60

Traditional Core Processes of Supply Chain Management

Moody’s book The Big Squeeze.3 At any rate, the notion that purchasing does the dirty work for accounting has been popularized early and often throughout supply chain circles. Concurrently, there’s also a long-standing perception that purchasing plays second (or third) fiddle to the star performers in a company, typically finance, sales, and marketing. However, warns Dave Nelson, retired vice president of global supply management at automotive supplier Delphi, “the practice of allowing purchasing to be an underachiever is an expensive approach to global supply management because it underpowers a vital contributor to corporate profits and growth. Unfortunately, examples of low expectations (and low results) in procurement are common.” When companies fail to recognize the positive impact good procurement practices can have on their bottom line, it makes it that much more difficult for significant and enduring supply chain improvements to take effect.4 Fortunately, the word has gotten out that by collaborating with your key supply chain partners, rather than relying on the traditional supplier squeeze and taking a “we know what they want better than they do” attitude toward customers, the purchasing department can become a strategic corporate advantage rather than merely a necessary evil.

A Formula for Success If you ask anybody outside a tight circle of supply chain directors about the role of the procurement department, you’ll probably hear that “they’re the ones preoccupied with controlling and reducing costs.” And yet, while cost reduction will always be a top priority for procurement, it’s no longer their sole claim to fame. Some procurement managers, in fact, pride themselves on their ability to create solutions and foster innovation, not merely pinching pennies. “Many procurement organizations have reached the upper limit of cost reductions possible in categories they are actively sourcing today,” explains Chris Sawchuk, leader of consulting firm Hackett Group’s global procurement advisory practice. “So they’re looking for ways to reinvent their value proposition. A key part of this is expanding their influence, and taking a lifecycle approach to category management. This requires working more effectively with spend owners, executives, requisitioners, suppliers, and other stakeholders. It also calls for skills that are outside procurement’s traditional areas of expertise.” He points to a Hackett Group study that found that procurement departments are attempting to raise the level of awareness of their contributions by monitoring, measuring, and reporting on their value contributions. For instance, Eastman Chemical, a producer of specialty chemicals, takes a very pragmatic approach to supply chain management, as its ultimate

Procurement

61

objective is to be a reliable supplier to its customers. That approach, basic though it may be, served the company well when it transitioned from producing commodity chemicals to becoming a provider of specialty chemicals. Getting to that point required a full-scale change in Eastman’s sourcing function, as the nature of the company’s procurement function shifted toward strategic supply management. As Mike Berry, the company’s vice president of global procurement and chief procurement officer, explains, Eastman has a five-point strategy to ensure the company’s sourcing practices meet the needs of its customers: 1. Integrate procurement with supply chain operations. Supply chain processes are cross-functional, and Eastman follows a talent management strategy that moves employees through various functions and departments within the company. 2. Collaborate with internal business partners. In addition to its crossfunctionality strategy, Eastman aligns procurement resources with sales and operations planning (S&OP) teams, to better share market insights across departments. 3. Develop supplier strategies. Not all suppliers are alike, and neither should be your procurement approaches to them. Berry points out that, with commodity suppliers, Eastman focuses on cost, while with strategic suppliers, the company focuses on driving value and innovation. 4. Continually develop and improve capabilities to deliver results. Eastman automates its supply chain processes using inventory optimization and other technology solutions. The company is also investing in staff development to better train its next generation of leaders. 5. Contribute to the company’s success. “We in procurement are known as nontraditional thinkers, even contrarians, in our approach to analyzing markets,” Berry says. “We focus more on market insights and business strategy than traditional procurement.” For instance, when appropriate, the procurement department has leveraged alternate methods and sources of supply, and has found competitive advantage through creative contracts that engage Eastman’s suppliers in ways that drive innovation. “Procurement must know how to document its own innovation and the impact it has on enterprise growth and be able to convince the rest of the organization that procurement’s expanded value proposition is real,” Sawchuk observes. He adds that procurement’s role in risk mitigation efforts should be better appreciated and leveraged. No other department is in a better position to identify early signs of financial distress among suppliers, he notes. Procurement can also evaluate alternative sourcing arrangements, and develop what-if scenarios to recognize supply network risks while building resiliency.5

62

Traditional Core Processes of Supply Chain Management

Managing the Changes In a study of purchasing patterns, the Center for Advanced Purchasing Studies found that a high percentage of procurement actually takes place outside of the purchasing department. Although it’s generally a purchasing manager assigned to the task of procuring products, whether it’s components used in manufacturing a product or finished goods that are sold on retail shelves, it’s usually the domain of the logistics manager to make other important supply chain buying decisions, such as the procurement of transportation. That’s not necessarily a best practice, according to supply chain consultant Tom Mulherin, particularly if transportation purchasing is being handled by somebody who lacks transportation expertise. From his perspective, Mulherin believes that transportation purchases lack the rigorous process that companies typically apply to the purchase of materials. With transportation, he says, it’s often just a matter of switching carriers on the basis of cost alone: “This carrier is going to give me a 5% discount, so let’s switch over to them.” A company needs to appreciate that changing a carrier or a supplier will result in a change in the company’s organization as well, he points out. The nature of supply chains today means that carriers, as well as other suppliers, are integrated into a company’s cost structure and operations, so any kind of significant change will have ripple effects. Any supply chain professional who is intent on making a sourcing change of any kind needs to ensure that the change will have a positive impact on at least one critical cost area of the company. That will require that companies get better at managing change itself. “Change management,” Mulherin observes, “is becoming a primary enabler of effective supply chain cost containment efforts.” To effect change management, he suggests companies stick to simple, easy-to-understand measurements that encourage appropriate behavior. Measure only key performance indicators, and determine that the benefits of reporting metrics are greater than the cost of gathering them. You’ll need to involve the users in the process as well, which means having them be a part of the process of developing and rating supplier qualifications, going on site visits, and taking ownership of the final decision.6

Keep Your Friends Close and Your Suppliers Closer Keep in mind, however, that just as manufacturing companies are getting much more choosy about whom they want to do business with, so too are their suppliers becoming more particular about whom they want as customers. The philosophy in purchasing circles for several years, particularly in the automotive industry, has been to reduce the total number of suppliers to a manageable core of key partners. As Dave Nelson, Patricia E. Moody, and

Procurement

63

Jonathan Stegner describe in the book The Purchasing Machine, “Reductions in the supply base from thousands to hundreds of excellent suppliers will continue as intra-enterprise alliances focus on only the proven, strong performers, for whom finding new customers will be no problem, leaving marginal producers to scratch for a range of customers.” The contrast, the authors continue, will grow even sharper in the coming years “as the best suppliers will pick the customers that bring them the most money, the best technology fit, and the most manageable schedules, all with the preferred lowest ‘paperwork’ or service costs.” Rather than shifting from one customer to another, good suppliers will find a winning team and endeavor to stay there.7 One of the most effective ways of ensuring that suppliers find your company worth their while is to do what supply chain leaders such as Walmart and Dell have done for years: share transactional information with them. Ford Motor, for instance, centralized its supply chain information and functionality into a single global material manufacturing system, which gives the automaker’s suppliers and customers direct access to real-time inventory and shipping data, updated on a daily basis.8 As a result, Ford was able to reduce the number of days it takes to transport vehicles to dealerships. The average lead time required for material procurement was cut, as well as the number of people needed to contact suppliers. In addition, inventories at Ford’s vehicle assembly facilities and the supply base are significantly smaller than in the past. Through the use of technology, Ford has been able to provide more accurate and timely information to manage its internal and external business processes to a Six Sigma level of capability (see Chapter 6). Furthermore, the company can provide its dealers with better information about their specific vehicle locations. These efforts include reducing inbound carrier discrepancies, such as parts deviations caused by shipment overages, and reducing how often it uses expedited shipments (the most expensive type of shipping). Ford estimates that these efforts alone have saved the company more than $1 million.

Looking Backward to See Forward Prior to its split-up into two companies, high-tech manufacturer HP managed a spend of about $50 billion annually. For direct materials (i.e., core supplies and materials used to make HP products), the company had nearly 90 distribution hubs, about 700  key suppliers, and roughly 120  logistics partners, according to Greg Shoemaker, HP’s global head of supply chain, central direct procurement services. “With that amount of spend comes a significant amount of leverage,” Shoemaker notes. “One of the things we discovered is that size alone isn’t what gets you the best result. Obviously, size gives you a lot of leverage and

64

Traditional Core Processes of Supply Chain Management

a lot of ability to manage a very big spend base, but it’s how you manage that. Even small companies can have an advantage if they are using the right approaches and the right techniques and stay on the cutting edge.” As an example of a best practice any company can focus on, Shoemaker cites procurement risk management. Using analytical tools, HP was able to look backwards over time at such variables as price, supply, and demand, and then predict what those volatile numbers might look like in the future. “In a very volatile pricing area, for example, we would predict ranges of prices that we might expect. Or in a volatile demand portfolio, we would predict what our demand numbers—the highs and the lows—might be.” That helped to educate and empower HP’s procurement professionals to spread the risk between HP and its supply base. The typical mantra in the high-tech industry used to be, “Mr. Supplier, you bear all the risk, and we’ll buy from you,” Shoemaker remembers. “That’s not necessarily a long-term winning strategy for us or the supply base because there’s so much consolidation that’s occurred in the high-tech industry.” With fewer suppliers and fewer high-tech giants, it’s no longer in a company’s best interest to be so transactionally oriented, he points out. HP uses risk management tools that allow the company to manage risk from a statistical basis. DRAM (dynamic random access memory) chips used in computers, for instance, are a very volatile commodity, where the prices can vary wildly from week to week. Using risk management, Shoemaker notes, “we might structure a deal with a supplier that allows us to say to them, ‘We’re going to guarantee you a certain volume level, and in return for that, we’ll ask you for a price cap.’ Or we might agree to a price floor, and in return for that guaranteed amount of volume, they’ve got something they can depend on, and we can get some pricing conditions that we can depend on.” HP has saved a lot of money over the years thanks to its adherence to best procurement practices, but that doesn’t mean it ever gets any easier. “The challenge that we have is that nobody just comes to us and says, ‘Here’s your price.’ You’ve got to work for every penny of it,” Shoemaker notes. For a high-tech manufacturer, a lot of the purchasing process is driven by market conditions and technology. “For instance, when a semiconductor fabricator goes to the next smaller die size, which reduces the price, it effectively does it for everyone. So what are you doing to manage that differently and get a better result?” That’s what procurement is all about—not just getting the best price, but the best possible results.9

Ensuring a Healthy Supply Chain How’s this for a public relations nightmare: You’re a major pharmaceutical wholesaler and you discover that, unbeknownst to you, you’ve been

Procurement

65

purchasing and distributing counterfeit drugs, which results in lawsuits against your company. That nightmare scenario is exactly what happened to McKesson, when it discovered it had purchased fake Serostim, a drug to treat AIDS patients. It’s also what happened to AmeriSourceBergen, when it bought more than $4 million worth of heavily diluted Epogen, a medication for patients on dialysis with anemia. The same thing happened to Cardinal Health, when it bought $2.4 million worth of tainted Procrit, another anemia drug.10 And Baxter International found itself at the center of the worstpossible scenario when hundreds took ill and dozens of people died due to contaminated heparin, a blood-thinning drug.11 The discovery of fake Serostim served as a wake-up call for McKesson, explains consultant Greg Yonko, formerly McKesson’s senior vice president of purchasing. “At that point we immediately took very stringent steps to tighten up all of our purchasing processes,” he says. Birth control pills and HIV drugs had long been favorite targets of counterfeiters, but according to Yonko, the Serostim incident was the first time a high-priced injectible growth hormone entered the marketplace as a counterfeit product.12 “Over the last few decades, increasing globalization and supply chain complexity have posed risks to pharmaceutical safety, ultimately impacting businesses and, most importantly, patients,” notes consultant Jay Hauhn, former chief technology officer with Tyco Integrated Security. “Today, materials are procured from multiple countries, manufactured somewhere else, potentially packaged in yet another country, and distributed and sold globally.” Although the US Food and Drug Administration (FDA) heavily regulates and monitors the pharmaceutical food chain, counterfeiting continues to worsen every year. It’s been estimated that 40% of the drugs sold in the United States are manufactured outside the United States, and that 80% of the active pharmaceutical ingredients in those drugs is produced offshore.13 According to Interpol, roughly one million people die each year due to counterfeit medications, and it is estimated that up to 30% of all pharmaceutical products sold in emerging markets are counterfeit.14 As a result, the FDA has launched numerous initiatives involving the use of various technologies to better track and trace drugs throughout the supply chain lifecycle. For instance, the FDA has urged the adoption of radio frequency identification (RFID) technology to track and trace all pallets and cases of pharmaceuticals, and in certain situations the agency has required that this technology be applied to every package as well. The goal is to ensure that every drug has a unique serialized identifier that will allow all pharmaceuticals to be trackable.15 In 2013, the FDA introduced the Drug Supply Chain Security Act (DSCSA), a 10-year program requiring various stakeholders in the pharmaceutical industry—manufacturers, repackagers, wholesale distributors, dispensers, and third-party logistics providers—to adopt an interoperable

66

Traditional Core Processes of Supply Chain Management

system to manage records of ownership and transfer of prescription drugs in the United States. Over the course of the program, companies under the Act are expected, among other things to: provide lot-level product tracing information; establish systems to verify and handle suspect or counterfeit products; and confirm authorized trading partners.16 Besides RFID, companies are also actively investigating the use of blockchain technology to track and trace prescription medicines. The MediLedger Project, for instance, involves a consortium of pharmaceutical industry leaders—including AmerisourceBergen, Bayer, Cardinal Health, Genentech, McKesson, Pfizer, Walgreens, and Walmart—working together to develop blockchain-based solutions to comply with the DSCSA.17 Thanks to blockchain’s distributed ledger capabilities, the MediLedger Project uses cryptography techniques that allow trading partners to securely exchange change-of-ownership information, helping to ensure all interactions throughout the supply chain are based on trust. In 2020, the consortium announced it had completed a pilot test demonstrating the viability of using a blockchain-based network to validate the authenticity of drug identifiers and the origin of saleable products throughout the supply chain. According to Matt Sample, vice president of manufacturing operations at AmerisourceBergen, the MediLedger pilot demonstrates the power of a connected network of authorized trading partners, including those without direct business relationships. The use of blockchain enabled a shared ‘phone book’ of authorized trading partners, locations, and connection points that enabled that network.”18 Similar efforts are also underway to enable the traceability of various foods as part of the Food Safety Modernization Act, which was passed in 2011. As with the drug supply chain, technologies such as RFID, blockchain, the Internet of Things, artificial intelligence, and other solutions are being deployed or pilot tested to improve the ability to share product lifecycle information in a secure manner. (See Chapter 13 for more details on supply chain technologies.) While technology can be used to identify and track authentic products, the larger issue threatening the pharmaceutical supply chain is what’s known as the secondary market—small and loosely regulated wholesalers and suppliers whose products occasionally enter the mass market, sometimes to fill in the gaps during an inventory shortage and sometimes because their products are priced significantly lower. Most of the counterfeit drugs have come through these small distributors, which are typically state-licensed entities that are supposed to be inspected by the pharmacy board, notes Dr. Thomas McGinnis, former director of pharmacy affairs at the FDA and currently chief of pharmaceutical operations with the Department of Defense’s TRICARE Management Activity. However, “a lot of them are very small businesses that are approached by somebody with product

Procurement

67

to sell. They don’t have a business relationship with them. They’ve probably never done business with them before. And yet they buy the product without making a phone call to the manufacturer or to the FDA to ask if this [company] who has a great deal is legitimate.” McKesson only buys drugs directly from pharmaceutical manufacturers, and of the hundreds of millions of products that go through its system every day, less than 1% are from the secondary market. According to Yonko, the company has an active business relationship with several alternativesource vendors, and initiates a rigorous due diligence process, including background and security checks as well as site visits, before it will purchase products from these vendors. The large drugmakers, meanwhile, have proactively taken their own steps to reduce the likelihood of counterfeit drugs entering the market. Many drug companies, including Pfizer, Johnson & Johnson, and Eli Lilly, require that their distributors only purchase drugs directly from them or from authorized resellers.19

It Seemed Like a Good Idea at the Time Back in the days of the late 1990s dot-com boom, virtually every discussion of supply chain management began with an evaluation of the importance of online marketplaces. The premise was both seductive and simple: Manufacturers would be able to purchase parts, supplies, and components directly off the Internet, thanks to the emergence of procurement software and sufficient security protocols that would safeguard any online transactions. These e-marketplaces (also known as online trading exchanges or net markets), which seemingly sprouted up out of nowhere about the same time that user-friendly web browser software (e.g., Netscape and Google) became widely available, enabled companies to buy and sell raw materials and other products in real time via the Internet. The hook that tantalized so many businesses was that companies would be able to save tremendously on their regular purchases of both direct materials (the core supplies and materials manufacturers require to make their products) and indirect materials (commodities that companies need to run their business, but that aren’t necessarily part of their production process, such as office supplies) through reverse auctions. Let’s say you were a glue manufacturer and you needed 10,000 tubes by the end of the month. You would post your specifications on a public exchange, where all of the tube suppliers who had been properly vetted could bid on your business. After a predetermined period of time, the auction would conclude and you could decide whether to accept the lowest bid or a slightly higher bid if you harbored doubts about the low bidder’s ability to actually deliver the products.

68

Traditional Core Processes of Supply Chain Management

When the Internet bubble burst in the early 2000s, taking down many high-flying startups fueled almost entirely by venture capital and irrational exuberance, many of the online exchanges were swept away in the floodtide of failure. However, the idea of online business-to-business marketplaces was a good one then and it remains a good one now; it was mostly the lack of execution that led to their quick fadeout from the public eye. That, and the hubris that convinced these fledgling companies they could “insert themselves between established trading partners and take a piece of the action,” as author David Taylor puts it. “As soon as the potential of exchanges became apparent, the major buyers and sellers set up their own captive exchanges, bypassed the start-ups, and took their markets back.”20

An Online Car Wreck There are several types of online marketplaces, and the more flexible they are in their functionalities, the more useful they are to businesses. Before the Internet era even began, there were private exchanges, one of the best known being retail giant Walmart’s Retail Link, which in those preInternet days used a proprietary electronic data interchange (EDI) pipeline to communicate transactional data between the retailer and its suppliers. Aerospace manufacturer Boeing was another early adopter of the private exchange model with its Part Analysis and Requirements Tracking (PART) page, a website that provides airlines and their maintenance contractors with a direct link to half a million airplane components. Because these types of exchanges were by definition private, they didn’t really make headlines (at least not until reporters began taking a much closer look at what made Walmart so successful). Thanks largely to eBay, public exchanges captured the imagination of American consumers, who were alternately fascinated and amused by the idea of being able to sell virtually anything to anybody. Amazon, never one to miss a trend, took eBay’s basic idea to heart and introduced its Amazon Marketplace, which allows third parties—often individuals or mom-and-pop sized shops but also larger companies—to use the Amazon platform to sell both new and used products. At first glance, Amazon Marketplace doesn’t seem much different from eBay, but actually the chief difference is an enormous one: All products are searchable through the basic ­Amazon.com website, so the entirety of Amazon’s customer base, in effect, has access to Amazon Marketplace. That’s made it possible for companies of all sizes to buy and sell both commodity and specialty items on a single-transactional basis. Numerous other B2B marketplaces have emerged, either spun out of existing consumer sites or launched to address specific markets, such as

Procurement

69

China’s Alibaba, DHGate, and Global Sources; India’s IndiaMart and TradeIndia; and the United States’ eWorldTrade. For a time in the early 2000s, another type of digital marketplace looked like it would become a dominant purchasing mechanism, and this was the consortium-based exchange. These online marketplaces briefly threatened to turn all the old assumptions of purchasing on their head, and involved major OEMs teaming up (or at least, attempting to team up) to create common platforms for their industry—aerospace, chemicals, consumer goods, pharmaceuticals, you name it. And the biggest consortium exchange of them all, at least in terms of potential and mindshare, was Covisint, an attempt by General Motors, Ford Motor, and Chrysler (back when Chrysler was a standalone company) to link up their supply chains through one common online procurement platform. This effort, they hoped, would allow them to get much better prices on components from their suppliers, many of whom sold to all three of the Detroit Big Three. Problem was, the automakers failed to ask their suppliers what they thought about the idea of having their products commoditized on an exchange where price presumably would be king. So Covisint never got buy-in from the suppliers, and that same lack of supplier interest also doomed many of the other big consortium-led exchanges. Their proponents claimed that members would save millions on their procurement costs, but they never took into consideration that the suppliers had so much to lose from the concept that they’d just refuse to play ball. As Thomas Stallkamp, former president of Chrysler, observes, “Covisint was a horrible idea. Nobody thought it through. [Trading] exchanges are fine, but Covisint and the way it was done was an absolute failure—it never got off the ground.”21 Adds economist Stan Liebowitz, “The laws of supply and demand are not so fragile as to be overcome by anything so small as a new method of communicating with each other.”22

A Rating Service for Buyers and Sellers What ultimately derailed the consortium model, and relegated the public exchange model to the back burners, was the simple reality that spot-buying direct materials from companies you have no relationship with is a bad idea. However, using the web as a medium to conduct transactions and to communicate with suppliers is, in fact, a very good idea so, not surprisingly, online marketplaces targeted to specific industries are still flourishing. For instance, electric car manufacturer Tesla Motors uses online marketplaces that specialize in bulk parts, such as metal castings, plastic molds, and small subassemblies.

70

Traditional Core Processes of Supply Chain Management

According to Mitch Free, founder and former CEO of online exchange MFG.com, buyers typically can access these exchanges for free, whereas suppliers usually pay a subscription fee to be listed on an exchange. One key element to the popularity of these types of sites plays into the same community spirit that websites like eBay and Amazon have fostered: Suppliers are rated by buyers for such things as timely delivery, customer service, and product quality. Buyers, similarly, are rated on such factors as timely payment, quality of technical data, and how easy they are to do business with. “The community can be an extremely powerful force in policing and evaluating the participants of an online marketplace,” Free says.23

Sustainable Sourcing Pays Off The community is also a powerful force in promoting sustainable sourcing practices, which involve the application of corporate social responsibility (CSR) principles when determining where to purchase and source raw materials and products from. Spurred on by pressure by their customers and the market, most if not all large companies now produce annual CSR reports along with traditional financial reports that indicate their triple bottom line (people, planet, and profit) performance over the preceding year. Manufacturers and retailers alike report on how well they’ve been able to reduce how much water they use, how much energy they consume, how much scrap they recycle, how many acres of trees they reforest, and other activities that help to bring a company as close as possible to zero waste and net-zero consumption of natural resources—what’s known as the circular economy. Indeed, some of the best managed and most highly regarded companies in the world today are, not surprisingly, also among those considered best-in-class at sustainable sourcing, i.e., purchasing raw materials in a way that doesn’t exploit the workers or the land where the products derive. Consumer packaged goods giant Unilever, for instance, was named the number one supply chain in the world by analyst firm Gartner in 2018, earning a perfect 10 for its CSR efforts.24 With its Sustainable Living Plan, announced in 2010, Unilever was one of the first major CPG companies to commit to shifting its sourcing of palm oil to only certified sustainable and traceable sources. The company also has pledged to reduce the environmental impact of its manufacturing practices in half by 2030. The efforts are paying off at the cash register, too; as of late 2019, Unilever’s Sustainable Living product lines were growing 69% faster than the rest of the business.25 Companies are getting more insistent that their key suppliers disclose environmental data related to their supply chains, particularly as it relates to climate change, water usage, and deforestation, according to the Carbon

Procurement

71

Disclosure Project (CDP), a nonprofit organization that helps companies measure their environmental impact and manage their supply chains more responsibly. Over 150 companies, such as HP, Nike, Procter & Gamble, Unilever, and Walmart, who account for a combined procurement spend of over $4 trillion, participate in the CDP’s efforts to urge greater transparency throughout the global supply chain. “Global corporations have supply chains that wrap around the globe, touching millions of people, and by holding the purse strings they have the power to drive impact at scale—incentivizing a behavior shift in the companies that supply them,” says Dexter Galvin, CDP’s global director of corporations and supply chains. “With emissions in the supply chain being on average 5.5 times higher than a company’s direct emissions, the buyersupplier dynamic will make or break whether our economy can reach netzero by 2050.”26 (We’ll look more closely at CSR efforts throughout the supply chain in Chapter 14.)

Closing the Loop According to consulting firm Bain & Company, external purchasing is the largest single expense category for most companies, averaging 43% of total costs. A world-class procurement department—one that has been empowered to think strategically about what the company is purchasing—can help reduce a company’s purchasing costs by 8% to 12%, and can also deliver additional annual savings of as much as 2% to 3%. “But many organizations wall off procurement from the rest of the business, treating it as a nonstrategic service,” observe Bain consultants David Schannon, Sam Thakarar, and Klaus Neuhaus. Collaboration—closing the loop between various departments—is the key to making sure that procurement savings don’t vanish before the company is aware of them. It’s vital to keep the finance department in particular well aware of any gains made through procurement practices. “Procurement managers seek to cut category costs that typically span multiple budgets, so the savings are difficult for finance to track,” observe the Bain consultants. “As a result, procurement claims large savings that never show up in the company financials,” which is a major point of frustration for chief financial officers, supply chain managers, and other business unit managers. However, when procurement works together with finance and the other departments, “they can create systems that reliably capture these gains, delivering real cash savings to management.” For example, when medical device manufacturer Boston Scientific decided to revamp its indirect material procurement process, its executive team wanted to capture the savings in real time. They also needed

72

Traditional Core Processes of Supply Chain Management

to determine whether it would be better to reinvest in growth or to apply those savings to the company’s bottom line. To do that, the company had to break down the silos between procurement and finance so that the finance department was made fully aware of where the savings were being generated from, budget by budget. Using cross-functional teams and category-sourcing plans, Boston Scientific was able to put systems in place that allowed finance to track categorylevel savings into specific departmental budgets. The payoff, as the Bain consultants note, was significant: Boston Scientific delivered $30 million in savings tied to specific budgets.27

Notes 1. Larry Paquette, The Sourcing Solution (New York: Amacom, 2004), 8. 2. Michael Hugos, Essentials of Supply Chain Management, Third Edition (Hoboken, NJ: Wiley, 2011), 56. 3. Patricia E. Moody, The Big Squeeze (Bloomington, IN: iUniverse, 2011). 4. Dave Nelson, Patricia E. Moody, and Jonathan R. Stegner, The Incredible Payback (New York: Amacom, 2005), 54–55. 5. David Blanchard, “Eastman’s Formula for Success Driven by Procurement Innovation,” IndustryWeek ( June 2014), 36. 6. Perry A. Trunick, “Why Do Companies Overspend for Logistics?” Logistics Today ( July 2004), 1, 10. 7. Dave Nelson, Patricia E. Moody, and Jonathan Stegner, The Purchasing Machine (New York: The Free Press, 2013), 35. 8. Logistics Today Staff, “Ten Best Supply Chains of 2003,” Logistics Today (December 2003), 21. 9. Author interview with Greg Shoemaker (31 October 2005). 10.  Mary Pat Flaherty and Gilbert M. Gaul, “Lax System Allows Criminals to Invade the Supply Chain,” The Washington Post (22 October 2003), www.­ washingtonpost.com. 11. Walt Bogdanich, “Heparin Find May Point to Chinese Counterfeiting,” The New York Times (20 March 2008), www.nytimes.com. 12. Rick Dana Barlow, “FDA Prescribes a Cure for Counterfeit Drugs,” Logistics Today ( January 2004), 1, 16–17. 13. Jay Hauhn, “What the Pharmaceutical Industry Can Teach Us about Supply Chain Security Best Practices,” IndustryWeek (24 May 2013), www.industryweek.com. 14. MH&L Staff, “Blockchain Powerful Tool for Transparency in Complex Supply Chains,” Material Handling & Logistics (13 March 2018), www.mhlnews.com. 15. Christine Blank, “Pharma Industry Expands Electronic Tracking of Drugs,” Drug Topics (12 June 2009), www.modernmedicine.com. 16. www.fda.gov. 17.  David Blanchard and Adrienne Selko, “Top  10 Supply Chain Innovations of 2017,” Material Handling & Logistics (November/December 2017), 10–14.

Procurement

73

18. www.mediledger.com. 19. Rick Dana Barlow, “Drug Makers Fight Back against Counterfeiters,” Logistics Today (February 2004), 9. 20. David A. Taylor, Supply Chains: A Manager’s Guide (Boston: Addison-Wesley, 2004), 170. 21. David Blanchard, “Covisint Follows the Road Less Traveled by,” Logistics Today (September 2005), 14. 22. Stan Liebowitz, Re-thinking the Network Economy: The True Forces That Drive the Digital Marketplace (New York: Amacom, 2002), 211. 23.  Nick Zubko, “Online Marketplaces Are Back in Play,” IndustryWeek (April 2008), 34–36. 24. David Blanchard, “Top 25 Supply Chains of 2018,” IndustryWeek (25 June 2018), www.industryweek.com. 25. www.unilever.com. 26. MH&L Staff, “Companies to Suppliers—We’d Like More Environmental Data,” Material Handling & Logistics (26 May 2020), www.mhlnews.com. 27. David Schannon, Sam Thakarar, and Klaus Neuhaus, “Time to Take a Smarter Approach to Procurement,” Material Handling & Logistics (April 2017), 28–31.

CHAPTER

6

Manufacturing Supply Chain on the Make Flashpoints Supply chain management begins with breaking down the silo mentality. Continuous improvement practices like lean and Six Sigma need to be tied in tightly with a company’s supply chain processes. The promise of digital technologies lies in their ability to connect manufacturers more closely to their customers. Top supply chains consistently design and develop products their customers want to buy.

One of the major objectives of supply chain management is to break down the silos that operate within any company. The term silo refers to the silhouetted portrait of a typical manufacturer: smoke-belching chimneys towering over several-stories-tall factories situated near tall office buildings. Every school kid recognizes that picture, and it’s become the default icon for every PowerPoint presentation that needs an instantly recognizable image of a production facility. Unfortunately, it’s not just the silo image that lingers in the public consciousness—it’s the entire silo mentality that supply chain proponents keep trying to break down, with varying degrees of success. Let’s face it: Taking control of the supply chain and aligning a company’s processes so that improvements are regular and long-lasting are very

75

76

Traditional Core Processes of Supply Chain Management

difficult tasks to accomplish. For some companies, though, an even harder task is deciding whether to bother trying to overcome the silo mentality at all, particularly given the long tradition of “throwing it over the wall” between various production departments. When it comes to aligning manufacturing within a supply chain context, it’s a lot easier to talk about it than to actually accomplish it. Today, thanks largely to the historic success of Japanese automaker Toyota and the more recent success of such US manufacturers as medical device producer Boston Scientific, agricultural vehicle manufacturer John Deere, and aerospace and defense conglomerate Raytheon Technologies, textbooks outlining the principles of lean manufacturing sit on the bookshelves of countless executive suites. Yet for all the talk about lean, there’s still a pervasive wait-and-see attitude at most of those companies, especially outside of the discrete manufacturing industries. While manufacturers and distributors of all types of products recognize that lean offers a more-or-less direct route to eliminating waste, reducing inventory, and becoming more profitable, wanting those benefits and actually having a plan in place for going after them are two very different things. Improving efficiencies within a lean environment takes a concerted and coordinated effort to align all facets of the supply chain toward achieving the same goals. And the job is far from done once a company has all its internal oars rowing in the same direction; that same process must be replicated throughout the main supply base. Any breakdown in communication with a key supplier will result in those lean inventories getting bloated again in very short order. The patience that is required for a successful supply chain transformation can evaporate after one bad fiscal quarter, and any kind of company-transforming initiative by definition requires significant expenditures of time, money, labor, and other vital resources. Confronted with “put up or shut up” ultimatums from top management, many supply chain managers are stymied in their attempts to streamline manufacturing operations, even in the face of evidence that such efforts have been successful at other companies. There’s also the business-as-usual mindset that looks upon supply chain initiatives as mostly a one-time opportunity to reduce costs in a single area, with little or no thought given to a sustained effort throughout all corporate operations.1 Nevertheless, companies continue to seek ways to break down the silo mentality for one basic reason: That’s what the best manufacturing companies in the world have done. Best-in-class manufacturers have at least this one thing in common: They’ve figured out how to reduce waste in numerous areas, which allows them to control their costs as they increase capacity and inventory turns. So let’s begin by taking a look at the influence that Toyota’s concept of continuous improvement has had on manufacturing.

Manufacturing

77

The Toyota Way Supply chain manufacturing concepts often seem to emerge fully formed out of nowhere, and while there have been numerous short-lived trends du jour, in reality the legitimate best practices have gestated for many years, sometimes for decades. The Toyota Production System, for example, emerged in Japan shortly after World War II ended, and in fact was based on concepts popularized even earlier in the twentieth century by Henry Ford. Today, numerous companies have production systems based on the TPS, such as the Autoliv Production System (APS), the Bosch Production System (BPS), the Caterpillar Production System (CPS), the Danaher Business System (DBS), the Eaton Business System (EBS), and so on throughout the alphabet. Each company puts its own spin on the Toyota model, based on its own needs and goals, but when it comes to the full package of lean principles, the TPS is in a class of its own. Although vestiges of the TPS date back to the 1920s, when Toyoda Automatic Loom Works invented a loom that would automatically stop itself whenever a thread broke, it was in the 1950s that the TPS as we know it came to be. Taiichi Ohno, an executive with Toyota Motor, came to the United States to study how American automakers built their cars. As it happened, Ohno’s epiphany came not within an automotive plant but in fact in a supermarket, a concept largely unknown in Japan at the time. The ability of American shoppers to self-select whatever groceries they wanted, in whatever quantities, inspired Ohno to develop an analogous pull system at Toyota where each production line would serve as a kind of supermarket for the next succeeding line, replacing only the items that were selected.

At a Glance Lean Manufacturing Lean manufacturing is a management philosophy focused on eliminating waste, reducing inventory, and increasing profitability.

All of these events and concepts were combined, refined, and ultimately streamlined into the Toyota Production System. Some of the bestknown elements of the TPS include: ■■

Eliminating waste (muda) from every process and activity a company is involved in; these wastes include transportation, inventory, motion, waiting, overproduction, overprocessing, defects, and unused skills.

78

Traditional Core Processes of Supply Chain Management

Empowering workers with the responsibility of shutting down the production line if and whenever necessary (jidoka). ■■ A visual management system known as 5S—sort, straighten, shine, standardize, and sustain—which aims at maintaining a clean, wellorganized facility. ■■ Implementing a pull system, based on color-coded index cards (kanban), that signals when a product needs to be replenished (just-in-time).2 ■■

At its heart, the TPS is based on two core philosophies that are deeply ingrained in the Toyota culture: continuous improvement (kaizen) and respect for people. Of course, nobody would pay much attention to what Toyota was doing if it hadn’t proven to be tremendously successful. As it so happens, the TPS is largely responsible for the conversion of a onceobscure company into one of the biggest and most respected automakers in the world. In The Toyota Way, consultant Jeffrey Liker explains point-bypoint the 14 management principles Toyota follows in its pursuit of continuous improvement and respect for people. He summarizes these best practices as follows: 1. Base your management decisions on a long-term philosophy, even at the expense of short-term goals. 2. Create continuous process flow to bring problems to the surface. 3. Use pull systems to avoid overproduction. 4. Level out the workload. 5. Build a culture of stopping to fix problems, to get quality right the first time. 6. Use standardized tasks as the foundation for continuous improvement and employee empowerment. 7. Use visual control so that no problems are hidden. 8. Use only reliable, thoroughly tested technology that serves your people and processes. 9. Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others. 10. Develop exceptional people and teams who follow your company’s philosophies. 11. Respect your extended network of partners and suppliers by challenging them and helping them improve. 12. Go and see for yourself to thoroughly understand the situation. 13. Make decisions slowly by consensus, thoroughly considering all options; implement decisions rapidly. 14. Become a learning organization through relentless reflection and continuous improvement.3

Manufacturing

79

Nearly Perfect A manufacturing concept frequently associated with lean is Six Sigma, a structured, quality-centric approach to manufacturing. Seen as the successor to the earlier Total Quality Management (TQM) movement, Six Sigma began at telecommunications company Motorola in the 1980s as a way of improving the quality and reliability of its products, which would enable the company to deliver a consistently high level of customer service. Based on quality initiatives developed by the Japanese, Motorola’s Six Sigma program involved every employee in the company. Motorola learned from the Japanese that “simpler designs result in higher levels of quality and reliability,” explains consultant Alan Larson, a divisional quality director at Motorola when Six Sigma was launched. The company also learned that it needed to improve manufacturing techniques “to ensure that products were built right the first time.”4

At a Glance Six Sigma Six Sigma is a measure of quality that strives for near perfection, which is defined as no more than 3.4 defects per million opportunities.

The term Six Sigma refers to the idea of near perfection, defined as six standard deviations between the mean and the nearest specification limit. In practice, this means a product or process can have no more than 3.4 defects per million opportunities; another way of putting it is that 99.99966% of all products are free of defects. Six Sigma, like the SCOR model (see Chapter 3), focuses on five areas: define, measure, analyze, improve, and control (DMAIC). Six Sigma programs typically use statistical process control (SPC) tools to monitor, control, and improve a product or process through statistical analysis. To achieve the desired result of enabling continuous improvement, rather than merely putting a temporary bandage on a problem, Larson recommends that every department, group, and unit within a company complete the following six steps: 1. Identify the product you create or the service you provide. 2. Identify your customers, and determine the customers’ needs. 3. Identify your suppliers and what you need from them.

80

Traditional Core Processes of Supply Chain Management

4. Define your process for doing the work. 5. Establish metrics for measuring the goodness of your process and feedback mechanisms to determine customer satisfaction. 6. Ensure continuous improvement by establishing a team that measures, analyzes, and completes focused action items.5 Proponents of the Six Sigma approach typically cite its lack of ambiguity as a major plus. The Six Sigma methodology applies a mathematical precision to what might otherwise be highly imprecise supply chain processes. A corollary benefit comes when a company insists on getting commitment from every employee, and requiring everybody to focus on the better good of the entire supply chain. Many large companies have achieved impressive results from their Six Sigma efforts. Motorola, for instance, claimed Six Sigma provided financial benefits worth $17 billion; General Electric, another major proponent of the methodology, has estimated the total value of its thousands of Six Sigma projects at $5 billion. It’s not just Fortune 500 companies that are benefiting from Six Sigma, either. And while it’s mostly been the multinational giants that have reaped the biggest Six Sigma payoffs (due to the significant amount of tools and training the methodology requires), smaller companies have also seen tangible benefits, albeit on a correspondingly smaller scale.6

Leaning into Quality United States Gypsum (USG), a manufacturer of gypsum wallboard for the construction industry, has trained every member of its entire supply chain team (roughly one hundred employees) in lean Six Sigma, a process that combines the continuous improvement and waste reduction goals of lean with the quality-focused goals of Six Sigma. As the American Society for Quality (ASQ) defines it, “Lean Six Sigma is a fact-based, data-driven philosophy of improvement that values defect prevention over defect detection. It drives customer satisfaction and bottom-line results by reducing variation, waste, and cycle time, while promoting the use of work standardization and flow, thereby creating a competitive advantage.”7 And it’s a key focus of USG’s global supply chain efforts. “We do a lot of cross-functional work within our supply chain, so if we have a warehouse in one region with stock-out problems, we’ll involve production, transportation, logistics, etc., to solve that problem,” explains Pete Savu, USG’s senior vice president, manufacturing and global supply chain. “We’ll use enterprise value stream mapping from several locations throughout the entire process.” (A value stream map is a chart that lays out

Manufacturing

81

in sequence all of the steps a manufacturer takes to bring a product from order to final delivery.) In fact, Savu adds, lean Six Sigma has spread beyond the traditional supply chain areas into other areas of the company, such as sales and finance. “Nothing here is done in a silo,” he emphasizes.8 According to consultant Robert Blaha, president of Human Capital Associates, three things differentiate lean Six Sigma from earlier improvement programs: 1. Lean Six Sigma focuses on the customer and is supported through a data-driven process. 2. In concert with the breaking-down-the-silos mentality, lean Six Sigma engages everyone in the organization—from the shop floor to the C-suite—in a common pursuit of perfection. 3. As the name suggests, it leverages the qualities of both lean and Six Sigma.9

Don’t Settle for Occasional Improvement According to lean consultant Rick Pay, there are four major reasons that companies fail to achieve benefits from their continuous improvement programs: 1. Senior management is not committed to or doesn’t understand the full significance of lean. 2. Senior management refuses to accept that cultural change is necessary for lean to be successful. 3. The company does not have the right people in the right positions. 4. The company chose lean when a different process improvement program—or none at all—would have been the better choice.10 Before adopting lean or any other continuous improvement program, corporate management must ask itself: Will this initiative directly contribute to our business strategy? The answer, Pay suggests, is not always obvious. “Some companies’ strategic focus, for example, is on competitive market positioning through new product development. In these companies, process improvement and productivity measures may not be perceived as contributing directly to their competitive advantage. You can bet that in these companies senior management may not support a lean initiative if waste reduction on the shop floor is the focus. And, without the full support of top management, the likelihood of success of any process improvement program is jeopardized. Top management,” Pay insists, “needs to

82

Traditional Core Processes of Supply Chain Management

fully understand the various stages of implementing lean so they won’t be tempted to pull the plug before results are achieved. In short, they need to accept lean as part of their overall operations and business strategies and support it all along the way.” Lean is not meant to be a quick fix, and there’s no real end point to it. Continuous improvement means just that—there’s no finish line, just a constant series of small victories that over time amount to major accomplishments. But not every company is willing to accept that kind of incremental timeline, especially if a board of directors or shareholders are expecting a big, quick payoff. When companies begin implementing lean practices, several common problems always appear, explains Steve Porter, vice president of manufacturing with industrial products distributor Grainger, “from skeptical teammates and worried executives to the general frustration of just giving the process time to work.” A company’s senior leadership needs to have clear and reasonable expectations as to how much time and money will need to be invested in the initiative, he says. “The biggest failure in lean comes when teams end the experiment prematurely. Lean takes more time than you may expect to get it right, which can lead you to think that the process is broken. The pattern is common: The team loses energy, leadership loses trust, and the transition ultimately fails,” Porter points out. However, lean quite simply needs time to work well. “Estimate at least six months to get results if your team is local, and more time if you are managing multiple regions. Teams must have this time to relearn the work, build trust, and grow before reliable production starts to take place.” The absolute worst mistake a company can make is to give up on lean too early. “The one characteristic that all successful lean organizations share is that they stick through the process,” he emphasizes.11 To that end, Mandyam Srinivasan, a professor with the University of Tennessee, has identified 14 principles that companies should follow to build, manage, and sustain their lean supply chains: 1. Measure any improvements in subsystem performance by weighing their impact on the whole system. 2. Focus on improving the performance of the lean supply chain, but do not ignore the supply chain’s business ecosystem. 3. Focus on customer needs and process considerations when designing a product. 4. Maintain inventories in an undifferentiated (unfinished) form for as long as it is economically feasible to do so. 5. Buffer variation in demand with capacity, not inventory. 6. Use forecasts to plan and pull to execute.

Manufacturing

83

7. Build strategic partnerships and alliances with members of the supply chain, with the goal of reducing the total cost of providing goods and services. 8. Design products and processes to promote strategic flexibility. 9. Develop performance measures that allow the enterprise to better align functions and move from a functional to a process orientation. 10. Reduce time lost at a bottleneck resource, which results in a loss of productivity for the entire supply chain. Time saved at a nonbottleneck resource is a mirage. 11. Make decisions that promote a growth strategy and focus on improving throughput. 12. Synchronize flow by first scheduling the bottleneck resources on the most productive products, then schedule nonbottleneck resources to support the bottleneck resources. 13. Don’t focus on balancing capacities—focus on synchronizing the flow. 14. Reduce variation in the system, which will allow the supply chain to generate higher throughput with lower inventory and lower operating expense.12

The Value of Teamwork To Tom McMillen, executive director, global chassis and body structures with automaker General Motors, implementing lean practices is a continuing adventure. The company is constantly coming up with new ways to optimize its supply network and remove waste in the process of moving parts from its suppliers to a GM assembly plant. “Throughout our organization, lean practices allow us to reduce inventory in plants and streamline business practices. The benefit is more efficiency and productivity in our supply chain.”13 Taking the supply chain view is the approach Toyota has taken all along, but it’s a difficult lesson for many American manufacturers. In the past, too many companies have looked upon the TPS model as a departmental solution suitable only for the plant floor and the production line, observes Jim Matheson, a professor with Stanford University.14 What’s more, this short-sighted thinking comes despite Toyota’s insistence that lean should be embraced at the enterprise level to guide future growth from senior management levels on down. In terms of best practices, companies should have lean teams who will determine the best manufacturing processes, document those processes, train each other on those processes, and then implement a plan where they all agree to follow those processes. Running lean throughout the supply chain requires evaluating every step within the manufacturing cycle.

84

Traditional Core Processes of Supply Chain Management

Accuride, a manufacturer of wheel end components for trucks and other large vehicles, started on its lean journey shortly after the company had basically hit rock bottom and filed for bankruptcy.15 Its Rockford, Illinois, operation was “a classic story of a rust-belt factory that had been starved for capital and left for dead by previous owners,” according to Rick Dauch, the company’s president and CEO (Dauch was named CEO of Delphi Technologies in 2019). Staring at a choice between going out of business or figuring out a better way to do things, Accuride decided to go lean, a journey that included a significant $70 million investment in production capabilities as well as buy-in from the company’s union-represented workforce.16 Accuride’s lean initiative includes the use of strategic planning tools, value stream maps, and a display board sharing high-level key performance indicators (KPIs) with all employees. These KPIs include updated information on various safety, quality, and productivity metrics. Accuride also uses a tool called Plan For Every Part, which helps determine quantities of items needed to meet customers’ needs, and then signals kanban replenishment systems to pull the needed parts. “If you do kanban right, it’s the most powerful continuous improvement tool there is,” explains Chuck Burns, supply chain manager and lean coordinator at Accuride’s Rockford Operations. “And when you get the shop floor-level workers involved in understanding the nuances of what goes into making products, then true continuous improvement has settled in.” The company’s lean programs extend to its customers as well, helping customers and suppliers alike to drive out waste throughout the supply chain.

Leaning in the Right Direction Jim Womack, one of the United States’ leading proponents of lean, believes that US companies need to transition from merely using lean tools to fully embracing lean management principles. “Companies today understand that you need to have quality at the source, that you need to put things into continuous flow, that pull is better than push in terms of scheduling, that the correct way to maintain machines is proactively rather than reactively. They understand lots of things,” Womack acknowledges. “The real question now is, can they implement a lean management system that can use the tools most effectively on a continuing basis? In most businesses there’s a complete disconnect, for example, between the metrics they’re using and the lean methods they’re deploying.” For instance, if your company is telling the purchasing department to beat down suppliers to get the lowest price, then you’re not leaving yourself much of an opportunity to collaborate with your suppliers, Womack points out. Instead of aiming for consistently brilliant performance, you’re

Manufacturing

85

settling for a short-term gain, which will soon evaporate when your suppliers decide they can no longer afford to work for you. “There’s a whole lot of curiosity about what it’s going to take to change the way companies are managed, to actually get the full benefits from lean on a sustainable basis,” he says, “but it’s going to require both experimentation and a fair bit of change in what managers do, and in what they think management is. Most managers think that their greatest contribution to the business is doing workarounds on broken processes rather than doing the hard work to get the process right so it never breaks down and you don’t need to do workarounds.” The biggest change needed in management thinking, Womack believes, is developing the ability to step back and say, “Gosh, the reason why we’re fighting fires all the time is we don’t have any fire marshals around here. We’re brilliant at fighting fires, but not adept at all at preventing fires.” What Toyota has done so well, he asserts, is to put bulletproof processes in place for product development, fulfillment, order delivery, and supplier management so that things work and get done. Too often US companies settle for an attitude of “we’ll get back to you in a few days with an answer.”17 Analyst firm Aberdeen Group recommends managers adopt these five best practices to achieve top performance through lean principles and inventory management: Develop standardized information flows from the supply chain organization to manufacturing, and vice versa. ■■ Establish a bidirectional information flow between the supply chain and manufacturing. ■■ Determine optimal inventory levels to ensure the reduction of wasted inventory by establishing optimal safety stocks at various buffers within the supply chain. ■■ Incorporate demand and production variability, inventory levels, and supplier lead-time as part of the schedule creation process. ■■ Develop lean techniques that support kanban variations suitable for supplier and internal operations.18 ■■

Smart Manufacturing, Smarter Suppy Chains Computer giant Apple may not have been the first company to do so, but it certainly set the bar higher than any of its predecessors when it began selling products with no physical supply chain at all. While Apple, like most manufacturers, earns the bulk of its revenues from physical products such as its lines of Mac computers and iPhone devices, the company also makes

86

Traditional Core Processes of Supply Chain Management

billions of dollars every year from “products” that it licenses and distributes digitally. In its heyday, the company’s iTunes store by itself brought in $1 billion per year, for music, films, and other entertainment that Apple basically “retailed” (or “e-tailed”) to its customers, eliminating the middleman in a disintermediation play that continues to this day. And when the public’s taste for purchasing MP3 files from Apple and other suppliers waned, Apple was right there with its streaming service that doesn’t even sell products at all—just the ability for the consumer to stream music and other digital files for a set period of time based on a subscription model. Welcome to the world of the digital supply chain, where companies like Apple, Amazon, and Google can sell or license products that require no material sourcing, no production, no transportation, and no warehousing. These companies have also capitalized on their digital success by offering more traditional hardware in the form of electronic devices that allow the user to access all that digital content they’ve subscribed to or purchased. The digital supply chain, according to the web-based encyclopedia Wikipedia, refers to “the process of the delivery of digital media, be it music or video, by electronic means, from the point of origin (content provider) to destination (consumer). In much the same manner a physical medium must go through a supply chain process in order to mature into a consumable product, digital media must pass through various stages in processing to get to a point in which the consumer can enjoy the music or video on a computer or television set.”19 Or as analyst firm Gartner puts it, with digital supply chains, warehouses are replaced with data centers, boxes are replaced with bits, and trucks are replaced with bandwidth.20 The COVID-19 pandemic not only found consumers around the world adapting their purchasing routines to accommodate even more digital content, but purchasing managers as well increasingly sought out digital alternatives to buying goods and services for their companies. This strategic shift was partly a reaction to severe shortages due to supply chain disruptions resulting from the pandemic. But companies also saw the opportunity to investigate the capabilities of various digital technologies and their promise of streamlining traditional supply chain processes. According to Jonathan Wright, global head of cognitive process reengineering at IBM, the pandemic prompted more manufacturers to update, or even entirely remake, their supply chains with more efficient digital technologies, such as analytics, artificial intelligence, blockchain, and the Internet of Things. Call it smart manufacturing; call it digital transformation; call it Industry 4.0—the buzzwords come and go, but what’s consistent is where these technologies are taking supply chains. These technologies, Wright says, will allow companies “to analyze demand patterns at a local and global level, [which] will enable tighter collaboration with logistics partners to better understand fulfillment constraints, allowing supply chains

Manufacturing

87

to service customers and B2B e-commerce companies with the products they need, where they’re needed most.” Companies will be better able to identify patterns in supply and demand, he adds, “at which point they can strategically think through opportunities to address these dynamic business challenges.”21 But don’t make the mistake too many companies make in assuming that simply adopting the latest-and-greatest technologies will inevitably lead to supply chain nirvana. That way madness lies. Software demonstrations don’t translate seamlessly into real-world solutions, cautions consultant Jeffrey Liker. That kind of thinking got companies in trouble back in the 1980s, and it’s still getting companies in trouble today. As a close student of Toyota, Liker believes that just as the Japanese automaker has made continuous improvement a philosophy worthy of emulation throughout manufacturing circles, so too should Toyota’s approach to technology serve as a lesson in the right way to do things. “Toyota is not interested in being trendy and making adoption of new technology an end unto itself,” Liker explains. “Any information technology must meet the acid test of supporting people and processes and prove it adds value before it is implemented broadly.”22 (We’ll look more closely at supply chain technologies in Chapter 13.)

Supply Chain in 3D A major focus of supply chain professionals is reducing or at the very least managing the costs of making and moving products from one place to another. But what if you didn’t have to transport or store products at all? If you needed a spare part or a new tool, what if you didn’t have to procure it from an outside supplier but could just make it yourself—literally? That’s the promise, at least, of additive manufacturing, more commonly known as 3D printing, a technology that dates back to the 1980s and has become a best practice for prototyping. As Alex Scott, professor of supply chain management with Northeastern University, explains, additive manufacturing differs from traditional manufacturing because “instead of material removal or formation such as machining or injection molding, additive manufacturing builds products from the bottom up, layer by layer. The process is highly flexible, with few constraints with regards to geometries or changeovers from one product to the next.” Changeover costs are low but the process does result in high variable unit costs because of the cost of the powdered materials used; however, Scott believes there could be significant room for the prices of the materials to drop, depending on the underlying commodities used to produce them.23 We saw in Chapter 2 how pharmaceutical giant Johnson & Johnson is using 3D printing to develop patient-specific products and therapies in such

88

Traditional Core Processes of Supply Chain Management

areas as eye health, orthopedics, and consumer products. In the aerospace industry, GE Aviation uses 3D printing to produce fuel nozzle tips for its jet engines as a single part; previously the company had to weld and braze as many as 20 different parts together.24 Apparel manufacturer Nike created a 3D printed plate for its Vapor Laser Talon football shoes.25 And during the COVID-19 pandemic, automakers such as Ford Motor and Volkswagen shifted gears to produce such essential items as plastic face shields, components for personal protective equipment, and ventilators using 3D printers.26 As Michael Gravier, professor of marketing at Bryant University, sees it, 3D printers are likely to follow a similar growth and deployment trajectory as cellphones. Just as many countries never installed the infrastructure needed for landlines, opting instead to invest in less expensive cellular technology, so too will countries and organizations opt for the lower capital investment required for 3D printing, and in the process gain more mobility, programmability, and adaptability. What’s more, “The specialization and economic benefits of globalization become outdated in a world where a 3D printer and some spools of wire or other generic inputs can make nearly any desired product relatively quickly.” Generic inputs, he points out, do not become obsolete and the quality is standardized. With 3D printing, a greatly simplified, highly responsive, and infinitely flexible supply chain is responsible for fulfilling a customer’s order, Gravier says. Looking to the not-too-distant future, he anticipates a typical scenario: “The customer places the order first, and then a local, highly automated 3D printing shop produces the finished product and then delivers it, often via drones. Rather than plan, source, make, deliver, and return, a future supply chain model will start with the consumer order, which will initiate make, deliver, and return.”27

Collaborating on Product Designs Looking again at Apple, the high-tech giant’s long string of successes are due not so much to its proficiency at managing a digital supply chain as they are to product innovation, which is one of the great equalizers among companies. One of the most obvious characteristics of a best-in-class supply chain is an ability to consistently design and develop products that customers want to buy. And thanks to a software-based process known as product lifecycle management (PLM), manufacturers are able to automate the collaborative design of their products from anywhere in the world. Using PLM, developers can tap into a central workspace and get access to part designs, bills of material, product specifications, production schedules, and other data. PLM includes elements of earlier computer-based technologies, such as computer-aided design, engineering, and manufacturing

Manufacturing

89

(CAD/CAE/CAM), as well as product data management (PDM), but PLM is much more of a supply chain solution because it allows the sharing of product information not only throughout a company’s many offices but throughout the offices of its supply chain partners and suppliers as well. The Joint Strike Fighter ( JSF) program, for instance, is a prime example of supply chain collaboration (though some might also suggest that it’s the poster child for how not to build an airplane). This multibillion-dollar initiative to build a next-generation aircraft—the F35—for the various branches of the US Armed Forces and the militaries of seven other allied countries includes Lockheed Martin as the lead contractor and roughly two hundred other subcontractors for a wide variety of manufacturing processes, such as avionics, components, materials, production, and testing. Product experts from all these companies can tap into Lockheed’s virtual workspace platform to work on their own piece of this massive international project. Thousands of engineers around the world can access the virtual workspace, with PLM software enabling the design process through one of the largest supply chain collaborations yet attempted.28

At a Glance Product Lifecycle Management Product lifecycle management (PLM) technology enables manufacturers to manage and share complex design and production information across an extended enterprise, with the goal of streamlining the product development process.

Aerospace, automotive, and high-tech manufacturers have been early adopters of PLM software because of the complex nature of their production process. However, given the constant demand for developing new products and getting them to market as quickly as possible, consumer packaged goods, industrial products, and pharmaceutical manufacturers have also turned to PLM as a supply chain best practice because, when properly deployed and managed, it can help reduce costs while increasing efficiency. Here are some examples: ■■

Playtex Products, a manufacturer of personal care consumer products, outsources 70% of its manufacturing to seven facilities throughout North America. Tracking document routing and product record data was increasingly difficult because this information was maintained on any

90

Traditional Core Processes of Supply Chain Management

number of electronic systems, or in some cases, on paper. By standardizing on a common PLM platform, Playtex enjoyed a 98% improvement in its document routing time. Time-to-market improved significantly as well, contributing in part to added revenues in the neighborhood of $20 million annually. ■■ Regulatory requirements from the FDA as well as legal bodies in Europe have become more demanding for pharmaceutical manufacturers such as Roche Diagnostics. Roche was having difficulty stepping up its quality management processes because its quality data were scattered among a dozen nonintegrated systems, with much of that information being shared via fax machines rather than over a computer network. By implementing a PLM solution throughout the company, Roche has been able to automate its documentation process, which helps the company manage its growing product lines as well as satisfy the government audits. ■■ At Eaton’s Hydraulics Division, a maker of hydraulic products for farm and construction machinery, it frequently took up to 10 days to distribute CAD files throughout the company. The process began with the transfer of completed drawings to microfilm, which were then sent to the main library and duplicated so they could be sent to other sites’ libraries. Not only did it take too long, but the error rate was as high as 6% at some of the libraries. A PLM solution capable of storing and retrieving more than 70,000 imaged documents has not only made the microfilming system obsolete, but it has also shaved the wait time from 10 days down to a mere three hours.29 The current trend in product development technology is to combine PLM capabilities with other solutions, such as manufacturing execution systems (MES), which deliver production instructions to the shop floor, and then track everything that happens to a product as it progresses through the manufacturing process. The goal from such a merger of capabilities is to integrate product design with shop floor production. “PLM is as much about effective product lifecycle decision-making as it is about product engineering,” explains Joe Barkai, an analyst with Manufacturing Insights. “PLM tools must be used not only to support engineering tasks, but, more importantly, to create and manage a comprehensive product management strategy, culture, and process.”30

The Future of Manufacturing As we saw earlier in the section on digital supply chains, the definition of “manufacturing” itself is in transition, no longer limited to the making of physical goods. Similarly, many companies today call themselves

Manufacturing

91

“manufacturers” even though none of their employees is actually involved in any stage of the traditional labor production process. “Leading manufacturers are evolving from being manufacturing companies to being manufacturing management companies,” notes a study produced by the University of Edinburgh and consulting firm Capgemini. This means that the production process—the “make” from the “plan-source-make-deliver-return-enable” SCOR model—is done by other companies, often in other parts of the world. “While many [manufacturers] hold on to core activities such as R&D, marketing, and finance, increasingly even intellectual property, such as design and engineering, is outsourced.” For instance, consumer electronics developer TomTom recognized early on that it was better at product innovation than it was at making things, so it focused on best practices within outsourcing rather than manufacturing capabilities. Automation and power products company ABB, meanwhile, engages in strategic outsourcing on a case-by-case basis. The company outsources robotics for the automotive industry; on the other hand, the manufacture of its core power distribution products is kept in-house.31 As more and more production work left the United States and moved to low-cost labor countries, especially China, it became an open question as to whether it’s a best practice or in fact a worst practice to offshore jobs to other countries. Working with the Council on Competitiveness, Harvard professor Michael Porter, one of the pioneer thinkers in modern supply chain management (see Chapter 1), has suggested that it’s in the best interests of US manufacturers to shift low-value production jobs overseas while focusing instead on high-value services. “Competitiveness is not a zero-sum game,” Porter points out. “The success of other economies is not a failure of US competitiveness—a job created there does not mean a job lost here, a new R&D lab built there does not mean one lost here, a rise in another country’s exports does not necessarily mean a decline in ours.”32 In a multiyear Harvard study, Porter and another Harvard professor, Jan Rivkin, elaborate on the topic by defining US competitiveness as “the extent to which firms operating in the US are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” And US competitiveness, they say, “hinges on improving productivity over the long run.”33 The good news is that if the US manufacturing industry were a country, it would be the eighth-largest economy in the world, according to data cited by the National Association of Manufacturers. Until the Great Recession of the late 2000s, manufacturing productivity had risen by 94% since the 1980s; although productivity has stalled since 2011 to basically no gains at all over the past decade, output per hour for US manufacturing workers was up by more than 2.19 times since the late 1980s.34 In any event, as globalization forces are influencing the relocation of production facilities, companies are rethinking their supply chains to

92

Traditional Core Processes of Supply Chain Management

maximize productivity while minimizing costs (the topic of globalization is covered in Chapter 9).

Notes 1. David Blanchard, “It’s Not Easy Being Lean,” Logistics Today (October 2003), 7. 2. “Toyota Production System Terms,” www.toyotageorgetown.com/terms.asp. 3. Jeffrey K. Liker, The Toyota Way (New York: McGraw-Hill, 2004), 37–41. 4. Alan Larson, Demystifying Six Sigma: A Company-Wide Approach to Continuous Improvement (New York: Amacom, 2003), 9. 5. Ibid., 42–43. 6. Steve Minter, “Six Sigma’s Growing Pains,” IndustryWeek (May 2009), 34–36. 7. www.asq.org. 8. David Blanchard, “Leaning into the Supply Chain,” IndustryWeek (September 2014), 24–28. 9. Jill Jusko, “Lean Six Sigma: Remember the Principles,” IndustryWeek (6 September 2011), www.industryweek.com. 10. Rick Pay, “Everybody’s Jumping on the Lean Bandwagon, but Many Are Being Taken for a Ride,” IndustryWeek (May 2008), 62. 11.  Steve Porter, “Lean Manufacturing’s Biggest Hidden Challenges,” American Machinist (27 July 2017), www.americanmachinist.com. 12. Mandyam M. Srinivasan, Streamlined: 14 Principles for Building and Managing the Lean Supply Chain (Mason, OH: Thomson, 2004), vii–viii. 13. Helen L. Richardson, “Forever Lean,” Logistics Today (March 2006), 32–34. 14.  John Teresko, “Learning from Toyota—Again,” IndustryWeek (February 2006), 34-41. 15.  The author visited Accuride Wheel End Solutions, Rockford Operations in January 2018. 16. David Blanchard, “Accuride Reinvents Its Wheel End Plant by Going All-in on Lean,” IndustryWeek (March/April 2018), 12. 17. David Blanchard, “Lean on Me,” IndustryWeek (December 2007), 53–54. 18.  Nari Viswanathan and Matthew Littlefield, “Lean Manufacturing,” Aberdeen Group (April 2009), 24. 19. Wikipedia Contributors, “Digital Supply Chain,” Wikipedia, The Free Encyclopedia, www.wikipedia.org. 20. C.J. Wehlage, “How the Digital Supply Chain Made Apple No. 1 on the Supply Chain Top 25” (25 July 2008), www.gartner.com. 21. Mark Brohan, “Q&A: IBM’s Jonathan Wright on digital supply chains in the ‘new normal’” (12 June 2020), www.digitalcommerce360.com. 22.  Jeffrey Liker, “When the Toyota Way Meets Industry 4.0,” IndustryWeek (27 August 2020), www.industryweek.com. 23. Alex Scott, “Is Additive Manufacturing a Plus for You?” Material Handling & Logistics ( July 2013), 17–18. 24. www.ge.com.

Manufacturing

93

25. Adrienne Selko, “3D Technology Shrinks the Supply Chain,” Material Handling & Logistics (May 2015), 18–20. 26. Stephanie Condon, “How the 3D Printing Industry Is Stepping Up to Help the COVID-19 Response,” ZDNet (24 March 2020), www.zdnet.com. 27. Michael Gravier, “3D Printing: Customers Taking Charge of the Supply Chain,” IndustryWeek (12 April 2016), www.industryweek.com. 28. Jennifer S. Kuhel, “A Solution Worth a Thousand Pictures,” Supply Chain Technology News (May 2002), 12–14. 29. www.oracle.com/agile; www.sap.com; www.softech.com. 30. Jill Jusko, “Acronym Alert: P&PLM,” IndustryWeek (August 2007), 44. 31. Simon Harris, Brad Mackay, Floyd D’Costa, et al., The Global Networked Value Circle: A New Model for Best-in-Class Manufacturing (Edinburgh, UK: University of Edinburgh Business School/Capgemini, 2009), 6–16. 32. David Blanchard, “Compete or Retreat,” IndustryWeek ( January 2007), 7. 33. Michael E. Porter and Jan W. Rivkin, Prosperity at Risk (Cambridge, MA: Harvard Business School, 2012), 2. 34. www.nam.org.

CHAPTER

7

Transportation Logistics à la Mode Flashpoints The faster your goods travel, the more you’ll spend on transportation. Transportation is a relationship business, so take the time to get to know your carriers. Labor issues and costs, along with technological advances, are hastening the development and adoption of autonomous delivery vehicles. When it comes to transportation, rule number one is: Get it there on time.

Transportation is the lifeblood of any supply chain, but a company’s logistics department tends to be an invisible link in that chain. If senior management thinks about freight transportation at all, their thoughts tend to focus on questions like, “Why are we spending so much on trucks?” or “Why are our products always shipping so late?” Those are fair questions to ask, especially when you consider that US companies spend more than $1 trillion each year on transportation, and what’s more, transportation costs account for between 5% and 15% of the cost of goods sold. And yet, the supply chain professionals who manage that spend are rarely given credit for keeping costs as low as possible. Freight transportation—the physical distribution of goods—involves four major modes: highway, rail, air, and water carriers.1 Many shipments move on two or more modes, such as from a railcar to a truck, and these shipments are classified broadly as intermodal.2 Because more than 70% of all goods in the United States at some point are transported on a truck (and 80% of all

95

96

Traditional Core Processes of Supply Chain Management

transportation costs are for motor carriage), this chapter will by design concentrate largely on best practices when dealing with motor carriers.3 The reasons why transportation costs are so high are almost as numerous as the types of goods being transported, which is another way of saying there is no single set of best practices that will work for every company, every time. The basic rule of thumb is: The higher the level of service (including speed of delivery), the higher the cost. The cost per pound for shipping goods by rail, for instance, is proportionately less than if they’re shipped overnight by an expedited courier. And not coincidentally, the value of the goods generally determines what mode is chosen: high-value electronic components are frequently shipped by air, while steel moves by water and grain by rail. There are numerous exceptions to every typical scenario, but historically those are the mode basics that transportation managers work from. Reducing transportation down to its core elements, there are three entities involved in any movement of goods: the shipper, who owns the goods (e.g., a sporting goods manufacturer), the consignee, who is the one receiving the goods (e.g., a discount retailer), and the carrier, who physically transports the goods (e.g., a trucking company). In this example, the manufacturer (shipper) sends a full truckload of its basketballs on a 53-foot truck (carrier) to the retailer’s (consignee) distribution center. Out of this basic structure there are countless possible configurations. Companies both ship and receive goods every day, so at any given time, the only way to determine whether a company is a shipper or a consignee is to look at the bill of lading. For simplicity’s sake, this chapter will look at best practices from the shipper’s point of view.4

Riding the Roads The most economical motor carrier mode is to ship by truckload, which is exactly what it sounds like: A shipper fills the entire capacity of a truck with its products, whether the truck is part of the shipper’s own private fleet or is owned by a contract carrier. However, most shipments by truck are lessthan-truckload (LTL), where any number of shippers occupy a portion of the same truck’s capacity to carry their goods. Because the carrier has to handle many shipments and make many more stops, LTL rates tend to be much higher than truckload rates. For that reason, shippers are always looking for ways to shift as much freight as possible from LTL to truckload. The challenge for a shipper is to configure its supply chain so that it’s usually shipping out full truckloads, which takes a lot of planning and is a relatively rare event for most small and medium-sized manufacturers. An alternative strategy for domestic transportation—particularly during periods when capacity is tight (meaning there aren’t enough trucks or

Transportation

97

drivers available to transport all the goods at any given time in certain areas of the country)—is to bypass the motor carriers entirely for most of the transportation period in favor of an intermodal strategy. Certainly the use of river barges and the railroads to move goods throughout the country has a much longer history than the use of trucks, but as previously noted, there’s a reason why three-quarters of all freight transported in the United States is on a truck: It’s faster and more reliable than rail or water, and it’s cheaper than shipping by air. The least economical method involving a motor carrier is expedited or express service. Although the public used to think same-day, next-day, and overnight deliveries were always accomplished via air transportation, expedited shipments usually travel all or most of the distance on a truck and the last mile in a courier van, and may never be put on a plane at all. This is made possible by the use of regional fulfillment and distribution centers located strategically across the county or the globe. (We’ll look at this in much greater detail in Chapter 8.) Most of the tractors on the nation’s highways are pulling dry van trailers, which means they are completely enclosed but accessible by one or two doors. Other standard types of vehicles include flatbeds; tankers, which carry liquids; and refrigerated vehicles (or reefers), which carry food, pharmaceuticals, or other goods that need controlled environments.

Regulations and Deregulation Coincidence or not, the idea of supply chain management started becoming popular just as a spirit of deregulation was sweeping through Washington, DC, in the late 1970s and early 1980s. In quick succession, the Airline Deregulation Act (1978), the Motor Carrier Act (1980), and the Staggers Rail Act (1980) effectively deregulated three core transportation industries, which opened up the whole nature of shipper/carrier relationships. Since deregulation took effect, the rate structure of the motor carrier industry has been largely influenced by supply, demand, and cost of service—the major forces of the marketplace, explains Gerhardt Muller, a professor (now retired) with the US Merchant Marine Academy. Before deregulation, he notes, interstate and intrastate rates were set by government regulations and agencies, such as the Interstate Commerce Commission (ICC).5 The ICC was terminated in the mid-1990s and was replaced by the Surface Transportation Board, which operates within the US Department of Transportation. Despite operating under an aura of deregulation for more than four decades, transportation is still a heavily regulated industry, almost to the point that it’s astonishing that anything can actually move from point A to point

98

Traditional Core Processes of Supply Chain Management

B according to schedule. Consider just a brief list of transportation activities and areas that come under the jurisdiction of a government agency: The number of hours in a day and in a week that a driver can be behind the wheel of a truck, and the devices that automatically record driving time. ■■ The carriage and movement of hazardous goods, including routes, parking, surveillance, packaging, and placarding. ■■ The type of fuel used in motor vehicles, as well as the engines themselves. ■■ The tracking and tracing of pharmaceutical and food products throughout their lifecycle. ■■ The filing of electronic manifests before crossing international borders. ■■ Compliance with homeland security requirements, such as the CustomsTrade Partnership Against Terrorism (C-TPAT) and the Container Security Initiative (CSI). ■■

Fuel for Thought The one question transportation managers get asked by their bosses more often than any other is: “Why are we spending so much on transportation?” The regulatory issues noted previously are just a small component of the factors that make transportation so expensive. Of course, the trick is to be able to anticipate when fuel prices will drop precipitously, as they occasionally will do (for instance, when the OPEC nations decide to flood the market with cheap oil in an attempt to gain back market share), and when they will spike so high that rationing and alternative fuel sources will be proposed by various pundits and politicians (often due to natural disasters like hurricanes crippling offshore refineries). We’ve seen both scenarios play out in this century, and fortunately both extremes tend to be short-lived. (Risk management, a strategic best practice based on contingency planning, will be discussed in detail in Chapter 12.) Ultimately, it’s not the temporary spate of price spikes or valleys that wreaks the most havoc on a transportation plan, but rather, price volatility. To that end, fiberglass manufacturer Owens Corning took a proactive approach to managing its costs when it developed a fuel reimbursement program for its carriers. The goal was simple: achieve better and more predictable transportation budgets and forecasts. At the time the program was launched, Owens Corning was spending $350 million on freight per year, spread among 400 carriers, mostly for truckload freight, and the program was set up to help the company recover a portion of the fuel supplement paid to carriers. Owens Corning changed the formula it uses for its current base fuel program, converting from the standard weekly retail survey of pump prices

Transportation

99

generated by the US Department of Energy to a New York Mercantile Exchange (NYMEX) base. The advantage of the program came in allowing carriers to monitor their fuel reimbursement throughout the month as they could see how fuel prices were established and how the system worked. The formula didn’t change how much Owens Corning paid the carriers; the change came in how the information was accounted for. The company offered side-by-side comparisons of the two fuel programs on its web-based supplier portal.6

A Capacity for Change As global supply chains become increasingly complex, so too do the factors that affect the cost of moving freight from door to door. A constant challenge in transportation this century has been managing the fluctuation in available capacity, particularly when it comes to motor carriers. It’s a two-fold problem, directly impacted by the state of the economy: When the economy is robust, there are not always enough trucks or truck drivers to deliver the amount of freight that needs to be moved. Conversely, when the economy is in decline, it becomes much easier—and cheaper—to find a trucking company willing to move your freight, but the challenge then is finding customers who want to buy your goods in the first place. Prior to the economic recession caused by the COVID-19 pandemic of 2020, the American Trucking Associations (ATA) was predicting that the United States was on the verge of a severe shortage of long-haul, over-theroad truck drivers. The ATA estimated that the industry was short by more than 60,000 drivers per year to handle freight moving on US highways, and forecast that the number could exceed 160,000 by 2028. Reasons for the shortage, according to the ATA, include an aging driver population, increases in freight volumes, and competition from other blue-collar careers. “The trucking industry needs to find ways to attract more and younger drivers,” explains Bob Costello, chief economist of the ATA. “The average age of an over-the-road driver is 46 years old, and almost as alarming is that the average age of a new driver being trained is 35 years old. Whether by removing barriers for younger drivers to begin careers as drivers, attracting more demographic diversity into the industry, or easing the transition for veterans, we need to do more to recruit and retain drivers.” Some of those measures include increasing pay, improving lifestyle factors that would let drivers spend more time at home, and improving conditions on the job like reducing wait times at shipper facilities.7 According to Bill Sanderson, chief administrative officer with Golden State Foods, a supplier to the food service industry, one of the reasons for the recurring driver shortage is the image of the job itself. The lifestyle of a long-haul driver—who often spends a week or more away from home, and

100

Traditional Core Processes of Supply Chain Management

frequently has to sleep in the cab of the truck—tends to turn away many eligible young men and women. After all, there are plenty of other jobs, such as construction and service industry occupations, that pay comparably well and let their employees go home every night. Until the trucking industry directly addresses these quality-of-life issues for drivers, Sanderson notes, carriers will have to keep paying more to attract them, and as a result, transportation costs for shippers will continue to increase.8 Also contributing to a shortage of available capacity has been the consolidation of many major trucking companies, and the bankruptcy of many smaller companies. According to analyst Donald Broughton with Broughton Capital, nearly 800 US trucking companies went out of business in the first three quarters of 2019, idling nearly 24,000 trucks and putting more than 3,000 drivers out of work. That’s more than twice as many trucking company failures as the previous year, he notes. There is every reason to expect that these volatile capacity swings will continue into the foreseeable future, and given that transportation best practices are very much characterized by collaborative relationships, shippers will have to stay adept at establishing and reestablishing relationships with those carriers most likely to stay in business.9

Know Thyself, and Thy Carrier, Too As Steve Huntley, former director of logistics operations at medical device manufacturer Covidien/Tyco Healthcare and now president of Resource Logistics Group, sees it, “Transportation is not a commodity—it’s a service. Without transportation there is no supply chain.” From his experience with manufacturers, best practices in transportation start at the grassroots level— developing a partnership with the carriers. “There’s a difference between a relationship and a partnership,” Huntley points out. “A relationship simply means you know somebody. With a partnership, however, you understand what their needs are, and you know what you can do to help them.” That takes not only knowing your operations inside and out, but understanding the carrier’s operations as well.10 Carriers are always going to ask for rate increases; that’s just the way the supply chain cycle works. However, Huntley suggests that you find out why the carriers are asking for more, because there’s a good chance you might avoid the increase if you can change your operations to make the rate hike unnecessary (e.g., by making your loading dock more efficient, you might be able to avoid unloading charges). You should empower everybody on your team to ask what they can do to make the partnership work better, Huntley urges, and that openness

Transportation

101

should extend to the carriers as well. Good communication can lead to opportunities to share ideas and discuss operational challenges. On the distribution side, you need to look closely at whom you’re shipping products to and how often. “When is the last time you looked at your transportation and distribution patterns?” Huntley asks. What mode of transportation do you use most frequently, and can you shift to a less expensive mode while still maintaining service levels? What are your inventory levels compared to your customers’ inventory levels? “Do not let your customers use your facilities as a warehouse,” he urges. And make sure you measure your costs on a month-to-month as well as a year-to-year basis so you can consistently track how well you’re doing.

Collaboration Is a Two-Way Street When analyst firm Aberdeen Group asked 286 companies which transportation best practices had been the most important in driving supply chain improvement, by far the top answer was collaboration.11 Here’s a look at the results of Aberdeen’s study, indicating how prevalent each best practice is among respondent companies (respondents could answer yes to more than one choice): Collaborate with carriers, suppliers, and customers to create more economical transportation processes (88%) ■■ Centralize transportation planning across the company via a load control center (77%) ■■ Reconfigure transportation network to optimize total delivered cost (76%) ■■ Create a more customer-centric transportation process (73%) ■■ Take greater control of inbound freight (69%) ■■ Synchronize activities across corporate functions (66%) ■■

Now, collaboration happens to be one of those buzzwords that suggests a high level of something is going on, but it’s often unclear exactly what that something involves. Let’s look at how a couple of companies have demonstrably improved their transportation by working together in a spirit of cooperation— rather than confrontation—with their key supply chain partners. PolyOne,12 a supplier of polymer products, uses a dedicated carrier to ensure that it has sufficient capacity to meet the needs of its customers. With 30 plants and 30 regional warehouses located near its major customers throughout North America, the company used to operate its own private

102

Traditional Core Processes of Supply Chain Management

fleet, but shifted to a dedicated carrier to better service its regional network. To ensure that it has sufficient capacity to satisfy its customers, PolyOne has not only increased the size of its dedicated fleet but has also significantly increased its use of rail and intermodal transportation. The company also uses transportation brokers for those specific lanes where capacity isn’t readily available from its dedicated carrier. An additional strategy to circumvent capacity challenges is to provide more lead time to the carriers. “We used to give them 24-hour advance notice on pickups,” notes Steve Feliccia, PolyOne’s director of global sourcing, logistics, and field services. “Now we try to provide a minimum of two days advance notice on all pickups, particularly in those areas where we’ve historically had trouble.” Transportation for Cargill Food Distribution, one of the largest beef suppliers in the United States, used to be primarily provided by the larger-sized motor carriers. To improve its availability to capacity whenever it’s needed, Cargill supplemented its carrier base with some smaller carriers. Roughly 10% of all transportation activity is accomplished by its own in-house carrier, Cargill Meat Logistics Solutions (CMLS). “We basically use CMLS for perspective,” explains Jon Meier, the company’s vice president of operations, warehousing, and transportation. “We run it not only to have available and flexible capacity when needed, but also to be able to relate to and occasionally challenge our contract carriers.” CMLS also has its own in-house brokerage business, which has allowed it to offer backhauls to some of the smaller carriers who might otherwise be stuck with empty trailers on the return trip. “Our goal is to be a preferred shipper for carriers,” Meier states. “We are open to collaboration with our customers and carriers and other shippers.”13

A Carrier by Any Other Name Choosing the motor carrier that best serves your company’s shipping needs is a decision that involves weighing numerous variables. However, you can simplify the process by answering these three questions: 1. Does the carrier have the equipment your company needs? 2. Can the carrier meet your service requirements? 3. How much will it cost? According to Edward Marien, long-time director of transportation and logistics management programs at the University of Wisconsin–Madison (now retired), it’s gotten more difficult for companies to make the right

Transportation

103

transportation choice because carriers have begun to offer overlapping services. He cites these four areas of supplier services: 1. At the most basic level, a motor carrier furnishes its own equipment (i.e., tractors and trailers). 2. Going beyond just providing transportation, many carriers now also offer consulting services, such as shifting the balance of distribution to capitalize on the most efficient routes. (This trend is largely responsible for the terminology shift away from “transportation” providers to “logistics” providers.) 3. Some carriers also function as third-party logistics providers (3PLs), where they assume many of the traditional management roles companies are outsourcing, such as warehousing (see Chapter 11). 4. As technology has increased in importance, some carriers offer their own software solutions, such as transportation management systems.14

Automate to Consolidate Consider how many decisions a supply chain manager has to make regarding the transportation of goods: What modes should we use? What carriers should we hire? What rates should we pay? What paperwork do we have to file? What route should the driver take? Those sorts of questions, and dozens more, have to be answered for every single shipment that leaves a company’s loading dock. For instance, Pella, a manufacturer of windows and doors, faces a constant stream of shipment consolidation challenges. The company utilizes a number of production facilities throughout the United States, and it’s not unusual for a customer to request, say, vinyl windows made in one area of the country, and a mahogany door made in another. Pella’s customers, however, expect the full order to arrive at the same time on a single truck. Since most of Pella’s freight is shipped via LTL carriers, delivering the complete shipment to the customer requires a considerable amount of consolidation and deconsolidation planning.

At a Glance Transportation Management Systems A transportation management system (TMS) is a software program that automates a company’s shipping process, from carrier selection to routing and scheduling.

104

Traditional Core Processes of Supply Chain Management

Pella, like numerous other companies, opted to automate its logistics planning by implementing a transportation management system (TMS). A TMS is a software program that automates many key transportation functions, using analytical capabilities within the software to optimize the best shipping choices, whether they be carrier selection, load building, fleet management, routing and scheduling, or freight audit payment. Although these programs can be expensive—from $50,000 for a stripped-down module to more than $1 million for a best-of-breed implementation—they have become a popular solution for a simple reason: They’re designed to help companies cut costs, and the return on investment for a TMS is generally less than a year. For Pella, adopting a TMS has helped to eliminate inefficiencies that were the result of manual plans, such as the scheduling of LTL carriers arriving at cross-dock facilities, where shipments are moved and consolidated onto other trucks without having to be warehoused (see Chapter 8). The TMS automated a process that formerly relied on Pella having to print and fax reports to the individual carriers. The TMS helps the company keep its trucks filled and running on schedule, while reducing manual processes in its outbound planning operations. As a result Pella is better able to plan out trailer loads, carrier schedules, and network routing.15 Here are some more examples of how companies are leveraging TMS technology to gain competitive advantage by improving their time-to-market delivery cycles: The Dannon Company produces a lot of yogurt—shipping roughly six million cups per day, which translates into hundreds of loads every day moving from the company’s three manufacturing plants to its six distribution centers and ultimately to its customers (primarily retailers of all sizes). As the company’s products became more popular, retailers became more insistent on better scheduling options and more on-time deliveries. That required a shift from the old method of phone calls, faxes, and e-mails to an automated solution that would provide true supply chain visibility. After adopting a TMS, Dannon was able to track priority deliveries, automatically calculate fuel surcharges, and monitor arrivals and departures in real-time. As a result, the company has been able to shave 1.5 hours off each internal employee’s workday formerly devoted to manual processes, while increasing customer service and satisfaction. ■■ Building products manufacturer Aeroflex was hampered by inefficiencies throughout its supply chain. Like Dannon, Aeroflex was relying far too heavily on manual processes and traditional phone and e-mail communications to manage its logistics network, which includes truckload, LTL, and ocean carriers connecting to numerous distribution centers. ■■

Transportation

105

Using a cloud-based TMS, the company has been able to centralize and automate carrier selection and tendering, no longer needing to reference individual carrier websites. The TMS also allows Aeroflex to maintain carrier contracts in a centralized location, view customer orders in real-time, and manage orders for remote warehouses. Freight rates can now be quickly and more accurately calculated. ■■ Sonoco, a manufacturer of consumer and industrial packaging solutions like Dannon and Aeroflex, was a large company that nevertheless was still trying to get by with manual processes in its shipping environments. With well over 200,000 shipments every year, having an employee involved in managing every one of those shipments just wasn’t getting the job done efficiently. Going the TMS route, Sonoco was able to automate the assignment of loads to trucks. The TMS allows Sonoco to react more quickly to market conditions, and has helped reduce the cost of shipping the company’s large inventory of packaging products.16

Autonomous Vehicles on Land, Sea, and Air With the ever-increasing demands for products delivered ASAP, inevitably companies have started looking to technology to provide the kind of service that traditional processes just can’t quite keep up with. With labor costs by far being the most expensive component to transportation, it’s also inevitable that the idea of removing humans entirely from the delivery process would become a popular, if still somewhat fanciful, alternative to warehouse staff and truck drivers. Additionally, hours-of-service regulations on the amount of time a driver can be on the road have been in constant flux for decades, with each change causing shippers and trucking companies alike to have to rethink and reevaluate how many drivers to have on the road. Even the electronic logging device mandate, which was enacted by the Federal Motor Carrier Safety Administration (FMCSA) to monitor hoursof-service compliance, hasn’t necessarily reduced highway accidents.17 So the idea of driverless trucks has achieved a level of cachet as the technology has started catching up to the promise. But let’s be clear: It would be premature to refer to autonomous (aka self-driving) trucks as a best practice, for the simple reason that despite all the hype and pilot tests and long-term projections, they’re still just an experiment. At this writing (2020), no company has yet put an entirely driverless truck on the open highways, nor is that likely to happen any time soon. The state of robotics and artificial intelligence isn’t there yet, and the public’s taste for new-fangled technology notwithstanding, the idea of commuters sharing the road with pilotless vehicles has a long way to go before it catches on. And that’s despite the sobering reality that an average of 40,000

106

Traditional Core Processes of Supply Chain Management

people are killed on the highways every year,18 which includes roughly one thousand truck and delivery drivers, making “driver” one of the most dangerous occupations in the United States.19 So while safety advocates for years have been urging stricter hours-of-service rules regulating how often human truck drivers can be on the road, they haven’t yet fully warmed to the idea of removing all drivers from the road. Of course, that doesn’t mean a lot of companies aren’t kicking the tires, so to speak, with pilot tests and partnerships aimed at reducing costs (largely in labor) and increasing efficiencies. Beer producer AnheuserBusch, for instance, has teamed up with a division of Uber to evaluate the potential benefits of using autonomous trucks to transport its products on the highway. Using a 53-foot trailer loaded with the company’s beer products, the self-driving truck traveled more than 100 miles along Colorado’s Interstate 25, going from Fort Collins through Denver to Colorado Springs. The catch, though, was that a human was behind the wheel at the beginning and the end of the journey, and was responsible for entering and exiting the highway. And in fact the human remained in the truck cabin for the entire journey to monitor the situation. But for all intents and purposes, the truck drove itself for the majority of the beer run. “We hope to see selfdriving technology widely deployed across our highways to improve safety for all road users and work towards a low-emissions future,” notes James Sembrot, Anheuser-Busch’s senior director of logistics strategy.20 Part of the transition process that will make autonomous vehicles a more credible option for shippers will involve a redesign of the trucks themselves. “The design of commercial trucks will dramatically change, driven by the need to increase their durability to much higher utilization rates, but also by more stringent imposition of safety requirements, as well as the need to enable frequent technology upgrades employed over the life of the vehicle,” explains consultant Ron Giuntini, principal of Giuntini & Company. Trucks will be designed to be remanufactured or upgraded periodically, which will require truck manufacturers to adapt their business model to the shift toward autonomous vehicles. Giuntini believes that human truck drivers could eventually be phased out entirely, though he admits this will be a gradual process that could take 20 to 40 years or more.21 One way of shortening that long gap between promise and reality is through the development of intelligent highway infrastructure and interconnected autonomous vehicles. Consulting firm KPMG has predicted that an emerging mobility services segment of the transportation market, centered on connected vehicles, could be worth more than $1 trillion by 2030. This presumes the continual development—and acceptance—of artificial intelligence tools; sensors capable of providing machine vision capabilities to trucks, delivery vans, and material handling vehicles; on-board computers allowing these vehicles to be autonomous; near ubiquitous and always-on

Transportation

107

connectivity via vehicle-to-vehicle (V2V) communications; and, just as important, a business model to embrace all of these technologies, explain Tom Mayor and Talley Lambert, consultants with KPMG.22 Pilot tests have already demonstrated “the feasibility of fully autonomous on-highway operation and offer the potential to safely open up four to six productive, on-road travel hours a day during which today’s two-driver rigs are parked for crew rest,” the KPMG consultants explain. They point to experiments in platooning (sometimes referred to as “truck trains”), which use V2V communication systems that allow multi-truck convoys to safely follow (draft) off a lead truck. Potential fuel savings have been reported between 7% and 14%. According to consulting firm McKinsey & Company, it will take at least another decade for fully autonomous trucks to begin operating on public highways, using V2V communications and AI technology. This evolution will likely involve four different waves: 1. In the first wave, two drivers will platoon two trucks on an interstate highway, but each driver will be independently driving on regular roads. 2. In the second wave, the second truck will operate autonomously while on the interstate, needing a human driver only for off-interstate driving. 3. In the third wave, the lead truck will have a human driver, and unmanned trucks—in a fleet of at least three vehicles—will follow close behind. Human drivers will board the trucks at interstate exits to transport them to the final destination. 4. In the fourth wave, fully autonomous trucks will operate the entire process, from loading to delivery. This probably won’t happen until at least 2030, and even then it could be many years before autonomous trucks replace traditional human-driven fleets.23 Of course, autonomous vehicle research isn’t limited to just trucks. Drones have certainly caught the fancy of consumers and businesses alike in the nearly effortless way they can navigate through the skies, whether at large public gatherings or to enable delivery of products to remote or dangerous areas, as well as enabling more convenient last-mile capabilities that other modes lack. Drones, for instance, have been used for such mundane activities as pizza delivery, for humanitarian purposes, such as delivering medical supplies in isolated rural areas in Rwanda and Ghana, and for delivering MRO supplies to offshore oil platforms. “Drone use promises to impact businesses’ bottom lines as labor costs virtually disappear from certain monitoring and shipping functions now performed by manned aircraft, over-the-road vehicles, or even on foot,” explains transportation attorney Enan Stillman. “Drones can also reduce

108

Traditional Core Processes of Supply Chain Management

risks and insurance costs by replacing humans on dangerous tasks such as inspecting cellphone towers, landing in antiquated rural airports, transporting or escorting high-value freight, monitoring wildfires or other natural hazards, and conducting search and rescue operations for missing assets or personnel.”24 Technical and infrastructure challenges are numerous, but as of 2020 the Federal Aviation Administration had already given approval to Amazon and UPS for delivery drones, and small-scale customer trial runs had already begun. Other autonomous vehicles in development include self-sailing cargo ships, self-optimizing forklift trucks, and autonomous trains, and while there’s no reason to expect to see these anytime soon, both Walmart and Amazon have revealed plans for flying warehouses that would carry limited supplies of fast-moving items, from which drones could be deployed for local deliveries.

Do-It-Yourself Logistics We’ve looked at how autonomous trucks, delivery drones, and other AIpowered technologies can help alleviate the labor situation while allowing products to be delivered even faster than imagined just a few years ago. But for every advancement in technology, there’s also a workaround solution that doesn’t really involve much high-tech at all. Call this the BYOV (bring your own vehicle) movement, a trend that’s being heavily promoted by retail giants Amazon and Walmart, among others. The idea is almost deceptively simple: A retailer pays independent drivers to use their own vehicles to pick up packages at local warehouses or distribution centers and then deliver them to a consumer’s house. It’s similar to the model Uber uses with its drivers, and in fact Uber itself has created a freight division for independent truck drivers to pick up entire loads and deliver them to customers’ docks, using an app similar to what consumers use when they want to hail a car. One of the key components of the Uber model is the commodity-like nature of the ride-hailing service, points out Evan Armstrong, president of Armstrong & Associates, a consulting firm focused on third-party logistics. The idea behind digital freight matching, he explains, is the use of a digital platform (i.e., app) to match a company’s freight with available trucking capacity. It gets more complicated than that, though; whereas a consumer might use Uber or Lyft to be transported a short distance within a single metropolitan area, using a similar app for domestic transportation involves a lot more considerations, such as the type of equipment needed (e.g., flatbed, refrigerated, hazmat); the need for multiple modes (e.g., a shipment moving from ocean carrier to railcar to truck); and customized services as

Transportation

109

needed (equipment failures or weather-related incidents). “Shipments are high-value and time-sensitive,” Armstrong says, “so placing an Uber-like app atop a complex industry doesn’t truly address the problem.” “The commoditization of freight is a lot different than the Uber model of passenger pick-ups, due to all of the exceptions and requirements in freight carriage,” adds John Wiehoff, CEO and chairman of third-party logistics provider C.H. Robinson.25 Even so, numerous freight-hailing services have arisen to offer shippers the opportunity to summon a driver and a truck at short notice, with full visibility into where the vehicle is throughout the entire journey from pickup to delivery. Major retailers, meanwhile, are constantly developing alternative business models that effectively transform consumers into drivers, particularly with a strategy known variously as buy online pickup in-store (BOPUS) or click-and-collect. During the COVID-19 pandemic, BOPUS became particularly popular as customers opted for curbside pickup—so not technically in the store, but at least in the parking lot. It allows consumers to do all their shopping online, but rather than waiting for a delivery truck, they can pick it up themselves, without incurring any shipping charges.

The Last Mile These self-service logistics options are part of the push to address what’s known as “the last mile” in logistics, the point at which a delivery is made to the customer’s loading dock or doorstep. And as e-commerce continues to grow in importance—not just for consumer purchases, but for corporate and industrial purchases as well—fulfilling on perfect orders all the way to the last mile is a crucial part of transportation management. “The last mile in the world of logistics has quickly become one of the most mission-critical areas for shippers to address, as issues that occur here have a major impact on brand perception, reputation, and customer satisfaction,” says Ken Toombs, global head of Infosys Consulting. “A mix of enhanced data along with emerging technologies (such as artificial intelligence) can play a key role in meeting the ever-increasing demands of today’s enterprise customers.” John Langley, director of development at Penn State’s Center for Supply Chain Research, notes that “last mile” in some cases has been shortened all the way down to the “last yard,” which he says refers to “what happens to a shipment once it is delivered to a customer or consumer, and then how it is routed to a specific location where it may be needed or used.”26 Jim Tompkins, chairman of supply chain consulting firm Tompkins International, also shies away from using the “last mile” term, preferring the phrase “final delivery.” What we know about final delivery, especially when

110

Traditional Core Processes of Supply Chain Management

it comes to e-commerce shipments, is that the delivery must be quick and inexpensive, he notes. “Unfortunately, final delivery choices are often fast and expensive or slow and inexpensive. With the customer wanting fast/ inexpensive and the options given are fast/expensive or slow/inexpensive, what can be done? The answer lies not only in how you deliver, but also in how far the delivery is.” The quicker a firm delivers, Tompkins points out, the more they will sell. So final delivery has be fast/inexpensive. For that to be possible, companies need to implement “a distributed logistics network where they can locate inventory in multi-client, automated fulfillment centers that are close to the customers. Trying to solve the final delivery via a traditional network is folly.”27 A successful last-mile strategy should begin with “an extensive review of how your end-to-end supply chain network is designed, and how your inventory is deployed, postponed, configured, and distributed across channels to meet [your] customers’ shopping and delivery preferences,” states Burton White, vice president, industry supply chain with consulting firm Chainalytics. He recommends the following six strategic keys to last-mile delivery: 1. Don’t lose sight of what matters to your customers, and learn what influences their buying behaviors. 2. Learn how to alter your customers’ expectations by offering incentives, such as bundling product shipments, to reduce your last-mile delivery costs. 3. Explore alternative distribution solutions, such as incorporating brickand-mortar stores into the network to make same-day fulfillment a viable option. 4. Optimize your transportation solutions to best satisfy the demands of last-mile delivery. 5. Keep inventory flexible and generic until the actual point of need to gain a strategic advantage. 6. Focus on an efficient returns management process by reducing the number of touchpoints.28

Get It There on Time In the final analysis, what matters most to your customers is not what technology you use, what kind of vehicle the products are being transported in, or what route a driver took to reach the final destination. For your customers, Transportation Rule Number One is: Get it there on time. Based on analysis conducted by Aberdeen, best-in-class companies have an ontime delivery rate of 96.6% or greater. Average companies, by contrast, are

Transportation

111

on-time 90.8% of the time, while those Aberdeen describes as laggards have only an 83% on-time rate. In terms of dollars-and-cents, laggard companies are continually compensating for their delivery inefficiencies by resorting to costly expedited service. There’s something wrong with that picture when a company spends more but consistently delivers less. Best-in-class companies, on the other hand, use expedited service only 2.9% of the time.29 “As we continue to evolve into an instant gratification society, being able to exceed the customer’s expectations is becoming more and more difficult,” notes Tompkins. “Reaching your customer when they want it, as they want it, continues to strain traditional supply chains.” Hitting that sweet spot of quick and inexpensive delivery will require companies to deploy inventory via distributed logistics. To stay competitive in that “instant gratification,” omni-channel-driven world, Tompkins says, companies will need to get better at managing the inventory flow as opposed to managing the inventory storage.30

Notes 1. Pipelines are a highly specialized mode specific to the transportation of oil, natural gas, and other commodities. However, their use represents only 5% of the US total transportation spend, so they are not directly addressed here. 2. According to statistics compiled by the Council of Supply Chain Management Professionals (CSCMP) for its 2020 State of Logistics Report, total transportation costs in the United States in 2019 were $1.05 trillion. Breaking it down by mode, it looks like this: Trucks: $680 billion Parcel: $114 billion Rail: $84 billion Water: $48 billion Air: $75 billion Oil Pipelines: $57 billion 3. Although drones have generated a lot of attention (at this writing, largely of the hype variety), they barely register a blip in terms of usage. According to analyst firm The Insight Partners, the total market for drone logistics and transportation in 2018  was $24  million, or 0.03% of the total market for air transportation. 4. “Logistics” traditionally refers to both transportation and distribution, but in some circles the term is used interchangeably with “supply chain.” Rather than adding to the confusion, this chapter will focus on transportation, and the following chapter on distribution and warehousing. 5. Gerhardt Muller, The Supply Chain Handbook, edited by James A. Tompkins and Dale Harmelink (Raleigh, NC: Tompkins Press, 2004), 304.

112

Traditional Core Processes of Supply Chain Management

6. David Blanchard, “Owens Corning to Launch Fuel Reimbursement Program,” Logistics Today (November 2005), 1. 7. MH&L Staff, “Aging Drivers, Higher Volumes, Competition Causing Driver Shortage,” Material Handling & Logistics (19 August 2019), www.mhlnews.com. 8. David Blanchard, “If You’re Not Collaborating with Your Carriers, What Are You Waiting For?” Logistics Today (March 2006), 5. 9. Kate Gibson, “Celadon Bankruptcy Biggest of Nearly 800 Truck Company Failures This Year,” CBS News (11 December 2019), www.cbsnews.com. 10.  David Blanchard, “Get Inside the Mind of the Carriers,” Logistics Today (March 2006), 1. 11. Beth Enslow, “Best Practices in Transportation Management,” Aberdeen Group Report ( June 2005), 3. 12. PolyOne changed its name to Avient in July 2020. 13. Roger Morton, “All the Right Answers,” Logistics Today (May 2005), 36–39. 14. Roger Morton, “Rating the Carriers,” Logistics Today ( January 2004): 12–13. 15. Roger Morton, “Tracing the Track to Transportation Success,” Logistics Today (March 2008), 26–29. 16. www.blujaysolutions.com; www.e2open.com; www.oracle.com. 17. Alex Scott, Andrew Balthrop, and Jason Miller, “Did the ELD Mandate Reduce Accidents?” Material Handling & Logistics (March/April 2019), 23–26. 18. EHS Today Staff, “US Experiences Three Straight Years of 40,000 Motor Vehicle Deaths,” EHS Today (19 February 2019), www.ehstoday.com. 19. David Blanchard, “Top 10 Most Dangerous Jobs of 2020,” EHS Today (26 May 2020), www.ehstoday.com. 20. David Blanchard, “Transportation Technology Wises Up,” IndustryWeek ( January/February 2017), 24–26. 21. Ron Giuntini, “Autonomous Vehicles Will Upend the Trucking Ecosystem,” Material Handling & Logistics (March/April 2018), 25–26. 22. Tom Mayor and Talley Lambert, “How Apps and Autonomy are Reshaping Logistics,” Material Handling & Logistics (May 2017), 14–15. 23. Aisha Chottani, Greg Hastings, John Murnane, et al., “Distraction or Disruption? Autonomous Trucks Gain Ground in US Logistics,” McKinsey & Company (10 December 2018), www.mckinsey.com. 24. Enan Stillman, “Supply Chain Drones on the Horizon,” Material Handling & Logistics ( July 2013), 26–30. 25. Blanchard, “Transportation Technology Wises Up.” 26.  David Blanchard, “Have You Upgraded Your Supply Chain Lately?” Material Handling & Logistics (November/December 2018), 4. 27. David Blanchard, “Why Is It So Hard to Find Good Help These Days?” Material Handling & Logistics (September/October 2018), 10–16. 28.  Burton White, “Last-Mile Delivery: Six Strategic Keys to Success,” Material Handling & Logistics ( January 2016), 25–27. 29. David Blanchard, “Portrait of Best-in-Class Transportation Management,” Industry Week (October 2008), 56. 30. David Blanchard, “More Supply Chain Than You Can Imagine,” Material Handling & Logistics (September–October 2019), 10–14.

CHAPTER

8

Distribution and Warehousing Going with the Flow Flashpoints To satisfy the increasing demands of customers, particularly those purchasing products online, companies are adopting omni-channel strategies. Cross-docking offers a replenishment tactic aimed at moving products as quickly as possible. Knowing how much inventory you need is important, but equally important is knowing where that inventory is. Warehouse management isn’t so much about space as it is how to effectively use that space.

Warehousing is one of the core functions of logistics, and yet more often than not it tends to be the forgotten stepchild in a company’s supply chain. In the SCOR model of plan, source, make, deliver, return, and enable, warehousing is implicit in sourcing (after you’ve purchased the products, you have to store them somewhere), delivering (products loaded onto a truck had to have first been stored somewhere), and returns, which encompasses the reverse logistics process (see Chapter  10). And yet, according to the 2020 Third-Party Logistics Study, 73% of companies outsource at least some of their warehousing to a third party, a clear indication that they do not consider warehouse management to be one of their core competencies.1

113

114

Traditional Core Processes of Supply Chain Management

However, the biggest company in the world—retail giant Walmart— built its discount empire largely on the efficiency of its distribution network. By strategically locating regional distribution centers (DCs) in close proximity to its stores, Walmart broke with the long-standing retail tradition of maintaining just one or two DCs to serve the entire United States. As a retailer that got its start by opening stores in small, rural towns and offering a tremendous assortment of products for the lowest possible price, Walmart found that transportation and replenishment were too expensive and too time-consuming under the traditional retail plan. Thus necessity begat the concept of strategically locating warehouses to provide more timely and economical inventory replenishment. As a result, Walmart could keep its shelves stocked more often, because each of its stores was being serviced more frequently than its competitors. More products on the shelves translates to happier customers, if you’re a traditional brick-and-mortar retailer. If you’re an e-commerce retailer—like Amazon, but also like Walmart, Target, Home Depot, and other major bigbox retailers—having more products in your warehouses that may never even see a store shelf translates to even more happier customers. Welcome to the world of omni-channel distribution, the latest game-changing trend in warehousing.

Omni-Channel Surfing The premise behind omni-channel is pretty simple: No retailer wants to lose a sale to a customer ready to purchase a product. Whether it’s at a traditional brick-and-mortar store, or at a kiosk inside that store, or on a retailer’s website, or an app accessed via smartphone or tablet, wherever a customer is interfacing with a retailer, the goal is to make sure there’s a product in the customer’s hands ASAP—within a few minutes if the product is in a store’s backroom, within a few hours if the product is across town at another store, or within a day if the product needs to be shipped from a nearby DC. The idea is simple, but executing on the promise of omnichannel isn’t simple at all.2 According to consultant Ian Hobkirk, president of Commonwealth Supply Chain Advisors, there’s a distinct difference between “multi-channel,” which refers to the various ways a consumer can make a purchase, and omni-channel, where “a consumer can experience a company’s brand across multiple channels within a single transaction.” Omni-channel requires companies to adapt their distribution capabilities to fulfill a higher number of smaller, more frequent orders—but still fulfilling the demands of traditional

Distribution and Warehousing

115

commerce as well. That’s a tall order, to be sure, and Hobkirk recommends that companies practice real-time warehousing, using wireless mobile devices to direct and confirm whenever orders are picked, whether using vehicles, conveyors, or goods-to-picker systems such as automated storage and retrieval systems (AS/RS) or robotic picking systems (an area where Amazon excels).3 When retailers began catching on in the early 2000s that e-commerce wasn’t just a passing trend but was becoming a preferred shopping method for rapidly increasing numbers of consumers, a typical strategy was to build new or convert existing facilities into dedicated e-commerce fulfillment centers. These facilities would only carry inventory that would fill e-­commerce orders. American Eagle Outfitters, a retailer of apparel and accessories, operates more than 1,000 stores under the American Eagle and Aerie brands. When the company saw the growth trajectory of e-commerce on its own business, it opted to build a new distribution center (it already had two North American DCs) that would integrate inventory and picking operations for both e-commerce orders and traditional brick-and-mortar store replenishment. “As with other retailers, omni-channel is a critical part of our business,” explains David Repp, American Eagle’s chief technology officer. With customers continuing to cross-shop between e-commerce and brick-andmortar stores, the retailer shifted its strategy for how it managed its inventory and fulfillment processes. With one of its DCs already nearing capacity for handling orders, American Eagle took a close look at its distribution network, ultimately deciding that a new DC was the optimum answer. “We found that we could reduce our inventory, operating costs, and in-transit delivery time to our customers by combining our DC e-commerce and store inventory and fulfillment operations,” Repp says. At one million square feet, the new DC, located in Hazleton, Pennsylvania, integrates automated sortation, picking, and conveying systems. Unlike most DCs, the new facility doesn’t rely on forklifts or pallet storage to move products throughout—everything moves by conveyor, in cases and totes. Enabling that automated strategy is a warehouse execution system (WES), a software solution that coordinates not only all of the material handling equipment and processes, but also the DC’s workforce. The WES works in conjunction with American Eagle’s warehouse management system (WMS) and enterprise resource planning (ERP) system—the end result is that the company can identify where every SKU is located at any given time, at all of its retail stores and in its DCs. And the new DC is able to process and fulfill orders no matter where those orders originally came from.4

116

Traditional Core Processes of Supply Chain Management

At a Glance Warehouse Execution Systems A warehouse execution system (WES) coordinates all of the processes that take place inside a warehouse or distribution center, including material handling equipment, devices, inventory management, and employees.

A Great Idea in Theory Omni-channel is a great idea in theory, but when nearly 800 retailers, manufacturers, and logistics companies were asked in a survey conducted by Penn State University and consulting firm Infosys about their readiness to embrace this style of distribution, 35% said they weren’t prepared to handle omni-channel fulfillment. Also, half of the respondents said they weren’t currently testing any new fulfillment strategies (such as home delivery from local stores, Sunday delivery, or locker pickups). That was in 2015. You might expect that situation to have changed dramatically over the next several years, as e-commerce exploded in popularity, but by 2019, in a similar study, the number of shippers who said they had no capability to handle omni-channel fulfillment actually increased, to 36%. Also, while in 2015 27% rated their omni-channel performance as inconsistent and another 28% as competent, those numbers got worse four years later: 38% in 2019 said they were inconsistent at omni-channel, and only 18% rated themselves as competent. And in 2019, 54% still hadn’t tested any new fulfillment strategies to answer growing demands from their customers for more products sooner. What happened, or more to the point, what didn’t happen?5 One of the biggest stumbling blocks preventing companies from achieving even basic competence at omni-channel is lack of talent. There just aren’t enough supply chain professionals skilled at enabling omni-channel capabilities to go around, leaving too many companies at a severe disadvantage when it comes to competing against rivals who have a deeper bench of talent. These rivals also are willing to invest in technology at the beginning of a shift in consumer demand rather than waiting to catch up later. For the omni-channel laggards, the biggest challenges are: gaining the flexibility to handle last-minute order changes; inventory visibility; inventory control; order management; and technology. For instance, just over half (56%) of the respondents in 2019 had invested in a WMS, which is almost unchanged from the 54% who had WMS capabilities in 2015. And again, while part of the hesitation to invest in technology is obviously budgetary, another

Distribution and Warehousing

117

reason is not having people on staff capable of deploying and managing that technology.

At a Glance Warehouse Management Systems A warehouse management system (WMS) controls, manages, and regulates the movement of goods within a warehouse or distribution center. Typical features of a WMS include inventory management, picking and putaway, order visibility, and fulfillment.

“The continuous transformation of the supply chain due to technology, regulations, or other factors only exacerbates the talent challenges in an already tight labor market,” says Meredith Moot, principal at management consulting firm Korn Ferry. “Whether you’re looking for an innovation leader or a frontline employee, you have to think about attracting, retaining, and training talent to build your workforce in a new, dynamic way.” Looking at the results of the 2019 study, Moot observes that 43% of respondents say they typically have to look outside of their companies for help any time an innovation or new technology emerges because they just don’t have a resident supply chain tech expert on staff.6

Virtual Inventory Another one of the warehousing best practices that retailers like Walmart, Amazon, and Target have adopted is cross-docking, where inbound products are unloaded at a distribution center, sorted by destination, and then reloaded onto trucks. The goods are never actually warehoused at all— they’re just moved across the dock (hence the name). This strategy allows a retailer to unload, say, a truckload of high-definition TVs at a regional DC, and then load a single TV onto different trucks headed for different retail stores. Ideally, the trucks should be timed to arrive and leave at roughly the same time. Cross-docking has lately developed into a best practice for manufacturers, too, thanks to the needs of companies to consolidate and reduce their inventory as much as possible. Over the years, 66% of the cash-to-cash improvements throughout all industry sectors have come from reductions in days of inventory, notes Ted Farris, a professor with the University of North Texas, and he credits

118

Traditional Core Processes of Supply Chain Management

cross-docking for some of those reductions. According to Farris, the cashto-cash formula adds accounts receivable to inventory and then subtracts accounts payable: accounts receivable



inventory – accounts payable

cash-to-cash

So if companies are using cross-docking to actually reduce how much inventory they’re holding, that’s good. However, if they’re only shifting inventories within the company and holding them elsewhere, that’s not so good because there’s no change in the cash-to-cash cycle, Farris points out. Since the inventory hasn’t been sold, it’s still considered accounts payable.7 “Most people define cross-docking as the process of rehandling freight from inbound trucks and loading it into outbound vehicles,” notes warehousing consultant Ken Ackerman, but there can be more to it than that. For instance, some of the merchandise for the outbound loads may already be stored in the DC, he points out. “In other cases, merchandise from a truck that arrived a few days ago is held in a staging area until the complete mix is available to fill an outbound order.” Some cross-docking facilities are designed with a large storage area and a cross-dock staging area because their requirements involve withdrawing product from storage as well as rehandling inbound freight.8 So the key is to use cross-docking strategically. Some retailers, for instance, position their inventory in several regional warehouses so they can cross-dock and provide next-day service to customers. Geographic postponement coupled with cross-docking can eliminate the need to have product inventory at all locations, Farris notes. Cross-docking can also be applied to less traditional situations, such as transferring a load from an inbound ocean container directly onto a truck. This tactic has become a popular way to circumvent congestion at the ports, particularly on the US West Coast. Here’s how cross-docking works, as described by supply chain consultant Jim Tompkins, chairman of Tompkins International: The supplier is notified of the shipping time, date, carrier, stock-keeping units (SKUs), and quantity for each order. ■■ The supplier is notified by the carrier of the arrival date and time for each shipment. ■■ The supplier receives the order details from the customer. ■■ The outbound carrier is notified of the pick-up time, load description, destination, and delivery date and time. ■■ The customer is notified of shipment detail, carrier, and arrival date and time. ■■ A dock location is selected for trucks involved in receiving and shipping. ■■

Distribution and Warehousing

119

Labor and handling equipment are scheduled. Receipts are recorded and reconciled, and any receiving variances are noted. ■■ Labels are created, and cases and pallets are routed and tracked from receiving to dispatch. ■■ ■■

Given all these steps, it’s very important that a company collects performance measures on carriers and warehouse operations.9

Cross-Docking, Compliance, and Collaboration Cross-docking tends to work most effectively with companies that have strong compliance programs with their suppliers and ship to their own DCs or retail stores, says Dave Gealy, a consultant with supply chain consulting firm Sedlak. “Retailers do it best,” he observes, “because their vendor compliance programs give more control and visibility into what’s coming into their systems, and they control their own stores.” Unless your company is a Fortune 500 giant, it can be difficult to set up compliance programs with all of your suppliers. That calls for a close spirit of collaboration so that when information is exchanged, the suppliers will understand what the client wants to order and the receiver will be able to see what’s being sent. Cross-docking is directly related to timing, Gealy explains. You need to be able to receive and ship products with just a few touches in a limited time. It’s also important to be able to quickly inspect inbound goods, which means a strong quality control program is essential.10

At a Glance Cross-Docking Cross-docking is the distribution process of rehandling freight from inbound trucks and loading it onto outbound trucks, without first storing the freight.

So how do you know if cross-docking is a good strategy for your distribution operations? According to a study conducted by logistics services provider Saddle Creek, 48% of respondents are cross-docking durable goods, followed by high-value products (25%), nondurable goods (19%),

120

Traditional Core Processes of Supply Chain Management

and perishable goods (17%). Tom Patterson, senior vice president at Saddle Creek, says that cross-docking is worth considering if: Your traditional distribution methods and current order cycles are not sufficient to handle customer needs. ■■ Your distribution network is outdated and inefficient, leading to extended cycle times and compromised shelf-life guarantees. ■■ Your transportation networks are overextended, negatively affecting your on-time delivery performance and requiring excessive reliance on expedited service. ■■ Your distribution costs are increasing faster than your sales growth.11 ■■

Handle with Care Warehouse management isn’t exactly a recent phenomenon. Some say the practice dates back at least to the fifteenth century BC when Hebrew patriarch Joseph (the one with the many-colored coat) pioneered the use of grain warehouses to stave off famine in Egypt. Commercial warehousing can be traced back at least to fourteenth century Venice, and cross-docking has its roots in nineteenth-century transit sheds. So while the idea of warehousing may not be quite as old as Methuselah, it’s pretty close. Nevertheless, in today’s world, thanks to the insistence by customers on perfect orders, just-in-time delivery, quick response, and fully integrated supply chain processes, “the role and mission of warehouse operations are changing and will continue to change dramatically,” observes warehousing consultant Ed Frazelle, formerly director of the Supply Chain & Logistics Institute at Georgia Tech. Companies are being pushed to minimize their inventories, which severely reduces the margin for error in their supply chains. As a result, Frazelle notes, “the accuracy and cycle time performance pressures in warehousing are immense.”12 Companies are being pushed in opposite directions simultaneously, as market pressures demand they increase warehouse productivity while employing fewer workers. More often than not, the solution to that operational tug-of-war involves the use of material handling technology (increasingly, a combination of hardware and software) within a company’s warehouse operations. Material handling, as defined by the MHI, a trade association serving material handling and logistics companies, encompasses “the movement, storage, control, and protection of materials, goods, and products throughout the process of manufacturing, distribution, consumption, and disposal. The focus is on the methods, mechanical equipment, systems, and related controls used to achieve these functions.”13

Distribution and Warehousing

121

Material handling equipment includes powered vehicles, such as lift trucks and automated guided vehicles (AGVs); conveyors and sortation systems; automatic identification (including radio frequency identification, or RFID) and data collection systems; lifting, positioning, and overhead handling equipment (including robots); automated storage and retrieval systems (AS/RS); order picking equipment; and packaging and shipping materials. This equipment is used in support of the eight main warehousing functions, as described by Frazelle: 1. Receiving happens when materials enter the warehouse, are verified as to the quantity and quality of these materials, and are disbursed. 2. Prepackaging occurs when products are received in bulk and are subsequently packaged in specific quantities. 3. Putaway involves the placing of materials in storage. 4. Storage refers to the physical containment of materials. 5. Order picking is the act of removing items from storage to meet a specific demand, whether for production or to satisfy customer requests. 6. Packaging is the step where individual items or assortments are containerized for more convenient use. 7. Sortation refers to the process of collecting picks into individual orders. 8. Unitizing and shipping encompass the preparation and packaging of orders into shipping containers, preparing shipping documents, weighing shipments, and loading outbound trucks.14

Saving on Labor The focus of any distribution operation is inventory, but that’s about the only thing that all companies will agree on. When it comes to inventory, how much a company should carry changes according to the time of year, the industry a company is in, the corporate philosophy of senior management, the flexibility of its suppliers, and most especially, the demands of its customers. No company wants to be caught short, but sometimes having too much inventory can be just as bad as not having enough. The short answer, then, to the question of how much inventory a company should carry is: it depends. Knowing how much inventory your company needs is important, but equally important is knowing where that inventory is at any given time. The role of tracking product location within a warehouse is typically assigned to a warehouse management system (WMS), a software application that interfaces with supply chain planning, order management, ERP, and transportation management systems, and can track the whereabouts of a company’s

122

Traditional Core Processes of Supply Chain Management

products by purchase order, bar code, lot number, pallet location, or other identification system. Thanks to the usage of RFID tags, urged on manufacturers by major retailers and the US Department of Defense, companies can already track at least some products in real time, and the end goal is being able to know exactly when and where those products were manufactured, packaged, and shipped. Companies that used to rely on paper-based inventory systems have found significant labor savings by adopting a WMS solution integrated with handheld bar code scanners and other supply chain technologies. For instance, an order can be entered directly into an ERP system, which will send the order to the warehouse or DC for picking and shipping. The system will then automatically send an invoice to the customer. Order pickers in the warehouse use the scanners to check rack and shelf locations, and to verify every order that they pick. The scanner informs the picker exactly where on the dock to take the order.15 Companies that have adopted a WMS typically experience labor savings between 20% and 40%, observes Ackerman. Space utilization is typically 10% to 20% more efficient when using a WMS, inventory levels could drop by as much as 50% after three years, and the costs of conducting a physical inventory check can be reduced by 75%, he says.16 In addition to adopting WMS solutions, warehouses are increasingly going the wireless route, which includes voice recognition systems (pickby-voice), RFID, handheld devices, global positioning systems (GPS), geofencing, wireless networking, and other solutions that facilitate real-time access to inventory data. According to analyst firm Aberdeen Group, 75% of the companies identified as best-in-class use real-time mobile devices to process transactions.17 For instance, Ace Beverage, a major beer distributor for AnheuserBusch, has a wireless data system that communicates real-time delivery data throughout the day. This system has greatly improved delivery efficiency, helping the distributor to eliminate 15 to 20 hours per week that it used to spend on driver and loading dock worker overtime. Thanks to the wireless system, when retail orders are in-house by 2 p.m., Ace Beverage starts loading the trucks according to scheduled stops, gaining a big jump on the loading process. Ace can start preparing loads early by picking the products from the warehouse inventory and staging them without having to load them onto trucks.18

How to Better Manage Your Warehouse One of the main principles that drives distribution best practices is: Know your situation and know your capabilities. You don’t necessarily need a

Distribution and Warehousing

123

new warehouse to handle increased business, and while many companies take a technological route to increasing productivity, it’s quite possible that better processes are the answer, not necessarily automation. “Look at your entire business as you search for solutions,” suggests Terry Harris, managing partner with supply chain consulting firm Chicago Consulting. If you make changes in one area, it will affect other areas.19 Following are several best practices that companies have taken to maximize the productivity of their distribution facilities that go well beyond a “throw money at it and pray” strategy: Reduce your inventory. Run as lean an operation as possible. In particular, eliminate all the obsolete products in your warehouse, the socalled dead inventory that your finance department has resisted writing off because they assume storage is free. Work more closely with your suppliers to time the receipt of goods as closely as possible to the time of use. ■■ Be selective in what you stock and where you stock it. Examine your order pattern to determine which are your fastest moving products, and then keep them at the front of the warehouse. If you use both regional and central DCs, keep the most expensive items upstream to avoid having to move that expensive inventory. ■■ Add hours or shifts. Sometimes even the best technology and processes aren’t enough to satisfy customer demand, particularly during peak season. In these situations, many companies opt to increase throughput by increasing hours of operation. While your labor costs will increase, you’ll gain in the short term by not having to invest in capital equipment. As a long-term strategy, however, you’ll have to determine if running an extra shift year-round is more cost-effective than investing in technology. ■■ Clear the dock area. Sometimes the best solution is also the easiest: Insist that every incoming truck have an appointment, so that every dock door is run off a firm schedule. The more predictable your operation, the more efficient will be the flow-through. Consider drop-andhook for truckload deliveries, where an inbound trailer is unhooked and dropped off in the yard, brought via a jockey truck to the dock for unloading, and then returned to the yard. In any event, ask yourself how much staging you really have to do. You’ll hear all sorts of reasons and excuses why somebody can’t take a load off the truck and put it straight into a stack without ever putting it down, notes Ackerman, but those reasons are no longer valid.20 ■■ Bypass the DC entirely. This strategy, known as predistribution management or more colloquially as the DC bypass, aims at delivering products ■■

124

Traditional Core Processes of Supply Chain Management

directly to retail stores or the point of consumption, rather than a warehouse. The greatest benefit here is timeliness. ■■ Outsource your warehousing to a third-party logistics provider. Before you consider hiring a 3PL to take over the bulk of your distribution processes, it’s vital that you first analyze your specific needs and determine if your company will be better served by letting a specialist run your warehouse (see Chapter 11).

Design for Supply Chain On-time delivery is a fundamental premise behind supply chain management, and it’s a key benchmark on the road to achieving the perfect order. Although same-day delivery is now available from many retailers and logistics providers, any company relying on the fastest and most expensive transportation options to fulfill its delivery obligations is either going to figure out a way to pass those costs on or it isn’t going to be in business very long. The old adage “Build a better mousetrap and the world will beat a path to your door” is now hopelessly out of date. It’s no longer good enough to build that better mousetrap—you also have to build a better distribution network from which you can optimally service your customers. According to a study undertaken by ProLogis, a consulting firm specializing in logistics real estate, the number-one challenge for supply chain professionals is to create a distribution network that can deliver on customer demands while still keeping costs in line.21 High-tech manufacturer HP operates one of the largest supply chains in the world, and one of the most sophisticated distribution networks. The company has learned that it is absolutely necessary to consider logistics activity when deciding where to source products and where to build factories. HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.22 HP used to rely on design for manufacturability strategies to build products as efficiently and inexpensively as possible, but the company shifted to a best practice known as design for supply chain. This concept looks at all of the costs throughout a product’s lifecycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed. “Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment,” explains Greg Shoemaker,

Distribution and Warehousing

125

HP’s global head of supply chain, central direct procurement services. “When we design for logistics enhancements, for instance, we make sure we’ve got the right size box that’ll fit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty.”23 The applications of design for supply chain are seemingly limited only by a company’s imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is popular with the apparel industry as well as high-tech companies, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer.24 HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP’s designs for take-back and recycling efforts are supplemented by its own recycling operation plant. “What we’re really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is,” Shoemaker explains. “So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package.”

Striking the Proper Balance A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.25 “The objective of strategic distribution network planning,” according to Dale Harmelink, a partner with supply chain consulting firm Tompkins International, “is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service.”26

126

Traditional Core Processes of Supply Chain Management

At a Glance Distribution Network Planning Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.

A distribution network plan, Harmelink suggests, should answer the following questions: 1. How many distribution centers (DCs) do you need? 2. Where should the DCs be located? 3. How much inventory should be stocked at each DC? 4. Which customers should be serviced by each DC? 5. How should customers order from the DC? 6. How should the DCs order from suppliers? 7. How often should shipments be made to each customer? 8. What should the service levels be? 9. Which transportation methods should be used? Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.

A Site for Sore Eyes When you get right down to it, all logistics (like all politics) is local. Amazon, for instance, operates more than 175 fulfillment centers throughout the world. Hamburger chain McDonald’s has more than 200 DCs worldwide to supply its more than 38,000 restaurants. In just the United States alone, Walmart has more than 150 DCs, each of which supports 90 to 100 stores in a 150+ mile radius. And yet, there’s a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision). To determine a metropolitan area’s

Distribution and Warehousing

127

overall logistics friendliness, following are 10 key areas companies should consider in their site selection evaluation: 1. Transportation and warehousing industry. How many businesses and employees within a city provide transportation, distribution, warehousing, and related services? 2. Workforce and labor. How many logistics-related workers live in the area or could be attracted to the area? And what is their average salary? 3. Road infrastructure. How many lane miles are available per capita, interstate highway access, miles of paved roads, and average daily traffic per highway lane? 4. Road congestion. What’s typical traffic volume like in a city? How many delays, accidents, and other factors affect the smooth flow of traffic? 5. Road and bridge conditions. What percentage of bridges are functionally obsolete or structurally deficient? 6. Interstate highways. What is a city’s access to interstate highways, and how many auxiliary interstate routes are in the area? 7. Taxes and fees. This includes things like truck user fees and motor fuel excise taxes. 8. Railroad service. How many rail carriers serve a metro area? 9. Waterborne cargo service. What’s the ocean port capacity as well as capacity of any inland waterways? 10. Air cargo service. How many air courier companies are in the metro area, and what’s the total air cargo tonnage for the area?27

How Much Is Too Much? How do you know if you’re spending too much on your distribution network? Location consulting firm The Boyd Company developed a comparative cost model that identifies how much it costs, on average, to operate a warehouse in 25 US cities considered likely to attract new warehousing investment, based on several site selection trends, such as access to rail terminals and container ports, as well as labor, real estate, taxes, and shipping costs. Boyd’s comparative model focuses on a hypothetical 500,000-squarefoot warehouse employing 150 nonexempt workers. The most economical city to locate a warehouse, according to the Boyd study, is Chesterfield, Virginia ($11.3  million), near Richmond, due to low power costs as well as low property and sales taxes. The most expensive city, conversely, was Stoughton, Massachusetts ($15 million), near Boston, which had high property and sales taxes, and high power costs.28

128

Traditional Core Processes of Supply Chain Management

According to Terry Harris, managing partner of Chicago Consulting, cost and service are the most important criteria when it comes to designing a warehouse network. Other relevant issues include highway infrastructure, real estate issues, labor climate, and carbon footprint concerns.29 Chicago Consulting undertook a study in 2018 to determine the best warehouse networks in the United States, with “best” indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Vincennes, Ind. The average distance to a customer would be 806  miles, with an average transit time of 2.28  days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Porterville, California.30 The latest trend in warehouse siting is micro-fulfillment or hyper-local fulfillment, which is a reaction to a situation where industrial real estate is harder and more expensive to find (particularly within urban settings), and where consumer demands for quick deliveries are even more aggressive than before, explains Don Nasca, business development manager with Delta Electronics, a manufacturer of power supplies and industrial fans. Rather than building huge DCs, which can be one million square feet or more, “a growing number of companies are turning to smaller spaces and seeking new ways to enhance productivity in these settings through automation.” Grocery retailers in particular, such as Kroger and Walmart, are adopting micro-fulfillment strategies to expand their grocery pickup and delivery options. In practice, the retailers “establish streamlined fulfillment centers within or nearby their traditional storefronts,” Nasca says, creating what are popularly known as urban warehouses that may be only 6,000 to 10,000 square feet. The retailer can cater its inventory specifically to that local market, and better service its customer base by offering a more personalized selection of products.31

A Quick Guide to Site Selection So what sorts of decisions do supply chain managers have to make when choosing sites and considering new locations? Kate McEnroe, who runs site selection firm Kate McEnroe Consulting, insists that the decision process need not be overly complicated. She offers the following to-do list of issues to focus on: Define required and preferred criteria, and set a realistic timeline. Create a format for organizing and analyzing site selection data. ■■ Gather objective data. ■■ ■■

Distribution and Warehousing

129

Eliminate areas that fail to satisfy required criteria. Rank the remaining areas on their ability to satisfy preferred criteria. ■■ Visit communities on your short list to assess sites, workforce, and business operating conditions. ■■ Consider property and incentive negotiations. ■■ ■■

Too often, she notes, companies allow themselves to go overboard on gathering every piece of data on prospective sites, with the assumption that site selection can be reduced to a mathematical formula. “Too much information can make it difficult to maintain focus on the project’s purpose,” McEnroe says. It’s just as important, if not more so, to develop a list of criteria that force a company to identify what is required versus what is merely convenient or familiar. Questions that need to be asked include: What local workforce skills are required, and how many potential employees live in the community under consideration? ■■ What are the geographic constraints of your distribution network, for both inbound and outbound logistics? ■■ What are your financial objectives? ■■ What is the optimal physical environment for your facility, in terms of size, utilities, and support services? ■■ What are the risks involved, and how can you avoid them?32 ■■

The Three Deadly Sins of Warehousing If you want to save money on your warehousing operation, you need to stop focusing on storage fees and instead focus on your handling costs, urges Jason Minghini, vice president, supply chain solutions with Kenco Group, a third-party logistics services provider. Companies usually consult with a warehousing expert for two reasons, he says: “Either they have a problem with high overhead and want recommendations for reducing it, or they want to improve good operations to become even more competitive in the marketplace. In each case, it’s not the storage—it’s the handling driving up their costs and keeping them from meeting or exceeding goals.” As Minghini sees it, the three most troublesome areas of warehouse operations are travel distance, touches, and paper.33 When Amazon acquired Kiva, a manufacturer of warehouse robots, in 2012, it served as a wakeup call to not just other retailers but any company with significant distribution capacity and often inefficient processes that automation wasn’t just a “nice to have” in the warehouse but a “need to

130

Traditional Core Processes of Supply Chain Management

have, and need to have it now.” As Mike Futch, executive vice president with supply chain consulting firm Tompkins International, explains, the need to add flexibility and scalability to DCs as omni-channel distribution widens while reducing reliance on labor is driving an increased interest in warehouse robots and automated guided vehicles for picking, sortation, palletizing, and depalletizing tasks.34 Petzl America, a manufacturer of mountain-climbing equipment and apparel, uses a robotic goods-to-person picking system to augment the productivity of its human workers by reducing the number of touchpoints. The system uses wireless vehicles moving along a track that stores and retrieves totes, and can tilt the totes when it arrives at a human picker, reducing the need for the picker to reach or stretch. The robotic solution has led to safer operations, a fourfold increase in the amount of picks, and an increase in picking accuracy. Cosmetic giant L’Oréal is using inventory-taking drones in its warehouses to conduct stock and location audits. Equipped with sensors and GPS technology, the drones follow a predetermined flight plan within a warehouse, using cameras to read information off labels, and sending that information to L’Oréal’s WMS and ERP systems. The drone solution has reduced the amount of time needed to perform the inventory by two-thirds, while greatly improving safety within the warehouses. With more than 100,000 SKUs, airplane manufacturer Lockheed Martin’s Rotary and Mission Systems group was still relying on manual pick-to-cart operations in its warehouse. The company opted for a collaborative robot (cobot) solution, an automated material handling vehicle that operates hands-free but alongside a human picker. The cobot’s display screen shows the picker exactly which product to pick, confirms the pick, and tells the picker which container the item should be put into. Within just six weeks of implementation, the cobot helped increase the number of lines picked per hour by nearly 400%.35 While many warehouses to this day still rely primarily on human labor, paper-based order pick lists, pallet jacks, and forklifts to move products from one area of a facility to another, as omni-channel and automation become ever more prevalent in distribution, the three deadly sins of warehousing could one day soon be forgiven and forgotten.

Notes 1. C. John Langley Jr. and Infosys, 2020 Third-Party Logistics Study: The State of Logistics Outsourcing (University Park, PA: Penn State University, 2020), 8. 2. David Blanchard, “Omni-Channel Is Not Quite Ready for Prime Time Yet,” Material Handling & Logistics (September 2013), 40.

Distribution and Warehousing

131

3. Ian Hobkirk, “The Ten-Step Omni-Channel Challenge,” Material Handling & Logistics (September 2013), 33–35. 4. Jim McMahon, “American Eagle Synchronizes Omni-Channel Fulfillment,” Material Handling & Logistics ( January 2016), 22–24. 5. C. John Langley Jr. and Infosys, 2019 Third-Party Logistics Study: The State of Logistics Outsourcing (University Park, PA: Penn State University, 2019), 28–33. 6. David Blanchard, “Have You Upgraded Your Supply Chain Lately?” Material Handling & Logistics (November/December 2018), 4. 7. Perry A. Trunick, “Time Is Inventory,” Logistics Today (April 2005), 26–27. 8. Ken Ackerman, Warehousing Tips (Columbus, OH: Ackerman Publications, 2002), 105. 9. Trunick, “Time Is Inventory.” 10. Helen L. Richardson, “Execution at the Dock,” Logistics Today (April 2004), 31–33. 11. 2008 Cross-Docking Trends Report (Lakeland, FL: Saddle Creek, 2008), 7–8. 12. Edward Frazelle, World-Class Warehousing and Material Handling (New York: McGraw-Hill, 2002), 1. 13. www.mhi.org. 14. Frazelle, World-Class Warehousing and Material Handling, 8–11. 15. Clyde E. Witt, “Cutting Costs with Cutting-Edge WMS,” Material Handling Management (April 2005), 14–15. 16. Ackerman, Warehousing Tips, 80. 17. Ian Hobkirk, “Warehouse Management Software: Five Key Capabilities for Every Distribution Center,” Aberdeen Group Report (December 2007), 9–10. 18. “Ace Beverage Goes Mobile and Wireless to Eliminate Distributor Overtime,” Material Handling Management (1 April 2008), www.mhlnews.com. 19.  Helen L. Richardson, “Eight Ways to Prevent Overloading Your Warehouse,” Logistics Today (October 2004), 21–22. 20. Perry A. Trunick, “How to Design a Regional Warehouse,” Logistics Today (May 2004), 31–36. 21. Perry A. Trunick, “How to Design a Cost-Effective DC,” Logistics Today (May 2005), 42–45. 22. Roger Morton, “Adapting to an Adaptive Supply Chain,” Logistics Today (September 2004), 14–15. 23. Author interview with Greg Shoemaker (31 October 2005). 24. Kevin O’Marah, “Design for Supply Chain Starts with Supply Chain Strategy,” AMR Research Alert (11 December 2003), www.gartner.com. 25.  David Simchi-Levi and Edith Simchi-Levi, “Finding the Right Balance,” Chief Logistics Officer (December 2003), 16–19. 26. James A. Tompkins and Dale Harmelink, The Supply Chain Handbook (Raleigh, NC: Tompkins Press, 2004), 82–83. 27. Bill King, “America’s Most Logistics Friendly Cities,” Logistics Today (19 November 2007), www.mhlnews.com. 28. Joseph Bonney, “Study Finds Wide Range in DC Operating Costs,” Journal of Commerce (24 February 2015), www.joc.com. 29. David Blanchard, “How to Build a Lean-Green Warehouse Network,” IndustryWeek (March 2008), 64–65.

132

Traditional Core Processes of Supply Chain Management

30.  “The 10 Best Warehouse Networks for 2018,” www.chicago-consulting.com/ ten-best-warehouse-networks-consultant-usa. In 2008, the best location for a single DC was Bloomington, Ind., roughly seventy-five miles northeast of Vincennes, indicating the population of the US shifted slightly southwest over the past decade. 31.  Don Nasca, “Can Warehousing Withstand the E-Commerce Boom?” Material Handling & Logistics (November–December 2018), 23–25. 32.  Jonathan Katz, “A Quick Guide to Strategic Siting,” IndustryWeek (May 2008), 14–16. 33. Jason Minghini, “How to Control Warehouse Storage Costs,” Material Handling & Logistics (March 2016), 24–26. 34.  Mike Futch, “Rise of the Warehouse Robots,” Material Handling & Logistics (October 2017), 13–15. 35. www.opex.com; www.hardis-group.com; www.6river.com.

CHAPTER

9

Globalization It’s a Not-So-Small World Flashpoints The main attraction to offshoring is lower labor costs, but those savings tend to be short-term rather than long-term. Companies too often fail to calculate the total supply chain cost of offshoring, which includes total landed cost, inventory holding cost, and the cost of product obsolescence. When it comes to setting up your global supply chain, the ultimate best practice is to go to the countries and look for yourself. Reshoring is one of the fastest growing globalization trends as the one-two punch of the trade war and the pandemic have made it a competitive advantage to bring key supply chain tasks back closer to home.

Technology has increased the speed and pace of commerce to such an extent that companies of all sizes now think in terms of global supply chains. While globalization expert Thomas Friedman credits technologies such as personal computers, workflow software, and Internet search engines for “flattening” the world, in fact the process started at the midpoint of the twentieth century when container shipping was introduced. In the 1950s, trucking executive Malcom McLean had one of those epiphanies that seem blindingly obvious in hindsight but took a while to catch on at the time: Instead of having stevedores at a port physically

133

134

Traditional Core Processes of Supply Chain Management

unload a truck and then store and secure the freight onboard a ship, McLean thought it made a lot more sense to leave everything in the trailer and load the entire container onto a cargo ship specially fitted to accommodate those containers. It took quite a few years of retrofitting ships, trucks, and containers to streamline the loading and offloading process; it took even longer to convince labor unions and port operators that container shipping was a good idea and not just a threat to their way of life. But eventually, the idea took hold. Today, 70 years later, McLean’s vision has resulted in enormous cargo ships capable of carrying 21,000 or more 20-foot-long containers (known as twenty-foot equivalent units, or TEUs), dropping anchor at so many international ports that many US companies pursued the cost/benefits equation of outsourcing their manufacturing to low-cost factories in Asia and Latin America and then having their products shipped by sea back to the United States (this practice is commonly known as offshoring).1 As we saw in Chapter 7, shipping containerloads by oceangoing cargo vessels is the least expensive (albeit slowest) transportation mode, so thanks to dramatically lower labor costs and generally lower logistics costs, for many years offshoring was a no-brainer for entire industry sectors, such as apparel and electronics manufacturers. Today, as the political winds have shifted, companies are modifying their supply chain strategies somewhat to bring the work closer to home (a practice known as nearshoring). In Chapter 8, we looked at best practices that companies are following when designing their domestic US distribution networks; in this chapter we’ll look at what companies are doing when their supply chains extend far beyond the boundaries of North America.

Playing by Somebody Else’s Rules While China has been a focal point for offshoring initiatives for several decades, US companies have been sourcing from numerous countries for many years, with varying degrees of success. There’s no single set of best practices for globalization since every country has its own cultural and supply chain requirements. It’s often hard to generalize on what the best distribution methods are to meet customer demand, since the stock answer typically is: It depends. Here are some key points to focus on when making site selection decisions overseas: ■■

Is it part of your company’s business strategy to own foreign real estate? Will your ability to serve certain global markets be enhanced by owning your own facilities overseas?

Globalization

135

How flexible is your market strategy? If the market develops more quickly or more slowly than anticipated, how easily can you add to or scale back from your distribution resources? ■■ How quickly can you enter and serve the market? That question can also be restated as: Can you afford to quickly enter and serve the market? The most effective way to serve a foreign market is to gain access to existing facilities near key distribution areas—airports, seaports, major highways, and railroad hubs. However, securing these facilities can be prohibitively expensive since demand for them is quite high. In any event, the larger your budget, the better your chances of establishing your facility in a strategically located area. ■■ Location is extremely important, but remember that you’re operating by another country’s rules now, so you need to identify if logistics services are available and reliable in the area. If not, you may find yourself centrally located in the middle of nowhere. ■■ Have you established a relationship with the local Customs department and other officials? Have you obtained the proper bonds and licenses to move goods into and out of the country? No matter how well you designed your distribution network, it can easily be dismantled by a cranky official who doesn’t know you, doesn’t know your company, and doesn’t see any reason to meet you halfway on compliance matters. ■■ Have you established a local supply base? The more familiar you become with local labor laws, as well as the culture of the region, the more effectively you’ll be able to tap into the supply of logistics workers in the area. It’s particularly helpful if you can hire a manager with both logistics experience and knowledge of the key end markets.2 ■■

Develop a Global Vision Companies that succeed in developing global supply networks have several best practice characteristics in common, explain Robert B. Handfield and Ernest L. Nichols Jr., authors of Supply Chain Redesign. For instance: These companies create an effective corporate global vision “as a primary driver for investing resources and effort in seeking global suppliers and customers,” Handfield and Nichols report. This vision becomes the primary focus for developing and deploying a global supply base. ■■ They invest in enabling management structures and systems to deploy their global vision. Best practices include global commodity councils and reporting systems; international procurement offices and sales offices that share expertise about regional sourcing and sales opportunities; ■■

136

Traditional Core Processes of Supply Chain Management

improved total cost models for decision making; and global information systems with sourcing and demand planning capabilities. ■■ They configure their supply base to optimize the mix of local suppliers and global suppliers. This mix is prone to change as companies gain more experience with local suppliers. ■■ They deploy resources to ensure that suppliers’ capabilities are aligned with their competitive and manufacturing strategies. Process specialists are assigned to correct isolated technical problems. When systemic problems are prevalent within a supplier’s organization, best-in-class companies apply a full-scale intervention process to effect positive changes. “By understanding the cost drivers that underlie total cost, managers can implement strategies designed to reduce these costs,” Handfield and Nichols observe.3

Following the Plan “When somebody asks me about globalization, the first things I think about are speed, execution, and launching products around the world in parallel,” says Mike Dennison, president of Flex, an electronics contract manufacturer. “Usually it’s tied to what my customers need relative to globalization, such as, ‘In six weeks I need to launch a product globally on three different continents with the same new product introduction plan,’ or something like that.” In other words, for Flex, as for any company whose supply chain reaches across the world, globalization is all about meeting your customers’ demands on a timely and global basis. That’s easier said than done since customers in one region of the world might have very different preferences than other regions. You have to allow for the localization or customization requirements of each region, Dennison says. So if you have factories in different parts of the world, even if they’re making similar products, you have to run those factories slightly differently based on the limitations or implications of the region they’re operating in. “The way you run a factory in Brazil is massively different from the way you run one in China or Hungary,” he points out. It’s different in the way Flex sets up its factories, in how it works with the government, in how product arrives at the factories and in how it leaves as finished goods, and in how those goods arrive at the end user. Dennison relates an example of when Flex needed to build a factory in Brazil, staff it within roughly four months, and begin manufacturing an electronics product nobody in the area had ever built before or probably even seen before. To pull that kind of global expansion off, Flex drew on

Globalization

137

the expertise of manufacturing and supply chain professionals who had successfully performed a similar factory launch in China. These experts were brought to Brazil to recruit the right labor pool, to implement the right kind of tests and technology for the product, to leverage the logistics of getting components into the Brazilian factory and then out to customers, to leverage the tax benefits and incentives that would make it more economical to produce in Brazil rather than to import from China, and to develop an effective distribution network for the local market. Helping one of its customers establish a foothold in a country like Brazil is “a very complicated endeavor,” Dennison says, “but as a contract manufacturer that’s where Flex adds real value because helping a company expand into a new market is not easy to do.” Thanks to its experiences in other markets like China, Flex is able to draw on lessons learned and best practices to ensure that it and its customers enter new markets following a proven game plan.4

Friendly Nations In Chapter 8 we looked at the various transportation and infrastructure factors that go into determining a city or region’s logistics friendliness, based on site selection criteria that take into account the similarities and differences between major US cities. On a global basis, the World Bank and the Finland-based Turku School of Economics have compiled an index that weighs the logistics performance of 167 different countries in seven areas: 1. Efficiency of Customs clearance and border management process 2. Quality of trade and transportation infrastructure 3. Ease and affordability of arranging international shipments 4. Competence of local logistics providers 5. Capability to track and trace international shipments 6. Cost of domestic logistics 7. On-time delivery performance.5 This logistics performance index (LPI) is particularly useful because it provides a counterargument to the prevailing wisdom current in many circles that there is very little downside to offshoring production and sourcing to other countries simply on the basis of cost. Many of the low-cost alternatives—China among them—are in fact totalitarian regimes whose idea of “free trade” is very much different from what is practiced in the United States, Canada, Australia, and the European Union. In many countries, the concept of collaboration—fostering a mutually beneficial relationship with

138

Traditional Core Processes of Supply Chain Management

key supply chain partners—is largely unknown. As noted in the World Bank study, “Supply chain reliability is key to logistics performance. In a global environment, consignees require a high degree of certainty as to when and how deliveries will take place. Reliability is typically much more important than speed, and many shippers are willing to pay a premium. In other words, supply chain predictability is a matter not just of time and cost, but also a component of shipment quality.”6 According to the World Bank study, the 10 most logistics-friendly coun­tries are: 1. Germany 2. Netherlands 3. Sweden 4. Belgium 5. Singapore 6. United Kingdom 7. Japan 8. Austria 9. Hong Kong 10. United States Canada ranks at 17. Three popular offshoring destinations—China, India, and Mexico—rank 27, 42, and 53, respectively. Pulling up the rear in the bottom five are: 163. Syria 164. Sierra Leone 165. Afghanistan 166. Haiti 167. Somalia7 Beyond logistics-friendliness, there’s also the very obvious fact that some countries pose a very high risk based on the such factors as corruption, political instability, labor abuses, dismal sustainability practices, intellectual property (IP) infringement, and other global worst practices. Cheap labor sometimes means forced labor. Fertile and abundant crops and easy access to water could very well be the by-products of a government’s turning a blind eye to exploitation of the local population. A proliferation of very affordable high-tech devices could be a tell-tale sign of counterfeiting and outright IP theft. And there’s a reason why some natural resources are referred to as conflict minerals, since the sales of these precious metals in

Globalization

139

some countries have been linked to the financing of armed conflict in various regions of the world. Transparency International, a nongovernmental organization, publishes an annual Corruption Perceptions Index (CPI), which measures the level of public sector corruption in 180 countries, on a scale of zero (highly corrupt) to 100 (very clean). New Zealand and Denmark topped the charts in 2020 with equal scores of 87; the United States didn’t even crack the top 20, finishing in a tie with France for 23rd place with a CPI score of 69. Somalia, which we just learned was the world’s least-friendly for logistics, is also the world’s most corrupt nation, with a CPI score of 9. South Sudan (12) and Syria (13) didn’t fare much better. “From foreign despots to terror networks, drug cartels to human traffickers, some of the world’s most destructive forces are benefiting from gaps in US law,” points out Gary Kalman, director of Transparency International’s US office. “Multiple corruption scandals have shown that transnational corruption is often facilitated, enabled, or perpetuated by countries toward the top of the CPI, including the United States.” In fact, more than two-thirds of the countries on the index have a score below 50, with an average score being only 43. Kalman says that “weaknesses in US laws are being exploited by a growing list of bad actors at home and abroad,” and his organization recommends that companies urge their representatives in Congress to push through bipartisan legislation that would help stop corrupt foreign interests from using the United States to launder their dirty cash.8

“Low Cost” Sometimes Means “Poor Service” The main reason why companies moved their manufacturing offshore in the first place was because the labor costs were much cheaper there, sometimes extraordinarily so. In 1990, US workers on average earned roughly 56 times the amount a typical Chinese worker made in a year, according to financial consulting firm Duff & Phelps, a gap so wide that it almost single-handedly explains why so many US companies offshored production work to China in the late twentieth century. Today, however, that gap has shortened tremendously, with the average US worker earning four times what a Chinese worker earns, so the disparity between the two countries is nowhere near what it used to be.9 Nevertheless, for many US companies, the opportunity to save significantly on labor and associated costs is all the justification necessary to move production overseas. You might think that higher transportation costs would be a deterrent, given the need to move products from one side of the globe to another rather than just across country. However, since most US-bound goods sourced overseas cross the ocean on maritime vessels, one of the least expensive transportation modes, logistics—at least at

140

Traditional Core Processes of Supply Chain Management

first—typically ranks quite low as a consideration when a company weighs the pros and cons of offshoring. However, within a year or two, after the advantages gained on the labor front have leveled off, many companies typically—and belatedly—wake up to the reality that they’ve relocated their manufacturing operations to a country whose government is totalitarian and exploitative, whose roads are substandard, whose logistics infrastructure is mainly centered on large cities, whose ports are alarmingly congested, and whose citizens have been known to appropriate American intellectual capital as their own. That’s certainly the case in China, still the offshoring capital of the world, where labor costs are rising as the country leverages US investment to rapidly expand its own manufacturing base. China continues to grow at an unprecedented rate along its East Coast, but much of its interior regions remain remote and logistically challenging. In part due to suspicions that China has unfairly manipulated its currency to gain an edge on its Western competitors, the country is frequently cited as causing the loss of manufacturing jobs in other economies. Nevertheless, it still leads every other nation by a wide margin as the offshoring country of choice. However, according to a survey conducted by consulting firm Deloitte, most manufacturing executives believe North America will not lose any competitive ground to China—or any other country—in such key areas as sourcing, sales and marketing, research and development, customer service, and information technology. “While globalization will continue and some manufacturing jobs will follow, North America is showing significant resiliency,” observes Craig Giffi, vice chairman of Deloitte.10

Total Cost of Supply Chain Companies doing business in China not only need to keep a close watch on the state of China’s logistics network and infrastructure, but they must also recognize the very different nature of doing business there. “China is moving fast and changing faster, an environment in which few Western companies are structured to compete,” observes James McGregor, author of One Billion Customers and one-time China bureau chief for the Wall Street Journal. “Your China business model must be configured for constant changes in every aspect of business and politics.” Although China appears to be a bottomless pool of opportunities and cheap labor, McGregor cautions, “Never use the Chinese market as a last resort to save your business. The Chinese can smell desperation and will take advantage of your weakness.”11 There’s a follow-the-leader mentality within otherwise rational-thinking executives, according to J. Michael Kilgore and Jeff Metersky, cofounders of supply chain consulting firm Chainalytics. They’re too prone to knee-jerk reactions whenever sales are in decline, and are too easily tempted to seek

Globalization

141

out the lure of low costs. However, when calculating the potential savings of offshoring production to China, or any other country with a still-evolving infrastructure, companies too often fail to take into account the total supply chain cost, which includes total landed cost plus the inventory holding cost and cost of product obsolescence. Kilgore and Metersky add that a logistics analysis should focus not just on how much it costs to transport goods to a port, but to the end customer, as cross-country transit times, as well as inter-facility costs to reposition product from ports to regional manufacturing and distribution points, can add millions of dollars in unplanned-for logistics costs. Companies need to evaluate the changes in inbound, outbound, and inter-facility logistics costs that will occur as sourcing points are changed. Kilgore and Metersky also recommend that companies continuously analyze their outsourcing strategies, as significant changes in exchange rates, capital costs, and transportation costs can make last year’s decision to go the offshoring route look downright foolish today.12 The authors of Global Supply Chains refer to another common yardstick too many companies don’t adequately use to measure their global supply chain costs: total cost of ownership (TCO). Many of the companies that don’t reap much reward from offshoring have simply failed to do their homework, the authors say, “focusing on short-term cost reductions without considering all hidden costs while attempting to estimate the TCO for offshoring decisions.” While most companies do look at basic transportation costs, and some also consider things like port charges, Customs duties, inspection costs, and expedited shipments, very few really do a full and complete analysis of exactly what it will cost them to shift some of their operations overseas. A full TCO analysis should involve a calculation of all the following costs: Transportation (freight, Customs duties, tariffs) Additional inventory ■■ Quality and obsolescence ■■ Schedule noncompliance (expedited shipping, out-of-stocks) ■■ Risk (currency, intellectual property) ■■ Payment terms ■■ Administration (travel, communications) ■■ Responsiveness (lead time, flexibility, port congestion).13 ■■ ■■

Take a Look for Yourself When it comes to setting up your global supply chain, the ultimate best practice is also the most obvious: Go to the countries and look for yourself.

142

Traditional Core Processes of Supply Chain Management

There’s nothing better than an on-site evaluation, recommends consultant Laird Carmichael, especially in potentially volatile situations. “If it seems like chaos and instability, it probably is. Sure, it might be the cheapest deal in terms of labor costs, but if the news yields stories of political unrest over time, it’s best to look elsewhere. Too little or too much police and military personnel, lack of traffic control, and illegal behaviors occurring in broad daylight without consequences are all bad indicators. None of these things can be determined without a trip to the country to view it first-hand.”14 What you need is a regional logistics assessment that evaluates a country’s or region’s logistics assets and abilities. Both geography and physical infrastructure are key differentiators. While the global site selection process looks at the same basic things a domestic US process would examine, there are some not-so-subtle differences in practice. For instance, instead of asking about how congested the highways are, you might have to ask if any highways have even been built yet. Many historically important cities got that way thanks to good geography, points out author Douglas Long, especially if they are centered on natural ports. “Having good geographic features does not help if there is no infrastructure, such as roads, ocean ports, or airports,” he notes. “Public infrastructure makes an enormous difference to a company’s ability to operate. No business can avoid the consequences, good or bad, of where they are located.” Public infrastructure includes major projects like bridges and roads, as well as relatively minor but still important things like road signs.15 As noted earlier, the downside to locating a manufacturing or distribution facility near an established port is that procuring these properties may be prohibitively expensive because the area is already built up. What’s more, many ports and airports restrict, or even prohibit, land ownership by foreign companies. The only way to secure property in some ports is to rent it from the port directly, notes Edgar Kasteel, a Netherlands-based international trade consultant. The trade-off to the difficulty and expense of getting a portside property is that you gain proximity to transportation infrastructure.16 Global site selection decisions don’t end with the physical infrastructure. “Modern businesses require a legal system with rules of trade and commerce, Customs officials, and legal enforcement of business contracts,” Long points out. “There is also a need for banks to provide financing. Trade and logistics require a wide variety of services provided by other businesses and the government. Without these services it would not be profitable to do business, regardless of how good the infrastructure or ports may be.”17 Pay especially close attention to duties and tariffs, Carmichael adds. These fees can have a profound effect on the bottom line. “It basically comes down to the country of origination of the raw materials, where they enter the country (via US or Mexico, etc.), and in what form. Because of

Globalization

143

a free trade agreement, the materials could be duty-free if handled within legal guidelines for a specific country.” Every country has different duties, he points out, and there are legal loopholes based on their Customs’ classification of materials. “Raw materials versus cut or partially assembled materials play a factor in many cases.”18

Finding the Next Global Hot Spot If “look for yourself” is the first best practice of globalization, the second would be “get there before everyone else does.” Timing is everything when it comes to being one of the first companies to enter an emerging market, particularly because labor is widely available and eager to demonstrate their capabilities. The so-called BRICS countries—Brazil, Russia, India, China, and South Africa—have gotten most of the attention, representing as they do the economies predicted to be the world’s dominant suppliers of manufactured goods, services, and raw materials by 2050 (according to Investopedia.com), but it’s actually the lesser developed nations that offer the greatest potential for cost savings. As both the political structure and logistics infrastructure of these emerging countries are likely to pose some risks, perhaps the third best practice of globalization should be “know what you’re getting into before you go there.” Among the “best-kept secrets” that are drawing attention from multinational companies and are ranked as among the fastest-growing economies in the world are Asian countries (Mongolia, Bangladesh, Cambodia, Myanmar, Vietnam), Eastern European countries (Turkmenistan, Tajikistan, Uzbekistan), Africa (Guyana, Ethiopia, Rwanda, Côte d’Ivoire), Ireland, Panama, and Turkey (according to the International Monetary Fund). Take Vietnam, for instance, which globalization expert Mark Minevich refers to as “the new tiger on the horizon. It has the ability to spread across all sectors—from pure manufacturing to performing R&D for some of the largest companies in the world.” Calling Vietnam “the Asian alternative to China,” consultant Alex Bryant points out that the country has an aggressive program of corporate tax incentives to attract foreign companies, and has invested 10% of its GDP into basic infrastructure services, such as electricity, water supply, ports, and telecommunications.19 Although many still think of Africa as a single monolithic region synonymous with extreme poverty, conflict, corruption, and instability, in fact the continent includes 54 separate economies and has emerged as a “must-visit” destination for many high-tech US companies, observes Tom McMakin, CEO of Profitable Ideas Exchange, a business development firm. In particular, he points to the creation of the African Continental Free Trade Area in 2018 as an important step toward establishing a single market across the continent.

144

Traditional Core Processes of Supply Chain Management

He cites a number of major corporations, such as General Electric, which plans to spend $1 billion in Nigeria by 2023 to improve its power generation and oil and gas exploration and production, and Volkswagen, which is building automotive assembly plants in Ghana and Nigeria as well as launching skilled labor efforts in Ethiopia. Acknowledging that the greatest challenge for African countries “is educating a much larger proportion of its labor force and making sure it has the skills to prosper in manufacturing,” McMakin nevertheless believes the decade of the 2020s could very well be “Africa’s turn.”20 Ultimately, the decision process for choosing an offshore manufacturing or sourcing site is the same no matter which country you’re looking at, says supply chain consultant Dave Hoover, formerly head of strategic procurement and sourcing with such companies as Honeywell and HNI. “In the end, human beings are always the ones doing the business, and everyone has an interest,” he says. The challenge in any global supply chain relationship, Hoover explains, “is to understand what the other party’s interests are, so that you can help satisfy them.” When you do that, they will be compelled to help satisfy yours. And when it comes to expectations, he suggests that you take every possible measure to ensure that your quality requirements are clearly and explicitly spelled out.21

The Need for Supply Chain Visibility Although Limited Brands, along with almost every other US-based apparel company, offshores its manufacturing, that doesn’t mean the company has outsourced the responsibility for monitoring its supply chain. Limited Logistics Services, the company’s logistics subsidiary, assigns its own people to oversee operations in its Asian factories as well as the flow of goods into the United States. According to consultant Nick LaHowchic, former president and CEO of Limited Logistics Services, the company works with key logistics suppliers to make sure it has the capacity it needs, especially during peak season. “Limited gets continuous feedback from the factory and the Asian consolidator, and daily reports from its ocean carrier,” he explains. To maintain speed and reliability, Limited assesses supply chain events before goods leave the factory. For instance, if a rush order needs to be put on certain goods that are scheduled to move by an ocean carrier, Limited’s visibility into its supply chain is extensive enough that it can identify exactly which shipment needs to be expedited. It takes three days for goods to travel from Hong Kong to Limited’s Ohio distribution center. The products are finished there within a day-anda-half, and then within two-and-a-half days, those products are shipped and

Globalization

145

delivered to all 5,300 of the company’s retail stores in the United States. “A lot of time is spent thinking about where product should be, a fair amount of time getting system information on where it is, and a small amount of time dealing with exceptions,” LaHowchic notes. Mike Duciewicz, long-time vice president of supply chain with office products supplier Ricoh (now retired), agrees that visibility into the entire supply chain is absolutely essential when it comes to managing a global operation. The company uses an integrated global system that provides timely, online status reports from its transportation providers. “Once a purchase order is placed in the system, Ricoh knows the production schedule, the estimated time of arrival (ETA) at the port of departure and the receiving port, offloading of the container, and the ETA at the distribution center,” Duciewicz says. Ricoh employs an internal nonvessel operating common carrier (NVOCC), which is responsible for coordinating the company’s international shipments, as well as providing online information from the carriers. The key point is that most product is manufactured by Ricoh’s own family group, he emphasizes.22

Shoring Up the Supply Chain Record high fuel prices. A worldwide economic recession. Rising costs of raw materials. Piracy on the high seas. Fluctuations in the value of the US dollar. All of these factors have contributed to a recent phenomenon known variously as nearshoring, reshoring, rightshoring, inshoring, upshoring, and reverse globalization. The concept is simple: Rather than establishing manufacturing facilities at a low-cost country halfway across the world, a company will choose a relatively low-cost country within its own hemisphere to save on logistics costs. In some cases, the choice will be the country of record where the company is headquartered. We’ve been hearing for quite a few years, even dating back to the previous century, that manufacturing companies are bringing their production operations back to the United States (reshoring), or at least to North America (nearshoring), with the goal of gaining a supply chain edge (and perhaps to win some favorable publicity) by relocating facilities closer to home. The outbreak of the COVID-19 virus in 2020 and the resultant pandemic helped accelerate interest among US companies in pulling some if not all of their production out of China (where the virus is said to have begun). According to a survey of global supply chain professionals conducted by analyst firm Gartner, 33% had already moved sourcing and manufacturing activities out of China, and planned to do so within the next two to three years, even before the pandemic was declared in spring 2020. “Global supply chains were being disrupted long before COVID-19 emerged,” says

146

Traditional Core Processes of Supply Chain Management

Kamal Raman, senior director analyst with Gartner’s supply chain practice. The US-China trade war, she observes, “had already made supply chain leaders aware of the weaknesses of their globalized supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged. But this kind of change comes with a price tag.” And that price tag can be a hefty one, as the trade war tariffs collectively have increased supply chain costs by as much as 10% for close to half of the organizations surveyed in the Gartner study.23 In a separate study conducted by consulting firm PwC, survey respondents indicated that leaving China for another low-cost Asian country could cut their production and supply chain costs by 24%, and that if they nearshored production to Mexico, it would cut their costs by 23%.24

There’s No Place Like Home Harry Moser may not have come up with the actual idea of reshoring, but he’s done as much as anybody to evangelize it. Ever since his retirement as longtime president of machine tool manufacturer GF AgieCharmilles, Moser has led the Reshoring Initiative, a nonprofit organization dedicated to bringing manufacturing jobs back to the United States. It’s not a short-term undertaking by any means; Moser estimates it could take 20 to 30 years of sustained reshoring to counter the impact of more than a half-century of offshoring.25 The future of US manufacturing, he says, depends on reducing the trade deficit, as the elimination of the deficit could add as many as five million jobs to the US economy. “Factors such as tariffs, skilled workforce, innovation, automation, and currency are all means to increase our competitiveness, thereby reducing imports and increasing exports,” Moser says. “A lower trade deficit is the result. At a given level of demand for goods, the only way to increase manufacturing is to import less or export more. Importing less—reshoring—is far easier.”26 Based on studies undertaken by the Reshoring Initiative, the trendlines in US manufacturing indicate that less new offshoring and more reshoring are a potent combination helping to contribute to a flattening in the total number of US manufacturing jobs. “The ongoing trade dispute with China [and] the heavy use of tariffs [under the Trump Administration] have caused more reshoring by companies wanting to produce or source within the US tariff walls,” he points out. Although new reshoring is at an all-time high level, it will still be a steep uphill battle to overcome for the depth of the deficit, he says.

Globalization

147

For Daniel Burrows, who in 2015 launched XStream Trucking, a Californiabased manufacturer of connected hardware for the long-haul trucking industry, his company’s decision to source parts from various parts of the world—China, Taiwan, Mexico—was based primarily on cheap labor. But that cost advantage turned out to be short-lived. “The first big inflection point came in 2018, when a trade war broke out between the US and China,” he explains. “The imposition of US tariffs on some of our parts came as a surprise. As a start-up still building our business and reputation, we couldn’t afford to pass along additional costs to our customers.” That got Burrows thinking seriously about reshoring. All of the advantages XStream had enjoyed from being in China, such as a large workforce and low labor costs, were already shrinking even before the trade war began, he remembers, so when the tariffs were imposed, it was enough to prompt Burrows to start rethinking about the supply chain. “We couldn’t predict how long the trade war would last, and that uncertainty was too big a risk for our supply chain.” While there were other lowcost Asian alternatives, such as Bangladesh and Vietnam, Burrows says the decision on where to source parts and assemble products did not come down to just labor costs. “We compared materials costs, shipping, operational complexities, and the risk of business disruptions,” he says. There were also logistics considerations, such as the fact that shipping internationally not only lengthens the supply chain but adds extra and unnecessary steps in the process, such as unpacking and inspecting for damage during shipping, as well as unexpected delays during Customs clearance at ports. Since XStream’s customer base is largely centered in North America, sourcing from China was making less and less sense. To date, XStream has reshored roughly 60% of its production back to the United States, a decision Burrows says has brought significant benefits to the company. They’ve been able to trim costs for one of its products by 20%, and cut the lead time in half—from eight weeks to four weeks. For another product line, they’ve enjoyed a 10% reduction in costs, and a reduction in lead time from eight to five weeks. “We moved a lot of manufacturing offshore and now brought back a lot of it,” he says. “It’s been painful, I’m not going to lie. But I’m glad we are back home.”27

Notes 1. MI News Network, “Top  10  World’s Largest Container Ships in 2019,” Marine Insight (15 April 2020), www.marineinsight.com. The OOCL Hong Kong, produced by Orient Overseas Container Line, is believed to be the first ship capable

148

Traditional Core Processes of Supply Chain Management

of carrying 21,000 TEUs. In 2009, the biggest cargo ships at the time had a capacity of 6,000 TEUs. 2. Perry A. Trunick, “Ten Things to Consider When Establishing a Global Distribution Network,” Logistics Today (September 2005), 26–28. 3. Robert B. Handfield and Ernest L. Nichols Jr., Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2002), 233–234. 4. David Blanchard, “How to Manage a Global Supply Chain,” IndustryWeek (August 2012), 30–32. 5. Jean-Francois Arvis et  al., Connecting to Compete 2018: Trade Logistics in the Global Economy (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2018), 20. The original LPI, launched in 2007, had seven components, which have since been consolidated to the pres­ ent group of six. “Cost of domestic logistics” is no longer explicitly singled out as an indicator. Also, “quality of information technology infrastructure” used to be included as a component. 6. Ibid., 2. 7. The World Bank study omits some countries, largely due to size (e.g., Liechtenstein) or political considerations (e.g., North Korea). 8. Adrienne Selko, “Top 10 Most Corrupt Countries of 2020,” Material Handling & Logistics (6 March 2020), www.mhlnews.com. 9. Gregory Burkart and Kurt Steltenpohl, “A New Perspective on the PostCOVID Supply Chain,” Material Handling & Logistics (27 August 2020), www .mhlnews.com. 10. David Blanchard, “Heroes and Villains,” IndustryWeek (September 2008), 7. 11. James McGregor, One Billion Customers: Lessons from the Front Lines of Doing Business in China (New York: The Free Press, 2005), 188. 12. J. Michael Kilgore and Jeff Metersky, “Overseas Manufacturing May Be Costing Your Firms Millions,” Chainalytics Supply Chain Strategy ( July 2003), 1–3. 13.  Mandyam M. Srinivasan, Theodore P. Stank, Philippe-Pierre Dornier, et  al., Global Supply Chains: Evaluating Regions on an EPIC Framework (New York: McGraw-Hill Education, 2014), 12–13. 14. Laird Carmichael, “How to Configure Success through Outsourcing,” Logistics Today ( June 2004), 40–41. 15. Douglas Long, International Logistics: Global Supply Chain Management (Norwell, MA: Kluwer Academic Publishers, 2003), 13–14. 16.  Trunick, “Ten Things to Consider When Establishing a Global Distribution Network.” 17. Long, International Logistics. 18. Carmichael, “How to Configure Success through Outsourcing.” 19. Adrienne Selko, “Global Hot Spots,” IndustryWeek (August 2007), 26–30. 20. Tom McMakin, “Calling Africa: Why the Forgotten Continent Can Be the Next Global Factory,” IndustryWeek (28 February 2020), www.industryweek.com. 21. Nick Zubko, “The Low-Cost Learning Curve,” IndustryWeek (August 2008), 32. 22. Helen L. Richardson, “Out in the Open,” Logistics Today (February 2004), 32–35.

Globalization

149

23.  MH&L Staff, “One-Third of Supply Chain Leaders Moved Business Out of China or Plan to by 2023,” Material Handling & Logistics (30 June 2020), www .mhlnews.com. 24. MH&L Staff, “Manufacturers Are Shifting Supply Chains Away from China,” Material Handling & Logistics (27 July 2020), www.mhlnews.com. 25. David Blanchard, “The Three Rs of Global Supply Chains: Risk, Reshoring, and Resilience,” Material Handling & Logistics (September 2014), 36. 26. Harry Moser, “Reshoring Was at Record Levels in 2018. Is It Enough?” IndustryWeek ( July/August 2019), 28–31. 27.  Daniel Burrows, “Why We’re Reshoring Our Manufacturing: A CEO’s View,” IndustryWeek (3 November 2020), www.industryweek.com.

CHAPTER

10

Customer Service Keeping the Customer Satisfied Flashpoints Customers prefer to deal with companies that can deliver perfect orders and shipments every time. The key to any successful relationship, supply chain or otherwise, is mutual trust. Accurately identify the top 20% of your best customers because that’s where your profits are coming from. Insist that every employee in your organization focus on the customer, and then empower them to do so.

Although the religious significance of the winter holidays often goes unacknowledged in corporate boardrooms, everybody who works for consumer goods producers, retailers, or logistics providers is well aware of the financial significance of having products manufactured, shelves stocked, and deliveries made before December 24. Nobody wants to hear from disappointed parents—not to mention very irate senior executives—that they ruined Christmas for thousands or even millions of kids because they couldn’t keep their supply chain promises. So what happens if you’re one of the world’s biggest retailers, with a reputation built on timely deliveries, and you’re not able to fulfill all of those orders in time for Christmas? And what do you do if the reason you’re going to be blamed for all the very unmerry Christmases is that you failed at the

151

152

Traditional Core Processes of Supply Chain Management

very thing you’re supposed to be better at than anybody else—having full visibility into your supply chain? That’s exactly what happened to online retail giant Amazon in December 2013. That whole experience has become a supply chain legend, a kind of worst practice horror story used to frighten young supply chain professionals who are tempted to take shortcuts when developing their logistics strategies. “If it can happen to Amazon,” the warnings sound—a game-changing industry leader that won its customers over so completely that it could launch a paid subscription service based on the promise of free guaranteed deliveries—“then it can happen here, too.” So what made December 2013 such an unmerry Christmas for Amazon? Basically, the retailer failed to deliver on its promises to deliver—those “guaranteed to arrive by” dates became more fiction than fact because the package delivery companies Amazon relied on—mostly UPS, and to a lesser extent FedEx—were overwhelmed by the sheer volume of goods people were ordering in the days leading up to Christmas, and there simply weren’t enough cargo planes available to accommodate all those packages. As The Wall Street Journal described it, on the morning of Christmas Eve that year, while employees at the UPS Worldport air hub in Louisville, Kentucky, were madly scrambling to sort and prepare packages to be loaded onto planes, dozens of other workers were just “standing around idle because the unexpected glut of packages from last-minute shoppers had swamped the company’s air fleet.” As UPS explained, demand was much larger than it forecast.1 Although UPS is extremely efficient and its Worldport operations is almost legendary in its ability to sort and ship out packages day in and day out (see Chapter  11), its system was overwhelmed by the sheer volume of parcels that arrived with promised delivery dates before December 25. After all, it was the retailers themselves who attempted to game the system to their advantage by luring in online shoppers with deeply discounted products “guaranteed” to arrive before Christmas, and then pinned all their fulfillment hopes on the logistics capabilities of UPS, FedEx, the USPS, and other delivery specialists. And it was the retailers—Amazon, Walmart, Kohl’s, and others—who ended up having to explain to unhappy customers what went wrong As Eric Best, a serial entrepreneur focused on e-commerce retail fulfillment, told the WSJ, “It’s easy to blame UPS, but it’s the retailers that are pushing these next-day shipping offers in the final hours of the shopping season. Retailers are driving consumer expectations to get stuff they ordered by the next day, and the later shoppers wait, the harder it is to predict.” And as the bellwether for all online retailers—and indeed, for all retailers of all types—Amazon was determined to apply the lessons it learned from the Christmas 2013 fiasco to make sure such a customer service failure would never happen again. In fact, CEO Jeff Bezos had already delivered

Customer Service

153

a preemptive strike against delivery failures when he revealed (during a 60 Minutes interview) that Amazon was developing a fleet of autonomous delivery drones that can transport objects and packages weighing up to five pounds within 30 minutes of an order being placed, within a 10-mile radius of an Amazon fulfillment center. Admitting that both the technology and the infrastructure to make neighborhood delivery drones a reality were still years away, Bezos pointed out that while technology might make faster deliveries possible, the “big idea” that defines Amazon is customer centricity—“putting the customer at the center of everything we do.”2 And it’s that drive to keeping the customer satisfied that continues to propel Amazon to devise new technologies and processes. “We know our customers want things faster. They want ordering from us to be as predictable and automatic as entering a room and turning on the light,” explains David Bozeman, vice president of Amazon Transportation Services, who describes his team’s focus on customer service as being more like customer obsession. Whether it’s the more than 200,000 warehouse robots the company had deployed throughout various operations by 2020, the artificial intelligence-powered Echo and Alexa devices that among other things allow customers to order products from Amazon by voice, or even the more fanciful projects the company has patented such as a flying warehouse blimp that could serve as a fulfillment center for delivery drones, Amazon is doing both the big things and the little things it needs to do to ensure its customers have products delivered to their doorsteps (or even inside their homes, thanks to another innovation called Key that allows delivery personnel access to a customer’s front door through a scanning device).3 The challenge, Bozeman articulates, isn’t just to satisfy the customer, but to be able to anticipate the customer’s future needs as well. And the secret to Amazon’s success, he reveals, is to focus on the supply chain basics. “Your supply chain has to be nimble and flexible, but at the same time you need to be solid on basic supply chain and operations work.”

The Perfect Order As the pace of commerce has dramatically increased, the patience of customers has similarly decreased. “Better, faster, and cheaper” just isn’t good enough anymore; customers today are demanding perfect orders, shipped on time to the minute, at a cost that barely leaves any margin for error—or profit. Every manufacturer faces the same crucial challenge: Your customer expects perfect orders and shipments every time—can your supply chain deliver them, every time? If you can’t, then your company faces the consequences of invoice deductions, lost sales, and even lost customers if your customer’s expectations are not met.

154

Traditional Core Processes of Supply Chain Management

Edward Marien, long-time director of supply chain management programs at the University of Wisconsin (now retired), describes exactly what a perfect order should look like when he refers to a “customer bill of rights.” According to Marien, the customer has the right to expect: 1. The Right Product in the 2. Right Quantity from the 3. Right Source to the 4. Right Destination in the 5. Right Condition at the 6. Right Time with the 7. Right Documentation for the 8. Right Cost4 Failure to deliver on any of these rights can be costly, and the ripple effect from failing at just one of them can be devastating, especially in timesensitive situations (and these days, everything is time-sensitive). By failing to get products to all of its customers in time for the holidays, Amazon didn’t come anywhere near close to perfect order fulfillment. It didn’t matter much if they had the right quantity, the right cost, or the right documentation— with delivery by December 24 being the ultimate pass/fail test, Amazon and its logistics partners failed the test. Amazon didn’t waste any time overhauling its logistics weaknesses. While revealing its drone delivery program got the company a lot of attention and publicity, it was old-fashioned transportation rather than cuttingedge technology that helped Amazon address its most pressing need: tighter control over its own supply chain. To do that, the company launched (via acquisition) its own air cargo fleet, Amazon Air, with a hub in Cincinnati, and expected to have 70 planes by 2021, with service to 20 cities. More visible to consumers, of course, has been the growing fleet of Amazon-branded delivery vehicles and trailers, which became almost ubiquitous in neighborhoods during the COVID-19 pandemic, when stay-at-home protocols saw consumers turning to home delivery—from Amazon and others—for just about every product they used to buy in brick-and-mortar stores. True, Amazon’s total logistics costs have skyrocketed over the years, growing more than twenty-fold from 2009 to 2019, according to analyst firm Statista. While the company’s shipping and fulfillment expenditures were 15.6% of net sales in 2009, those costs had nearly doubled to 27.9% by 2019. But, not coincidentally, by 2020 Amazon also had nearly 39% market share of all e-commerce sales in the United States. So, whatever the cost, Amazon’s growth parallels its ability to deliver quickly, consistently, and correctly to its customers.5

Customer Service

155

The High Cost of Imperfection Companies today are measuring their supply chain performance by analyzing how often they can deliver perfect orders, as well as how much it costs to be perfect. Consumer packaged goods giant Procter & Gamble, for instance, defines a perfect order as a product that arrives on time, complete (as ordered), and billed correctly. When P&G set out in the 1990s to measure how close it was coming to this high-water mark, it discovered that every imperfect order was costing it $200. P&G found it had too many areas of imperfection that added unnecessary costs: the cost of redelivery when orders were late; replacement costs if shipments were damaged; processing costs for quantity adjustments, as well as price and allowance deductions.6 Since that time, the company has committed itself so fully to a customer focus that it’s been named one of the top supply chains in the world 16 years in a row by analyst firm Gartner. In the book Supply Chain Redesign, authors Robert B. Handfield and Ernest L. Nichols Jr., offer the following equation companies can use to calculate the total cost of moving a product through their supply chain, and then determine how best to reduce costs without reducing service: Price per unit + Containerization cost + Transportation freight costs + Duties and premiums = Landed cost + Incoming quality control + Warehouse costs = Dock-to-stock cost + Inventory carrying costs + Defective materials + Factory yield + Field failures + Warranties + Service + General and administrative costs + Lost sales and customer goodwill = Total cost7

Every Day Is a Holiday Earlier in this chapter, we looked at how failure to deliver packages in time for the Christmas holidays in 2013 led to a renewed push for better processes

156

Traditional Core Processes of Supply Chain Management

and technologies, and while there are still occasional hiccups and glitches, the Christmas seasons have come and gone relatively snafu-free since then. That by itself is a testament to retailers creating and then enhancing the various best practices we’ve discussed; it’s even more impressive when you consider that the retailers themselves have created even more holidays to drive even more shoppers online during what used to be off-peak seasons. As Greg Hewitt, CEO of package delivery specialist DHL Express US, has observed, e-commerce has helped to expand holidays well past their regional and local origins. “Chinese New Year and Duwali have joined Christmas and Valentine’s Day as important, global holidays that see a significant spike in online shopping—and corresponding delivery needs,” he notes. “Consumers are looking across borders and finding opportunities to buy in seasonal holiday times that were once confined; consider that Alibaba’s Singles’ Day for Chinese shoppers now reaches the Philippines, Thailand, Malaysia, Singapore, and Vietnam. Amazon’s Prime Day has also expanded to new global regions.”8 These new global holidays, Hewitt points out, have put a significant strain on supply chains. “Delivery networks need to adapt to these instances of sporadically high orders, especially given that consumers expect fast and on-time delivery regardless of whether they are seeking a holiday present or a deeply discounted item for personal use,” he says. Alibaba, China’s answer to Amazon, has developed its own logistics network, Cainaiao, to streamline the order fulfillment process for Singles’ Day. Of course, not every company can afford its own logistics network, which is why regional fulfillment offers companies a way to get closer to their customers.9

One Good Return Deserves Another Our consumer culture has become so fickle, particularly in this era of ­e-commerce retail, that even when an order is perfectly delivered—the right product, the right condition, the right time, etc.—the customer still might not be happy, and will end up returning it. The problem has gotten so bad, thanks to the rise of e-commerce and the attendant ship-it-back-if-you’re-not-satisfied culture, that the cost of product returns is now well north of $400 billion, with some predicting that amount could top $1 trillion at some point in the 2020s. That’s how much it costs US manufacturers and retailers in lost sales, transportation, handling, processing, and disposing of goods that were purchased but ultimately returned. It’s estimated that customer returns can reduce a retailer’s profitability by 4.3% and a manufacturer’s by 3.8%. Returns have always been a problem for retailers, as historically 5% to 10% of goods bought in a brick-and-mortar store are returned; lately, though, with e-commerce’s growth showing no signs of slowing, the return rate has also climbed ridiculously, accounting from between 15% to 40% of all online purchases.10

157

Customer Service

According to supply chain consulting firm Tompkins International, these are the top six reasons customers return products: 1. Customer ordered incorrect product or size. 2. Customer decided product was not needed or wanted. 3. Customer returned the product without giving a reason. 4. Product did not fit description on website or in catalog. 5. Product did not fit customer’s expectations. 6. Company shipped incorrect product or size. These six reasons account for nearly 75% of all reasons for returns, and yet only the fourth and sixth reasons are attributable to company error. “From the customer’s viewpoint, it really doesn’t matter who caused the product return,” observes consultant Bruce Tompkins. “The customer wants to return the product with as few difficulties as possible, and the company wants to retain its customer and keep costs down. Returns are inevitable, so why not use metrics to monitor and improve reverse logistics activities?”11 That’s precisely what high-tech manufacturer Logitech has done. Product obsolescence is a constant irritant to the high-tech industry, where the value of a consumer device seems to start dropping as soon as the product leaves the design stages. “Price erosion is the silent killer,” says Gray Williams, a consultant with Symphony Consulting and formerly vice president worldwide of supply chain for Logitech, a manufacturer of computer devices. Because returns can amount to as much as 10% of all outbound shipments, Logitech is constantly striving to synchronize its supply and demand to keep inventory moving. That synchronization involves a process called progressive dispositioning, where the goal, as Williams explains, “is to continuously identify and disposition excess as early in the cycle as possible.” Dispositioning includes repairing, refurbishing, liquidating, and recycling/scrapping. The returns process includes auctioning off excess inventory via online websites. “You need to keep your inventory moving,” he says, “so disposition your excess and obsolete inventory wherever it is located, whether that’s in the factory, a distribution center, or the channel.” Reverse logistics is often misinterpreted as just a way of making pennies on the dollar off of products that you didn’t think you could even give away any more. Logitech, however, is methodical in the way it measures its return processes. It uses an excess inventory index that calculates the cost of doing nothing (i.e., how much money the company stands to lose by not properly dispositioning its returned/excess products): period costs

price erosion factor

excess in warehouse excesss in channel



158

Traditional Core Processes of Supply Chain Management

Period costs include warehousing, standard revision costs, maintaining excess and obsolete reserve, and the cost of capital. The price erosion factor depends on the company and its products, but by way of example, let’s assume it’s 1%. If a company is carrying $40 million in current excess inventory and has $30 million excess in the channel, when you add those together you get $70  million; when you multiply that amount by 1%, it equals $700,000. Then add in the total period costs—let’s say it’s $1.3 million per month. For that hypothetical company, the cost of inaction for one month is $2 million. To benefit from a reverse logistics effort, a company first has to know what its actual return rate is, and then determine what return rate is acceptable. James Stock, a professor with the University of South Florida, studied product returns and found that many companies don’t know what’s coming back, how much is coming back, or what recovery rate to expect. “In our study, companies doing really well are seeing 80% to 90% recovery rates. Average companies realize rates around 60%. For companies doing poorly, 40% is the norm,” Stock observes.12

Supply Chain in Reverse Although historically many companies have more or less accepted returns as a necessary cost of doing business, that’s no longer the case. In addition to allowing companies like Logitech the opportunity to reclaim revenues that would otherwise be lost, a reverse logistics program can also help companies improve their products. “Product failure and returns information can be fed back to sales or research departments to identify root causes such as packaging or product design errors,” note consultants Jonathan Wright and Michael Joyce with Accenture’s Supply Chain Management practice. Focusing on reverse logistics can also help companies reduce or eliminate the product defects that led to the returns in the first place.13

At a Glance Reverse Logistics Reverse logistics is the process of moving returned goods from their consumer destination for the purpose of capturing value or proper disposal. It includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory, as well as packaging and shipping materials from the end user or reseller.

Customer Service

159

According to Accenture, only 5% of electronics and high-tech products are returned due to product defects. “Buyer’s remorse” is responsible for 27% of the returns, but the overwhelming majority of high-tech products are returned with nothing wrong at all. As Tony Sciarotta, executive director of the Reverse Logistics Association and previous director of asset recovery and returns management at high-tech appliance manufacturer Philips Consumer Lifestyle, puts it, “no fault found” became the bane of his existence. Philips was seeing a 40% return rate on MP3 players, for instance, but 90% were classed as “no fault found.” That led Philips to stop thinking of returns as a product issue and instead as a customer experience issue, and to focus on what exactly it was about the product that led so many customers to want to return it.14 After consulting with colleagues at other high-tech companies, Sciarotta started asking, “How do we make these products easier to use so we do not get the returns, and why are so many returns happening?” The answer was to address potential problems at the design stage of the product by focusing on ease of use and interoperability. If the product was simple to purchase and simple to use, then it wouldn’t be returned as often, he explains. The thinking at Philips became, “We have to make products that the customers love,” and the company embraced the concept of ease-of-use in its designs. Each division of the company also formally established a returns department with the goal of reducing the amount of product returns.15 The payoff for better managing returns can be significant. Accenture has estimated that by reducing the number of “no fault found” product returns by 1%, a major high-tech manufacturer such as Philips could save more than $20 million annually in return and repair costs.

Money in the Bank The book The Value Profit Chain relates the story of a manager of a chain of Domino’s Pizza outlets who taught his employees to think of the lifetime value of a customer, not just a one-off $8 purchase. If somebody orders one pizza per week for 10 years, that represents a total of $4,000 spent over a decade. The manager told his employees, “Think of the customer as having $4,000 pasted on his forehead, which you peel off $8 at a time. Then act accordingly.” To reinforce his message, he would give bonuses to the employees with the fewest number of customer complaints.16 While the pizza manager’s estimate was based more on his gut than on a spreadsheet calculation, he had the right idea. One of the keys to building successful and long-term relationships with customers is being able to calculate customer lifetime value, a metric that attempts to measure how much a customer will spend throughout his or her entire relationship with

160

Traditional Core Processes of Supply Chain Management

a company. To arrive at this value, determine how many regular customers you have (let’s say it’s 1,000), how long they typically remain loyal customers (say it’s five years), and your typical net profit over that period of time ($5,000,000). Divide the total net profit by the number of customers and you end up with $5,000. So every one of your regular customers is worth $5,000 in profits over a span of five years. This rudimentary example illustrates why companies consider a good customer to literally be money in the bank, which is why nurturing and extending the lifespan of a customer is a trait common to best-in-class supply chains. Variously referred to as “hero customers,” “loyalists,” and “apostles,” these customers have bought into the promises your company offers them, and keep coming back for more. It’s important that you accurately identify the 20% of your customer base that makes up this loyal “hero” base, because these customers produce all of your profits.17

A Better Way to Sell Mouthwash Back in 1995, retail giant Walmart launched an initiative with the simple goal of establishing a closer relationship with its vendors, an effort that was borne mainly out of frustration with the status quo. Pharmaceutical supplier Warner-Lambert (now part of Pfizer) had a problem keeping Walmart’s shelves stocked with its popular Listerine mouthwash product. It was the classic retail dilemma—the out-of-stock rate was far too high, which forced Warner-Lambert to maintain significant safety stock to satisfy the demand from its retail customers. Jay Nearnberg, Warner-Lambert’s director of customer replenishment at the time (now senior director of collaborative planning and process management with Pfizer), was feeling the pressure since the out-of-stock problem was costing his company millions of dollars in lost sales. It was also hurting the company in terms of credibility, both with retailers and with consumers. Walmart had laid down the law: Warner-Lambert needed to get its instock levels up to 98%, or else. The “or else” included such dire punishments as the retailer cutting back on shelf space, no longer supporting promotions, and refusing to add new products from the company. So, for Nearnberg, failure to reach 98% was not an option. As Ronald Ireland, information technology manager with Walmart at the time (now a consultant with Oliver Wight), remembers, Nearnberg consulted with the retailer about its automated replenishment system, Retail Link, and learned that Warner-Lambert, like other suppliers, could use the system to access point-of-sale history as well as a 65-week

Customer Service

161

forecast. Up to that point, Warner-Lambert wasn’t using Walmart’s Retail Link to develop its own forecasts; for that matter, neither were most of Walmart’s other suppliers. “It was well known that Walmart’s demand forecasts and replenishment schedules were inaccurate,” Ireland explains. “There also would be challenges in integrating a single customer’s forecasts into production planning without additional customers’ critical mass also included.” Walmart, however, assumed that its trading partners would provide useful feedback that would improve the quality of the forecasts. The real goal, according to Ireland, was for the suppliers to collaborate with the retailer to improve the accuracy of the forecast and replenishment schedules. “The replenishment plan,” he explains, “was based on the forecast, so it was imperative to create as accurate a demand forecast as possible. The more accurate the forecast, the more accurate the replenishment schedule would be.”18 Ultimately, the two companies launched a pilot program called collaborative forecasting and replenishment. This project let both companies share and compare sales and order forecasts, with one of the benefits being that Warner-Lambert now knew when Walmart was scheduling promotional events. In the past, not knowing exactly when such promotions would occur, the drug company’s strategy was to keep enough inventory on hand to prevent out-of-stocks.19 By linking customer demand with replenishment needs, the in-stock percentages for Listerine increased from 85% to 98%. Equally impressive was a sales hike of $8.5 million during the pilot test, which not only convinced Walmart and Warner-Lambert that sharing information with supply chain partners was a good idea but also led in 1996 to a full-scale launch of the slightly renamed collaborative planning, forecasting, and replenishment (CPFR) effort, under the sponsorship of the Voluntary Interindustry Commerce Standards (VICS) association.20

At a Glance Collaborative Planning, Forecasting, and Replenishment Collaborative planning, forecasting, and replenishment (CPFR) enables supply chain partners to share historical data and develop plans to manufacture and distribute a product. This shared information is used to forecast needs, establish and alter promotion timelines, and determine when stock or supplies need to be replenished.

162

Traditional Core Processes of Supply Chain Management

A Nine-Step Program for CPFR The basic CPFR process model developed by VICS focuses on these nine steps: 1. Develop a front-end agreement. The retailer/distributor and manufacturer establish guidelines and rules for the relationship. 2. Create a joint business plan. The manufacturer and retailer create a partnership strategy and then define category roles, objectives, and tactics. 3. Create a sales forecast, based on the retailer’s point-of-sale (POS) data and other information. The sales forecast is then used to create an order forecast. 4. Identify exceptions for the sales forecast. The partners identify items that fall outside sales forecast constraints set jointly by the manufacturer and retailer/distributor. They then develop a list of exception items. 5. Resolve/collaborate on exception items. The partners then submit an adjusted forecast. 6. Create an order forecast. The partners combine POS data, causal information, and inventory strategies to generate a specific order forecast that supports the shared sales forecast and joint business plan. This allows the manufacturer to allocate production capacity against demand while minimizing safety stock. It also gives the retailer increased confidence that orders will be delivered. 7. Identify exceptions for the order forecast, based on the predetermined criteria established in the front-end agreement. 8. Resolve/collaborate on exception items. As with step 5, the partners then submit another adjusted forecast. 9. Generate the order. The order forecast becomes a committed order.21

Don’t Expect Collaboration to Be Easy CPFR is just one in a long tradition of retail-centric efforts to solve a problem that can’t really ever be solved but at least can be guessed at more intelligently: How many products are consumers going to buy, and when? Vendor-managed inventory (VMI), for instance, which got its start several decades ago, is a replenishment practice where the manufacturer manages the inventory of its products at a retail location. The retailer provides regular inventory updates to the manufacturer, who’s responsible for replenishing that supply as needed. The manufacturer benefits by having more reliable sales data to base its forecasts on; the retailer benefits because it no longer

Customer Service

163

has to maintain its inventory levels. VMI involves the supplier, rather than the retailer, taking responsibility for maintaining the retailer’s inventory levels based on transactional data shared by the retailer.22 Other collaborative processes, such as quick response (QR) and efficient consumer response (ECR), have the advantage of being more responsive than processes based strictly on customer forecasts. As author Paul Myerson explains, “[QR and ECR] are driven largely by actual customer demand and also provide visibility in out-of-stock situations so that manufacturers and retailers can react more quickly. Point-of-sale information can add visibility across the entire supply chain as well when included in a collaborative replenishment process.” Collaborative efforts in general, as we’ve mentioned earlier, are difficult to set up and even more difficult to achieve consistent and lasting value. Myerson estimates that as many as 8 in 10 collaboration attempts end up in failure, for any number of reasons: Relying too much on technology or a single type of technology Failing to understand when it’s the right time to collaborate ■■ A nagging element of distrust among supply chain partners ■■ A lack of commitment to the process from senior management ■■ Spreading limited resources too thin over too many competing initiatives ■■ ■■

So with such a high failure rate, why even bother trying to collaborate? Simple, Myerson says: “Collaboration is well worth the effort as it can result in reductions in inventories and costs, along with improvements in speed, service levels, and customer satisfaction.” So it really does all revolve right back to where it started: the customer.23

Respecting Your Partners As Jeffrey Liker explains in his book, The Toyota Way, one of the key principles that automaker Toyota follows day in and day out is: Respect your extended network of partners and suppliers by challenging them and helping them improve.24 (See Chapter 6.) Echoing that philosophy, Robert Handfield, a professor at North Carolina State University, observes that, even during times of recession and economic turmoil, companies need to work with each other, as it’s in everybody’s best interests that their industries do not fail. “Managers of supply chains need to reach out to critical suppliers and work on strengthening their business,” Handfield notes, “both to weather the crisis and increase profits for the future.”25

164

Traditional Core Processes of Supply Chain Management

Consulting firm Plante Moran conducts an annual study to determine exactly which automotive original equipment manufacturers (OEMs) did best when their suppliers were given a chance to weigh in. In a 2019 survey of more than 400 Tier One suppliers, Toyota and Honda were far and away the companies suppliers preferred to do business with, although tellingly none of the six major OEMs studied were given a grade of good. (The Plante Moran OEM-Supplier Working Relations Index measures each OEM on a matrix that includes Good, Adequate, Poor, and Very Poor. Toyota came the closest to the Good threshold.) GM and Ford took the third and fourth slots, near the bottom of the Adequate rankings. Nissan and Fiat Chrysler (FCA) brought up the rear, with grades of Poor.26 Explaining the significance of the rankings, Dave Andrea, principal in Plante Moran’s Strategy and Automotive/Mobility consulting practice, observes that given the competitive pressures automakers are under, “they need to be laser-focused on improving their supplier relations in order to best leverage their supply base.” Over the first two decades of the twentyfirst century, the Working Relations Index (launched in 2001) has illustrated that the heart of OEM buyer/supplier relationships is trust and communication. On the supplier side, that trust is demonstrated through such activities as price reductions on parts and investments in new technology, with the expectation being that the OEMs will reciprocate by continuing to do business with the supplier. But it’s not just purchasing that influences how well an OEM will score in the rankings, Andrea points out. “For instance, the study asks to what extent late or excessive OEM engineering changes impact on-time development or quality and cost targets, whether the supplier is given flexibility in meeting cost and quality objectives, and whether the supplier is involved early enough in the OEM product development process and kept involved throughout the process.” All OEM functions need to be aligned to take cost and time out of the entire supply chain to meet the OEM’s cost objectives as well as to help the suppliers’ cost and financial performance, he says. Suppliers contribute roughly two-thirds of the value of an automobile, Andrea explains, so it is clearly in the OEM’s best interest to be a preferred customer to do business with. In short, he says, “Focusing on improving supplier relations has never been more important for the automakers.”27

A Culture of Customer Satisfaction For several decades, J.D. Power and Associates has studied and measured customer satisfaction, honoring those companies that are best at listening

Customer Service

165

to their customers’ voices. Companies who reach that exalted best-in-class status consistently do three things: 1. They collect the right information from their customers. 2. They properly analyze that information and ensure that it gets into the hands of the people who are in a position to use it. 3. They properly act upon that information.28 Companies have discovered the value in using web-based surveys and call centers to collect targeted information from their customers. Business analytics and customer relationship management (CRM) programs are available to crunch through all the mountains of customer data that come in and put that data into some kind of actionable context. But how do you know exactly what to do with that information? J.D. Power suggests every company should be able to answer these four questions: 1. Do you know how satisfied your customers are compared to your competitors’ customers? 2. Do you measure how well each individual branch or department in your company is satisfying its customers? 3. Do you understand your customers’ needs (i.e., what it takes to make them happy and, more important, get them to do business with you)? 4. Do you know how closely customer satisfaction is tied to your bottom line (i.e., its impact on loyalty, word of mouth, etc.)? Question 3 is the most important, according to the J.D. Power book Satisfaction, because “understanding the needs of your customer provides a filter through which every decision must be screened. Developing a new product or service? Every phase of that process must begin and end with customer needs. Features, options, pricing strategy; they all depend on the wants, desires, and concerns of your customers.”

At a Glance Customer Relationship Management Customer relationship management (CRM) is a customer-centric strategy that uses software tools to optimize profitability, revenues, and customer satisfaction. It ties into all of a company’s other enterprise and supply chain systems, with the goal of providing a complete view of a company’s operation.

166

Traditional Core Processes of Supply Chain Management

The ultimate best practice, as borne out by numerous studies J.D. Power has conducted over the years, is to build a culture of customer satisfaction from the top down, insisting that every employee throughout the organization focus on the customer and then empowering them to do so. If you fail to keep your customers satisfied, they’ll find somebody else who can.

How to Get the Most Out of a Relationship The term collaboration means different things to different people, and can be used interchangeably to describe activities that are transactional, tactical, or strategic. To get a better idea of what collaboration actually means in the real world, Accenture teamed up with Logistics Today (which has since morphed into Material Handling & Logistics) to conduct a collaboration-focused survey of supply chain executives. From that study, a working definition emerged: Collaboration refers to cooperative supply chain relationships— formal or informal—between companies and their suppliers, supply chain partners, or customers, which are developed to enhance the overall business performance of both sides. The survey also identified the barriers to collaborating with trading partners, which include technology and data hurdles; difficulties in measuring performance; an unclear value proposition; concerns about data security; and a lack of trust. Collaborative efforts require a lot of time and effort, and the payoff for companies typically lags their biggest customers. That can often lead to a “Why even bother?” attitude, which inevitably will doom any collaborative relationship. So how do you make collaboration work? John Matchette and Andy Seikel, executive partners in Accenture’s Supply Chain Management practice, offer these guidelines for getting the most out of a relationship: Fit the relationships to your strategy. Define the link between overall strategy and collaboration opportunities, identify the purpose of each collaboration, and be prepared to react quickly to changes in strategy or environment. ■■ Identify the best partners. Use a range of competitive and market sources to develop the intelligence to spot and evaluate potential partners. ■■ Optimize your relationship portfolio. Develop systems for timely reporting to enable faster, better-informed decision making about the collaboration. Know how to identify new opportunities based on activity in your current portfolio. Make sensible trade-offs between internal efforts and alliances. ■■

Customer Service

167

Maximize day-to-day performance. Use performance measures that reflect the organization’s overall business objectives so that the people involved in the collaboration will be able to communicate the “why” and “what” of every alliance they form and to share experiences across alliances. ■■ Manage the relationship. Plan to communicate and maintain continuous personal contact with key people at partner organizations. Success on this front makes it possible to develop new opportunities from existing relationships. ■■ Capitalize on your collaboration’s assets. Capture and adopt best practices. Share information and leverage collaboration-created assets across the parent company.29 ■■

Notes 1. Laura Stevens, Serena Ng, and Shelly Banjo, “Behind UPS’s Christmas Eve Snafu,” The Wall Street Journal (26 December 2013), www.wsj.com. 2. Charlie Rose, “Amazon’s Jeff Bezos Looks to the Future,” 60 Minutes transcript (1 December 2013), www.cbsnews.com. 3. David Blanchard, “CSCMP Edge 2018: How to Build a Future Supply Chain,” Material Handling & Logistics (November/December 2018), 6. 4. Edward J. Marien, “The Customer’s Bill of Rights,” Logistics Today (February 2005), 20–22. 5. www.statista.com. 6. Robert B. Handfield and Ernest L. Nichols Jr., Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems (Upper Saddle River, NJ: Financial Times/Prentice Hall, 2002), 73–74. 7. Ibid., 76. 8. Greg Hewitt, “The Future of Logistics Is Racing toward the Last Mile,” Material Handling & Logistics ( January/February 2019), 27–28. 9. Andy Grady-Smith and Todd McCourtie, “Hyper-Localization: How to Overcome the Challenge of Meeting Local Market Needs,” Material Handling & Logistics (March/April 2019), 21–22. 10.  Courtney Reagan, “That Sweater You Don’t Like Is a Trillion-Dollar Problem for Retailers. These Companies Want to Fix It,” CNBC (12  January 2019), www.cnbc.com. 11. David Blanchard, “Moving Forward in Reverse,” Logistics Today ( July 2005), 1, 8. 12. Helen L. Richardson, “Point of No Returns,” Logistics Today ( June 2004), 20–25. 13.  David Blanchard, “Moving Ahead by Mastering the Reverse Supply Chain,” IndustryWeek ( June 2009), 58–59. 14. David Blanchard, “Going in Reverse Can Be the Right Direction,” IndustryWeek (February 2012), 43–44. 15. John Shegerian, “Optimize Reverse Logistics with Tony Sciarrotta,” transcript of Impact! podcast (8 July 2020), www.impactpodcast.com.

168

Traditional Core Processes of Supply Chain Management

16. James L. Heskett, W. Earl Sasser Jr., and Leonard A. Schlesinger, The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees (New York: The Free Press, 2003), 53. 17. Ibid., 76. 18.  Ronald K. Ireland with Colleen Crum, Supply Chain Collaboration: How to Implement CPFR and Other Best Collaborative Practices (Boca Raton, FL: J. Ross Publishing, 2005), 37–40. 19. Dirk Seifert, Collaborative Planning, Forecasting, and Replenishment (New York: Amacom, 2003), 30–31. 20. VICS merged with GS1, a supply chain standards organization, in 2012. 21. www.gs1us.org. 22. David A. Taylor, Supply Chains: A Manager’s Guide (Boston: Addison-Wesley, 2004), 48. 23. Paul A. Myerson, Lean and Technology (Old Tappan, NJ: Pearson Education, Inc., 2017), 247–248. 24. Jeffrey K. Liker, The Toyota Way (New York: McGraw-Hill, 2004), 199. 25.  Robert Handfield, “United They’ll Stand,” The Wall Street Journal (23  March 2009), R6. 26. www.plantemoran.com. 27. Clare Goldsberry, “Automotive Supplier Working Relations Index Shows Uphill Road for OEMs,” Plastics Today (19 June 2019), www.plasticstoday.com. 28. Chris Denove and James D. Power IV, Satisfaction: How Every Great Company Listens to the Voice of the Customer (New York: Portfolio, 2006), 232–239. 29. John Matchette and Andy Seikel, “How to Win Friends and Influence Supply Chain Partners,” Logistics Today (December 2004), 40–42.

PART

Supply Chain Strategies

 

3

CHAPTER

11

3PLs When You’d Rather Not Do It Yourself Flashpoints Before you consider outsourcing part of your supply chain, you need to figure out what your core competency is. Using a 3PL will give you the opportunity to focus more on your customers’ needs. A 3PL should be held accountable for its ability to meet your expectations. Monitor every aspect of your 3PL’s operation so that you have full visibility throughout the supply chain.

Nearly 20% of all generic drugs come from India, and as one of that country’s largest pharmaceutical companies, Lupin knew well the importance of serving not only its domestic market but the whole world—and especially the lucrative US market. Lupin’s challenge was a significant one—ensuring that its products were available, replenished quickly, and reliably delivered on time to pharmacies. That required distribution and warehousing capabilities that would ensure all products met the various regulatory standards set by the US Food and Drug Administration and other agencies. Lupin is headquartered in Mumbai, and its US subsidiary is based in Baltimore, Maryland. And yet, for American retailers, pharmacies, distributors, and consumers, the center of Lupin’s supply chain universe is actually Louisville, Kentucky. Thousands of pallets of generic drugs are shipped every year to Louisville, where the products are warehoused in temperature-controlled facilities, and ultimately shipped to customers.

171

172

Supply Chain Strategies

Kentucky is well known for any number of things—bourbon, horse racing, and fried chicken being at the top of the list—but pharmaceuticals certainly isn’t one of them. So why would Lupin choose to center its North American supply chain strategy in Louisville? Because that’s where United Parcel Service (UPS), Lupin’s supply chain partner, is located. And, not coincidentally, that’s where UPS’s global air operations are located. UPS handles roughly two million packages per day at Worldport, based at the Louisville airport, where the package carrier averages 300 flights per day (or actually, per night, since all UPS flights occur when the Louisville airport is otherwise inactive). The physical operations are quite impressive, as UPS occupies 5.2 million square feet and 155 miles of conveyors in its package system. Worldport processes 416,000 packages per hour.1 It’s no accident, then, that Lupin’s product distribution is based in Louisville, where UPS Supply Chain Solutions, a division of the package delivery giant that offers third-party logistics (3PL) services, operates a four-millionsquare-foot campus that is home to more than 200 companies. While the sign outside might say UPS, inside the 10  nondescript facilities making up the campus you’ll find, in addition to healthcare and pharmaceutical services, such activities as high-tech diagnostics and repair, critical parts deployment, returns management, cross-dock facilities, product configuration and testing, and quality assurance.2

A Shift to the Supply Chain Side What’s happening in Louisville is hardly unique. The same story has occurred throughout the United States, typically in medium-sized cities like Memphis (TN), Indianapolis (IN), Cincinnati (OH), and Reno (NV) that have access to interstate highways and airports, but are spared the congestion and infrastructure constraints of larger cities. According to Robert Lieb, professor of supply chain management at Northeastern University, dozens of cities in the United States would like nothing better than to establish industry-focused villages in their area. “If you’re trying to run a lean manufacturing or a build-to-order operation, the appeal of having a clustering of related activities around a particular manufacturer is terrific because you’re not worried about infrastructure, or being able to handle movement,” Lieb points out. The biggest hurdle these budding supply chain villages have to overcome is lack of funding.3 Political roadblocks are often more difficult to navigate around than physical ones. To hear some politicians tell it, outsourcing is synonymous with taking jobs away from Americans, but as the Lupin example illustrates, outsourcing can just as easily be credited with bringing jobs into the United States. Although the national media has yet to really notice it, the emergence

173

3PLs

of 3PLs is much more than just an interesting sidebar. It’s evidence that for best-in-class companies today, competitive advantage comes from knowing when to say, “Frankly, I’d rather not do it myself.”

Letting Somebody Else Do It Many well-known and highly regarded manufacturers today are in fact brand managers, since they do little to none of the actual making. Apple, Cisco Systems, Dell, Nike—these are all examples of product-centric companies that do not make their own products, at least not in the traditional sense. In the same way, companies that used to rely on their own employees to run their warehouses and schedule outbound freight transportation are now relying on 3PLs to do these and similar logistics tasks for them.

At a Glance Third-Party Logistics Provider A third-party logistics provider (3PL) is an asset-based or non-assetbased company that manages one or more logistics processes or operations (typically, transportation or warehousing) for another company.

In fact, most companies (roughly 80% within North America and at least 70% in other industrial regions of the world) are already using an outsourcer for at least one key supply chain task. These outsourcers, known in supply chain circles as 3PLs, have grown within the past decade to become a global market worth $932 billion in 2018, according to market research firm Armstrong & Associates. Major companies such as General Motors, Nestlé, PepsiCo, Procter & Gamble, Unilever, Volkswagen, and Walmart each use 40 or more 3PLs. In fact, in the United States, more than 90% of the domestic Fortune 500 companies use a 3PL.4 And in an illustration of the rich-getricher principle, the top 10 global 3PLs control roughly 80% of the world’s total logistics volume, according to analyst firm Gartner.5 Worldwide, the services most frequently outsourced to a 3PL, according to a 2020 3PL study conducted by Penn State University and consulting firm Infosys, are: ■■ ■■

Domestic transportation (73% of responding companies) Warehousing (73%)

174

Supply Chain Strategies

International transportation (65%) Customs brokerage (54%) ■■ Freight forwarding (52%) ■■ Freight bill auditing and payment (35%) ■■ Cross-docking (35%) ■■ Reverse logistics (33%)6 ■■ ■■

According to Lieb, companies are increasingly expecting 3PLs to invest in areas such as e-commerce and omni-channel fulfillment, especially as the role of a traditional 3PL is broadening. “The e-commerce marketplace is very competitive, and companies such as Amazon have moved aggressively in providing logistics services for companies selling their products online,” Lieb points outs.7 As we saw in Chapter 10, Amazon has become both a customer and competitor in the market for logistics services, a situation other large retailers (such as Walmart) will attempt to model. The average amount of time a company has worked with its primary 3PL is more than six years, according to Lieb. Also, in the true spirit of supply chain management, many companies report that their major suppliers and customers are also served by their primary 3PL. Conversely, 30% of the companies surveyed by Northeastern University indicated that their use of 3PL services has had a negative impact on their supply chain integration efforts.8 So clearly, simply signing a 3PL contract is not necessarily a best practice. As we shall see, companies using 3PLs must by definition develop specific best practices in managing those relationships.

Supply Chain Essentials and Nonessentials The increasing sophistication of supply chains—spanning corporate departments and global boundaries—has made it imperative that supply chain professionals think far beyond the four walls of their companies. At a strategic level, this requires a close study of every task, process, and operation within a company’s extended enterprise. Because few companies actually have this expertise in-house, and fewer still are willing to invest resources in nonstrategic areas, a new breed of third-party supply chain specialists has emerged to offer their services to companies that are willing to let somebody else do the actual work. Much of the motivation behind this trend is that companies are increasingly being challenged to focus on their core competencies. The question constantly being put to them is: How good are you at what you do, in every aspect of your business? Many companies are best-in-class at designing products, for instance, but are strictly average in the actual building of

3PLs

175

them. In previous generations, that might have been a black mark against the company, but today the ability to accurately assess your strengths and weaknesses is itself a best practice. Many of the noncore tasks that manufacturers once routinely performed just because that’s the way things got done are now being outsourced to companies that specialize in offering a narrow niche of services. Author Thomas Friedman has described this process as insourcing because thirdparty employees “come right inside your company; analyze its manufacturing, packaging, and delivery processes; and then design, redesign, and manage your whole global supply chain.”9 As supply chain consultant Jim Tompkins, chairman of Tompkins International, sees it, all of the activities a typical manufacturing company has to perform can be broken down into four categories of essential and nonessential tasks: 1. Primary core tasks: Things that differentiate you in the marketplace (e.g., production, product design, production planning, and scheduling). 2. Secondary core tasks: Things that need to be done well but are not visible to the customer (e.g., procurement, logistics, human resources, maintenance). 3. Primary noncore tasks: Things that if not done well can have a negative impact on your customer relationships (e.g., information technology, finance and accounting, sales and marketing). 4. Secondary noncore tasks: Things that need to be done but do not have a significant impact on the success of your business (e.g., real estate, food service, landscaping).10

Finding Your Core Competency Consider the case of Moen, one of the best-known manufacturers of plumbing products. The company considers itself best-in-class when it comes to sinks and faucets; when it comes to areas outside of its core competency, however, Moen is willing to look elsewhere for help. The company has developed an internal evaluation model that helps it identify when and where it needs help: Is this process or function strategic to our organization? Does this process or task provide us with a competitive advantage? ■■ Do we want to upgrade performance in this area to differentiate us from our competitors? ■■ ■■

176

Supply Chain Strategies

If the answer to any of these questions is “no,” then Moen will consider outsourcing that process. For instance, Moen uses a 3PL to design and develop the right kind of packaging to conform to the pallet configuration needs of a major retail customer. Because packaging design expertise wasn’t considered a competency that it needed to have in-house, Moen decided to outsource that task.11 What it all boils down to is how you answer the question: How good are you at what you do? Whether or not outsourcing a piece of your supply chain to a 3PL is worth the trouble depends as much on you as it does the 3PL. In areas where you don’t want to invest, it’s very likely that a 3PL will make that investment, says consultant Scott Saunders, formerly Moen’s vice president of supply chain. Is your company the best in the world at a particular logistics function? Is that function a strategic competence area? If not, Saunders suggests, you should consider outsourcing. It was the same story, though in a vastly different industry, for PIC USA, a supplier of breeding stock to farms, cooperatives, and others involved in pork production. “Our core competency is swine genetics,” observes Ole Torgersen, transport logistics manager. “We used to have our own fleet and drivers, but we realized that transportation was not our specialty and it would probably be better for us to outsource it to someone else.”12 But choosing a 3PL isn’t as easy as consulting a directory and calling around. Most companies today expect considerable value added from their outsourced partners. Moen, for instance, expects a 3PL to be proactive when it comes to moving its freight—that means suggesting creative solutions, not just mimicking the same processes Moen had used in the past. “Transportation management wasn’t Moen’s core competency and we thought we could save time and resources by outsourcing the function,” Saunders remembers. However, despite being a major player in its niche, Moen didn’t have much luck at first when it started looking for the right 3PL. The company’s transportation spend wasn’t considered large enough to make it worth their while to the major 3PLs who were invited to bid on the business. “The big guys didn’t find Moen’s business attractive enough, and they didn’t offer us enough perceived value to take us to the next level,” he says. Ultimately, Moen did find a 3PL partner, but as Saunders learned, that was just the beginning of the process. Managing a 3PL relationship takes a special knack all its own. It involves skill sets that in many ways are different from those needed to manage the actual task. “It’s more like managing a purchasing or sourcing function,” he says. “An operations person may not be successful at managing a 3PL relationship.” In the case of PIC USA, the key was to find a 3PL that was as familiar with site selection as it was with transportation management. PIC was shifting its business model from a centralized network that delivered large

3PLs

177

volumes of lower-priced animals to a decentralized system delivering low volumes of high-priced animals. As a result, PIC searched till it found a 3PL able to perform a site location study as well as a routing and scheduling analysis. The 3PL discovered that PIC needed to revamp its distribution network so that its hubs were closer to the source farms. This led to a reduction in the specialized metric of miles-per-pig from nine miles to eight, Torgersen explains, which in dollars and cents saved PIC $80,000 per year (the less time a pig spends on a truck, the healthier it is on arrival). The reduction in fuel costs due to being closer to the customer has also resulted in significant savings.

The Same Set of Eyes Before you undertake a 3PL relationship, you need to evaluate your own company, Saunders advises. You won’t be able to identify if the 3PL is improving your logistics if you never measure your own performance. Look at your own organization with realistic expectations, and make sure you measure the right things internally. If you measure the wrong things, he warns, it will skew your expectations. Moen uses a 3PL partnership model developed by Ohio State University to measure the effectiveness of its outsourcers. The model includes a supplier agreement, which helps direct Moen to spend time with its supplier base developing goals and expectations for both sides. Scorecards measure how well the 3PLs meet Moen’s expectations. It’s important, Saunders adds, that you review those scorecards regularly, and be willing to adjust your expectations and the scorecard itself if the initial evaluation process wasn’t quite right. The key is finding a comfort level where the customer trusts the 3PL to do its job properly, and the 3PL is confident enough in its abilities that it freely shares the best practices it’s learned from other customers and other industries. Reaching that comfort level, however, can be a frustratingly long time in coming.13 Making the wrong decision when choosing a 3PL is a surefire route to insomnia as it’ll keep you awake at night more effectively than drinking too much caffeinated coffee, says Chris Honsberger, former director of global sourcing with coffee giant Starbucks (currently chief supply chain officer with International Rescue Committee). And even if you’re pretty sure you made the right choice, you’re not going to be able to totally disassociate yourself from keeping a close eye on the outsourced process. Although the task you’ve outsourced to a 3PL may no longer be one of your company’s core competencies, you still need to be engaged in whatever area of logistics the 3PL is responsible for, Honsberger advises. He

178

Supply Chain Strategies

remembers a time when Starbucks wasn’t seeing the turnaround it expected from a third-party relationship at one of their facilities. “We started walking the building together with a specific audit list of operational health indicators,” he explains, to ensure that both Starbucks and the 3PL were looking at the same things through the same lens, such as inbound quality, stock location accuracy, and order accuracy. “When you both look at something at the same time and you see inefficiencies, it’s easier to identify areas for improvement.”14

The Financial Impact of Outsourcing Just because a company has outsourced some of its logistics or production tasks does not mean it can outsource the ultimate responsibility for those roles. It’s quite the contrary: Supply chain professionals at companies need to be tuned in to every aspect of a 3PL’s operation so that they know where their products are at every point in the cycle. Consultant Greg Meseck, a managing director with Ernst & Young who’s also worked for such firms as KPMG, Marsh, and PepsiCo, relates the consequences of not keeping a strict eye on the outsourcing process. “A global pharmaceutical company outsourced the production of a key drug to a third party,” Meseck remembers. “The pharmaceutical company held the marketing rights to this new drug. The outsourced manufacturer had a major disruption and, as a result, was unable to provide the drug per the agreed-upon terms. Due to the late delivery, both the pharmaceutical company and the outsourced provider suffered significant financial losses in terms of lost market capitalization and reduced revenues.” Most companies, Meseck believes, are unable to model the risks inherent in outsourcing and the corresponding probable results, nor can they map these outcomes to their financial statements. Best-in-class companies, however, have identified ways they can calculate the financial impact of outsourcing. Analyzing supply chains from a risk perspective offers companies a better understanding of the potential sources of a disruption, he notes, and, most important, the potential financial impact resulting from a disruption. Start by constructing a financial framework, Meseck recommends, which identifies key supply chain risk areas as well as critical risk drivers. These drivers include lead times, single-source suppliers, Customs clearance times, material availability, level of customer customization, product returns, financial strength of key suppliers, and port location. The next step, he says, is to assess the percentage of total risk by category, and then to incorporate this information into a financial model. As Meseck explains, “Mapping the risk categories to the financial statements provides management with a fact-based approach to identifying and

3PLs

179

quantifying risk.” This enables companies to make a 3PL decision based on operational, financial, and risk factors. As a result, he notes, a company will be “fully able to leverage its outsourcing capabilities in order to meet customer demands regarding cost, quality, and timeliness while effectively managing the underlying risks associated with outsourcing.”15

Staying in Touch One of the first questions manufacturing companies ask a prospective 3PL is, “How can we stay in touch with our customers if we outsource service to you?” While it may not be the answer you’re hoping to hear, a 3PL is entirely within its rights to respond, “That’s up to you.” Just because you outsource some of your supply chain functions doesn’t mean you stop interacting with your customer base. If anything, as discussed in the previous chapter, knowing what your customers want and keeping them happy should be one of your company’s core competencies, so using a 3PL for other tasks gives you the opportunity to get even closer to your customers. It’s irrelevant to the customer if you use a 3PL, says John Mascaritolo, director of Clayton State University’s Center for Supply Chain Management and formerly director of global logistics with high-tech manufacturer NCR. NCR’s goal was to always have exposure to the customer. NCR’s customers, like any other company’s customers, expect on-time deliveries, complete and undamaged—in other words, the “perfect order” (see Chapter 10). Whether it was NCR or a 3PL that was managing the logistics, ultimately it’s going to be NCR that’s judged on how well, or poorly, those orders are managed. To stay in tune with its customers’ expectations, NCR would assign project managers and sales personnel to regularly meet with its customers after a product was delivered and installed. It was also important, Mascaritolo notes, to meet frequently with the 3PL. A company’s business and its relationships are always changing, he points out, so a 3PL “needs to be flexible enough to go along with the changes.”16

Going Beyond the 3PL Model While 3PLs generally assume responsibility for specific services, some companies prefer to outsource even more responsibility to an entity known as a lead logistics provider (LLP), which functions much like a general contractor because it manages all of a company’s logistics activities. Since an LLP often acts as an overseer over one or more 3PLs (and since the supply chain field loves to create acronyms), it is sometimes referred to as a fourth-party logistics provider (4PL) (see Shell case study in Chapter 2).

180

Supply Chain Strategies

At a Glance Lead Logistics Provider (LLP) A lead logistics provider (LLP) manages all logistics activities for a company, including management of 3PLs. It is sometimes referred to as a fourth-party logistics provider (4PL) because an LLP functions as a thirdparty overseer of other third parties.

One of the first and best-known LLPs was Vector SCM, a joint venture formed by automaker General Motors and Menlo Worldwide, a 3PL. Vector SCM was designed to “act as the nervous system within the supply chain, providing design and engineering and creative solutions tied to order fulfillment, manufacturing, logistics, and supply chain, end to end,” according to Greg Humes, who once served as president and CEO of Vector SCM. Although GM’s financial difficulties ultimately led it to reabsorb Vector SCM’s logistics capabilities in 2006, at its peak the joint venture integrated all of GM’s 3PL relationships and managed more than 80% of the automaker’s annual $6 billion logistics spend. An LLP can help make your company more competitive, but you have to be willing to give up some control over your supply chain. For instance, aerospace and industrial manufacturer Honeywell set up a 4PL relationship within one of its rapidly growing business units that lacked an existing logistics infrastructure, on the theory that it would be easier to use a 4PL in a growth environment where the demands of the supply chain were constantly changing. While Honeywell would continue to manage overall corporate strategy, the 4PL would manage at the day-to-day operational level. Honeywell rewards its 4PL with financial incentives for projects that lead to better logistics performance.17 As with all relationships, sometimes they don’t work out over the long term. As Lieb explains, as market pressures increase and companies face customer expectations of delivering more services, they’ve turned to using multiple 3PLs to meet those requirements. While managing multiple relationships with 3PLs, many companies are not enthralled with the 4PL model of doing business, Lieb says. “Some companies that have used 4PLs have reported that rather than reducing the level of complexity of their relationships with 3PLs, it has simply added another layer of complexity and one more party to deal with.”18 When investment manager Reed Carr was researching 4PLs during his tenure as logistics outsourcing development manager for chipmaker giant

3PLs

181

Intel, he talked to many companies to get their take on when to use a 4PL and when not to. A frequent complaint he heard from companies was that after getting an initial good return on investment, it became difficult over time to identify if the 4PL was a help or a hindrance. One company, Carr remembers, saw its transportation costs per unit actually increase after hiring a 4PL to manage that part of the business. The companies that were most successful in their 4PL relationships were those that lacked the logistics expertise or assets in-house, Carr says. “They didn’t have IT or physical infrastructure, and didn’t want to invest in those areas. Companies with all that in place and who considered supply chain a competitive asset were less likely to find the 4PL model desirable.” Most companies give up logistics expertise in-house in order to offset the cost of a 4PL, Carr notes, so any company considering going the route of outsourcing their logistics needs to determine how much expertise they want to retain. “Perhaps you shrink the management team from 100 to 10,” he says by way of example. “You can eliminate part of the management structure but keep the ability to monitor and measure the 4PL. You have to keep a significant foot in the door.”19

Outpacing the Competition Outsourcing a supply chain process can help a company achieve several benefits, particularly by enabling it to focus on its core business. According to consulting firm Capgemini, there are numerous other ways a 3PL can help a company, including: Tap into unrealized cost savings by leveraging spend across the enterprise. ■■ Accelerate the achievement of results. ■■ Provide better tracking of key operational functions. ■■ Add value by converting operations from overhead to competitive strength. ■■ Decrease supplier costs through leverage of volume discounts, objectivity, and reduced cycle times. ■■ Improve adherence to policies. ■■ Improve inventory performance through sophisticated statistical techniques. ■■ Outpace competition through use of leading-edge technology and best practices methodologies.20 ■■

182

Supply Chain Strategies

Higher Demands, Higher Expectations According to John Langley, director of development at Penn State’s Center for Supply Chain Research, 3PLs and their customers need to be well aligned to achieve great efficiencies and effectiveness in their relationships. Automaker Ford Motor, for instance, worked with a 3PL to develop and manage a centralized logistics network that involved all inbound material handling for more than two dozen of its manufacturing plants. The 3PL redesigned Ford’s logistics network by creating 10 order dispatch centers and consolidating shipments to plants. The end result was the establishment of a single point of contact for all Ford logistics, which allowed the 3PL to train 1,500 suppliers on a common set of procedures. The automaker gained a clearer picture of how its logistics operations impacts the entire company, and thanks also to the implementation of new supply chain technology (such as routing, order tracking, and metric reporting solutions), Ford saw an inventory reduction of 15%.21 In 2015, 36% of companies’ total logistics expenditures went to 3PLs, but by 2019 that number had jumped to 52%, according to the aforementioned annual 3PL study conducted by Penn State and Infosys. Domestic transportation and warehousing are the dominant logistics services outsourced to 3PLs, but as competition among 3PLs gets even tighter due to industry consolidation and the increasing need to get products to consumers more quickly than ever, 3PLs are expanding their offerings into fullfledged supply chain projects that extend beyond traditional services. In fact, there aren’t too many logistics-related services that a 3PL won’t do if you’re willing to pay them. That includes supply chain analytics (see Chapter 4), sustainability and regulatory compliance (see Chapter 14), and supply chain financing (see Chapter 15).22

Notes 1. www.ups.com. 2. David A. Mann, “UPS Has Brought How Many Companies to Louisville?” Louisville Business First (29 March 2019), www.bizjournals.com. 3. David Blanchard, “It Takes a Supply Chain Village,” Logistics Today (November 2004), 9. 4. www.3plogistics.com. 5. David Gonzalez, Greg Aimi, James Lisica, et al., Helping Logistics Leaders Define Their Transactional, Preferred, and Strategic 3PL Relationships, Gartner (24 July 2017; refreshed 4 April 2019), www.gartner.com.

3PLs

183

6. David Blanchard, “If Geopolitical Chaos Has You Confused, Don’t Worry: There’s a 3PL for That,” Material Handling & Logistics (September– October 2019), 4. 7. David Blanchard, “The Omni-Channel Capabilities Gap,” Material Handling & Logistics (October 2014), 28. 8. David Blanchard, “How to Win at Outsourcing,” Logistics Today (November 2004), 1, 21. 9. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-first Century (New York: Farrar, Straus and Giroux, 2005), 144. 10. James A. Tompkins, Steven W. Simonson, Bruce W. Tompkins, et al., Logistics and Manufacturing Outsourcing: Harness Your Core Competencies (Raleigh, NC: Tompkins Press, 2005), 41. 11. Helen L. Richardson, “How to Maximize the Potential of 3PLs,” Logistics Today (May 2005), 19–21. 12.  Roger Morton, “Why Is This Pig Smiling?” Outsourced Logistics (August 2008), 14–16. 13. Richardson, “How to Maximize the Potential of 3PLs.” 14.  Tom Andel, “3PL Selection Starbucks Style,” Material Handling & Logistics (21 May 2012), www.mhlnews.com. 15. Greg Meseck, “Risky Business,” Logistics Today (August 2004), 34–41. 16.  Helen L. Richardson, “3PLs at Your Service,” Logistics Today (September 2004), 47–50. 17. Helen L. Richardson, “What Are You Willing to Give Up?” Logistics Today (March 2005), 27–29. 18. Robert C. Lieb, “Consolidation in the 3PL Industry: Why Is It Happening, and What Does It Mean?” CSCMP’s Supply Chain Quarterly (23 October 2015), www .supplychainquarterly.com. 19. Richardson, “What Are You Willing to Give Up?” 20. William Frech and Ben Pivar, “Riding the Outsourcing Wave” Supply Chain Technology News ( June 2003), 13–15. 21. David Blanchard, “Ford Collaborates with 3PL to Centralize Its Logistics Network,” IndustryWeek (29 November 2015), www.industryweek.com. 22. Blanchard, “If Geopolitical Chaos Has You Confused, Don’t Worry: There’s a 3PL for That.”

CHAPTER

12

Risk Management What to Do When Absolutely Nothing Goes According to Plan Flashpoints An effective supply chain risk management plan requires a strategic view of your operations as well as that of your supply chain partners. Risk management contingency programs can help substantially reduce the impact of supply chain disruptions. As supply chain technologies advance, so too do the number of cybersecurity breaches. Supply chain disruptions often prompt companies to adopt best practices and enabling technologies sooner than they might have otherwise planned.

Every year, almost like clockwork, an unpredictable catastrophe will strike somewhere in the world and put supply chains throughout the world to the ultimate test. Usually it’s some kind of natural disaster—tsunamis, earthquakes, hurricanes, wildfires, and the like. Sometimes they’re man-made, such as acts of terrorism or sabotage. And sometimes they’re the result of contagion, such as SARS, swine flu, and COVID-19. Whatever crisis might be dominating the news at the time you’re reading this book (and at this writing, COVID-19 is still very much an active concern), none of these events could be foreseen, and yet not only reputations and businesses but in fact the lives and livelihoods of thousands, sometimes millions of people or

185

186

Supply Chain Strategies

more are affected. And that places a lot of burden on supply chain professionals to somehow figure out a way to respond promptly and decisively to something totally unexpected. That’s where risk management comes in. The fact of the matter is, it doesn’t take a huge, unforeseen disaster to upset the natural order of a supply chain. There are plenty of garden variety disruptions to keep a supply chain manager constantly on guard against risks of all shapes and sizes. For instance, according to the Resilience360 report from logistics company DHL, the top three risks to global supply chains are uncertainties concerning trade flows, cybersecurity incidents, and climate change producing extreme weather conditions, such as wildfires, droughts, low water levels, and melting ice. “Modern supply chains are vulnerable,” says Shehrina Kamal, director of risk intelligence with DHL’s Resilience360 group. “Transportation delays, theft, natural disasters, inclement weather, cyberattacks, and unexpected quality issues can disrupt cargo flows, creating short-term costs and delivery challenges.” Other significant areas of risk include raw material shortages, product recalls, labor unrest, tougher environmental regulations, and even the threat of drones to air safety.1 According to consulting firm McKinsey & Company, every year at least one company in 20 suffers a supply chain disruption costing at least $100 million.2 There’s really no end to risk, and a supply chain risk manager’s job is never really done. To coin a phrase: You can’t stop risk—you can only hope to minimize it. But how do you minimize something you can’t even predict? The answer is: You don’t need to predict it. You just need to plan for it, and contingency planning has emerged in this century as one of the single most important best practices for supply chain management. Having a contingency plan in place can help companies respond more quickly to unplanned events, points out consultant Eugene Klein, formerly general manager of food distributor SYSCO. Effective risk management programs can also help substantially reduce supply chain disruptions. A contingency management team, Klein suggests, should include representatives from all departments of a company: senior management, operations, distribution and logistics, legal, quality control, engineering, sales and marketing, and public relations. “Eliminating all risk is neither possible nor cost-effective, so companies must identify the most vulnerable components of an operation and apply a greater share of resources to the most critical components,” he adds.3

Reducing Your Vulnerability In The Resilient Enterprise, Yossi Sheffi, director of the Center for Transportation and Logistics at the Massachusetts Institute of Technology and one of

Risk Management

187

the world’s leading experts on supply chain risk, suggests that by reducing their vulnerability to disruptions, companies can also reduce their vulnerability to daily market fluctuations and thereby improve their general financial performance. He offers these best practices in vulnerability reduction: Organize for action. Companies should consider naming a chief risk management officer who would be responsible for security as well as ensuring that the company is flexible enough to recover quickly from a disruption. This flexibility, Sheffi notes, “may involve redesign of operational processes, transformation of corporate culture, changes in product design, organizational changes within the company, and different relationships with customers, suppliers, and other stakeholders.” Assess the vulnerabilities. This involves asking three questions: What can go wrong? What is the likelihood that it will happen? How severe is the possible impact likely to be? Reduce the likelihood of disruptions. Focus on separating abnormal activities from normal baseline activities, Sheffi advises, such as deciding which containers should be checked, which employees warrant special attention, or how many product failures in a given time period might indicate sabotage. He suggests taking a layered approach to security rather than opting for a single defensive mechanism, which, even if such a mechanism were possible, would be prohibitively expensive. Collaborate for security with industry associations, citizen watch organizations within the company’s community, and government initiatives such as C-TPAT. Build in redundancies. A too-tight supply chain, Sheffi warns, “may be an indication of danger; when too many ‘redundant’ employees are let go, when capacity utilization is ‘too high,’ and when procurement is focused on a single supplier, risk management alarms should go off.” Don’t abandon your lean business processes, he notes, but be aware of the risk of slicing your supply chain too thin. Invest in people and culture. Simply put, a company’s most important assets are its employees.4

Don’t Let Their Problems Become Your Problems Supply chain risk management is a business issue, not a standalone concern, says Michael Chagares, director of risk consulting services with consulting firm PwC. Supply chain management by itself, he points out, has always involved managing uncertainty and risk. “Today, however, that risk component has a never-before-seen impact on the ability of a company to achieve its goals. With the right supply chain risk mitigation processes in place, risk management can contribute to a company’s overall profitability

188

Supply Chain Strategies

and ultimately make the business more resilient as it encounters threats to its operations.” Chagares recommends companies take a three-pronged approach to accomplishing that kind of resiliency: Assess the risks by first defining your supply chain, including customers, suppliers, and third-party providers, to gain an understanding of their operational and financial risk profiles. It’s important to understand what could happen to you if, for instance, one of your suppliers fails to deliver raw materials. Their problems can quickly become your problems if you don’t have contingency plans in place. ■■ Design a framework that integrates all the key risk capabilities necessary to make enterprise-wide decisions. For instance, spell out exactly who is responsible to direct and track decisions. The framework should also include “risk analytics to help identify, measure, and monitor operational risks,” he says, as well as “risk reporting that delivers focused, relevant, and timely information that delivers the insights management needs to make informed decisions.” ■■ Implement your supply chain risk mitigation action plan. You’ll know you’ve got a sound plan, he says, if it gives you a clear direction and becomes part of the fabric of your company.5 ■■

Shelter from Supply Chain Storms Everything changed for supply chain managers after the terrorist attacks of September 11, 2001. Up until then, supply chain security tended to be parochial, with companies primarily focusing on protecting their goods from familiar domestic criminal elements: shrinkage, shoplifting, burglary, arson, and the like. Focusing on theft prevention makes a lot of sense, since crime costs US companies nearly $50 billion per year. The retail industry alone loses between 1% and 2% of its inventory each year to shrinkage.6 However, the events of 9/11  introduced supply chains to a powerful motivational element that had largely been unknown in the United States: fear, particularly economic fear. According to a Government Accountability Office (GAO) report, if a weapon of mass destruction were to be detonated in the United States, it could result in as much as $1 trillion in costs related to port closures.7 To put that number into perspective, $1 trillion is equal to the total amount spent on logistics in the country in a given year.8 Given that one bomb exploded in one port could essentially cost the US economy an entire year’s worth of supply chain activity, it seems

Risk Management

189

reasonable to assume that significant progress has been made to secure our ports from outside threats. In the years since 9/11, governments throughout the world—and particularly the United States—have added numerous layers of bureaucratic checks and balances designed to make global supply chains safer. The US Department of Homeland Security (DHS), for instance, was  created as a cabinet-level agency in 2002 specifically to orchestrate various trade and security efforts. The US Customs Service was reorganized and renamed US Customs and Border Protection (CBP) in 2003. And air passengers have witnessed firsthand the constant bevy of changes engendered in airport security by the Transportation Security Administration. At the most obvious level—the protection of America’s citizens—the establishment of various security-oriented agencies and initiatives has accomplished its main goal: To date, there have been no direct follow-up attacks on US soil. However, there is far too much at stake for supply chain managers to relax their vigilance, especially given the likelihood that the next attack could come from cyberterrorists, and far too many businesses, hospitals, utilities, schools, and other organizations are vulnerable to such attacks from within their own computer systems.

Cybersecurity Blanket Thanks to the advancement and adoption of various digital technologies, supply chains today are far more intelligent and interconnected than ever before—which is both a blessing and a curse. One of the holy grails of supply chain management is achieving full end-to-end visibility, a goal that is becoming increasingly possible thanks to artificial intelligence, the Internet of Things, data analytics, and other technologies that allow software and hardware to “talk” to each other and share transactional data. But that very same interconnectedness also makes every digital supply chain susceptible to cyberbreaches. According to the Cyber Incident and Breach Trends Report compiled by the Internet Society’s Online Trust Alliance (OTA), roughly half of all cyberattacks occur through a company’s supply chain.9 The cyberattack on retail giant Target in 2013, for instance, occurred by way of a breach gained through an HVAC vendor. That attack involved more than 41 million Target customers’ payment card accounts, and cost Target $18.5 million in settlement costs, not to mention an incalculable amount in lost revenue from customers who lost trust in the retailer’s ability to keep their credit card data secure.10 The OTA estimates that the total cost of the more than two million cyber incidents in 2018 was at least $45 billion, including more than 60,000 infected websites due to attacks via the supply chain.

190

Supply Chain Strategies

A study of manufacturers conducted by professional services firm Sikich found that fewer than 20% of companies consider themselves “very ready” to address cybersecurity risk, while 63% say they are only “somewhat ready.” The latest trends in cyberattacks include ransomware and electronic payment fraud, points out Kevin Bong, a senior manager in Sikich’s security and compliance practice. Hackers, he explains, “are looking for companies with easy vulnerabilities to exploit. Unfortunately, many manufacturers fit this bill.” The rapid rise of IoT and robotics technologies are increasing cybersecurity vulnerabilities, Bong says, contributing to an equally rapid rise in cyber incidents. While companies need to develop comprehensive security protocols, conduct regular risk assessments, and maintain constant vigilance over their system, Bong suggests that a good place to start would be to implement these six actions: 1. Require passwords of at least 16 characters. Rather than insisting that all passwords have a mix of characters and symbols, Bong says it’s far more difficult to penetrate passwords of 16 characters or more. 2. Use dual-step authentication to improve remote access control. 3. Ensure that the default settings in your operating systems don’t expose your network to vulnerabilities. 4. If you use third-party applications, manage all updates on a regular and consistent basis. 5. Employ strong Internet filters. 6. Educate your employees on how to recognize and handle suspicious emails.11 The National Institute of Standards and Technology (NIST) offers these cyber supply chain risk management best practices: Include cybersecurity requirements in every request for proposal (RFP) and contract with a supply chain partner. ■■ Have a member of your security team work on-site with your suppliers to address any vulnerabilities or security gaps. ■■ Institute “one strike and you’re out” policies to protect yourself against supplier products that are counterfeit or out-of-spec. ■■ Use secure authentication processes for all software and hardware. ■■ Use track and trace programs to establish the provenance of all parts, components, and systems. ■■ Insist that your supply chain cybersecurity team works in tandem with everybody who is involved in the product development lifecycle.12 ■■

Risk Management

191

Customs-Trade Partnership Against Terrorism Whenever government intrudes into global commerce, the moves are generally met with a great deal of resentment from industry, but after 9/11, businesses became highly motivated to cooperate with various security initiatives. While safety protocols and technology are key facilitators of security measures within companies, twenty-first-century supply chain security best practices are increasingly centered on these industry/government initiatives. In the United States, the best-known and most important best practice for supply chain security is the Customs-Trade Partnership Against Terrorism (C-TPAT), which was created shortly after 9/11 by CBP. (There are a couple dozen similar initiatives in other countries, such as Canada’s Partners in Protection program, Sweden’s StairSec initiative, New Zealand’s Secure Export Scheme, and the European Union’s Authorized Economic Operator program.) C-TPAT establishes a set of relationships and collaboration between government and industry for companies to implement security practices—both within their own company as well as throughout their supply chain, explains Theo Fletcher, IBM’s vice president of import security and supply chain compliance. “In return for implementing those security practices and investing in those practices, companies receive benefits from the government,” he explains.13 One of the main benefits is the assurance that a company’s goods will flow more quickly through Customs. Participating companies are also subject to fewer inspections, which allows them to maintain a more predictable global supply chain, which in turn provides a competitive advantage versus those companies that have not adopted C-TPAT. C-TPAT’s role is to certify known shippers through self-appraisals of security procedures, coupled with Customs audits and verifications. To be approved by CBP, participating companies must commit to these practices: Conduct a comprehensive self-assessment of their supply chain security processes using the C-TPAT guidelines, which encompass these areas: ■■ Procedural security ■■ Physical security ■■ Personnel security ■■ Education and training ■■ Access controls ■■ Manifest procedures ■■ Conveyance security ■■ Submit a supply chain security profile questionnaire to CBP. ■■ Develop and implement a program to enhance security throughout their supply chain following C-TPAT guidelines. ■■

192

Supply Chain Strategies

■■

Communicate the C-TPAT guidelines to other companies in their supply chain, and work to build the guidelines into relationships with these companies.14

Getting Countries to Talk to Each Other The key to C-TPAT and parallel efforts succeeding is that companies must agree to implement a global common process that includes their supply chain partners. The rallying point for industry and government, Fletcher suggests, should be the World Customs Organization SAFE Framework of Standards on supply chain security and trade facilitation. It’s vital to the advancement of supply chain management that there is a common set of global practices and processes. As of summer 2020, 183 countries—representing over 98% of the world’s total trade—had adopted the WCO SAFE Framework, which is based on four principles: 1. Harmonizing the advance electronic cargo information requirement on inbound, outbound, and transit shipments. 2. Applying a consistent risk management approach to address security threats. 3. Using nonintrusive detection equipment to effect Customs examinations of high-risk containers and cargo. 4. Providing benefits to companies that meet minimum supply chain security standards and best practices.15 “The WCO requires Customs officials in one country to talk to others,” Fletcher points out. As officials receive the relevant import data and learn what goods are going to be coming into their country within the next few days, if their risk assessment raises any red flags, they can ask the exporting country to inspect those goods before they are shipped. “That creates good relationships between trading partners—good sharing of data, good sharing of knowledge, and a good sharing of trust between trading partners, which previously did not exist—certainly not to the extent that they do within the WCO framework.” For border crossings, another best practice for US companies is to utilize the Free and Secure Trade (FAST) lanes at the Canadian and Mexican borders. This program, which is a component of C-TPAT, promotes trade “by using common risk management principles, supply chain security, industry partnership, and advanced technology to improve the efficiency of screening and clearing commercial traffic at [the] shared borders.” To be eligible for expedited border crossings via dedicated lanes (where available), companies must already be participating in C-TPAT.

Risk Management

193

Cargo theft is a global problem and one of the biggest threats to supply chains, totaling well over $20 billion worldwide, according to BSI, a standards organization. Cargo thieves predominantly target trucks by hijacking them, breaking into them when parked, or stealing the cargo and the vehicle both. Countries most severely impacted by cargo theft include China, Germany, India, Mexico, South Africa, and the United States. Companies worldwide face an ever-increasing range of supply chain challenges, says Jim Yarbrough, global intelligence program manager at BSI, from human rights violations to violent cargo hijackings to natural disasters. That situation, he says, “creates extreme levels of risk for organizations, both directly affecting the bottom line, but perhaps more seriously, hidden threats to the supply chain which, if ignored, could do serious harm to a company’s reputation.”16 The most frequent targets of cargo thieves are consumer electronics, food, and apparel, and more than one-third (39%) of all cargo thefts occur at truck stops and highway rest areas, according to a study conducted by the Chubb Group of Insurance Companies. Modal yards managed by trucking companies, railroads, or ocean carriers are targeted by 27% of all cargo thieves, and another 25% of thefts occur at unsecured locations, such as motel, restaurant, and mall parking lots. “Cargo thieves are opportunists,” points out Barry Tarnef, a marine loss control specialist with the Chubb Group, adding that cargo crime in the United States costs businesses several billion dollars per year. Tarnef suggests that companies follow these seven steps to prevent cargo theft: 1. Thoroughly screen prospective employees. 2. Carefully select transportation partners and intermediaries. 3. Establish a security culture within your company. 4. Factor in security when determining shipment routing. 5. Incorporate countersurveillance. 6. Take advantage of technology, such as vehicle and shipment tracking systems and high-tech security seals. 7. Conduct periodic security audits.17

“It’ll Never Happen Here” Not every devastating attack on the nation’s supply chain is a sneak attack; sometimes they’re announced several days or more in advance. That was certainly the case with Hurricane Katrina’s attack on the US Gulf Coast in August 2005, an event that meteorologists had seen developing well ahead

194

Supply Chain Strategies

of the actual landfall, and most of the country was aware of thanks to round-the-clock news coverage. And yet, to this day, the damage wrought by that storm still lingers in the areas most severely hit, and the lessons learned haven’t necessarily been adopted unilaterally. Katrina was the first big test for the Federal Emergency Management Agency (FEMA) since its absorption into the DHS in 2003, and by most accounts FEMA flunked the test. Created specifically to “manage federal response and recovery efforts following any national incident,” FEMA was late to react to the storm’s potential for damage, was ineffective in coordinating relief efforts, and was stymied by a culture of “It’ll never happen here” wishful thinkers in the New Orleans area. As a GAO report notes, “incomplete policies and plans contributed to the lack of clarity in leadership roles and responsibilities in the response to Hurricane Katrina. This problem resulted in disjointed efforts by emergency responders that may have caused increased losses of life and property.”18 Although the government’s response to Katrina was certainly inadequate at all levels—local, state, and federal—the reaction time of several companies was superlative, as they applied the same type of supply chain best practices to the relief effort that they apply to their daily business activities. Consider, for instance, retail giant Walmart, which responded to the disaster scene promptly and without compromise. We saw in Chapter  10 how Walmart uses point-of-sale data to strengthen its relationships with suppliers. After Katrina hit, the retailer demonstrated that it could similarly use historical sales patterns from previous hurricanes to determine exactly what products customers would need to recover from the storm. Walmart employs its own meteorologists, and it relied on their forecasts—rather than the government’s—to route trucks and supplies to the area. The company’s strategy also included setting up “mini–Walmarts” in the most devastated areas, where employees handed out clothing, diapers, personal care items, and food.19 Similarly, Home Depot, another big-box retailer, reacted quickly to the storm’s onslaught thanks to its culture of always being prepared for disasters. The retailer in fact organizes its divisions geographically based on the types of disasters that occur most frequently in a given area, whether it is hurricanes in the South, blizzards in the North, or wildfires in the West.20 Home Depot manages to stay ahead of storms because they know what to expect (i.e., they pay very close attention to weather forecasts to determine when to close stores and what supplies to stock). For instance, before Hurricane Katrina struck, the retailer preloaded trucks at its distribution centers so it could quickly get products to the areas where they were needed the most.21 Perhaps recognizing its own bureaucratic inefficiencies, the US government has become more receptive to the idea of working with private companies like Walmart and Home Depot to deal with emergency relief efforts.

Risk Management

195

Since Katrina, one of the biggest changes has been “government opening its doors to the private sector in general, the recognition that we are part of the collective solution,” notes Jason Jackson, Walmart’s senior director of emergency management. Since Katrina, when preparing for hurricanes Walmart’s transportation division has been able to quickly obtain overweight trucking permits that make it possible to carry large power generators to stores in the affected areas.22 Walmart’s emergency center, which was established in the aftermath of the 9/11 attacks, operates 24/7 and by design responds not only to hurricanes and other natural disasters, but also to events within a particular store, such as fires, shootings, or chemical spills. “Every day, just because of our size, we’re dealing with day-to-day emergencies,” Jackson says. “So the company has this mechanism in place to manage and provide resources and support to take care of it. [The emergency center] itself is really a connection and coordination framework for quick action.” At the corporate level, Walmart works closely with government agencies and disaster relief organizations to coordinate emergency response efforts. For instance, the company and its Walmart Foundation committed up to $20 million to help relief efforts in the wake of the damage wrought by Hurricane Harvey in 2017.23 Similarly, FEMA thinks so highly of the response team capabilities of another retailer that it measures the severity of crises by “the Waffle House Index,” named after the 24-hour restaurant chain’s reputation for almost always staying open, no matter how bad a storm might get. Based on the colors of a traffic light, “green” means Waffle House is serving a full menu, “yellow” means a limited menu, and “red” means the restaurant is closed. The restaurant chain, according to a Yahoo!Finance report, prepares for hurricane season “with military-style strategy and execution,” developing storm checklists for every location, consulting with local authorities, and training every employee on emergency protocols. The company also coordinates jump teams, which involve Waffle House employees who live outside of the hurricane area. They’re able to quickly restore service if needed, and can focus on relief efforts while local employees are dealing with their own families and home situations.24 “Waffle House knows immediately which stores are going to be affected, and they call their employees to know who can show up and who cannot,” explains Panos Kouvelis, director of the Boeing Center for Supply Chain Innovation at Washington University in St. Louis. “They have temporary warehouses where they can store food, and most importantly, they know they can operate without a full menu.”25 Waffle House and other retailers like Walmart, Home Depot, and Lowe’s “have good risk management plans in place and are great examples of how their supply chains get affected in two different ways,” he says. “On the one hand, their own supply chain is exposed. At the same time, their stores are

196

Supply Chain Strategies

supposed to be the first to react and provide the basic supplies. Their supply goes down, while their demand goes up.” Because Waffle House is so well prepared for disasters, it’s a rare occasion for the index to hit red, Kouvelis says. However, just such an occasion occurred in March 2020, when the Waffle House Index was used for the first time to measure the impact of an event that was not storm-related. The COVID-19 virus caused the shutdown of more than 20% of the restaurant chain’s Southeast US locations, leading Waffle House to declare the situation a “code red.”26

Taking Responsibility for Your Supply Chain Effective supply chain security measures require that companies take a strategic, high-level view of not only their own operations, but also the security procedures of their supply chain partners. “Every touch point has to be scrutinized, beginning with the supplier and ending with the final handoff,” recommends John Mascaritolo, director of Clayton State University’s Center for Supply Chain Management and formerly director of global logistics with high-tech manufacturer NCR. You need to ask specific questions about every one of those touch points, he suggests, such as, “Who attaches the cargo security seals? Is there a witness, or are the seals given to the truck driver? Once the carrier has a shipment, if there’s an accident, what is my process and what does my carrier do? What happens if a container arrives with a broken seal?” Companies need a process for handling all of these situations, Mascaritolo continues. “Achieving C-TPAT certification is one process. Going through the exercises to secure your supply chain is another process. You have to ask yourself what you can and cannot control.”27 The US government’s strategy for supply chain security is basically a two-part approach, notes Greg Aimi, vice president of supply chain technologies research with analyst firm Gartner. The first part is convincing companies to assume responsibility for the security of their own supply chains, through voluntary participation in C-TPAT. The second part, Aimi points out, is focused on the Automated Commercial Environment (ACE), a trade processing system developed by CBP whereby the government determines the admissibility of imports and exports going through a US port.28 ACE is designed to “consolidate and streamline the export and import process, providing one automated system for entry processing, cargo release, and export processing,” explains Amy Smith, head of US Customs and trade compliance with DHL. “Without ACE, a paper-based system requires importers and exporters and their logistics agents to submit the same data to different agencies, and it requires the same information to be keyed in manually to multiple electronic systems. With ACE and the single window,

Risk Management

197

information can be submitted and processed quickly, for use by multiple government agencies for review and clearance.”29 The ACE program itself, though designed to be “the backbone of the CBP’s trade information processing and risk management activities,” has been hampered by technological delays and inadequate funding. As recently as summer 2020, CBP had secured a loan of $15  million to update ACE’s collections platform to be cloud-based rather than running off 30-year-old COBOL code.30

Securing the Supply Chain The Container Security Initiative (CSI) is a voluntary program orchestrated by CBP that sets security standards for containerized cargo bound for the United States. CSI is designed to increase security of import cargo by providing additional CBP screening capabilities and personnel at overseas ports where those cargoes originate. Launched in early 2002, as of spring 2019, 58 ports in North America, Europe, Asia, Africa, the Middle East, and Latin and Central America had been designated CSI ports by CBP. These CSI ports are responsible for prescreening more than 80% of the container traffic coming into the United States. To earn the CSI designation, a port has to meet these standards: The port must have regular, direct, and substantial container traffic to ports in the United States. ■■ Customs must be able to inspect cargo originating, transiting, exiting, or being transshipped through a country. ■■ Nonintrusive inspection equipment—such as gamma or X-ray—and radiation detection equipment must be available for use at or near the potential CSI port. ■■

CSI ports must also commit to: Establishing an automated risk management system. Sharing critical data, intelligence, and risk management information with Customs. ■■ Conducting a thorough port assessment and resolving port infrastructure vulnerabilities. ■■ Maintaining integrity programs, and identifying and combating breaches in integrity. ■■ ■■

By virtue of the rigorous inspection process their shipments are put through before they leave a CSI port, companies will greatly reduce any

198

Supply Chain Strategies

potential risks to their supply chains while ensuring their goods will be expedited through Customs once they reach a US port. Shipping through a CSI port and participating in C-TPAT will also lower a company’s score in CBP’s Automated Targeting System (ATS), a decision support tool Customs uses to identify high-risk imports. C-TPAT currently groups companies into three tiers, which represent a company’s progressive commitment to the program: Tier 1 companies have submitted security plans and committed to meet minimal security criteria. In addition, companies with clean inspection records (meaning no significant compliance or law enforcement problems) receive expedited inspection service when their containers are pulled for inspection. ■■ Tier 2 companies have had their plans validated by CBP officials, which improves their ATS score. ■■ Tier 3 companies have cleared a CBP audit and are judged to be following best practices that exceed requirements. These companies also use “smart boxes,” which are containers equipped with tamper and intrusion detection technology.31 ■■

Taking Steps Toward Effective Compliance While there’s an ongoing debate over the effectiveness—or lack thereof—of the United States’ various homeland security efforts, statistics indicate that a considerable amount of illegal import and export activity is in fact being prevented. In 2019, according to the US Bureau of Industry and Security, there were 36 criminal convictions for export violations, $1.2 million collected in criminal fines, $1 million in forfeitures, $1.1 million in restitution, over 1,000 months of imprisonment, and $18 million in civil penalties.32 And it’s not necessarily just the “bad guys” who are getting punished. Any company transporting, storing, or ultimately responsible for these illicit goods can be subject to fines, penalties, and possible jail time. Companies and individuals are obligated to not do business with illegal parties or entities, destinations, and end users, states Larry Christensen, export control expert with the law firm of Miller & Chevalier Chartered. “They are also expected to take steps to ensure they do not commit such violations.” He offers these best practices that companies should adopt to develop their own compliance programs: Start at the top and obtain board-level commitment. “Before any compliance program can be successful, buy-in from the board of directors and seniorlevel staff must be secured,” notes Christensen, who was once director of

Risk Management

199

the Office of Regulatory Policy in the US Department of Commerce where he helped rewrite the Export Administration Regulations. According to the US Government Sentencing Guidelines, corporate officers and board members must be knowledgeable about the content of their compliance program, exercise reasonable oversight, and give compliance officers direct access to the board. Assess your security processes. “Hire outside trade experts to perform a compliance gap analysis on your current compliance processes,” he suggests. “Then fill the gaps.” For instance, look closely at how and where your compliance records are being stored. Compile a list of embargoed countries with which your company is not allowed to trade. Put effective stop measures in place that ensure items are not shipped to those countries either directly or indirectly. Electronically screen names and addresses in your master customer/ partner files against the various government blacklists. These lists should be monitored and updated daily. You also need to establish an ongoing name and address screening process. Since governments are continually adding and deleting names from their various restricted lists, you need to be current with list updates and modifications. Collect end-use information from customers and other supply chain partners to ensure that your product is being purchased for its intended use, Christensen urges. He also suggests you perform diversion risk screening. “Collect information about the nature of your customer’s business to determine whether your product or service is consistent with the business of your customer. Make sure that your customer is not diverting your product to another party.” To that end, he suggests companies obtain jurisdiction and classification information from each supplier. Write and implement processes and procedures that are part of each business function. Compliance must be a key concern across a company’s entire supply chain and other functional areas, including information technology, research and development, engineering, manufacturing, sales, order entry, fulfillment, shipping, finance, legal, and compliance to ensure that the proper measures are taken to control the export and reexport of goods, technology, and software. Train, train, train. Don’t develop processes and procedures only to file them away in a cabinet, Christensen says. “Procure training for the whole company with different levels of training based upon each job function. Train your staff until they understand how an effective compliance program can make or break a company, and then train them again.” Perform annual audits of your compliance procedures. As Christensen points out, “It is better to be safe than sorry, and every process breaks down over time unless it is audited.”33

200

Supply Chain Strategies

An Investment Worth Making Since 9/11, things have been relatively quiet on the North American continent as far as orchestrated terrorist attacks, which has resulted in a natural tendency toward complacency, not to mention keeping an eye on the budget. Security technology and risk management programs cost a lot of money, which helps explain why they tend to be low priorities both during periods of stability as well as during economic slowdowns—the urgency just isn’t there. Funding for seaport security under the Port Security Grant Program has been frozen at $100 million since 2012 (at one point it had been as high as $400 million), despite the myriad roles security plays at the ports, such as guarding against cargo theft, drug smuggling, human trafficking, and stowaways, points out Brian Harrell, president and chief security officer at Cutlass Security Group and former facility security officer at HOVENSA Oil Refinery in the US Virgin Islands “There’s no question that more investments in security equipment, infrastructure, technology, personnel, and training will be needed,” Harrell says. “All parties—the ports, terminal operators, the various government agencies, the [White House] and Congress—must do their part.” He cautions that failing to increase port security funding could make it difficult for the ports to serve their function as “trade gateways, catalysts for economic prosperity, and important partners in our national defense.” Investing in port security, he says, always results in a positive return on investment.34

Business as Unusual Certainly one of the most impactful disruptions the supply chain has ever seen occurred early in 2020 and, at this writing, is still ongoing: the COVID19 pandemic. As consultant Gopal Iyer, a consultant with 4C Associates, has observed, while some events in the past affected certain geographies of the world, with COVID “every node in global supply chains was simultaneously being challenged, exposing any vulnerabilities for flexibility and resilience.” If nothing else, Iyer states, the pandemic has highlighted in a most dramatic fashion the importance of risk management and continuity planning. He offers these recommendations aimed at helping companies prepare for any kind of global disruption to their supply chains. Know your supply chain. Iyer cites a study conducted by the Chartered Institute of Procurement and Supply (CIPS) that found only 4% of companies have visibility into their Tier 2 and Tier 3 suppliers, a level of myopia that poses a huge risk to supply chains. It is vitally important, he urges, that companies get better at mapping process, information, and cash flows to gain an end-to-end view of their extended enterprise.

Risk Management

201

Digitalize your supply chain. In a world characterized by nonstop digital transformation, companies need to ensure their internal systems are able to keep up with the speed of information flows. Having digital technologies throughout the supply chain will also help companies react more quickly to take corrective actions as needed. Cost isn’t everything. “Commercial costs will always form an important part of the supply chain equation,” Iyer says. “However, it is important to consider other elements like continuity, operational complexities, resilience, and sustainability to fully appreciate the real cost of your supply chain.” Constantly update your continuity plan. If you’re only updating your continuity plans every couple of years, you’re asking for trouble. The best practice these days is to continuously monitor and plan for business continuity within your supply chain. Break down the silos. A silo mentality makes it nearly impossible to gain full visibility throughout your organization and your supply chain. The goal, Iyer says, is to operate as a single value system. He points to retail giants Amazon and Spar as examples of companies that succeeded where so many failed during the pandemic, as they kept their operational focus on their multiple supply chains.35 Shortly after COVID-19  was declared a pandemic, many retailers saw their shelves quickly emptied of such items as toilet paper, hand sanitizer, cleaning supplies, various pharmaceuticals, face masks, soup, and meat products, just to name a few. A comment by meat processor Tyson Food’s chairman John Tyson that “the food supply chain was breaking” led to even more panic buying among consumers and breathless headlines in the popular media. As MIT’s Yossi Sheffi explains in his book on the pandemic, The New (Ab)Normal, “Contrary to the media’s apocalyptic assessment, the COVID-19 pandemic did not break America’s or Europe’s food supply chains. The retail shortages experienced by consumers were only temporary.” In fact, there was never an actual food shortage, Sheffi emphasizes. What happened, he points out, is that consumers shifted where and what they were buying.36 When many office buildings, universities, sports arenas, restaurants, movie theaters, and other facilities catering to large gatherings of people were closed during the pandemic lockdown, the demand for bulk quantities of food and paper goods that industrial companies would normally buy dropped precipitously. Consumers who typically ate at least one meal a day away from home, and used public bathrooms during the day, suddenly found themselves spending their entire days at home. Further, as Sheffi explains, consumers started buying more comfort food and nonperishable items, such as bread, pasta, canned goods, rice, and frozen food. So the packaged goods and food manufacturers had to pivot their supply chain production away from industrial-sized bulk goods to more individual and family-sized offerings. That took time, but not very much time, as “the

202

Supply Chain Strategies

incredibly fast catch-up of supply is a testament to the ingenuity and commitment of the people and the organizations who run and operate the food supply chains,” Sheffi says. The biggest lesson learned from the pandemic, Sheffi says, “is in the emerging opportunities for companies to grow and improve connections,” enabled by technological platforms. The Internet of Things, for instance, connects people to data to machines. Mobile devices connect people to people anywhere in the world. Likewise, supply chain visibility tools connect companies to companies around the globe. Taking the long view, Sheffi suggests that COVID-19 may end up helping to accelerate more technology adoption, which in turn “will make the global economy more robust over time.” In Chapter 13, we’ll look more closely at the emergence of these supply chain technologies.

Notes 1. MH&L Staff, “Trade Issues, Cybersecurity, Weather—Top Supply Chain Risks,” Material Handling & Logistics (1 April 2019), www.mhlnews.com. 2. Knut Alicke, Ed Barriball, Susan Lund, et al., “Is Your Supply Chain Risk Blind— or Risk Resilient?” McKinsey & Company (14 May 2020), www.mckinsey.com. 3. Helen L. Richardson, “Is Your Supply Chain at Risk?” Logistics Today (April 2006), 1, 14. 4. Yossi Sheffi, The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage (Cambridge, MA: The MIT Press, 2005), 270–278. 5. Michael Chagares, “The New Game of Supply Chain Risk Management,” Business Finance (12 May 2011), www.businessfinancemag.com. 6. TJ McCue, “Inventory Shrink Cost the US Retail Industry $46.8 Billion,” Forbes (31 January 2019), www.forbes.com. 7. www.gao.gov. 8. David Sparkman, “State of US Logistics 2019: Collaboration Required to Control Logistics Costs,” Material Handling & Logistics ( July–August 2019), 11–14. 9. www.internetsociety.org. 10. Kevin McCoy, “Target to Pay $18.5M for 2013 Data Breach That Affected 41 Million Consumers,” USA Today (23 May 2017), www.usatoday.com. 11. Kevin Bong, “Cybersecurity 101: Six Basic Fixes to Hackproof Your Factory,” IndustryWeek (29 August 2018), www.industryweek.com. 12. www.csrc.nist.gov. 13. Author interview with Theo Fletcher (4 October 2005). 14. Descriptions of US Customs and Border Protection programs and relevant statistics cited in this chapter are available at www.cbp.gov. 15. www.wcoomd.org. 16. MH&L Staff, “Cargo Theft Is the Biggest Threat to Supply Chains in 2016,” Material Handling & Logistics (April 2016), 5.

Risk Management

203

17. David Blanchard, “Seven Steps to Prevent Cargo Theft,” IndustryWeek (December 2008), 54. 18. “National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts,” US General Accounting Office (April 2009), 9. 19. Michael Barbaro and Justin Gillis, “Walmart at Forefront of Hurricane Relief,” The Washington Post (6 September 2005), D1. 20. Justin Fox, “A Meditation on Risk,” Fortune (3 October 2005), 50–62. 21. Julia Boorstin, “Rapid Response,” Fortune (3 October 2005), 80. 22. Ann Zimmerman, “Walmart’s Emergency-Relief Team Girds for Hurricane Gustav,” The Wall Street Journal (30 August 2008), A3. 23.  Robbie Neiswanger, “Walmart Copes with Hurricanes,” Arkansas Democrat Gazette (9 September 2017), www.arkansasonline.com. 24. Ethan Wolff-Mann, “How Waffle House’s Hurricane Response Team Prepares for Disaster,” Yahoo!Finance (25 August 2017), www.finance.yahoo.com. 25. Laura Walters, “What Do Waffles Have to Do with Risk Management?” EHS Today (6 July 2011), www.ehstoday.com. 26. Jacob Bogage, “Things Must Be Bad. Waffle Houses Are Closing,” The Washington Post (26 March 2020), www.washingtonpost.com. 27. Helen L. Richardson, “Think Supply Chain Security—Think Strategy,” Logistics Today (September 2005), 17–19. 28. IndustryWeek Staff, “How Secure Is the Global Supply Chain?” IndustryWeek (29 April 2006), www.industryweek.com. 29. Amy Smith, “Getting Up to Speed with the Border Clearance Process,” Material Handling & Logistics (11 December 2015), www.mhlnews.com. 30. Jason Miller, “CBP Takes $15M Loan to Speed Up Revamp of 30-Year-Old System,” Federal News Network (28 July 2020), www.federalnewsnetwork.com. 31. Perry A. Trunick, “Increase Security, Reduce Delays,” Logistics Today (February 2006), 28. 32. www.bis.doc.gov. 33. Larry E. Christensen, “Twelve Steps to an Effective Compliance Program,” Logistics Today (16 February 2006), www.logisticstoday.com. 34.  Ed Finkel, “Ports Fight Security Breaches and Possible Funding Reductions,” Security (9 April 2018), www.securitymagazine.com. 35. Gopal Iyer, “How to Prepare Your Supply Chain for a Second Wave of Pandemic,” Material Handling & Logistics (10 August 2020), www.mhlnews.com. 36. Yossi Sheffi, The New [Ab]Normal (Cambridge, MA: The MIT Press, 2020), 21–25, 231–232.

CHAPTER

13

Supply Chain Technology If You’ve Got the Money, Somebody’s Got the Solution Flashpoints Digitalization is disrupting the supply chain in ways both profound and subtle. The real promise of artificial intelligence lies in its capability to better manage inventory, predict pricing, and streamline operations. RFID and blockchain offer a more efficient means of facilitating product recalls and thwarting counterfeiters. The Internet of Things connects devices together so they can communicate supply chain information in a meaningful way.

Throughout this book, we’ve touched on many of the enabling technologies that supply chain professionals use regularly or at least have in their toolboxes to address the various processes that involve the movement of goods from their point of origin to their final destination. We’ve looked, for instance, at how supply chain planning and predictive analytics tools offer a higher level of forecasting accuracy, helping companies reduce their inventories while improving their time-to-delivery performance. Product lifecycle management solutions allow manufacturers to collaborate on product designs on not just a company-wide but supply chain–wide basis. Warehouse management and warehouse execution systems can track the whereabouts of products anywhere within a facility while synchronizing all

205

206

Supply Chain Strategies

distribution activities. Autonomous vehicles offer ways to move materials more safely and expediently throughout warehouses, on the highways, and even through the air. And of course, there are numerous other task-centric solutions that are designed for specific supply chain processes. Supply chain technology, broadly speaking, covers a wide range of equipment, machinery, hardware, and software that help companies and organizations operate their supply chains, explains Ned Young, coprincipal investigator with the National Center for Supply Chain Automation. “Technologies included in the supply chain consist of such devices as optical scanners, automated storage and retrieval systems (AS/RS), programmable logic controllers (PLCs), conveyor systems, radio frequency identification (RFID), sensors, robotics, database management systems, inventory control systems, and local area networks.”1 (That list of technologies most definitely is not meant to be all-inclusive.) As we’ve reached the third decade of the twenty-first century, it’s becoming clear that we’re now living in a digital age, one that’s requiring supply chain professionals to become knowledgeable about technologies that may not have even been heard of twelve months prior, outside of some skunk works research departments. We used to characterize the ubiquity of computers by saying, “every household has a PC,” but today it’s more accurate to say that almost every human being has a computer of some sort, thanks to smartphones, wearables, and other mobile devices. The buzzword du jour describing this era—“digital transformation”—has become shorthand for “any kind of technology that uses any kind of device to do things humans don’t want to do anymore, or are getting paid too much to do.” That’s my own definition; analyst firm Gartner, in its “IT Glossary,” says that digital transformation can refer to anything from IT modernization (for example, cloud computing), to digital optimization, to the invention of new digital business models.”2 And this move toward digitalizing anything and everything is having a huge impact on supply chain professionals. As Jack Allen, senior director of logistics and manufacturing solutions with networking giant Cisco Systems, puts it, “We’re at the threshold of a massive disruption, as digitalization both creates and destroys existing business models. Change doesn’t happen overnight, but it’s happening faster than ever.”3 “Digitalization itself is not a new process,” notes Pierfrancesco Manenti, research vice president with SCM World, a cross-industry supply chain community affiliated with Gartner. “However, the extent to which it is being made a priority—by not only chief information officers but also chief supply chain officers—is significant.” That very ubiquity of digital tools in the hands of every consumer has put increasing pressure on companies to adapt their business models to be as user-friendly and instant gratificationcapable as popular consumer apps developed by Amazon, Uber, DoorDash, and other firms.

Supply Chain Technology

207

“The everyday customer now expects the global supply chain to be able to deliver what they want immediately,” Manenti observes. “Like consumers, business-to-business customers can be picky and impatient, and they certainly expect the same access to customized products at affordable prices.” However, he admits, digitalizing an end-to-end supply chain is far from easy; in fact, it will require a totally new approach compared to previous technology investments and deployments. Manenti suggests that companies should follow these three recommendations as part of their digital transformation process: 1. Recognize that digitalization is a business strategy, not a technology implementation. Consider designating a chief digital officer to manage the strategic mission of the organization’s digitalization efforts. 2. Focus on the customer experience first, not on digitalization. Customer demand, he emphasizes, should be the catalyst for change, not just digitalization for digitalization’s sake. The end game should be to connect demand with supply. “This is the only way to cater to consumers’ desire for fast, affordable, and customized products,” he says. 3. Invest in training your staff and hiring specialists as needed to prepare your company for the digital transformation.4

Getting the Job Done with AI In those simpler times before the COVID-19 pandemic rewrote the definition of what a global threat to humanity actually looks like, Tesla Motors CEO Elon Musk once remarked that he thought artificial intelligence (AI) is “our biggest existential threat” and suggested that AI is “far more dangerous than nukes.”5 While Musk tends to be outspoken on every subject even remotely related to technology, he has hardly been a lone voice in the wilderness when it comes to fearing the potential of devices and software eclipsing humans in sheer intelligence; Cambridge University’s Stephen Hawking, Microsoft’s Bill Gates, and other technology luminaries have similarly opined that AI, machine learning, and related technologies are potential menaces not to be treated lightly.6 What rarely goes mentioned whenever these well-known entrepreneurs and researchers are quoted about dangerous technology is that there is almost zero resemblance between the type of AI they’re having nightmares about and the real-world AI that has become so much a part of the mainstream business arena that most supply chain professionals don’t even realize they’re using AI. For instance, in a 2020 study conducted by Deloitte Consulting and MHI, a trade organization serving the material

208

Supply Chain Strategies

handling and logistics industry, roughly one thousand supply chain professionals were asked what technologies they are currently using in the workplace. Only 12% said they’re using AI.7 If your first reaction to that number is, “Wow, AI must not be as popular as the media says it is if hardly anybody is using it,” then you’re making the same mistake that 88% of the survey respondents made because everybody is already using AI in the workplace. Everybody. If the thinking among those 1,000 supply chain professionals (over 400 of whom were at the executive level, and nearly 500 of whom work at companies with over $50 million in annual sales) was that the question was asking if they had invested in AI-powered warehouse drones capable of autonomously picking up goods from a shelf and delivering them to a machine that automatically loads those goods onto a driverless truck—well, no, of course they don’t have anything like that. Nobody does. Researchers are working on things like that, to be sure, but all of these intelligent solutions are years away—and in the case of driverless trucks, many years away—from being both practical and affordable enough for mainstream use. No company (not even Amazon) has deep enough pockets to invest in every type of robotics hardware and intelligent software imaginable, along with the technical staff knowledgeable enough to create and deploy those technologies. The point is, companies don’t need deep pockets to become AI users because they’ve already bought it. Consider: Pick up your smartphone and ask it a question, and then wait for the response, which is provided by a computer voice. You’re using AI: speech recognition, machine learning, intelligent agents, neural networks.8 Every time you search a term or phrase on Google, or use a spellchecker like Grammarly to verify you didn’t make any spelling or grammatical mistakes in a document, or rely on a traffic app to suggest the best route on your morning commute, you’re using AI.9 In the supply chain arena, AI’s potential lies not in the dystopian science fiction–inspired visions of evil computers taking over the world, but in real-world applications of intelligent technology to run much more mundane tasks. “Companies are already using AI to improve ways they manage inventory, predict pricing, and streamline operations,” points out Markus Kückelhaus, vice president of innovation and trend research at logistics company DHL. While it may not sound glamorous, AI’s biggest impact on logistics operations, he says, will involve manual labor and repetitive tasks. “The warehouse is a complex web of interdependent parts. AI technology will help enable the next wave of process efficiency gains.”10 It’s not going to be robot butlers and autonomous sky-taxis that demonstrate the potential of AI to provide realizable return-on-investment; it will more likely be the applications designed to solve specific problems. For decades now, AI has been dogged by the reputation (often earned) of being

Supply Chain Technology

209

a technology-in-search-of-a-solution, but as computing power continues to follow Moore’s Law11, savvy developers are identifying tasks that can actually help companies be more competitive and profitable. These applications may not be as headline-worthy as killer-bee drones, but they’re a lot more practical and effective—and they’re getting the job done. For instance, consider how companies are using AI to tackle the challenge of predicting freight prices. “Pricing varies seasonally, by day of the week, time of day, and route,” Kückelhaus notes. “Using reams of historical data, computer models have been built to resemble those built by electronic traders on Wall Street. These models evaluate historical pricing along with current variables, such as weather and traffic, to come up with a quote.” This pricing model, he explains, is just one example of how AI can help shift logistics professionals from being reactive to being proactive, thanks to predictive analytics. (See also Chapter 4.) “As machines get smarter, technology is going to be the differentiator in the logistics industry,” he states. “All too often with new technologies, individuals, teams, and organizations fall in love with shiny new things and promised capabilities. Instead, it is useful to ask: What are the business problems that can be solved using AI?” An equally good question to ask, he adds, is: Does this problem need to be solved with AI? As George Prest, CEO of MHI, reveals, “Supply chain people often get enamored of these great new tools [like AI], but we sometimes forget that the whole point of the technologies is to better serve the customer.” The key to AI—and indeed, to all digital technologies—is to match the technology to an actual problem that needs solving.12

The ABCs of RFID Revolutions sometimes take place without a single shot being fired, and that’s largely been the case when it comes to the adoption of radio frequency identification (RFID) technology, which is often described as the next generation of bar codes. Although RFID was invented for military applications in the 1940s and has been used for security access and related business tasks since the 1960s, it never really hit the public consciousness until Walmart went all-in on the technology in the early 2000s, which set off a flurry of “what do we do now?” reactions from its supply chain partners and suppliers. For many suppliers, dealing with RFID mandates has been remarkably similar to the well-known stages of coping with grief. The first stage, of course, is denial (“RFID? You have got to be kidding!”), followed by anger (“How dare they try to force us to adopt this untested gimmick!”), then bargaining (“Okay, we’ll do it, but we’ll do the absolute least amount that we can get away with”), then depression (“We’re going to go broke

210

Supply Chain Strategies

paying for all these tags”), and if things work out, to the final stage, acceptance (“Hey, we’re actually a lot more productive now thanks to RFID”).13 For all the activity and excitement RFID has engendered—entire cottage industries of consultants, analyst firms, conferences, websites, and even political action groups have sprung up (and in some cases, just as quickly vanished) over the past two decades—its purpose and capabilities are still misunderstood, even by companies that have launched pilot programs to satisfy a retailer-driven mandate. As a result, while the technology itself continues to advance, it’s kind of gotten nudged to the side in favor of sexier-sounding technologies like the Internet of Things. However, while RFID never became the be-all and end-all solution it was promised to be, it has become a tried-and-true solution in the supply chain manager’s toolbox of technologies. RFID is a data collection technique that passes product information via radio waves to a receiving unit. This basically requires a tag (an electronic chip with an antenna) and a reader, which receives the data and forwards it on to a computer software application (e.g., a warehouse management system) for processing. There are two general categories of RFID tags: active tags, which include a power source, such as a battery; and passive tags, which do not (the type of tags typically found in retail-centric applications like Walmart’s are passive). RFID is so attractive because it is an enabler of supply chain visibility. These tags and labels are designed to locate stuff—whether that stuff is a case of Viagra, a shipment of laptop computers, or an entire 53-foot truck. The big selling point of RFID, however, is not merely that these tags can tell you where stuff is—bar codes and global positioning systems (GPS) can also do that—but that the amount of information that can be stored in these tags is exponentially greater than what can be stored on the oldergeneration bar codes. This is possible thanks to an electronic product code (EPC) embedded in the tags, which greatly facilitates the traceability of products, whether it be for product recalls, to thwart counterfeiting and shrinkage, or just being able to locate a case of beans in the back room of a warehouse. In the late 1990s, a handful of major consumer packaged goods companies, such as Gillette, Procter & Gamble, and Unilever, as well as some big-box retailers like Home Depot and Target, joined an RFID think-tank at the Massachusetts Institute of Technology (MIT) with the goal of developing a technology that could track the whereabouts of products anywhere within a warehouse or retail store. Their work led to the creation of the EPC, an important milestone in the development of the technology (up to that point, RFID was mostly being used in toll booths, libraries, and building security checkpoints). While all of those companies were instrumental

Supply Chain Technology

211

in getting RFID out of the development labs and out into the real world, the 800-pound gorilla of RFID was definitely Walmart.

Proactive Replenishment When you’re the biggest company in the entire world, with annual sales larger than the annual gross domestic product (GDP) of many countries, you can pretty much do whatever you want. Or so you would think. It used to be that whenever retail giant Walmart told its suppliers to adopt whatever supply chain technology was in vogue at the time, those suppliers accepted the latest mandate as the price of doing business with their biggest customer. That was the case in the early 1980s, for instance, when Walmart installed point-of-sale scanners in its stores and cajoled its suppliers into affixing bar codes on their products. It was the case when the retailer’s suppliers were instructed to start using electronic data interchange (EDI) technology as a way of sending and receiving transactional information, such as orders and invoices. It was the case when Walmart insisted that its suppliers sign on with the UCCnet global registry, which would allow the retailer to synchronize all of its suppliers’ product data. Walmart was also the driving force that pushed the adoption of RFID technology, which led to suppliers placing RFID tags on every pallet and case shipped to the retailer’s distribution centers. And today, even though Amazon, Apple, and Google seem to get  all the fawning press from the popular media, when it comes to deploying supply chain technology for real-world applications, Walmart is still pushing the envelope. In 2003, encouraged by the results of pilot tests conducted in the United States and abroad, Walmart launched the modern era of RFID when it announced that as of 2005, it expected all of its top 100 suppliers to have an RFID tag on every case and pallet shipped to three Walmart distribution centers (DCs) near Dallas, Texas. That meant each of those companies had to make a major commitment to RFID if they expected to stay on Walmart’s good side, and that kind of technology investment wasn’t going to come cheap. Analyst group Forrester, for instance, estimated that a typical supplier could expect to spend as much as $9 million in start-up costs for tags, hardware, software, and related services.14 Nevertheless, several other retailers announced their own RFID initiatives on the heels of Walmart’s dictate, such as Albertson’s, Best Buy, Home Depot, and Target, as well as the US Department of Defense. By 2007, Walmart widened its mandate to well over 1,000 of its suppliers, while in the meantime the retailer installed RFID readers in more than 1,000 Walmart and Sam’s Club stores (though installations at the DC level proved to be a more arduous process than expected).

212

Supply Chain Strategies

At a Glance Radio Frequency Identification Radio frequency identification (RFID) is a data capture technology that uses radio waves to pass information from a tag to a receiving unit.

When Walmart put its suppliers on notice that it was launching its RFID initiative, many companies were understandably perplexed. “Why RFID, and why now?” was a typical reaction. The reality of the situation was, despite its having invested millions in various collaborative initiatives like CPFR (see Chapter 10), Walmart still had blind spots in its supply chain, and when you’re the biggest retailer in the world, those blind spots can take on the appearance of craters. One particularly annoying technology gap, remembers Simon Langford, formerly Walmart’s manager of global RFID strategy (and now owner of a boutique hotel), was that the retailer had 0% visibility into its back rooms. For instance, only one out of every four products in stock made it to a warehouse picking list, he says, and only one out of three of those made it to a retail shelf in a timely manner. “No one has ever sold anything that sat in a back room,” Langford points out.15 The promise of RFID, from Walmart’s perspective, is that the retailer gains proactive information allowing it to replenish its stores more regularly. That, in turn, allows Walmart to offer its consumers improved customer service, speedier shopping, and fresher product, Langford says. “The stores with the cleanest and best-run back rooms are also the stores with the best in-stock availability,” he notes. So for Walmart and any other retailer, by improving visibility into what’s in the back room, RFID can help reduce the incidence of out-of-stocks, which not only improves the customer’s experience but also directly translates into more sales for the retailer. Other benefits RFID offers to retailers include: Automated receiving allows retailers to receive and deploy merchandise more quickly, accurately, and inexpensively (i.e., with less labor). ■■ RFID allows more rapid inventory counting. A study from consulting firm Kurt Salmon Associates (which has since been acquired by Accenture) suggests that RFID can reduce by as much as 90% the amount of time needed to track inventory on the sales floor, in holding areas, and in the back room. ■■ Retailers can see an immediate reduction in shrinkage, which is a polite way of referring to unpurchased products that leave a store or ■■

Supply Chain Technology

213

warehouse in somebody’s pocket. Not only can RFID identify when a consumer leaves the store without paying for something, but it can also set off an alert when an employee tries to steal a product from the warehouse or DC. ■■ RFID also allows a company to take a full inventory count every day, compared to every four to eight weeks.16

In Search of Payback All that sounds great for Walmart, the other big retailers, and the US Department of Defense. However, on the supplier side, many consumer goods manufacturers quietly (and not-so-quietly) bristled at the prospects of it taking years (if ever) before they would see a hard-dollars return on investment from their RFID implementations. According to Steve Banker, service director, supply chain management with analyst firm ARC Advisory Group, the expectation from manufacturers investing in RFID is that the payback period would take at least two years, as a company would have to invest in tags, infrastructure costs, and labor, necessitating hefty savings in inventory to even break even, at least in the short term.17 One unnamed Walmart supplier told The Wall Street Journal that he has yet to see any clear savings from his RFID investment of $200,000 per year. “[RFID] is a big black box with nothing out there for a return,” he says.18 In a bid to restore faith in the technology as well as encourage its suppliers to continue in their implementation efforts (the threat of fines for noncompliance apparently not doing the trick), Walmart sponsored a study at the University of Arkansas to demonstrate how RFID has helped improve inventory accuracy. Based on a pilot study, the university’s analysis indicates that an automated, RFID-enabled inventory system can improve inventory accuracy by 13%. The study focused on equipping test stores with RFID readers and antennas in backroom locations, such as receiving doors, sales floor doors, and box crushers. The results were compared to an equal number of stores that did not have RFID technology. “Inventory accuracy, which determines important processes such as ordering and replenishment, is often poor, with inaccuracy rates sometimes as high as 65%,” explains Bill Hardgrave, formerly director of the University of Arkansas’ RFID Research Center and now provost of Auburn University. The 13% improvement obtained by the test stores in the study suggests that RFID can significantly reduce unnecessary inventory, which Hardgrave estimates could be measured at millions of dollars saved by major retailers and their suppliers.19 In a follow-up study conducted by Auburn University and standards body GS1 US, it was discovered that manufacturers and retailers using

214

Supply Chain Strategies

EPC-enabled RFID to optimize inventory management and reconcile product shipments were achieving in some instances 99.9% order accuracy. The study involved five major retailers and eight consumer packaged goods companies, and a sample size of more than one million products. When item-level RFID tags were not used, 69% of the orders shipped and received from brand owners to retailers contained data errors. Data errors equate to expensive chargebacks from the retailers to their CPG suppliers. The study also determined that, for retailers, item-level RFID can help reduce out-ofstocks, improve inventory accuracy and loss detection, increase sales margins, and help expedite returns. Retailers and CPG companies alike should consider “the immediate positive impact item-level RFID can have on supply chain efficiency,” Hardgrave says. “Retailers and brands have a tremendous opportunity to eliminate errors, as the lack of inventory accuracy is a preventable problem that can be solved with greater automation through RFID.”20 The ability to have a unique product ID can also have demonstrable advantages. The pharmaceutical industry, for instance, prodded by the US Food and Drug Administration, has incorporated RFID into some of its businesses to thwart counterfeiters. Pfizer, for instance, uses RFID tags on every package, case, and pallet of its Viagra product, and on every case and pallet of its Celebrex drug, to enhance patient safety. Similarly, GlaxoSmithKline tags all bottles of Trizivir (an HIV medicine) distributed in the United States. The tag can be read by wholesalers and pharmacists to verify that the product is authentic. For the entire pharmaceutical industry, it’s been estimated that RFID technology can save companies more than $9 billion thanks to track and trace capabilities.21 One of the chief benefits of RFID is that it offers a more efficient means of facilitating product recalls. For instance, Brandt Beef, a California beef producer, is using an RFID system that can track both backward and forward—backward from a retail site (a grocery store or restaurant) to a specific animal, and forward from a feed lot to a retail site (during a meat recall). Cattle are tagged on their ears and are then scanned as they move from the feed lot to the slaughterhouse. After processing, the beef receives a bar code label that is linked to the animal’s ID number.22 Similarly, Canadian meat producer Atlantic Beef Products (ABP) uses RFID to enable full traceability of its processed meat products. While discrete manufacturers (e.g., automotive or computer makers) assemble individual components into a finished product, meat producers do the exact opposite, breaking down a whole side of beef, for instance, into various cuts that are sold individually. ABP, like other meat producers, needs to be able to track the pedigree of every one of those cuts of meat, back to the ranch where the animal was raised. That’s where RFID comes in. According

Supply Chain Technology

215

to ABP, the benefits of RFID are not solely in the realm of product traceability. Using RFID and bar codes, ABP can also identify what grade and yield it receives from livestock suppliers, along with monitoring shrinkage and tracking worker productivity.23 Recalls are also an enormous problem for the automotive industry. Ford became a believer after more than six million Firestone tires were recalled because of instances of the tires disintegrating at high speeds on Ford Explorers. Ford has implemented an RFID system that can track the entire lifecycle of a tire, from manufacturing to storage and assembly to its mounting on a specific vehicle. Application of technology in this manner not only helps with recalls but can also lead to more timely and accurate orders and shipments.24 Aerospace manufacturer Boeing is using a type of RFID technology known as a real-time locating system (RTLS) to locate tools, parts, and other assets at NASA’s Kennedy Space Center. As an active (i.e., battery-powered) RFID system, an RTLS can provide real-time updates on the location of tagged assets via wireless signals within a geographic area, such as a production facility, warehouse, or yard. Boeing has more than 70,000 of its parts in various facilities at the Kennedy Space Center, and thanks to its use of RTLS technology, the company has been able to reduce the number of hours previously spent looking for parts and inventorying tools.25

Work the Bugs Out The University of Denver conducted a survey of senior supply chain executives to determine what companies—primarily, suppliers to major retailers or military contractors—ought to be doing to derive the maximum benefit from passive RFID. From those interviews, the researchers compiled a list of recommended practices (we won’t necessarily call them “best” practices) concerning RFID: Familiarize yourself with RFID, even if you don’t plan to use it any time soon. ■■ Apply tags upstream, either at your manufacturing facility or at your suppliers’ facilities. This will enable you to track tagged products throughout both the production and distribution processes. ■■ Proceed with extra caution when goods must be repackaged to avoid having to apply tags more than once. ■■ Take advantage of the capabilities RFID tags offer that traditional bar codes lack, particularly in terms of capturing a much larger volume of data in a shorter period of time. ■■

216

Supply Chain Strategies

Focus first on your highest value items. The more expensive the products being tagged, the easier it is to justify the cost of tags. ■■ Establish a test lab pilot to work out the bugs in the system before you go live. ■■

There are well-known technical problems that hinder the effectiveness of RFID, such as its limitations reading through liquids and certain metals, or its operating capabilities in extreme temperatures. As companies have discovered, the hardware is still evolving, and while the prices continue to drop (down to roughly five cents per tag), RFID is still a significant investment.26 On the other hand, for retailers attempting to meet the omni-­ channel demands of their customers, RFID’s ability to provide inventory accuracy makes it a key enabling technology. As Auburn University’s Hardgrave says, the only way to serve the customer where and how they want to be served is inventory accuracy, and “the only way we’ve found to solve it in an efficient manner is RFID. We know it works. We know the benefits.”27

A Block Off the Ol’ Chain Blockchain has been referred to as “the biggest innovation in computer science,28 and a potential cure for cancer.29 It’s also been called “the most overhyped and least useful technology in human history.”30 The truth, as ever, lies somewhere in between. For some companies, blockchain barely even registers on their “need to know” radar. For others, it offers a way to address a narrow set of problems—including supply chain problems—that aren’t readily solvable by standard methods. So let’s look at exactly what blockchain is, what it isn’t, and why it factors into current and future supply chain initiatives. Blockchain technology, in simple terms, is a distributed, public ledger platform that allows the sharing of transactional data in a way that can’t be traced or hacked. Its roots are based in financial services, but blockchain is also promoted as a way to ensure security throughout supply chain transactions, especially in industries particularly susceptible to product recalls and counterfeiting, such as pharmaceuticals (a characteristic it shares with RFID). “Every time factories, distributors, shippers, warehouses, and retail stores log a transaction related to an item, such as a product being placed on the shelf, all the data points are linked together to form a chain, and copies of this data appear across multiple devices,” explains Andres Richter, CEO of Priority Software. “Since the record lives in multiple locations at once, it is extremely difficult to edit, change, or forge and it can be referenced much more quickly, and with greater confidence, than traditional record keeping.”31

Supply Chain Technology

217

At a Glance Blockchain Blockchain is a distributed, public ledger platform that allows the sharing of transactional data in a manner that cannot be traced or hacked.

However, blockchain faces a pretty big, well, stumbling block: Many supply chain professionals aren’t quite sure what it is or how it works. When Deloitte and MHI asked 1,100 supply chain and manufacturing industry leaders how useful blockchain is to their organization, 43% said they had little to no understanding of what blockchain is. Another 45% said they had only a cursory understanding of what it is. So it’s going to take a while for blockchain to be taken seriously if nearly nine out of 10 supply chain leaders don’t have a firm grasp on how it could help them. That being said, many companies are already using blockchain for various applications: Smartphone provider Samsung Electronics, for instance, has developed a blockchain “wallet” that lets users buy, sell, and trade cryptocurrency (such as bitcoin) through their smartphones. ■■ Food and beverage giant Coca-Cola has teamed up with the US State Department to create a secure registry for workers to help fight the use of forced labor worldwide. ■■ More than 500 companies, including Anheuser-Busch, BNSF Railway, BP, Cisco Systems, FedEx, Google, Home Depot, Procter & Gamble, UPS, and Whirlpool, are members of the Blockchain in Transportation Alliance and share the common goal of developing a framework and standards from which they can trace products throughout the supply chain.32 ■■ Mirroring its RFID mandates earlier in the century, in 2018 Walmart and its Sam’s Club division began requiring suppliers of fresh, leafy vegetables to implement real-time, end-to-end traceability of products back to the farm using blockchain technology.33 ■■ The US Food and Drug Administration is investigating how blockchain, and other track and trace technologies, can be used to trace and verify prescription drugs. A pilot test that is expected to go into effect in 2023 as part of the Drug Supply Chain Security Act has the aim of keeping counterfeit drugs from entering the supply chain and thereby protecting patients. Using blockchain technology, the drug tracing system will be ■■

218

Supply Chain Strategies

able to provide a step-by-step account of where a drug originated from, who has handled it, and its current location.34 Tan Miller, director of the Global Supply Chain Management Program at Rider University, sees a lot of parallels between blockchain and RFID: Both were hyped as transformative technologies. The gestation period between introduction and significant deployment across industry is lengthy. ■■ The path from pilot projects to established, large-scale, real-world applications will be far from linear. ■■ ■■

“Actively monitoring and evaluating the progress of a relatively new technology can lead to unexpected and important findings and benefits,” Miller says. “For example, in the flurry of corporate initiatives triggered by Walmart’s RFID edict in 2003, several firms reported that in their efforts to meet Walmart’s RFID requirements, they actually developed related processes that improved their inventory accuracy levels within their own warehouses.” He envisions a similar situation eventually emerging with blockchain, and recommends that every company hire at least one or more supply chain professionals to monitor the progress of blockchain, to participate in advisory groups, and attend industry conferences and other educational opportunities.35

An Interconnected Collection of Technologies Forty billion—that’s how many devices will be connected to the Internet by 2025, according to analyst firm IDC, which estimates these devices will collectively generate nearly 80 zettabytes (ZB) of data by then (1 ZB equals 1 trillion GB). Even if IDC’s prediction is off by half, that’s still a lot of devices and a lot of data, and it’s all part of the Internet of Things, a term originally coined to describe RFID interconnectivity but which now refers to the entire interconnected world of smart devices that can communicate with each other. Predictive maintenance is just one of the many uses to which IoT technology is being deployed. And as investment website The Motley Fool notes, most of the companies that will be employing IoT technology will also be using blockchain technology to secure all that performance and transactional data that’s being shared.36 The promise of IoT technology (which is more properly a collection of technologies) is that the status of such things as raw materials, components,

Supply Chain Technology

219

production machinery, finished products, material handling equipment, packaging, and transportation vehicles can be communicated at any time, from anywhere. And just like AI, many people don’t even realize that they’re using IoT technology in everyday life, whether it be video doorbells, activity trackers, or smart thermostats. Basically, the IoT is a machine-to-machine communications network. It taps into various technologies that have been in use for years—sensors, RFID, asset management, data collection, GPS—and connects all these devices, software, and hardware together so they can communicate in a meaningful way. The Port of Rotterdam in The Netherlands, for instance, has embarked on a multiyear digital transformation initiative based on the deployment of sensors across 26 miles of land and sea—from the City of Rotterdam to the North Sea. The sensors are designed to gather information about water temperature, wind currents and speed, water levels, berth availability, and supply chain visibility. The goal is to not only transform Rotterdam itself into a smart port, but to communicate as well with IoT-connected cargo ships with the aim of enabling smarter traffic management at the port. “Speed and efficiency are essential to our business and require us to use all of the data available to us,” explains Paul Smits, CFO of the Port of Rotterdam Authority. “Thanks to real-time information about infrastructure, water, air, etc., we can enormously improve the service we provide to everyone who uses the port and prepare to embrace the connected, autonomous shipping of the future.”37

At a Glance Internet of Things A network of interconnected smart devices that allows the devices to talk to each other and share performance and transactional data.

Some other ways companies are utilizing IoT within their supply chains include: ■■

Gear manufacturer Itamco has connected its forklift fleet through a machine-monitoring program that communicates to forklift drivers such information as how many pallets need to be moved, and from where to where. Each forklift is linked to the company’s ERP system through a GPS device and a smart tablet mounted on the forklift. Itamco says the IoT solution has improved warehouse efficiency by 10%.

220

Supply Chain Strategies

Chemical giant Dow Chemical monitors the transportation of high-risk and hazardous material shipments—by truck, train, or ocean carrier. Various identification technologies (RFID, GPS, bar codes) connected to sensors monitor and communicate the status of the cargo, including the environmental conditions of the products while in transit. ■■ Food manufacturer Nestlé uses wireless vehicle management system (VMS) technology on more than 2,000 forklifts across more than 60 manufacturing and distribution facilities. This IoT solution can report vehicle data and schedule maintenance as needed, based on actual usage. The VMS has a lock-out feature preventing anybody other than trained personnel from using the vehicle, and it verifies that all safety protocols have been properly followed before the forklift will become operational.38 ■■

Reinvent, Rethink, Reimagine At the risk of dampening the overexuberant hopes of technology marketers and investors, as we’ve seen in this chapter, the technologies that are most likely to deliver real and tangible value to supply chain professionals will not be glamorous or sexy applications. Quite the contrary. They’ll be solutions to specific problems that offer a relatively timely return on investment. That being said, there are some companies more willing than others to invest time and talent into pushing the boundaries of what technology can do for supply chain professionals. Consulting firm Accenture refers to these companies as “digital trendsetters” because they look at the supply chain differently than everybody else (“digital followers,” in Accenture-speak). According to research conducted by Accenture consultants Kris Timmermans, Gary Hanifan, and Stéphane Crosnier, almost three times as many trendsetters as followers invest in AI, and nearly twice as many trendsetters invest in IoT. If you’d rather be a trendsetter yourself than a follower, Accenture recommends you follow these three steps: 1. Reinvent your supply chain business case. 2. Rethink your operating model. 3. Reimagine your ecosystem. What made a company’s supply chain great yesterday may not be good enough today or tomorrow, the Accenture consultants point out. “By doing digital differently, trendsetters are transforming their supply chains into superfast, digitally disruptive, hyper-flexible, and highly collaborative enablers of superior customer service and profitable enterprise growth.”39

Supply Chain Technology

221

Notes 1. Ned Young, “How Does Supply Chain Technology Differ from Supply Chain Management?” Material Handling & Logistics ( July/August 2015), 40–44. 2. www.gartner.com. 3. David Blanchard, “Disruption at the Speed of Supply Chain,” Material Handling & Logistics (May 2016), 4. 4. Pierfrancesco Manenti, “How to Approach the Digital Supply Chain Future,” Material Handling & Logistics (May 2017), 30–31. 5. Catherine Clifford, “Elon Musk: ‘Mark My Words—AI Is Far More Dangerous Than Nukes,’” CNBC (13 March 2018), www.cnbc.com. 6. David Blanchard, “A Smarter Way to Run a Supply Chain,” IndustryWeek ( June/ July 2016), 26–29. 7. “Embracing the Digital Mindset,” MHI Annual Industry Report (Charlotte: MHI, 2020), 6–7, 38. 8. Katarzyna Pohorecka, “Exploring SIRI Technology as Artificial Intelligence and Its Impact on People,” Medium (17 July 2019), www.medium.com. 9. Bernard Marr, “The 10 Best Examples of How AI Is Already Used in Our Everyday Life,” Forbes (16 December 2019), www.forbes.com. 10. Markus Kückelhaus, “A Smarter Way to Handle and Move Materials,” Material Handling & Logistics ( July/August 2018), 17–18. 11. Moore’s law suggests that computing power doubles roughly every two years. 12.  David Blanchard, “Technology Adoption 101: Improve the Customer Experience,” Material Handling & Logistics (May–June 2019), 4. 13. David Blanchard, “The Five Stages of RFID,” IndustryWeek ( January 2009), 50–53. 14.  David Blanchard, “Aww, Geez, Not Another RFID Article,” Logistics Today (May 2004), 7. 15. David Blanchard, “RFID Is Off and Running at Walmart,” Logistics Today (February 2005), 1, 10. 16. “Moving Forward with Item-Level Radio Frequency Identification in Apparel/ Footwear,” Kurt Salmon Associates, 2005, 2–4. 17. Blanchard, “RFID Is Off and Running at Walmart.” 18.  Gary McWilliams, “Walmart’s Radio-Tracked Inventory Hits Static,” The Wall Street Journal (8 February 2007), D6. 19. David Blanchard, “Walmart Lays Down the Law on RFID,” IndustryWeek (May 2008), 72–74. 20. MH&L Staff, “RFID Enables Nearly 100% Order Accuracy for Retail,” Material Handling & Logistics (6 November 2018), www.mhlnews.com. 21. V. Daniel Hunt, Albert Puglia, and Mike Puglia, RFID: A Guide to Radio Frequency Identification (Hoboken, NJ: Wiley, 2007), 60–64. 22. Claire Swedberg, “Brandt Tracks Its Beef,” RFID Journal (31 March 2006), www .rfidjournal.com. 23. Perry A. Trunick, “From Stable to Table,” Logistics Today (March 2007), 18. 24.  Charles Poirier and Duncan McCollum, RFID Strategic Implementation and ROI: A Practical Roadmap to Success (Fort Lauderdale, FL: J. Ross Publishing, 2006), 124.

222

Supply Chain Strategies

25. Claire Swedberg, “Boeing Tracks Assets at Kennedy Space Center,” RFID Journal (13 November 2008), www.rfidjournal.com. 26. Paul Nuzum and Carol J. Johnson, “RFID—Lessons Learned,” ProLogis Supply Chain Review (October 2005), 1. 27. Deborah Abrams Kaplan, “The Rise, Fall, and Return of RFID,” Supply Chain Dive (21 August 2018), www.supplychaindive.com. 28. Don Tapscott and Rik Kirkland, “How Blockchains Could Change the World,” McKinsey & Company (6 May 2016), www.mckinsey.com. 29. Charlie Caruso, “How Blockchain Could Cure Cancer,” Medium (20 May 2018), www.medium.com. 30. Nouriel Roubini, “Roubini Calls Out the Big Blockchain Lie,” MarketWatch (18 October 2018), www.marketwatch.com. 31. Andres Richter, “Big Brother Is Watching Your Supply Chain,” Material Handling & Logistics (11 February 2020), www.mhlnews.com. 32. David Blanchard, “A Chip Off the Ol’ Blockchain,” Material Handling & Logistics (May/June 2018), 4. 33. Olga Kharif, “Walmart, Sam’s Club Start Mandating Suppliers Use IBM Blockchain,” IndustryWeek (25 September 2018), www.industryweek.com. 34. David Blanchard, Adrienne Selko, and David Sparkman, “Top 10 Supply Chain Innovations of 2019,” Material Handling & Logistics (November/December 2019), 11–15. 35. David Blanchard, “Why Is It So Hard to Find Good Help These Days?” Material Handling & Logistics (September/October 2018), 10–16. 36. Scott Levine, “These Jaw-Dropping Facts Will Change Your Mind about the Internet of Things,” The Motley Fool (30 April 2020), www.fool.com. 37. David Blanchard, “The Logistics Landscape Is Wide Open for the Internet of Things,” Material Handling & Logistics (April 2016), 11–14. 38. MH&L Staff, “Building a Connected, Smart Port of the Future,” Material Handling & Logistics (1 February 2018), www.mhlnews.com. 39. Kris Timmermans, Gary Hanifan, and Stéphane Crosnier, “Digital Trendsetters: Secrets of the Most Successful Supply Chains,” Material Handling & Logistics (October 2016), 22–24.

CHAPTER

14

Corporate Social Responsibility Doing the Right Things for the Right Reasons Flashpoints Most large and many mid- to small companies have adopted sustainability initiatives, often to comply with regulations or a customer mandate. Environmental programs have proven easier to monitor than human rights initiatives. Companies need to understand and be able to measure exactly what is involved in the manufacturing and distribution of their products. Technology is being leveraged to provide visibility and transparency into global supply chains that are difficult to monitor. Eco-friendly strategies, when properly implemented, can produce significant cost savings.

Climate change. Disappearing rainforests. The greenhouse effect. Natural disasters. Forced and slave labor. Acidification of the ocean. Overpopulation. Pestilence and drought. Sounds like the makings of a summer movie blockbuster, but in fact the interest in—and demand for—environmentally friendly business practices has grown at such a rapid pace in recent years that a movement that’s gone under various names over the years—conservation, ecology, environmentalism, green—has blossomed into the sustainability movement. It’s gone from the “it’s just a fad” stage to the “what’s our eco-business strategy and how do we execute on it?” stage. And for businesses, it all falls under the heading of corporate social responsibility (CSR),

223

224

Supply Chain Strategies

which is a somewhat elastic concept but generally refers to the measurement of how sustainable a company’s business practices are—not from a financial perspective but from an impact-on-the-world perspective.1 When economist and Nobel laureate Milton Friedman wrote in 1970 that “the social responsibility of business is to increase its profits,” he clearly had no idea how often that quote would be cited as evidence that academics who spend their entire careers in ivory towers just don’t get it. Friedman, after all, never served as the CEO of a manufacturing company nor had to stand in front of a microphone fielding questions from angry shareholders demanding to know why, for instance, his company supported human trafficking or why it discriminated against the LGBTQ community or why it deprived local farmers of access to clean water. And he certainly never calculated the impact of climate change or documented his carbon footprint. Friedman would’ve had a tough time winning a Nobel Prize in today’s economy.2 So what exactly is sustainability? According to the Environmental Protection Agency’s (EPA) definition, sustainability is based on this simple principle: “Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment. To pursue sustainability is to create and maintain the conditions under which humans and nature can exist in productive harmony to support present and future generations.”3 There’s no denying that the sustainability movement is a veritable holy war, prone to inspiring heights of hyperbole on the furthest ends of the ideological spectrum, from pronouncements that removing every gasolinepowered vehicle from the highways is the sole salvation of the planet to claims that global warming is a hoax concocted by alternative energy producers and shareholders. We could devote an entire book discussing the politics of sustainability, but for the purposes of this chapter, we’ll focus on the business of sustainability, and specifically on how to realign your supply chain so that it becomes more cost-efficient, more energy-efficient, less wasteful, more attractive to investors and customers, and ultimately, more productive.

Champions of CSR Supply chain professionals can be the champions of CSR initiatives, says Gina Manis-Anderson, founder and CEO of consulting firm Savii Group, because “they know how to think outside the box, and can use change management principles to show the CEOs and CFOs how to integrate CSR into the overarching corporate strategy.” Customers, she avers, want companies to look at more than just profits, referencing an Edelman study that

Corporate Social Responsibility

225

found that 87% of consumers expect companies to hold the interests of society on an equal footing as their business interests.4 “Supply chain leaders have the most influential voice in the CSR conversation, and can be the gatekeepers of getting sustainability and corporate consciousness initiatives off the whiteboard and into action,” Manis-Anderson points out. Going beyond the triple bottom line of people, planet, and profits, she says, can lead to substantial benefits to companies of all sizes. For instance, focusing on having transparency throughout every stage and link in the supply chain can help to protect the supply chain itself. “If your supply chain is to be effective in meeting CSR standards, it must be operating at the highest of ethics,” she says. Also, by initiating ongoing conversations with suppliers to achieve greater transparency, companies will not only enhance their CSR efforts but will also provide more opportunities for innovation, efficiency, and cost savings. “Stronger supplier relationships can also uncover potential improvements in product quality,” she adds.5

Corporate Irresponsibility Although the modern environmental movement dates back at least to the 1960s, 1970 is usually cited as the beginning of the movement because the first Earth Day celebration and the creation of the US Environmental Protection Agency occurred that year. But like many movements with both ideological and political motivations at their roots, setting environmental goals has proven to be significantly easier than achieving them, especially when the goalposts are frequently moved and even more especially since attaining those goals requires substantial and consistent participation from industry. When the EPA was formed, for instance, cleaning up air pollution was part and parcel of its mandate, and numerous regulations emerged that led to various developments propelling that goal, such as the introduction of unleaded gasoline, cleaner burning engines for motor vehicles, and the issuance of air quality standards under the Clean Air Act of 1970. Today, 50 years later, air pollution falls almost at the very bottom of a list of corporate supply chain sustainability goals, according to a 2020 study conducted by the MIT Center for Transportation & Logistics and the Council of Supply Chain Management Professionals (CSCMP). With more than 1,100 supply chain professionals weighing in, the study reveals what the MIT/CSCMP researchers admit was “a surprising result”: Air pollution and natural resource conservation are low-priority items today when it comes to sustainability. Social issues, in particular the eradication of child labor and forced labor, are seen as the most important sustainability issues for their companies to focus on. However, that doesn’t necessarily translate

226

Supply Chain Strategies

into focused, measurable initiatives to improve human rights throughout the supply chain.6 Consider the nature of the modern supply chain, and the impact that technology has had on how we can move people, goods, and information. It’s now possible to order a product in the morning and have it delivered to you that same afternoon. Medicines and other essential items can be flown by drone to the remotest outposts of the desert or the most impassable mountain ranges. But it’s also made it possible for bad actors to hack into supposedly secure databases to obtain passwords, transactional information, account numbers, and all manner of data that expose consumers and corporations alike to breaches perpetrated by unknown and often impossible-to-track cybercriminals. The constant demand for products that can be delivered as close to instantaneously as possible has led far too many desperate—and unscrupulous—companies to turn a blind eye toward the network of lowertier suppliers within their supply chains who often act with reckless disregard for basic human rights. As we saw in Chapter 9, while globalization has led to a much larger customer base for companies, it’s also exposed the propensity among bad actors to exploit workers both at home (undocumented migrant labor) and abroad (sweatshops and forced labor). And even the best-run and most ethical multinational companies often find it difficult to consistently keep tabs on what’s going on in the furthest reaches of their supply chains. “A lean, agile supply chain network is important in the hypercompetitive global marketplace, but an increased reliance on contractors and their subcontractors brings all kinds of increased risk and with it a heightened responsibility to closely vet and monitor supplier performance and behavior,” notes Thomas Derry, CEO of the Institute for Supply Management (ISM), a trade organization offering educational and professional certification services. This can be a quite daunting task, he observes, as some Fortune 500 companies might have 10,000 or more suppliers under contract, and unethical behavior by just one of those suppliers could damage a company’s reputation considerably—sometimes irreparably. “Among suppliers, and their own subcontractors, poor working conditions, loose financial transactions, skirting of environmental regulations, or substandard quality in parts or materials can all turn into scandals that affect the contracting organization,” Derry says. “As a result, corporations must constantly vet and monitor supplier performance and behavior.” Toward that end, the ISM has developed formal guidelines for sustainability and CSR. Some of these principles include:

■■ ■■

Do not tolerate corruption in any form. Promote diversity, equity, and inclusion throughout your company.

227

Corporate Social Responsibility

Support environmental precaution and responsibility. ■■ Value, respect, and enforce human rights.7 ■■

promote

environmental

Who’s Minding the Supply Chain? On the subject of human rights, slavery didn’t come to an end with the Emancipation Proclamation; unfortunately, it is still very much alive and well in the world, with more than 40 million victims of modern slavery and nearly 25  million toiling in some form of forced labor (according to the Global Slavery Index),8 and it’s been estimated that two out of every three of those victims support corporate supply chains in some fashion. The top five products at risk of modern slavery being imported into G20 countries are electronic devices (especially computers and smartphones), apparel, fish, cocoa, and sugarcane. Every year, roughly $150 billion are generated by companies as the result of forced labor, says Helen Carter, lead consultant with Action Sustainability. It’s a myth, she explains, that modern slavery is mostly confined to sex trafficking, which actually only makes up 20% of all instances. The vast majority of slavery situations occur in manufacturing, agriculture, construction, mining, textiles, utilities, and domestic work. It’s also a myth, Carter adds, that modern slavery only takes place in emerging countries. More than 1.5 million people are toiling in slavery conditions in Europe, North America, Australia, and Japan.9 One of the problems is that corporations as a whole don’t do a very good job of monitoring the entirety of their supply chains on how well they’re doing protecting human rights. For instance, the Corporate Human Rights Benchmark (CHRB), a ranking of global companies created by an investor alliance, scores each company on how well it performs when it comes to demonstrating respect for human rights (e.g., child and forced labor, women’s rights, working hours, water use, sourcing practices). These scores are based on the UN Guiding Principles on Business and Human Rights, and a perfect score would be 100%, which means the company discloses how it measures and monitors every item on the CHRB list.10 Not a single company in the study—mostly manufacturers and retailers in the food, apparel, and oil and gas industries—scored a 90% or higher, which using the traditional academic grading scale would be considered an A. What’s more, only one company (footwear manufacturer Adidas) scored between 80% and 90%, the equivalent of a B grade. And only two other companies—BHP Billiton and Rio Tinto, both involved in mining— got the equivalent of a C grade by scoring between 70% and 80%. In fact, nearly two-thirds of the companies ended up earning less than 30% in the

228

Supply Chain Strategies

CHRB ranking, and many are familiar names, such as Costco, Hershey’s, Kraft Heinz, Kroger, McDonald’s, Mondelez, Starbucks, Target, Walmart, and Yum! Brands. It needs to be pointed out that the CRHB study doesn’t suggest or imply that these companies are themselves violating any human rights anywhere in the world; what it does suggest, though, is that these companies aren’t doing a very thorough job of measuring and reporting their performance relative to various human rights issues. There’s even a term that’s often used to describe companies that speak a good sustainability game but fail to live up to their CSR promises: greenwashing. The MIT/CSCMP sustainability study referenced earlier points explicitly to this practice: “Some publicly stated goals may not match actual invested resources and can be perceived as a form of greenwashing.” While social issues are often highlighted as critical goals for companies, when it comes right down to putting their money where their mouths are, companies more often than not will focus on more easily measurable (and perhaps, more cost justifiable) environmental goals, such as carbon reduction.11

The Black Elephant in the Room Indeed, when it comes to CSR initiatives, the elephant in the room is that, if left to their own devices, many and perhaps most manufacturers would opt out of participating. To say that some have been dragged kicking and screaming into adopting eco-friendly practices might be only a mild exaggeration. “What’s in it for me?” is not an uncommon reaction among executives given the dictate to start measuring, and then improving, their company’s sustainability. It’s also accurate that compliance with various regulations aimed explicitly at corporate supply chains, such as the Dodd–Frank Act, the California Transparency in Supply Chain Act, and the UK Modern Slavery Act, has prompted movement where perhaps that movement would not have been made otherwise. Author Thomas Friedman refers to “a black elephant,” a phrase first coined by environmentalist Adam Sweidan, which combines the concept of a “black swan event”—a rare, unpredictable, surprise occurrence—and “the elephant in the room”—that annoying problem or situation everybody is aware of but nobody wants to talk about. As Sweidan relates in Friedman’s book, Thank You for Being Late, there is a gathering herd of environmental black elephants, including global warming, deforestation, ocean acidification, and mass biodiversity extinction. “When they hit, we’ll claim they were black swans that no one could have predicted, but in fact they are black elephants, very visible right now.”12

Corporate Social Responsibility

229

According to a survey conducted by analyst firm IDC Manufacturing Insights, the main reason why companies get involved in any kind of sustainability initiative in the first place is to comply with government and/ or other regulations (42% of responses), and that’s by a two-to-one margin over the next closest response. Twenty-one percent say they’ve gotten into sustainability projects because of a mandate and/or pressure from customers and consumers. Coming in third, with 20% of responses, is the opportunity to reduce costs.13

At a Glance Carbon Footprint The amount of greenhouse gas emissions (carbon dioxide) produced by an individual or an organization, or the amount used in the manufacture and distribution of a product.

The idea of a cap-and-trade market has been proposed in the United States in recent years, one that would be modeled somewhat on a market adopted by the European Union in 2005 as a result of the Kyoto Protocol. The “cap” refers to a limit imposed on companies on the amount of their greenhouse gas (GHG) emissions. The “trade” refers to a market where companies needing a higher limit than regulations allow can in fact buy credits for additional emissions from companies that are producing far fewer emissions than they’re allowed. The merits of such a plan are subject to debate, and while a cap-and-trade program was proposed as part of a clean energy bill during the Obama administration, and even approved by Congress, the bill never got through the Senate. It’s still unclear as to whether the United States will eventually adopt cap-and-trade provisions or some sort of a carbon tax, as the idea still seems to be a volatile political hot potato. However, as Andrew Winston, an expert on green business, sees it, “climate change regulations are coming and will change business forever. The attack on emissions will affect every aspect of society, from how we power our lives and travel to how businesses source, make, distribute, and sell goods. When governments and markets ‘price’ carbon, the cost of everything changes, sometimes by a significant margin.” As Winston notes, some products in their current forms will become much more expensive to make and ship. That makes it imperative, he says, that companies understand exactly what is involved in the manufacturing and distribution of their products.14

230

Supply Chain Strategies

The Carbon Footprint of a Banana To understand the difficulty in providing a consumer with a meaningful and accurate sustainability label, consider the carbon footprint of a simple banana. Researcher Edgar Blanco, with the Center for Transportation and Logistics at the Massachusetts Institute of Technology, was commissioned by Chiquita Brands to determine the impact that distance traveled has on a banana’s overall sustainability score. “Even a simple product like a banana has a complex supply chain: hundreds of farms with different agricultural practices, a variety of trucks and ocean vessels, multiple logistics flows and distances, varying time spent at refrigerated storage, and multiple sources of electricity at stores and warehouses,” Blanco explains. Chiquita’s bananas are grown in Central America and are shipped by boat to various US ports, and are then stored in regional warehouses before being shipped on refrigerated trucks to their final retail destination. Naturally, then, a banana sold in a port city like Houston or New Orleans will log many fewer transportation and distribution miles than a banana going to a store in Minneapolis, Chicago, or Kansas City. According to Blanco’s research, a banana sold in Minneapolis would have a carbon footprint of 168 g (grams of carbon dioxide equivalent), whereas that very same banana sold in New Orleans would have a much lower carbon footprint of 97 g.15 But the logistics journey makes up only one element of the total supply chain of the banana. “Even within one well-defined operation, the number of elements you need to measure is very complex in terms of data and interactions with suppliers,” Blanco notes.16 A carbon footprint, he points out, has three dimensions: depth, referring to how far back or forward in a product’s supply chain you choose to measure; breadth, which takes into account what types of data are measured throughout the supply chain; and precision, which is the degree of accuracy in the measurement of carbon emissions. So the plantation field where a banana is grown has to be factored into the equation, as the process of fruit harvesting can contribute as much as 25% of the total carbon footprint of a banana. There’s also the fuel efficiency of the various vehicles the bananas are transported in, the energy efficiency of the warehouses they’re stored in, and even the cardboard boxes bananas are typically packaged in.17 Jason Mathers, director of vehicles and freight strategy with the Environmental Defense Fund, offers this example of how a company can reduce its overall carbon emissions by shifting its freight from one transportation mode to another (all things being equal, and the freight still arriving to the customer as scheduled): “A container moved from Shanghai to the port of Seattle and then trucked to Cleveland would have a footprint of 13.1 metric tons of carbon. If that container came into the port of Norfolk instead, its

Corporate Social Responsibility

231

footprint to Cleveland via truck would be 5.6 tons, and via rail it would be 3.5 tons. A move from Seattle via an intermodal mix would result in a footprint of 4.7 tons—less than the truck footprint from Norfolk.”18 Retail giant Walmart uses a supplier scorecard and what it calls a Sustainability Index to gather and analyze data related to a product’s lifecycle, touching on all supply chain points—from sourcing, manufacturing, and transporting, to selling, customer usage, and end of use. Walmart uses the data from the surveys to identify key social and environmental hot spots and to set an agenda as it works with its suppliers to drive continuous improvement. According to the retailer, the Sustainability Index allows suppliers to see their own scores, and how they compare relative to other suppliers. The index also suggests opportunities for improvement for each product category, including tips on how to conduct a product lifecycle analysis (LCA).19

Don’t Reinvent the Wheel An LCA is actually a stricter standard than a manufacturing emissions–based footprint, points out GreenBiz Group senior analyst John Davies, but it can also open up new revenue opportunities. He cites the example of construction equipment manufacturer Caterpillar, which uncovered a multibilliondollar business opportunity by expanding its remanufacturing capabilities. For instance, while comparing the carbon impact of remanufacturing a cylinder head versus building a new one, Caterpillar discovered that the remanufacturing process consumes 90% less water, uses 80% less energy, requires 99% fewer materials, occupies 99% less landfill, and emits 50% fewer greenhouse gases.20 Air Products and Chemicals, a supplier of atmospheric, process, and specialty gases, uses LCA as a best practice for its CSR initiatives. LCA offers a systemized method to calculate the total environmental cost to manufacture a product, and then offers alternative approaches to production that are more in line with Air Products’ sustainability goals. And indeed, by 2019, the company had already achieved most of its 2020 sustainability goals. Some of its recent accomplishments from its “Grow, Conserve, and Care” initiative include: generating more than half (53%) of its revenues from sustainable products, which allowed customers to avoid 69 million metric tons of carbon dioxide; reducing use intensity by 3.7% (from a 2015 baseline) in its air separation units; and reducing its lost time injury rate by 63%.21 Corning Painter, CEO of Orion Engineered Carbons and formerly senior vice president, supply chain, corporate strategy and technology at Air Products, recommends that companies use existing standards, such as ISO 14040 and ISO 14044, as their framework for LCA. There’s little to be gained, he notes, from trying to reinvent the wheel when it comes to sustainability,

232

Supply Chain Strategies

especially since the ISO already laid the groundwork with its international LCA standards. “The more all of industry consistently follows these types of best practices, the more credibility we’re all going to have,” Painter observes. “If 90% of companies do sustainability well but 10% don’t, and if some environmental group finds them out, it will make everybody skeptical of anything that any of us say.” Manufacturers have a good story to tell, he emphasizes. “We just need to be out in front of our sustainability efforts and let people know that we’ve been doing CSR type of activities for a long time.”22 One important tool organizations are using to combat human rights violations is technology. Made in a Free World, an antislavery charitable organization whose board includes software executives, has developed a database that can map bills of materials of various products and services, all the way down to the raw materials and labor used throughout a product’s lifecycle. Using a supply chain network tool, the solution can triangulate inputs such as supplier performance ratings and payment history to identify situations where forced labor might exist. It can also suggest alternative sources so the user can avoid doing business with questionable suppliers.23 Similarly, Dun & Bradstreet has developed a Human Trafficking Risk index, which uses proprietary data from D&B’s global database of 250 million business records, along with public data from the US government. The index is designed to help companies gain better visibility into their supply chains by analyzing conditions where products are being made or sourced.24 Blockchain technology is being leveraged to create a secure registry for workers to validate a worker’s credentials, with the aim of detecting when child labor or forced labor is being exploited. Soft drink giant Coca-Cola and the US State Department are spearheading this project, which aims to identify when forced labor is used to produce sugarcane within Coke’s supply chain.25

Bridge Over Muddled Waters There is a poisonous substance in the world that is so deadly that it takes the life of a child every 19 seconds. In fact, it’s so lethal that it kills more people every year than the number of people who die in war or acts of terrorism. The real tragedy is that the same substance that kills so many people is something that we encounter every day and in fact is something we can’t live without. It’s water. In the United States as well as most of the industrialized countries of the world, access to clean drinking water is taken for granted. It’s just assumed that the municipalities and organizations responsible for a community’s drinking supply will ensure that the water is free of impurities. When that

Corporate Social Responsibility

233

turns out not to be the case (consider, for instance, the uproar that resulted when it was learned that the drinking water in Flint, Michigan, had been contaminated with lead), then steps are taken to correct the situation. Clean water is considered one of the inalienable rights of US citizens. In many other parts of the world, however—namely Africa, Latin America, and Southeast Asia—the only available water is often contaminated with deadly diseases. Women and children often walk three hours every day to gather this dirty, diseased water, knowing full well it will probably make them sick, but they don’t have any other choice. Consider the average day of an American citizen, and how much water he or she uses in that day: showering, going to the bathroom, washing their hands, making coffee or tea, eating food that needed water to grow, washing clothes, washing dishes, washing the car, going to a swimming pool, watering the lawn. The average American uses 150 gallons of water a day for all their various activities. In comparison, the average family in a developing country is lucky if they can find 5 gallons per day. And if they do find 5 gallons, the water is likely to be unsafe. In fact, one out of every eight people in the world drinks water that will probably make them sick. All told, almost a billion people in the world don’t have easy access to clean water. This, you would think, would be an international tragedy of such epic proportions that it would dominate the news and the many civilized nations would marshal all their resources to ensure that everybody had access to clean, safe water, but for many reasons—some political, some cultural—this global calamity rarely makes the headlines. That’s starting to change, though, due to the rise of an awareness that every company, no matter how big, no matter what industry, has an obligation to leave the planet and its resources in at least as good a condition at the end of the day as it was at the beginning. Coca-Cola, for instance, set itself a water replenishment goal whereby it would improve water efficiency in its manufacturing operations by 25% by 2020 (using a 2010 baseline). While the company admitted it wouldn’t be able to hit that target on schedule in its 2019 Business & Sustainability Report, Coke has already achieved an 18% improvement, stating that it now uses only 1.85 liters of water for every liter of final product (compared to the 2.16 liters of water used in 2010). Coke uses water footprinting, which measures the total volume of water used to produce its products, to gain a clearer idea of its water usage throughout its manufacturing processes and supply chain.26 However, the amount of water that Coke uses in its manufacturing process accounts for only 1% of its total water use, and doesn’t include the water used to grow agricultural ingredients sourced by Coke.27 Part of what prompted Coke to set its replenishment goal in the first place, according to the Washington Post, was to overcome the perception that the company was exploiting some of the local communities near its

234

Supply Chain Strategies

production facilities in India and other countries. The criticism directed at Coke at the time was that the company not only exacerbated water shortages but in some cases contaminated local water supplies.28 If even a multinational giant like Coke has encountered some difficulty in achieving its sustainable water initiatives, what can smaller companies do, especially when many organizations don’t have a full-time sustainability manager on staff and, as often happens, the assignment ends up on the supply chain manager’s to-do list? Nick Martin, sustainability practice leader at environmental consulting firm Antea Group USA, suggests that companies focus first on what’s in their power to manage. At a facility level, for instance, he recommends companies follow what he calls the “4R” approach to optimize their water management: 1. Reduce: Avoid using water where possible by rethinking your processes and/or modifying your products. 2. Reuse: Where is it possible to optimize every drop of water your facility touches through safely reusing water within processes? 3. Recycle: Where can water or wastewater be treated and directed to a beneficial use either on or offsite? 4. Return: To what extent can your facility return water to the local watershed where it was originally sourced from and reduce the overall demand of your operations?29

Eco-Friendly Strategies Consumers say they want “sustainable products,” but they also want them shipped right away, and the quicker the better, so there’s a disconnect in the consumer mind that equates ordering products online with reducing energy consumption. While it’s true that fewer consumers traveling to brickand-mortar stores reduces their personal carbon footprint, transportation is inherently an energy-consuming process, and moving products through warehouses, onto trucks, through cities, and ultimately to homes or offices still uses up a lot of energy. Since trucking companies tend to be singled out more often than not as major contributors to carbon pollution, the EPA has issued numerous regulations over the years with the goal of significantly reducing the amount of carbon emitted from trucks by making the vehicle engines more fuel efficient and cleaner burning. Parcel delivery companies such as UPS, FedEx, and DHL have all implemented strategies aimed at reducing their energy consumption, and have invested in alternative fuel sources, such as electric- or hydrogen-powered vehicles. UPS, for instance, has set a goal of having 40% of the fuel used by

Corporate Social Responsibility

235

its ground vehicles coming from alternative sources by 2025. FedEx intends to improve efficiency in its Express vehicles by 30% by 2020. And DHL hopes to reduce emissions to zero by 2050. “Cutting energy costs is the poster child for a quick, sustainable ROI,” says Yossi Sheffi, director of the MIT Center for Transportation and Logistics. “Devising ways to become energy-efficient involves activities that benefit the environment and simultaneously cut costs. Whether you replace light bulbs or have fuel-efficient trucks, the ROI happens quickly.”30 As one of the major third-party logistics providers (3PLs) in the United States and manager of a large fleet of its own vehicles, Ryder System Inc. has responded to the call to more sustainable logistics in a number of innovative ways. The company, for instance, has reduced the amount of sulfur emitted from its trucks by switching to ultra-low sulfur diesel fuel at all of its fueling operations; deployed electric vehicles throughout its fleet; and championed the development of electric vehicle charging solutions. Ryder also has worked closely with manufacturers on adopting sustainable designs and processes throughout their supply chains, and offers the following strategies for developing a more environmentally friendly supply chain: Warehousing and Distribution ■■ Integrate energy conservation strategies in the warehouse to reduce reliance on GHG-producing sources. ■■ Set targets for reducing energy consumption and conduct annual audits to ensure progress. ■■ Use low-voltage lighting and install motion sensors or timers on lighting systems. ■■ Conduct regular facility inspections to identify opportunities to upgrade the roofing, doors, and windows, and to repair leaking water pipes and irrigation systems. ■■ Integrate real-time inventory visibility in the warehouse to reduce unnecessary trips and wasteful inventory obsolescence. ■■ Leverage technology to streamline and improve the accuracy of inventory levels. ■■ Create a closed-loop system for reporting and reconciling inventory levels with front-office systems. ■■ Optimize distribution networks to require fewer trips, less idling, and lower overall delivery costs. ■■ Establish regional distribution centers to serve customers based on demand. ■■ Optimize and consolidate routes to reduce the number of loads overall. Transportation ■■ Align inbound and outbound shipments to reduce carbon emissions with less fuel and to speed up cash-to-cash cycles.

236

Supply Chain Strategies

Connect in real time to customers to synchronize returns with maximized fleet use (i.e., backhauls). ■■ Coordinate supplier shipments to consolidate freight costs and negotiate better rates. ■■ Automate transportation management systems. ■■ Switch to an electronic freight bill, audit, and payment process to reduce or eliminate paper transactions. ■■ Synchronize with warehouse operations to extend efficiency. ■■ Consider a dedicated fleet solution. ■■ Control routes, fuel consumption, and idle time. ■■ Enhance driver training with courses that improve driving skills and performance, and teach drivers simple techniques to reduce fuel consumption.31 ■■

Notes 1. Environmental, social, and governance (ESG)—is often used more or less interchangeably with corporate social responsibility (CSR). 2. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine (13 September 1970), section SM, page 12. 3. www.epa.gov. 4. Gina Manis-Anderson, “Supply Chain Professionals Can Save the World,” Material Handling & Logistics (April 2014), 24–26. 5. Gina Manis-Anderson, “Channeling Influence: Supply Chain’s Evolutionary Role in Corporate Social Responsibility,” Material Handling & Logistics (May 2016), 29–31. 6. MIT Center for Transportation & Logistics and Council of Supply Chain Management Professionals, State of Supply Chain Sustainability 2020 (Cambridge, MA: MIT Center for Transportation & Logistics, 2020). 7. Thomas W. Derry, “Don’t Allow Supply Chain Growth to Increase Reputational Risk,” Material Handling & Logistics (May 2016), 28. 8. www.globalslaveryindex.org. 9. David Blanchard, “Who’s Taking Responsibility for Your Supply Chain?” IndustryWeek (May/June 2017), 14–17. 10. David Blanchard, “Who’s Responsible for Minding the Supply Chain?” Material Handling & Logistics (March/April 2019), 4. 11. MIT Center for Transportation & Logistics and Council of Supply Chain Management Professionals, State of Supply Chain Sustainability 2020. 12. Thomas L. Friedman, Thank You for Being Late (New York: Farrar, Straus and Giroux, 2016), 158. 13. Kimberly Knickle and Bob Parker, “Attitudes and Trends Toward Greening Manufacturing and the Supply Chain in North America,” Manufacturing Insights: Emerging Agenda: Customer Needs and Strategies (December 2008), 5–6.

Corporate Social Responsibility

237

14. Andrew S. Winston, Green Recovery (Boston: Harvard Business Press, 2009), 25–27. 15. Mary Aichlmayr, “The World in a Grain of Sand,” Material Handling Management (August 2009), 4. 16. William Pentland, “Here Comes Carbox,” Forbes (3 July 2008), www.forbes.com. 17. Edgar Blanco, et al., “Chiquita and MIT Center for Transportation and Logistics Aim High on Defining Carbon Footprint Measurement,” Distribution Business Management Journal 8 (2009), 80–81. 18. David Blanchard, “Corporate Social Responsibility in the Supply Chain,” IndustryWeek (May 2012), 26. 19. www.walmartsustainabilityhub.com. 20. Brad Kenney, “The ‘What, Why, How, and When’ of Carbon Footprinting,” IndustryWeek (May 2008), 48–55. 21. www.airproducts.com. 22. Blanchard, “Corporate Social Responsibility in the Supply Chain,” 22–26. 23. David Blanchard, “The Dark Side of the Supply Chain,” IndustryWeek (October 2015), 29. 24. MH&L Staff, “Human Trafficking Risk Index Provides Supply Chain Transparency,” Material Handling & Logistics (26 April 2016), www.mhlnews.com. 25. MH&L Staff, “Coca-Cola to Use Blockchain to Combat Forced Labor,” Material Handling & Logistics (21 March 2018), www.mhlnews.com. 26. www.coca-colacompany.com. 27. David Blanchard, “How Sustainable Are Sustainability Initiatives?” Material Handling & Logistics ( June 2016), 4. 28. Chelsea Harvey, “Coca-Cola Just Achieved a Major Environmental Goal for Its Water Use,” The Washington Post (30 August 2016), www.washingtonpost.com. 29. Nick Martin, “Five Ways to Optimize Sustainability across Global Facilities,” EHS Today (December 2020), 22–23. 30. Adrienne Selko, “Energy Efficiency Is Key to Better Logistics,” Material Handling & Logistics ( July/August 2018), 28–29. 31.  David Blanchard, “How to Green Your Supply Chain,” IndustryWeek (May 2008), 74.

CHAPTER

15

The Financial Supply Chain Cash Is King Flashpoints One of the most important things a company can do is to improve the management of its cash flow. Zero-based budgeting shifts a supply chain’s strategic focus from savings to profitability. Rolling forecasts allow companies to shift their budgeting plans more quickly based on more current information. Supply chain finance helps companies free up cash while lengthening supplier payment terms.

What exactly is a supply chain? No, we’re not reverting back to basic definitions this late in the book, but most of what we’ve looked at to this point has focused on physical (or in some cases, digital) supply chains, specifically involving the movement of goods or services from the point of origin to the point of consumption. “From dirt to dust” is a commonly used cliché to describe end-to-end supply chains, implying a product’s lifecycle extends from the moment its raw materials are first processed to the moment its usefulness ends.1 But it’s not quite accurate to suggest that a company’s most crucial supply chain decisions are always centered on improving the inbound and outbound flow of components and products; in many cases the most important thing a company can do is to improve how it manages its cash flow. Let’s take a look at some of the best practices companies use to manage their financial supply chain.

239

240

Supply Chain Strategies

A Convergence of Talent A company’s financial supply chain management framework should start with the creation of an integrated team combining both the finance and the supply chain functions, recommends consultant Carlos Alvarenga, CEO of Katalyst (formerly a consultant with Accenture). Their first task should be to focus on operations research, risk management, and financial optimization tools and techniques. Rather than concentrating on physical product flows and facilities, this team should concern itself with corporate-level risk, financial performance, and shareholder risk and returns, he says. For example, Alvarenga points out how aerospace manufacturer Boeing has embraced the concept of financial supply chain management when making product development and strategic sourcing decisions, including investment and risk modeling, demand modeling, spreadsheet modeling, and portfolio analysis. Boeing includes financial design considerations into its production and supply chain decisions, such as: Can unit costs be lower if the company spends more on automating production? Are new design features a good investment, or would they be able to sell more planes if they kept the price lower? It’s all about making design and production decisions from the perspective of risk and probability, Alvarenga says. “Supply chain strategists will need to rethink their training and expand their view and knowledge of finance and risk management,” he adds. If manufacturers truly are intent on a convergence of finance and supply chain, “traditional roles will have to change, as will power over supply chain management decisions.” For instance, the role of the chief financial officer could overlap and intersect the role of the chief supply chain officer. In any event, supply chain professionals should get more comfortable speaking the language of the finance department.2 To that end, the finance department at forklift manufacturer Toyota Industrial Equipment Manufacturing works very closely with the supply chain and other departments to ensure all aspects of the production process meet their budgets. As Joseph Kurdziel, Toyota’s controller, explains, the company’s budget process allocates funds to various departments to pay for every aspect of its production operations, such as product development, raw materials, and labor. “All key personnel are expected to meet these targets to ensure our actual financial performance,” he says. If, for some reason, the company misses its budget numbers, the capital expenditure plan is reviewed and cash disbursements are postponed so that manufacturing can continue at an optimal level. “Finance provides the reports to assist the departments in their day-today decision-making processes, as well as budgeting and capital expenditure planning,” Kurdziel says. All the department heads are involved, along with the president, and they’re each responsible for driving the short- and

The Financial Supply Chain

241

long-term goals of their respective departments. This isn’t an every-so-often affair, he stresses. “Communication is very important in Toyota’s environment, and the executives meet daily to discuss the events of the day.”

Zero Hour for Budgeting Why are supply chain professionals always under pressure to reduce costs? The answer is simple, explain Kris Timmermans and Andrew Corr, managing directors with global consulting firm Accenture: Half of a company’s costs are in its supply chain or costs of goods sold (COGS). The very nature of a corporate supply chain sometimes seems to be working against a company’s ability to keep overall costs under control. Timmermans and Corr cite the example of a personal care company that was able to improve its COGS for existing products by 4% to 5%—sounds pretty good, right? But hold on . . . while finding success in that area, the company was also seeing costs rising for e-commerce fulfillment and new product development, so the actual improvement to the bottom line was just 1%.3 “This scenario plays out more often than not,” they explain. “Even if supply chain leaders can deliver single-digit category savings in one area, costs end up ballooning in another area. That means no noticeable or sustainable change to the bottom line.” As a result, a condition they describe as “savings fatigue” can settle across the supply chain department. One way to overcome that fatigue is to adopt a new mindset—specifically, a zero-based mindset, a new spin on the zero-based budgeting concept that dates back more than 50 years. According to Accenture (which coined the phrase “zero-based mindset”), digital technologies can be leveraged to help propel companies into shifting their spending and cross-organizational commitments. Like zero-based budgeting, where companies started brandnew budgets every year (resetting to zero, basically) rather than basing them on the previous year’s numbers, a zero-based mindset attempts to build the supply chain from the bottom up. “Budgets are built by every entity owner, but they also have a horizontal owner—someone that has a view of the performance of every cost package across all the entities,” Timmermans and Corr state. “This structure creates a healthy tension across the organization that ensures tracking and execution— and a culture where everyone is accountable.” A zero-based supply chain does not rely solely on past costs or performance, the Accenture consultants point out. Rather, “it continues to set and stretch performance targets, identifying ‘should costs’ for costs of goods sold based on how the organization will look and operate in the future. And the savings uncovered are redirected into growth initiatives that drive efficiencies and new products and services. Essentially, the organization

242

Supply Chain Strategies

shifts from having a focus on savings to one that’s centered on impact to the profit and loss statement. And in doing so, it remains constantly focused on uncovering inefficiencies in costs that can be captured and redirected for new growth and bottom-line impact.”

Roll with the Changes When it comes to budgeting, there’s a basic rule-of-thumb, says Steve Player, founder and managing partner of consulting firm The Player Group: “You should change it whenever the key assumptions it is based on are no longer valid.” There are any number of reasons why those assumptions might have or will change, he explains, such as a change in the economy’s growth (either stronger or weaker than expected); supply chain disruptions (hurricanes, earthquakes, etc.); a shift in the competitive landscape (mergers and acquisitions involving key competitors); altered expectations of how your customers or suppliers would serve the market; or the introduction of new technologies and solutions. But sometimes, he adds, companies need to spend less time on the budgeting process and more time on the planning process.4 If you’re basing your budget on a set of assumptions that turn out to be wrong, maybe you should consider a rolling forecast, which is a forecasting system that allows you to make adjustments along the way, Player suggests. “A traditional forecasting system is set up to reward employees for reaching low-ball targets that you negotiated for yourself, but a rolling forecast provides opportunities to set more ambitious growth goals that align with industrywide growth.”5 According to research conducted by benchmarking firm American Productivity and Quality Center (APQC), companies that use rolling forecasts are better aligned with unfolding business strategy, are more effective at business analysis, derive greater value from their budgeting processes, and have more reliable forecasts than those who do not use them, notes financial management research specialist Elizabeth Kaigh. “In order to achieve truly effective rolling forecasts, finance functions should examine budget deviations and develop an understanding of the underlying assumptions that have changed since annual targets were originally set. Once deviations are identified, the forecast should then be revised to reflect their effects on organizational success.” Not only does this increase a company’s agility, but it provides a level of resilience from the inevitable but impossible to predict supply chain disruptions.6 Miles Buntin, director of enterprise performance management at consulting firm The Hackett Group, estimates that roughly 60% of world-class

The Financial Supply Chain

243

companies use rolling forecasts to some extent.7 Consumer packaged goods giant Unilever, for instance, abandoned its annual budget in favor of an eight-quarter rolling forecast. Several business units contribute to the forecasting process, including supply chain, sales, marketing, and finance, who all report feedback and input received from customers. Every month, the quarter’s forecast is updated based on current information, and appropriate changes are made as needed. Other companies known to be using rolling forecasts include glass manufacturer Corning, beverage cup maker Solo Cup, and oil and gas producer Statoil. The advantage of using rolling forecasts over traditional annual budgets is easy to explain, Steve Player says: “It makes no sense to use a nineteenth century tool to manage a twenty-first century company in a volatile global economy.”8

Supply Chain Finance: Part Strategy, Part Technology “Natural, political, and operational disruptions are the new normal in today’s global supply chains,” says consultant Shanton Wilcox, head of North America Supply Chain with Infosys Consulting. “To mitigate these risks, companies are increasingly leveraging supply chain finance.” According to a recent study of third-party logistics trends conducted by Infosys and Penn State University, supply chain finance “allows those within the supply chain to access capital that would otherwise be tied up while goods are in transit.”9 Supply chain finance is a fairly recent term that refers to a specific set of tasks within the financial supply chain. It’s partly a best practice, partly a facilitating technology, as it involves solutions such as procure-to-pay automation, order-to-cash automation, and the use of a common platform (such as a supply chain network) for buyers, sellers, and financial institutions. It’s basically built on the premise: What if you (or your suppliers) could get paid earlier than usual, at reasonable terms, using the resources of a third party who could offer greater liquidity (cash flow) in return for a negotiated fee? As Daniel Stanton, author of Supply Chain Management for Dummies, explains, “When a big company places an order with a smaller company, the smaller company often has to make a relatively major investment in equipment, labor, and raw materials, which can create cash-flow challenges. After the small company fills the order, months may pass before their big customer pays for the work. In the meantime, the small company may have trouble paying its own bills if it doesn’t have adequate cash reserves.” That’s where supply chain finance comes in. “Supply chain finance strategies,” Stanton says, “give small companies options for managing their cash flow based on orders that they receive.”10

244

Supply Chain Strategies

At a Glance Supply Chain Finance Supply chain finance is a strategy designed to help companies (especially small to medium-sized firms) free up cash while lengthening supplier payment terms.

To get a better understanding of what supply chain finance is, Tom Roberts, senior vice president with PrimeRevenue, explains what it is not: It’s not a loan; it’s not dynamic discounting; it’s not factoring. “There is no lending on either side of the manufacturer/supplier equation,” he explains, so there is no impact to balance sheets. It’s not an early payment discount program, either, since it doesn’t involve offering suppliers earlier payments in return for a discount. Dynamic discounting, Roberts says, “is expensive for both suppliers, who are getting paid less, and manufacturers, who tie up their own cash to fund the programs.” And finally, with factoring, suppliers sell all their invoices to a financial institution in return for earlier but only partial payment—“the suppliers can’t pick and choose which invoices to sell based on cash flow needs,” he points out. Supply chain finance is sometimes referred to as reverse factoring because while factoring is a supplier-driven approach, reverse factoring is a customer-driven approach.11 “Supply chain finance improves cash flow by allowing buyers to optimize their cash conversion cycle by focusing strategically on payment terms with their suppliers,” Roberts continues. “At the same time, suppliers can get paid early by a third party, typically a financial institution. By extending the invoice due date, buyers free up cash that would otherwise be trapped in the supply chain. Likewise, suppliers can accelerate their own cash flow through access to early payment.”12 “Supply chain finance,” adds Rick Erickson, global director of freight payment solutions with US Bank, “facilitates transactions between trading partners by providing financing and payment options that are negotiated to improve each trading partner’s financial position.” By extending payments—to 45, 60, 75, or 90 days—companies have more cash on hand they can use for other projects without negatively impacting their relationships, he says. “Preserved cash can then be leveraged to purchase assets, make acquisitions, manage restructuring efforts, reduce debt, repurchase stock, enhance earnings per share, or create increased liquidity.” “High performing supply chains minimize the number of days between the time they pay their suppliers (cash out) and the time they receive payment

The Financial Supply Chain

245

from their customers (cash in),” explains supply chain consultant Jane Malin with Bridge Consulting. “When Net 30 becomes Net 60 or greater, imagine how that positively impacts your cash-to-cash cycle.” The bottom line, according to Erickson, is that the shorter the cash-to-cash cycle, the more cash is accessible and the more net working capital is available for investment.13 Of course, there are at least two sides to every story, and as consultant Paul Ericksen (former chief procurement officer with truck manufacturer Oshkosh Corp.) points out, cash is never really “trapped in the supply chain.” “That’s like saying that when you buy groceries, the money you pay for them is trapped in the store,” Ericksen observes. “I wonder how stores would react if we told them we were going to extend payment terms.” He also emphasizes that in order for a supplier to get paid per the previous payment terms, the supplier must accept a discount on price. So, it’s important that all parties embarking on a supply chain finance strategy understand that everything—and especially cash flow—comes with a price.14 Supply chain finance isn’t just for small companies, however. Even large companies, such as $9 billion medical device manufacturer Boston Scientific, can benefit from a strategy designed to improve its working capital while increasing its cash flow. The company has invested in more than 30 acquisitions since 2004, with many of the transactions being cash deals. As a result, Boston Scientific needed a way to increase its cash flow without slowing down its momentum, or threatening its suppliers or investors. The company implemented a supply chain finance program that provided a way for its suppliers to get paid earlier than usual for a nominal fee, which meant the suppliers wouldn’t need to borrow from traditional banks at a much more expensive rate. The supply chain finance platform allows the suppliers visibility into when invoices were approved and when payments were processed. To date, more than 100 suppliers have signed on to the program. And for Boston Scientific, the program has led to a cash flow improvement of more than $200 million, which has helped fund significant acquisitions.15

Financials on the Rocks As we saw in Chapter 12, managing a supply chain can be a risky business, particularly since even the best managed companies are often subject to the financial performance—or lack thereof—of their customers and suppliers. On the customer side, Christopher Smith, senior finance manager, resource management with Lawrence Berkeley National Laboratory (formerly vice president of finance and administration with defense contractor SAIC), suggests there are seven signs that indicate when a customer is in financial distress and poses a significant supply chain risk. If any of these situations

246

Supply Chain Strategies

come up, a company should consider it “a red flag that the customer requires additional scrutiny and potentially greater contractual management”: 1. The customer’s financials are getting worse. 2. The customer is constantly reporting bad news as its credit rating downgrades. 3. Habitually slow payments or a change in frequency of payments. 4. More liens, debt, and creditor financing statements. 5. Invoice disputes are becoming more frequent. 6. Silence, secrecy, and concealment. 7. Discrepancies between accounts receivable and accounts payable.16 On the supplier side, supplier management needs to be very robust and sophisticated due to the constant presence of risk in the supply chain, suggests Michael Chagares, director of risk consulting services with consulting firm PwC. You have to examine your critical suppliers’ overall financial and operational health, he says. “You have to look at doing a specific contractual engagement and understanding how that can be used to potentially mitigate the risk. You’ve got to have really strong communication between you, your key suppliers, and your key vendors to understand and be very proactive on whether there are any issues they should be anticipating.” As Chagares sees it, companies have actually gotten pretty good at managing their financial risk, but they haven’t quite figured out the nuances of operational and strategic risk management—that’s where risk analytics comes in. Companies need to assess all three types of risk across the entire supply chain, he says, and then apply analytical tools to better understand what could happen should those risks occur. “Instead of reacting to something that happens, you can look across your supply chain to help sharpen your view and provide stronger capabilities in how you prioritize the risks across the supply chain, how you measure those risks, and how you understand different scenarios and test for those scenarios.” According to Chagares, failing to manage supply chain risk invites disaster, so you need to identify, prioritize, measure, and map risk across your entire supply chain ecosystem. Develop a rating system based on key metrics your company uses to measure risk, and then communicate the results across your supply chain. “You also have to ask ‘what-if’ questions,” he adds. “Use probability modeling to identify unknown risks, different levels of volatility, and develop appropriate plans to deal with potential scenarios. When is the right time to only have one plant in one country? When is the right time to put a duplicate operation in a second country?” It’s important to constantly consider and evaluate how your business environment can change, he stresses, so

The Financial Supply Chain

247

always test out potential scenarios to ensure your company is insulated as much as possible from the risks that could impact your customers or suppliers and reverberate throughout your entire supply chain.17

Show Me the Money As the authors of Financing the End-to-End Supply Chain observe, the amount of cash a company has on hand can be compared to the level of oil in a car engine. Without sufficient engine oil, the car’s moving parts will seize up and eventually cause serious, perhaps irreparable, damage. So too, a company without sufficient cash won’t be able to pay its employees, its suppliers, or its creditors, and won’t be able to invest in maintenance or product development. In short, like a car without oil, a company without cash will soon break down. A car with too much oil, though, can also lead to problems, as the engine will literally be leaking excess fluid on the ground. Likewise, a company holding onto too much cash will similarly be plagued by inefficiencies. Without pushing the analogy too far, the authors conclude that “cash management within a business is as essential as the engine management system in an automobile.” While supply chain professionals are quite adept at managing the physical flow of goods, and have become by necessity very skilled in overseeing the flow of information as well, it’s just as important to be aware of the financial flow that moves from the buyer to the supplier and up the supply chain.18 The authors cite as an example the efforts Unilever took several years ago to support hundreds of small and medium-sized suppliers in Indonesia, when that country’s economy was in turmoil. The CPG giant acted as an intermediary between the suppliers and the local banks, not only providing the suppliers with much-needed cash but also helping improve their credit ratings. This of course helped the suppliers, but it also helped Unilever, which ensured the stability of its supplier base while also lowering its overall costs by gaining better terms with the suppliers—certainly a case of win-win.19 Economic downturns, such as occurred in Indonesia at the turn of the century, are an all-too-frequent type of supply chain disruption. Rarer by far, but all too familiar thanks to the COVID-19 pandemic, are global disruptions that impact virtually every country in the world. As consulting firm The Hackett Group points out, even before the coronavirus hit the United States, the 1,000  largest US companies (not counting financial firms) had taken longer to pay their suppliers in 2019 than they had in the previous year. It had also taken these companies longer to get paid by their own customers, and as a result, they had to hold on to inventory longer. That kind of ripple

248

Supply Chain Strategies

effect led to overall working capital performance in the United States taking a dip, as both cash on hand and debt grew to record levels—and again, that was the trendline before the pandemic had even arrived.20 COVID’s arrival led to a renewed focus on working capital and overall liquidity as companies struggled to reinvent themselves to deal first with the crisis and then the aftermath. While companies had been relying heavily on supply chain financing and other external solutions, the pandemic led to “a sense of urgency driving improvement,” notes Craig Bailey, associate principal with The Hackett Group. Instead of turning to banks and greatly increasing their debt, “companies began making liquidity and cash flow a top priority.” With supply chain disruptions—whether economic, geopolitical, weather-related, or viral—becoming more of the norm than the exception, it’s increasingly important that companies do all they can to improve their cash situation. The Hackett Group offers these best practices: Don’t let the disruption go to waste—it can be the propellant driving your company to overhaul your current processes, particularly if they’ve proven to be inefficient. ■■ Adopt technology solutions that offer real-time visibility into all facets of your supply chain, as well as smarter planning and analytics tools, such as scenario modeling, integrated business planning, cash flow forecasting, and risk management solutions. ■■ Get your own house in order before making changes to terms with your suppliers and customers. Incentivize your employees—sales, procurement, commercial teams—to optimize for cash. And definitely prepare for more disruptions by improving your risk management and contingency plans. ■■ Do keep a close eye on your suppliers and customers, though. If one of your suppliers fails, will that severely impact your supply chain? Provide incentives to your customers to encourage their prompt payment, and offer support as needed to ensure the continued viability of your key suppliers. Plan out alternative scenarios in anticipation of potential failures within your supplier or customer base, always with an eye toward protecting cash and building for what The Hackett Group’s experts call “the next normal.” ■■

Notes 1. Some industries have their own expressions. For instance, the food industry describes their supply chain as being “from farm to fork.”

The Financial Supply Chain

249

2. David Blanchard, “Managing the Financial Supply Chain,” IndustryWeek (April 2013), 26–29. 3. Kris Timmermans and Andrew Corr, “Reinventing the Supply Chain with a New Take on an Old Budgeting Technique,” Material Handling & Logistics (March/ April 2019), 27–28. 4. David Blanchard, “How Do You Know When You Should Change Your Budget?” IndustryWeek (5 June 2013), www.industryweek.com. 5. Jonathan Katz, “Beyond Frozen Forecasts,” IndustryWeek (11 April 2010), www .industryweek.com. 6. Elizabeth Kaigh, “Keep Up with Changing Market Conditions with Rolling Forecasts,” IndustryWeek (4 December 2014), www.industryweek.com. 7. Robert Freedman, “Budgeting Consultants Tout Benefits of Rolling Forecasts,” CFO Dive (16 October 2019), www.cfodive.com. 8. Russ Banham, “Let It Roll,” CFO (May 2011), www.cfo.com. 9. David Blanchard, “Geopolitical Chaos Got You Confused? Don’t Worry: There’s a 3PL for That,” Material Handling & Logistics (September/October 2020), 4. 10. Daniel Stanton, Supply Chain Management for Dummies (Hoboken, NJ: Wiley, 2018), 228–229. 11. Tom Roberts, “Why Manufacturers Are Turning to Supply Chain Finance to Prep for Growth,” IndustryWeek (13 April 2017), www.industryweek.com. 12. Tom Roberts, “Three Ways Supply Chain Finance Can Fund the Future,” Material Handling & Logistics (March/April 2019), 29–31. 13. Rick Erickson, “Is Your Supply Chain Ready for the New Interest Rate Environment?” IndustryWeek (18 December 2015), www.industryweek.com. 14. Paul Ericksen, “Suppliers Are Not Your Bank, and Boeing Is Not Your Friend,” IndustryWeek (9 May 2019), www.industryweek.com. 15. Roberts, “Three Ways Supply Chain Finance Can Fund the Future.” 16. David Blanchard, “How Do You Know When Your Customer Is on the Rocks?” IndustryWeek (April 2013), 28. Based on a presentation Smith gave at the Association for Financial Professionals (AFP) Annual Conference, 15 October 2012, Miami, FL. 17. Peter Alpern, “Managing Supply Chain Risk with Eyes Wide Open,” Business Finance (6 May 2011), www.businessfinancemag.com. 18. Simon Templar, Erick Hofmann, and Charles Findlay, Financing the End-to-End Supply Chain (Philadelphia: Kogan Page, 2016), 44–47. 19. Ibid., 101–102. 20. MH&L Staff, “Slow Supplier Payments in 2019 Driving New Focus on Cash for 2020,” Material Handling & Logistics (25 June 2020), www.mhlnews.com.

CHAPTER

16

The Supply Chain Profession What Keeps You Up at Night? Flashpoints Top-performing companies have top-performing supply chain people working for them. Effective supply chain managers must be able to measure the right things, rather than everything. Every company should consider appointing a chief supply chain officer. The time is now to start developing the next generation of supply chain talent.

In today’s business climate, just managing to get through an entire work day without a major crisis has become a core competency for supply chain professionals. Whether a company looks upon supply chain management as the be-all and end-all of its corporate strategy, or whether it chooses to outsource most of its warehousing and transportation processes to a third party, its supply chain specialists always seem to be in the middle of one contentious situation after another. Maybe that’s just the nature of the job. Up to this point, this book has looked at best practices as they relate to tasks, processes, and technology, but with this final climactic chapter, it’s only fitting that we reveal the ultimate secret to supply chain success: you. That’s right, for a company to truly have a fighting chance at transforming its

251

252

Supply Chain Strategies

supply chain and achieving consistent best-in-class performance, it’s going to be up to you to help lead that effort. Throughout this book we’ve looked at the supply chain through practitioners’ eyes because supply chain management isn’t a dry study of theories and spreadsheets—it’s the daily alignment of the right people in the right tasks to run their companies as efficiently and profitably as possible. Despite the numerous different job classifications and titles within the supply chain profession (e.g., logistics manager, chief supply chain officer, procurement manager, vice president of operations, distribution manager, director of global trade), these professionals all share common goals and face similar challenges. Fortunately, there is a solid sense of fraternity within the supply chain community based on a shared need to learn from each other. The sense that “we’re all in this together” has helped foster a spirit of continuous improvement that motivates supply chain professionals to attend and participate in numerous industry events to share their experiences while learning the best practices of their peers. In fact, travel itself is a frequent activity for supply chain professionals. According to a 2007 career patterns study conducted by Ohio State University, 50% of all logistics professionals spend at least one week per month on the road, and 25% say they’re spending at least one week per month traveling internationally. Not surprisingly, when asked how they allocate their time, logistics professionals say they’re engaged in transportation activities 27% of their work day, with the next closest response being warehousing, at 16%. They’re also a well-educated group; half of the respondents spend between two to four weeks per year on continuing education and training. All survey respondents have at least an undergraduate degree, and 55% have a post-graduate degree as well.1 “Without being too simplistic, the profiles of logistics executives have changed from managing employees in a warehouse to someone in the boardroom having an understanding of robotics, inventory management, software/hardware, international customs, currency exchanges, border treaties and security, to name a few responsibilities,” says Juan Morales, managing director with executive search firm Stanton Chase International.2

People Management Consider a company like consumer packaged goods manufacturer Colgate-Palmolive. Although based in the United States, more than 80% of its customer base live somewhere else, and as a result, the company has created and fosters a culture of global people management. “Supply chain

The Supply Chain Profession

253

management is getting exponentially more complex, so supply chain talent is the price of admission,” explains Linda Topping, vice president and chief procurement officer at Colgate-Palmolive. Demographics studies indicate that less than 20% of the US workforce have the necessary skills to match the needs of supply chain organization, so managers will need to change their company culture to attract and retain a new generation of supply chain leaders, Topping observes. ColgatePalmolive’s leadership initiatives aim to “expose our future leaders to the right experiences that will keep them engaged in their careers,” she adds. “Today’s leaders need to change their company culture so that it will entice the next generation of leaders, and convince them to stay.”3 Colgate-Palmolive’s Emerging Leaders Future of Work program (enabled by analyst firm Gartner’s SCM World group) aims to do exactly that by identifying 20 or more high-potential individuals who show the most promise of developing into supply chain leaders, and then fully nurturing that potential with support from senior executive “coaches.” The program, with roughly half of all participants being diversity candidates, focuses on four key areas: Automation and Integration, People and Talent, Customer Centricity, and External Engagement. While the program’s main goal, according to Gartner’s Beth Morgan, is to create and sustain a pipeline of future leaders, the participants have proven their potential by developing strategies in support of the company’s Internet of Things and omni-channel initiatives, delivering customer-specific solutions, and speeding up the adoption of automation within Colgate-Palmolive’s factories and distribution centers.4 The number-one best practice when it comes to managing your supply chain is to have best-in-class people in positions of responsibility throughout your organization. And having a foundation of excellence built on the best talent is “the number-one requirement for transforming a supply chain,” according to Ted Stank, chair of the Global Supply Chain Institute at the University of Tennessee. Finding that kind of talent, he acknowledges, will require what he calls “a game-changing shift in hiring strategies focused on identifying people skilled in four critical competencies: leadership skills, technical savvy, superior business skills, and global orientation.”5 And indeed, as supply chains have gone global, learning how to identify these people, how to train them, and how to develop them into productive employees has become increasingly important, as well as much more difficult. If it sometimes seems like companies tend to make it up as they go along when it comes to developing their supply chain groups—if they even refer to it as a supply chain group—there’s some truth in that. Managing the people within a supply chain is every bit as challenging as managing the functional processes.

254

Supply Chain Strategies

Talent Search To begin with, where are you going to find these top-notch people? Mark Wilson, director of recruiter relations and technology at Ohio State University, one of the nation’s leading supply chain breeding grounds, suggests that many of the best supply chain minds might still be completing degrees at colleges and universities and haven’t even entered the job market yet. Recruiting these candidates into entry-level positions can be an overwhelming task for firms that have little to no college campus recruiting experience, Wilson admits. First of all, if your company isn’t in the Fortune 500, chances are most college students have never heard of you, especially if you’ve never recruited at their school in the past. Second, college recruiting is rarely a skill possessed by direct-line managers, who tend to be unfamiliar with the on-campus recruiting cycle. And, frankly, “Most employers lack a plan for organizing their recruiting efforts,” Wilson observes. Fortunately, as supply chain programs grow in popularity, it’s becoming easier to find quality candidates. “Whether your plan is for an ongoing recruiting program or a program for just-in-time hiring,” he says, “there are some simple steps you can take to improve your odds for achieving success.” Wilson offers the following advice: Get to know the people who work in career services. “These professionals can be your resource for gaining insight into how and when to recruit on-campus,” he explains. “They can help you understand the cycle and timing for interviewing college candidates, average salary offers, and when to make offers of employment. They can also help you understand what students are looking for in written descriptions of the job and your company.” Get to know the top candidates by seeking them out directly. Many supply chain programs have professional organizations for students. “The student leaders of the organizations are typically leaders in every category of life, and tend to be highly regarded by college faculty, students, and employers,” Wilson points out. “Invite these student leaders to lunch and ask them which firms recruit effectively and how you can help their student logistics organization. You are likely to find many valuable nuggets of information to assist you in your recruiting efforts.” Establish an on-campus presence with a few select schools. This could involve corporate sponsorship programs, working with student organizations, and facilitating information sessions for top candidates. Develop a connection with the supply chain faculty at these schools. “Before or during your visit to conduct interviews on campus, take the time to meet with a faculty member and ask how you and your firm might be of help and get involved with their work,” Wilson suggests. “This can lead to assisting with research and to classroom access, where you will find the candidates you are seeking. Plus, faculty can point you in the direction of their top performers.”6

The Supply Chain Profession

255

APICS, a trade association for supply chain management, offers certification programs to train supply chain professionals, and to that end has developed what it calls a multi-tiered “supply chain manager competency model.” While some of the tiers focus on basic foundational skills (e.g., effective communicator, team-oriented, possesses interpersonal skills), the model also breaks down what technical competencies a supply chain manager should have, and what skills a hiring organization should look for from a candidate: Site selection/ability to locate facilities Distribution ■■ Warehousing ■■ Logistics ■■ Global trade regulations ■■ Strategic sourcing/supplier relationship management ■■ Customer relationship management ■■ Knowledgeable in lean and Six Sigma tools ■■ ■■

“The personal demands of supply chain leaders increase each day, and the organizational pressure to recruit and retain effective supply chain leaders is continually increasing,” explains Peter Bolstorff, executive director of APICS Supply Chain Council. “Given the impact of supply chain performance on shareholder value, developing future supply chain leaders is a strategic imperative.”7 The best supply chain programs at US universities, according to Gartner, are offering their students ample opportunities to participate in the core supply chain activities in various ways, such as simulation, timed projects, cooperative projects, and internships. Based on a 2018 study of the bestknown university programs, Gartner has determined that the top five supply chain programs are: 1. Pennsylvania State University 2. Rutgers University 3. Auburn University 4. Michigan State University 5. University of Tennessee8

Hiring Problem Solvers Just because students do well in school doesn’t mean they’ll prove to be as capable on the job. So how can you predict whether a job candidate will be

256

Supply Chain Strategies

a proactive problem solver once he or she joins your firm? Harry Joiner, an executive recruiter specializing in supply chain and e-commerce, suggests using a seven-step checklist that projects how well or poorly a candidate will do when confronted with a real-world supply chain problem at your company. Start the process by asking the candidate to describe a specific challenge he or she has confronted in a previous work situation. Good problem solvers should demonstrate an ability to: 1. Define the problem. “Have the candidates identify what went wrong by including both a cause and an effect in the definition of the problem they solved,” Joiner says. 2. Define the objectives. They should be able to articulate the outcome they achieved after solving the problem. 3. Generate alternatives. Pay close attention to how many alternatives the candidates came up with, Joiner suggests. “Did the quality of the alternatives vary greatly? Was there a significant difference in the hard (and soft) costs associated with each idea? This is the area in which the candidates can demonstrate their creativity and resourcefulness as problem solvers.” 4. Develop a detailed action plan. Have the candidates recap their action plan, and observe whether the candidates specify who did what and by what dates. The devil is in the details, Joiner notes, and detailed problem solvers are usually more effective than generalists. 5. Troubleshoot. You want to see if the candidates were aware of worstcase scenarios and what steps they took to ensure the plan would work. 6. Communicate. “Getting information to the right people is key for getting the buy-in to make it a success,” Joiner observes. He suggests you have the candidates address which individuals or groups affected the success of their action plan. “The most effective executives are those who can leverage their time and talents by getting things done through other people. This is your opportunity to build your company’s management bench.” 7. Implement. It’s important that the candidates be able to identify who carried out the plan and monitor its implementation. You want to find out whether, as a manager, the candidates will be “hard on the issues and soft on the people.” The more you can drill down into real-world examples of how candidates have solved problems in the past, the better an idea you’ll get of how well they’ll solve problems at your company, Joiner points out. “Think in terms of the quality, consistency, and costs of their solutions. During the interview, you must get the candidates to be specific about their problemsolving experience. Minimize the chances of being duped by getting the

The Supply Chain Profession

257

candidates to recap in vivid detail exactly what happened in a given situation. If you don’t challenge them during the interview process,” he adds, “you may pay a steep price later for your lack of persistence.”9 Dan Charney, president and CEO of Direct Recruiters, an executive search firm specializing in recruiting supply chain talent, notes that the socalled “soft skills” are just as in demand as industry-specific technical skills. In particular, companies are looking for the following soft skills from their supply chain managers: 1. Good communication skills 2. Strong work ethic 3. Organizational skills 4. Social savvy 5. Time management skills 6. Critical thinking 7. Team-orientation 8. Flexible and adaptable attitude “Like never before, companies place high value and put much emphasis on soft skills because they realize just how linked they are to job performance and career success,” Charney points out.10

Training the Next Generation There is a distinct generational shift underway, not just in supply chain circles but throughout the entire workforce. Those Baby Boomers11 who used to occupy most of the senior executive roles are retiring from the daily grind and taking up either consultant/advisory roles or leaving the workforce entirely. That’s opened the door for Generation Xers to move up the ladder to assume senior supply chain positions, and as a result they in turn need to train and develop a younger generation, the Millennials, to do much of the heavy lifting needed to manage their organization’s supply chains. And convincing Millennials to pursue supply chain careers has proven to be a very large and never-ending task. After all, employees are a lot like your customers, and whether you’re trying to get somebody to purchase your products or to accept a job offer at your company, they’ll more than likely respond, “Why should I buy what you’re selling?” According to a survey of supply chain professionals conducted by the American Productivity and Quality Center, nearly two-thirds (64%) of the respondents say that attracting talent is a top priority at their companies. And when it comes to “talent,” these professionals are singling out people

258

Supply Chain Strategies

who are strategic thinkers, who adhere to a strict code of ethics, and who are considered team players. It cuts both ways, though—employees want to feel that their jobs mean something, that they’re making a difference in the world and not just punching a clock. And as such, they expect their companies to act responsibly.12 Beyond that, Generation Zers are products of the digital age and are more digitally connected than any other generation. As Dan Charney explains, “They have no concept about life before the Internet, mobile devices, digital games, or iTunes. They are very tech-savvy and even more entrepreneurial than Millennials.” Gen Z employees are characterized as being more loyal and flexible in their career paths than Millennials, Charney notes. “They will choose career opportunities that provide quick advancement and work/life balance over salary, and want mentors to help them achieve their goals.”13 When describing supply chain careers to young people, Abe Eshkenazi, CEO of APICS, often says, “Nothing happens in an organization without supply chain having a role or an impact on it. So we expect individuals to not only understand the entirety of the organizational process but to move into leadership, because they have the capability to evaluate the entire enterprise. We encourage supply chain professionals to get that broad-based knowledge and then to use it.” Eshkenazi’s advice to young supply chain professionals: “Advance the organization. Stand up. Be a leader in your company. Supply chain professionals do make a difference in this world.”14

Toy Stories With the goal of developing top supply chain talent, some companies actually start the training process even before they hire an employee. Toy manufacturer Hasbro, for instance, hires an intern every year within its logistics group, with a good crop of students to choose from throughout New England. New hires will spend their first three months in training with senior executives in all core supply chain areas. Their training will then be tailored to the specific role for which they were hired. Those who are being groomed for senior-level positions will attend the company’s global leadership program, which was designed in partnership with Dartmouth College’s Tuck School of Business. That program has paid dividends in how Hasbro’s various business units are being run, with a high level of collaboration across business units throughout the enterprise. The overall objective is to foster community within Hasbro as well as in the outside communities and throughout the supply chain. The toymaker also offers e-learning, as well as more traditional skills development options through tuition reimbursement.15

The Supply Chain Profession

259

Another toymaker, Mattel, hires college graduates directly out of supply chain or business programs with the aim of developing them into supply chain leaders. “Finding really good people who’ve been there and done it before is a challenge,” explains Peter Gibbons, Mattel’s chief supply chain officer. The company shifts employees to various roles with Mattel and various parts of the world to provide them with more insight into how the entire company operates. The goal, Gibbons states, is to have people “who are broader, who’ve moved between different parts of the supply chain.”16

Gray Matters While no company in its right corporate mind would ever refer to it as a best practice, one of the most frequently used tactics to initiate a quick turnaround is a workforce reduction. Supply chain professionals, especially senior-level chief supply chain officer–type executives, are learning the sad truth: With healthcare costs skyrocketing beyond all reason, some companies are concluding that an experienced (read: older) supply chain expert will cost more in salary, healthcare, and other benefits than a less experienced (read: younger) person. The fact that Wall Street tends to immediately reward massive layoffs with a hike in the share price only perpetuates the ritual. This short-term mentality ends up costing a company in the long run when it discovers key supply chain operations aren’t being managed as efficiently anymore. Companies lose a wealth of business wisdom when they lay off seasoned professionals, and they’re just as myopic when they don’t consider these professionals for job openings, notes Lynn Failing, executive vice president, supply chain practice leader with Kimmel & Associates, an executive search firm specializing in supply chain markets. The push toward outsourcing noncore supply chain activities to third parties (see Chapter 11) means that the positions held by people who used to manage these jobs are being eliminated as well, Failing adds.17 At the top of a company’s pecking order, ageism doesn’t really seem to be much of a problem within the supply chain profession, as a 2019 survey conducted by Material Handling & Logistics indicates that most of those in senior management or supervisory roles are at least 50 years old. At the other end of the corporate ladder, though, it’s not usually a quick rise to the top: Despite the push to attract more young people into the business, most supply chain people don’t become managers until they reach their 30s. Based on the survey, just 5% of supply chain leaders are in their 20s.18 “Many entry-level employees in distribution and supply chain want to see a career path that leads to promotion and increased financial rewards,” points out Al Will, president of PWG Distribution Solutions, who has developed a warehouse and distribution skills training program at the community

260

Supply Chain Strategies

college level. “Day-to-day development occurs through experience on the floor and supervisors willing to mentor. External organizations, such as training firms and educational institutions offering specific training, can enhance safety and the employees’ overall contribution to the company.”19 When it comes to developing and retaining young supply chain talent, Tan Miller, director of Rider University’s Global Supply Chain Management Program, says there are two different approaches that companies will typically follow: They will either rotate them regularly through different areas of the company (warehousing, transportation, planning, etc.) with the aim of instilling in them a broad-based perspective, or else they’ll assign the young employees to a single area where they can develop deep functional expertise. As Miller sees it, though, “the best supply chain organizations have a mix of colleagues, some with broad-based supply chain experience and some with deep functional expertise.” Both of these skill sets are important, he observes, both should be highly valued, and companies would do well to include a combination of supply chain generalists and functional experts among their staffs.20 The key to leveraging your supply chain talent, however it might be dispersed throughout the company, is to ensure that senior management agrees on exactly how the supply chain organization will support the company’s business strategy, says consultant Joseph Roussel, part of the team that developed the original SCOR model (see Chapter  3) and formerly a partner with PwC. While keeping an eye on costs, best-in-class organizations know that having the right people creates a competitive advantage and are willing to spend more where it counts to maintain that advantage. Roussel recommends that companies consider these three questions as part of their supply chain talent recruitment strategy: 1. Are you clear about how your supply chain supports your strategy, and how it can help you achieve the differentiation you are looking for? 2. Are you clear about what you are looking for in your supply chain talent to build the strategic supply chain capability that will lead you to success? 3. Are you managing your supply chain talent pool such that it will help build and develop the distinctive capabilities of your company?21

How Diverse Is Your Supply Chain? It might be the single most single most frequently heard response to the question: What’s your biggest challenge as a supply chain manager? Time and again, year after year, in survey after survey, the answer more often than not is: finding, developing, and retaining talent. Whether it’s during

The Supply Chain Profession

261

good economic times or bad, no matter what area of the country, in virtually every industry sector, there just doesn’t seem to be enough good people to fill the available supply chain jobs. However, there’s compelling evidence that the “talent shortage” is more of a mirage than a reality. If you’re a white male in your 50s and living in the Midwest, then you’ve got a lot of company among your supply chain peers. According to an annual salary survey conducted by Material Handling & Logistics,22 78% of supply chain managers are Caucasian, 83% are male, 40% are in their 50s, and 36% live in the Midwest region of the United States. You’re also doing pretty well, career-wise, as Caucasians earn, on average, nearly $20,000 more per year than the next-closest racial group (Hispanic/Latino); males earn $26,000  more than females; and 50-year-olds earn roughly $12,000 more than 40-year-olds, and $30,000 more than 30-year-olds. However, the Midwest is not the highest-paying region of the United States for supply chain talent, falling more into the middle of the pack (the West Coast has the highest average salaries), but the cost of living in the Midwest—as well as the fact that the region has the highest percentage of supply chain jobs—compensates somewhat for the lower salaries. All told, in 2019 the typical supply chain manager was earning $98,088. But what if you’re not a middle-aged white male? The University of Tennessee’s 2019 report on diversity and inclusion in the supply chain is as depressing as it is predictable: Men are more likely than women to be hired at entry-level positions, and are much more likely to be promoted to senior levels. While women account for 40% of the workforce in supply chain organizations, only 15% have executive roles at their companies. According to Diane Mollenkopf, a supply chain professor at UT and author of the diversity report, companies with more diverse management teams generate higher revenue because of their emphasis on innovation. In other words, the development and practice of diversity within a company’s supply chain is in and of itself a best practice. Research confirms that companies “who adhered to best practices created aggressive diversity goals and action plans to improve top-line, bottom-line, and long-term shareholder value,” she states. “Recruiting, retaining, and developing a diverse management team has been shown to lead to higher levels of organizational success.”23 In a similar 2020 study on women in the supply chain, Gartner discovered that only 17% of all chief supply chain officers—a catch-all term for a company’s top-ranking supply chain executive—are women. And that’s actually good news, since in 2019 the number was only 11%. Women don’t consistently make it through the leadership pipeline, explains Dana Stiffler, vice president analyst with Gartner. While nearly two-thirds (63%) of companies surveyed say they have active goals, objectives, or initiatives to recruit women and build their pipelines, it can often take many years for these sorts of activities to actually take root.24

262

Supply Chain Strategies

One key factor to improving the situation is to improve pipeline planning and management, Stiffler points out, especially if a company is serious about attracting and retaining more diverse talent in senior management positions. “Not a single respondent cited employee resource groups as a top action for progressing women to senior leadership roles in supply chain. Leadership development programs or improved work-life balance also didn’t make the list. However, 21% claim that integrated pipeline planning is their best approach. This reinforces what we have found over the years: The right place to focus for diverse senior leadership is the pipeline and the decisions that support it,” she observes. That begs the question, of course: Then why don’t more companies pursue more diversity in their supply chain workforce? One reason, according to the Gartner survey, might be a stated preference among hiring managers at industrial companies for candidates with science, technology, engineering, and math (STEM) degrees. Only 22% of all engineering majors are women, for instance. Since future supply chain roles will require more, not less, technical skills, this education gap is a major concern. While consumer-facing companies have less of a preference for STEM candidates than industrial companies (39% versus 55%), it can be a self-fulfilling prophecy if the total number of young women interested in STEM majors continues to lag, since their career paths into supply chain organizations will continue to be steep.25 “Computing is where the jobs are,” points out Reshma Saujani, CEO of Girls Who Code, and where they’ll be in the future, but women are showing less interest, not more, in computer science. While 37% of all computer scientists were women in 1995, that number dropped to 24% by 2019. And if we do nothing to stop that trend, that percentage will continue to drop, she warns. Saujani, however, is doing something. Her company’s goal is to build the largest pipeline of future female engineers in the United States, and they’re starting at the earliest stages of a woman’s career—elementary school—all the way up through college and beyond. “There is still a bias in which girls require perfection of themselves and therefore don’t take the chances and risks that boys do,” she says. “This means they don’t choose a field that they feel they won’t excel in. We have to teach girls to explore more, fail more, and be open to all possibilities.”26 It’s not entirely an all-uphill battle for women, though. In an opinion piece for IndustryWeek titled “My Brilliant Supply Chain Career,” Terry Onica relates her experiences as a woman employed for 30 years in the manufacturing industry, primarily within the automotive supply chain, a sector heavily dominated by males. Acknowledging that “women constitute one of US manufacturing’s largest pools of untapped talent,” Onica points to herself as a testament that manufacturing and the supply chain can be a rewarding career path for women—both financially and personally—as well as for the companies that hire and train them. Citing a Women in Manufacturing

The Supply Chain Profession

263

study, Onica explains that “gender diversity benefits a manufacturing firm through improved ability to innovate, higher return on equity, and increased profitability.” For young women interested in pursuing supply chain careers, the key to success is to find a mentor who can help teach the business side of the industry. The most important quality a woman in the supply chain profession can have, Onica says, is “stick-to-it-iveness.”27

What Keeps You Up at Night? Author and former Forrester analyst Navi Radjou suggests companies should consider appointing a chief supply chain officer (CSCO), who would be responsible for integrating enterprise-wide supply chain strategy into their business strategy. This senior-level executive would also promote the company’s supply chain proficiency to Wall Street analysts by reporting on the positive impact of its supply chain transformations.28 Very few business cards actually have a “CSCO” imprinted on them, but nevertheless many professionals feel the weight of their entire supply chain rests on their shoulders. With that kind of enterprise-wide responsibility, it’s only natural that supply chain professionals—no matter what their title— would want to be able to compare their situation with others in similar positions of authority at other companies. The University of Tennessee’s Global Supply Chain Institute polled a group of senior level executives at some of the largest manufacturers and retailers to get an idea of what topics were most important to them: Talent. “All companies need better processes to assess, identify, recruit, develop, and retain top talent, especially since supply chain talent is increasingly scarce,” says J. Paul Dittmann, executive director of the Global Supply Chain Institute. ■■ Customers. There’s an urgency to better understand exactly what the customer wants, and supply chain leaders need to get better at educating the customer on cost-service tradeoffs, Dittmann notes. ■■ Agility. How quickly can you react to changes in the market, and implement new strategies that will help you better compete? The ability to plan and then adjust that plan as often as needed defines an agile supply chain leader. ■■ Technology. Not only are supply chain managers expected to be aware of all the new and existing technologies, but they must be able to identify which are most appropriate for their needs and just as importantly, which provide the best return on investment. ■■

264

Supply Chain Strategies

Cost. Managing costs requires creativity and a proactive attitude, but beyond simply keeping costs down, managers have to ensure their supply chains are properly aligned with the global environment. ■■ Regulations and infrastructure. Compliance with the various rules and regulations is tedious but essential. Equally difficult to manage but just as important is to understand the limitations of the transportation infrastructure and to design a supply chain network that won’t be hampered by aging roads, bridges, etc. ■■ Risk. Supply chain managers have learned, sometimes painfully, that disruptions and disasters are definitely going to occur, always when least expected, usually at the most vulnerable time. So having a resilient supply chain built to withstand the brunt of those disruptive events is a must-have characteristic of successful leaders. ■■ Sustainability. Companies are expected to have a well-developed corporate social responsibility (CSR) strategy (see Chapter 14), and while it’s often the marketing team that articulates that strategy, it’s usually the supply chain team that executes it.29 ■■

In its annual salary survey, Material Handling & Logistics also asks its readers the question: “What would you most like to change about your job?” Perhaps some of these responses sound familiar: Hire better and smarter people. Increase corporate recognition of the importance of the supply chain. And increase the supply chain’s power in regard to corporate decisions. ■■ More opportunities for growth. This company does not properly staff and support supply chain activities. ■■ Transition every part of the business to digital. ■■ Eliminate age discrimination and quit chasing the newest “bright shiny object.” Corporate attention deficit disorder is making all of us less effective. Follow-through is still necessary and accountability is still lacking. ■■ The “do-this-now” because something wasn’t scheduled properly aspect of the job. ■■ Determining the best metrics to measure operations and bottom lines. ■■ No one realizes what I do. I don’t go around announcing what I am doing next, so no one knows all the responsibilities I have. ■■ More opportunities for growth. My company does not properly staff and support supply chain activities. ■■ The ability and availability to pursue professional certification programs. ■■ Having too much to do and too little time to do it in.30 ■■ ■■

The Supply Chain Profession

265

The Secret to Supply Chain Success Here’s a happy statistic to close this chapter as well as this book: In that same 2019 salary survey of supply chain professionals, 44% said they were satisfied and another 32% said they were very satisfied with supply chain as a career path. So that’s very good news. However, a lot of work still needs to be done before executives at every company truly understand the importance of key supply chain processes to their company’s mission. This situation is gradually improving, but it takes time and a lot of top talent has yet to be convinced that the supply chain is a good fit for them. In addition, as global business activities increase, the role (some might say “the burden”) of supply chain professionals is expanding to address the need for companies to have strategic thinkers able to effectively manage global trade. When asked by Material Handling & Logistics to describe their job situations and how they feel about their profession, here’s what some supply chain people had to say: Companies should realize that their own survival depends on not only hiring new talent to aid with the Wild West of burgeoning e-commerce companies, but also retaining their existing workforce through internal promotions and employee development to avoid key employees from leaving, especially those who know the recipe to the ‘secret sauce.’”— Engineering manager at a 3PL ■■ The single biggest challenge facing the industry is lack of qualified workers in all aspects of logistics.”—Corporate manager with a transportation/warehousing company ■■ Generally, logistics is underestimated in companies and so are the salaries, but this is nothing new. Companies do not recognize the importance of logistics and see it in most cases as only costs. Otherwise my biggest satisfaction in the job is the feeling of improvement, moving things forward, making things better.”—Operations manager at a wholesale distributor ■■ Company management today seems to be enamored with the latest whizbang technology without understanding and then providing the resources necessary to implement any improvements to the systems of work.”—Continuous improvement manager with an aerospace & defense company ■■

266

Supply Chain Strategies

Supply chain/logistics is a very hot job right now with a greater emphasis being placed on it by companies, which is great to see. We need to ensure that the new entrants to the job force have a good foundation of business principles as well. This will make them very well rounded and able to see the entire picture of a company’s operations.”—Senior executive at a wholesale distributor ■■ The cost of doing business continues to increase year after year, but internal resources continue to diminish. That makes it very difficult to run a successful operation.”—Senior executive for a retailer ■■ Logistics is still looked at as a necessary evil in some corporations, rather than a tool or opportunity to better position companies to compete with their competition, and achieve financial success.”—Logistics manager with a pharmaceutical/healthcare company31 ■■

Clearly, in some companies, senior management has yet to be convinced that the supply chain is the “straw that stirs the drink.” Depending on the company and the executives, there yet lingers a mindset that supply chain management is just a fancy word for procurement, or that it’s too disruptive, or that it takes too long to derive any benefits, or that it’s a bottomless pit of expensive technology solutions that don’t solve anything. Or maybe no reason at all is given for disdaining supply chain initiatives, other than the old standby, “not invented here.” This book is offered as evidence to the contrary, having as its theme that the best-run companies in the world have the best supply chains and employ the best supply chain managers. Rather than only focusing on the “whats” and the “hows,” this book has hopefully opened up a realization that the “whos” make the difference. Without exception, top-performing companies have top-performing people working for them. That’s the competitive advantage supply chain professionals offer their companies, and it’s the secret to long-term and long-lasting success.

Notes 1. Bernard J. La Londe, James L. Ginter, and James R. Stock, “The Ohio State University 2007 Survey of Career Patterns in Logistics,” The Ohio State University, 10–14, www.cscmp.org. 2. Juan D. Morales, “Prepare for Who You’ll Need to Be,” Material Handling & Logistics ( June 2013), 41–43. 3. David Blanchard, “The Competitive Advantage of a Supply Chain,” IndustryWeek (11 July 2014), www.industryweek.com. 4. Beth Morgan, “The Top 6 Supply Chain Talent Breakthroughs 2018,” SCM World (2018), www.scmworld.com.

The Supply Chain Profession

267

5. David Blanchard, “Hiring Top Talent is a Supply Chain Game-Changer,” Material Handling & Logistics (November 2013), 32. 6. Mark D. Wilson, “Best Practices in College Recruiting,” Logistics Today (March 2004), 13. 7. David Blanchard, “There’s No School like a Supply Chain School,” Material Handling & Logistics (September 2015), 6. 8. “Gartner Announces Rankings of the 2018 Top 25 North American Supply Chain University Graduate Programs,” Gartner (6 September 2018), www.gartner.com. 9. Harry Joiner, “Seven Steps to Successful Problem Solving,” Logistics Today (August 2004), 33. 10. Dan Charney, “Wanted: Workers with Soft Skills,” Material Handling & Logistics (October 2016), 38–39. 11.  Pew Research Center defines the generations currently in the workforce as: Silent (those born between 1928–1945), Baby Boomers (1946–1964), Generation X (1965–1980), Millennials (1981–1996), and Generation Z (1997–2012). 12. David Blanchard, “Why Would I Want to Work for Your Company?” Material Handling & Logistics (April 2016), 4. 13. Dan Charney, “8 Talent Trends in Material Handling for 2016,” Material Handling & Logistics ( January 2016), 30–31. 14. David Blanchard, “Supply Chain People Are Making a Difference in the World,” Material Handling & Logistics (November/December 2017), 9. 15. Helen L. Richardson, “Have New Employee, Will Train,” Logistics Today (August 2004), 24–30. 16. Loretta Chao, “Mattel Looks to Overcome Supply Chain Talent Shortage,” The Wall Street Journal (15 June 2015), www.wsj.com. 17. Madeleine Miller-Holodnicki, “Help Wanted: Experienced in Everything,” CLM Logistics Comment ( January/February 2004), 1–3. 18. David Blanchard, “For Love or Money: MH&L’s 2019 Salary Survey,” Material Handling & Logistics ( January/February 2019), 10. 19. David Blanchard, “No One Ever Said Managing the Supply Chain Is Easy,” Material Handling & Logistics (September 2015), 12–20. 20. David Blanchard, “How to Stay Relevant in the Age of Supply Chain,” Material Handling & Logistics (September 2016), 11–19. 21. Joseph Roussel, “Making Talent Part of Your Supply Chain Strategy, IndustryWeek (24 October 2014), www.industryweek.com. 22. Blanchard, “For Love or Money: MH&L’s 2019 Salary Survey,” 7–12. 23. Diane Mollenkopf and Mary Long, Supply Chain Diversity and Inclusion (Haslam College of Business, University of Tennessee, 2019), 3–9. 24. Dana Stiffler, Sarah Watt, and Caroline Chumakov, 2020 Women in Supply Chain Survey Highlights Consumer Value Chain Progress (Gartner, 2020), 1–12. 25. “17% of Chief Supply Chain Officers are Women,” Material Handling & Logistics (12 August 2020), www.mhlnews.com. 26. Adrienne Selko, “Would You Encourage Your Daughter to Pursue a Material Handling Career?” Material Handling & Logistics (May/June 2019), 32. 27. Terry Onica, “My Brilliant Supply Chain Career,” IndustryWeek ( January/February 2020), 29.

268

Supply Chain Strategies

28. Navi Radjou, “IBM Transforms Its Supply Chain to Drive Growth,” Forrester Best Practices (24 March 2005), 14–15. 29. J. Paul Dittmann, “8 Things on the Minds of Supply Chain Executives,” Material Handling & Logistics (27 August 2014), www.mhlnews.com. 30. David Blanchard, “What Would You Most Like to Change About Your Job?” Material Handling & Logistics ( January/February 2019), 4. 31. Hundreds more comments like these from supply chain professionals can be found at www.mhlnews.com: search “salary survey.”

About the Author

DAVID BLANCHARD is an award-winning journalist and a senior content director/editor-in-chief with Endeavor Business Media. Throughout his tenure with Penton Media/Informa/Endeavor, he has overseen the editorial management of numerous brands within the Manufacturing & S­ upply Chain Group, including Business Finance, Chief Logistics Officer, EHS Today, IndustryWeek, Logistics Today, Material Handling & Logistics, and Supply Chain Technology News. He has also launched and edited numerous digital products, and has served as content director of several industry c­ onferences. He has been interviewed by such media brands as Good Morning America, NPR, and USA Today, and serves on the jury of the Logistics Hall of Fame. He is a frequent speaker at major supply chain industry events. He lives in a suburb of Cleveland, Ohio.

269

Index

A ABB, 77 Aberdeen Group, 85, 101, 110–111, 122 Accenture, 9–10, 24, 32, 158–159, 166, 212, 220, 240–241 Accuride, 84 Plan For Every Part, 84 Ace Beverage, 122 Ackerman, Ken, 118, 122–123 Action Sustainability, 227 Additive manufacturing. See 3D printing Adidas, 227 Aeroflex, 104–105 Afghanistan, 138 Africa, 143, 233 African Continental Free Trade Area, 143 Ageism, 259, 264 Aimi, Greg, 196 Air pollution, 225 Air Products and Chemicals, 231 Grow, Conserve, and Care, 231 Albertson’s, 211 Alibaba, 32–33, 69, 156 Cainaiao, 156 Single’s Day, 156 Allen, Jack, 206 Alternative energy, 224, 234–235 Alvarenga, Carlos, 240 Amazon, 6, 26–27, 68, 70, 86, 108, 114–115, 117, 126, 129, 152–154, 174, 201, 206, 208, 211

Alexa, 27 Amazon Air, 154 Amazon Marketplace, 68 Amazon Transportation Services, 153 Kiva, 26, 129 Prime Air, 26 Prime Day, 156 American Eagle Outfitters, 115 American Productivity and Quality Center, 242, 257 American Society for Quality, 80 American Trucking Associations (ATA), 99 AmeriSourceBergen, 65–66 Analytics, 24–26 data, 54–56, 189 risk, 246, 248 supply chain, 30, 36–37, 54–56, 64, 86–87, 104, 182, 188, 205 Andrea, Dave, 164 Anheuser-Busch, 106, 122, 217 Antea Group USA, 234 APICS, 255, 258 Supply Chain Council, 6, 33, 35, 38, 255 Apple, 11, 32, 85–86, 88, 173 ARC Advisory Group, 213 Arlequeeuw, Patrick, 19 Armstrong & Associates, 173 Armstrong, Evan, 108–109 Artificial intelligence (AI), 19, 24, 27, 53, 55, 66, 86, 105–107, 109, 153, 189, 207–209, 219–220

271

272Index

Ashland, Kentucky, 128 Asia, 134, 143–144, 147 Atlantic Beef Products (ABP), 214–215 Auburn University, 213, 215, 255 Augmented reality, 19 Australia, 137, 227 Austria, 138 Autoliv Production System, 77 Automated Commercial Environment (ACE), 196–197 Automated guided vehicles (AGVs), 4 Automated receiving, 212 Automated storage and retrieval systems (AS/RS), 206 Autonomous vehicles, 105–108, 206, 208 Avient. See PolyOne B Backhauls, 21, 102, 236 Bailey, Craig, 248 Bain & Company, 71–72 Bair, Mike, 17 Baltimore, Maryland, 171 Bangladesh, 143, 147 Banker, Steve, 213 Bar codes, 22, 122, 209–211, 214–215, 220 Barkai, Joe, 90 Barlow, Jeanette, 53 Barra, Mary, 11 Baseball, 29–30, 42 Baxter International, 65 Bayer, 66 Belgium, 138 Benchmarking, 16, 33–39 Berry, Mike, 61 Best Buy, 211 Best, Eric, 152 Bezos, Jeff, 152–153 BHP Billiton, 227 Bias, 50 Big Data. See Analytics Black elephant, 228 Blaha, Robert, 81 Blanco, Edgar, 230 Blockchain in Transportation Alliance, 217

Blockchain, 9, 66, 86, 216–218, 232 defined, 217 Bloomington, Indiana, 132 BNSF Railway, 217 Boeing, 17–18, 68, 215, 240 Part Analysis and Requirements Tracking (PART), 68 Bolstorff, Peter, 38–41, 255 Bong, Kevin, 190 Booz Allen, 7, 12 Border crossings, 192 Bosch Production System, 77 Boston Scientific, 71–72, 76, 245 Bottlenecks, 83 Boyd Company, The, 127 Bozeman, David, 153 BP, 217 Brandt Beef, 214 Brazil, 136–137, 143 Bridge Consulting, 245 Broughton Capital, 100 Broughton, Donald, 100 Bryant University, 88 Bryant, Alex, 143 BSI, 193 Budgeting, 240–242 Bullwhip effect, 7 Buntin, Miles, 242–243 Burns, Chuck, 84 Burrows, Daniel, 147 Business intelligence, 55–56 defined, 55 Butner, Karen, 11 Buy online pickup in store (BOPUS), 109 C C.H. Robinson, 109 California Transparency in Supply Chain Act, 228 Cambodia, 143 Cambridge University, 207 Campbell Soup, 50–52 Canada, 137–138, 191–192 Capacity, 21, 96–97, 99–102, 108 Cap-and-trade, 229 Capgemini, 91, 181

Index

Carbon Disclosure Project, 70–71 Carbon footprint, 5, 128, 224, 228–231, 234–235 defined, 229 Cardinal Health, 65–66 Career services, 254 Cargill, 102 Cargill Meat Logistics Solutions (CMLS), 102 Food Distribution, 102 Cargo inspections. See Container inspections Carmichael, Laird, 142–143 Carr, Reed, 180–181 Carter, Helen, 227 Cash flow, 239, 243–245, 247–248 Cash-to-cash cycle, 245 Cash-to-cash formula, 117 Category management, 60 Caterpillar, 231 Caterpillar Production System, 77 Cecere, Lora, 10 Center for Advanced Purchasing Studies, 62 Central America, 230 Certification programs, 255, 264 Chagares, Michael, 187–188, 246–247 Chainalytics, 37, 110, 140 Change management, 42, 62, 85, 224 Charney, Dan, 257–258 Chartered Institute of Procurement and Supply, 200 Chesterfield, Virginia, 127 Chicago Consulting, 123, 128 Chicago, Illinois, 230 Chief supply chain officer (CSCO), 252, 259, 261, 263 China, 91, 134, 136–137, 139–141, 143, 145–147, 156, 193 Chinese New Year, 156 Chiquita Brands, 230 Christensen, Larry, 198–199 Christmas, 151–152, 155–156 Chubb Group of Insurance Companies, 193 Cincinnati, Ohio, 154, 172

273

Circular economy, 70 Cisco Systems, 33, 48–50, 56–57, 173, 206, 217 Clayton State University, 179, 196 Center for Supply Chain Management, 179, 196 Clean Air Act, 225 Cleveland, Ohio Climate change, 70, 186, 223–224, 228–229 Cloud computing, 206 Coca-Cola, 217, 232–234 Cohen, Shosanah, 39 Colgate-Palmolive, 33, 252–253 Emerging Leaders Future of Work, 253 Collaboration, 10, 12, 20–22, 60–61, 71–72, 88–89, 100–102, 119, 124, 137–138, 160–164, 166–167, 187, 191, 205, 212, 220, 258 Collaborative design, 88–89 Collaborative forecasting and replenishment. See Collaborative planning, forecasting, and replenishment (CPFR) Collaborative planning, forecasting, and replenishment (CPFR), 41, 51, 161–162, 212 defined, 161 Collaborative robot (cobot). See Robotics Collaborative transportation network, 20–21 Commonwealth Supply Chain Advisors, 114 Compliance programs, 198–199 Computer-aided design (CAD), 88–90 Computer-aided engineering (CAE), 88–89 Computer-aided manufacturing (CAM), 88–89 ConAgra Mills, 36 Conflict minerals, 138–139 Connected vehicles, 106–107 Consensus planning, 51 Consumer-Driven Supply Network, 19–20

274Index

Container inspections, 197–198 Container Security Initiative (CSI), 98, 197–198 Containerization, 133–134, 230 Containers, 133–134, 145, 192, 196–198 Contingency planning, 186, 188, 200–202, 248 Continuity planning, 200–202 Continuous improvement, 16, 76–85, 87, 231, 252 Contract manufacturing, 49 Conveyors, 206 Cook, Tim, 11 Core competencies, 174–177, 179, 251 Corning, 243 Corporate Human Rights Benchmark (CRHB), 227–228 Corporate social responsibility (CSR), 4, 32–33, 70–71, 223–236, 264 Corr, Andrew, 241–242 Corruption Perceptions Index, 139 Corruption, 138–139, 143, 226 Cost management, 21 Cost of goods sold (COGS), 241 Cost reduction, 60–62, 71–72, 76, 89, 224–225, 229, 241–242 Costco, 228 Costello, Bob, 99 Cote d’Ivoire, 143 Coty, 30–31 Council of Supply Chain Management Professionals (CSCMP), 6–7, 225, 288 Council on Competitiveness, 91 Counterfeits, 64–67, 138, 190, 210, 214, 216–218 COVID-19 pandemic, 86, 88, 99, 109, 145, 154, 185, 196, 200–202, 207, 247–248 Covidien/Tyco Healthcare, 100 Covisint, 69 Crosnier, Stéphane, 220 Cross-docking, 104, 117–120, 174 defined, 118 Cryptocurrency, 217 bitcoin, 217 Customer bill of rights, 154

Customer lifetime value, 159–160 Customer relationship management (CRM), 165, 255 defined, 165 Customer satisfaction, 164–166 Customer service, 3–4, 11–12, 16, 18–20, 26–27, 33–35, 37, 42–43, 50, 52–53, 56, 101–105, 108–111, 114–116, 121, 124–126, 128, 136, 151–167, 179–180, 206, 212, 216, 220 Customs brokerage, 174 Customs, 135, 137–138, 141–143, 147, 191–192, 197–198, 252 Customs-Trade Partnership Against Terrorism (C-TPAT), 98, 187, 191–192, 196, 198 Cutlass Security Group, 200 Cybersecurity, 186, 189–190, 226 D Dallas, Texas, 211 Danaher Business System, 77 Dannon Company, 104 Dartmouth College, 258 Tuck School of Business, 258 Data synchronization, 22 Dauch, Rick, 84 Davies, John, 231 DC bypass. See Predistribution management Decision support. See Business intelligence Dedicated carrier program, 101–102 Deforestation, 70, 223, 228 Dell, 32, 63, 173 Deloitte 140, 207, 217 Delphi, 60 Delta Electronics, 128 Demand planning. See Supply chain planning Denmark, 139 Dennison, Mike, 136 Deregulation Airline Deregulation Act, 97 Motor Carrier Act, 97 Staggers Rail Act, 97

Index

Derry, Thomas, 226 Design for commonality and reuse, 125 Design for postponement, 125 Design for supply chain, 124 Dewberry, Yone, 21 DHGate, 69 DHL, 186, 196, 208, 234–235 DHL Express US, 156 Resilience360, 186 Digital supply chains, 85–86, 88, 189, 201 defined, 86 Digital transformation, 86, 206–207, 219 defined, 206 Digitalization, 23 Direct materials, 67, 69 Direct Recruiters, 257 Disruptions, supply chain, 30–31, 47–50, 53, 86, 178, 185–187, 193–196, 200–202, 242–243, 247–248, 264 Distributed logistics network, 110–111 Distribution centers (DCs), 26, 30, 42–43, 52, 97, 101–102, 114–119, 122–123, 125–128, 130, 144–145, 194, 211–213, 218, 230, 235, 253 Distribution network, 115, 120, 124–129, 134–135, 137, 177, 182 Distribution network planning, 126 defined, 126 Distribution, 26–27, 113–130, 208, 210–212, 255 Dittmann, J. Paul, 12, 263 Diversity, equity, and inclusion, 23, 226, 253, 260–263 DMAIC (define, measure, analyze, improve, and control), 79 Docks, 117–118, 122–123 Dodd-Frank Act, 228 Domino’s Pizza, 159 Donovan, Mike, 37–38 DoorDash, 206 Dow Chemical, 52–53, 220 Driverless trucks, 105–107, 208 Drones, 26, 88, 107, 111, 130, 153–154, 186, 208, 226

275

Drop-and-hook, 123 Drucker, Peter, 42 Drug Supply Chain Security Act, 65–66, 217 Duciewicz, Mike, 145 Duff & Phelps, 139 Duke, Mike, 11 Dun & Bradstreet, 232 Human Trafficking Risk index, 232 Duwali, 156 Dynamic discounting, 244 E Earth Day, 225 Ease-of-use, 159 Eastern Europe, 143 Eastman Chemical, 60–61 Eaton Business System, 77 eBay, 68, 70 E-commerce, 26–27, 85–87, 109–110, 114–116, 152–154, 156, 174, 234, 241 Edelman, 224–225 Efficient consumer response, 163 Electronic data interchange (EDI), 68, 211 Electronic logging devices, 98, 105 Electronic product code (EPC), 19, 210, 214 Eli Lilly, 67 E-marketplaces. See Online marketplaces Emergency management, 193–196 Employee empowerment, 78 Energy consumption, 70 Energy efficiency, 224, 230–231, 234–235 Enterprise resource planning (ERP) system, 9, 54, 115, 121–122, 130, 219 Environmental data, 70 Environmental Defense Fund, 230 Environmental regulations, 186 Environmental, social, and governance (ESG). See Corporate social responsibility (CSR)

276Index

Environmentalism. See Sustainability Ericksen, Paul, 245 Erickson, Rick, 244 Ernst & Young, 178 Eshkenazi, Abe, 258 Ethiopia, 143 European Union, 137, 191, 227, 229 Authorized Economic Operator, 191 eWorldTrade, 69 Excess inventory index, 157–158 Export Administration Regulations, 199 Exports, 191–192, 196 Extended enterprise, 17–18, 89, 174, 200 ExxonMobil, 6 F Factoring, 244 Failing, Lynn, 259 Farris, Ted, 117–118 Faseler, Jacqueline, 52–53 Federal Aviation Administration, 26, 108 Federal Emergency Management Agency (FEMA), 194–195 FedEx, 152, 217, 234–235 Feliccia, Steve, 102 Fiat Chrysler (FCA), 69, 164 Fill rate, 33–34, 36–37 Finance, 71–72 Financial design, 240 Financial supply chain, 239–248 5S, 78 Fletcher, Theo, 191–192 Flex, 136 Flint, Michigan, 233 Food Safety Modernization Act, 66 Food shortages, 201–202 Forced labor, 138, 217, 223, 225–228, 232 Ford Motor, 6, 63, 88, 164, 182, 215 Ford, Henry, 77 Forecast accuracy, 11, 47–51, 56–57, 160–161, 205 Forecasts, 29, 31–32, 37, 41, 47–57, 82, 152, 160–162 Forrester, 211, 263

Forrester, Jay, 7–8 Fortna, 27 Fortune magazine, 32, 80, 119, 173, 226, 254 4C Associates, 200 Fourth-party logistics provider (4PL). See Lead logistics ­provider (LLP) France, 139 Franciscan Missionaries of Our Lady Health System, 22 Frazelle, Ed, 120–121 Free and Secure Trade (FAST), 192 Free guaranteed delivery, 152 Free, Mitch, 70 Freight costs, 209, 236 Freight forwarding, 174 Freight market intelligence, 37 Freight-hailing technology, 21, 108–109 Friedman, Milton, 224 Friedman, Thomas, 133, 175, 228 Fuel costs, 3, 98–99, 145, 177 efficiency, 230, 234–236 reimbursement program, 98–99 Futch, Mike, 130 G Galvin, Dexter, 71 Gap analysis, 36, 199 Gartner, 11, 23, 25, 32, 48, 70, 86, 146, 155, 173, 196, 206, 253, 255, 261–262 AMR Research, 48 SCM World, 12, 206, 253 Gates, Bill, 207 Gealy, Dave, 119 Geisinger Health system, 22 Genentech, 66 General Electric, 80, 144 GE Aviation, 88 General Mills, 6 General Motors, 11, 69, 83, 164, 173, 180 Generations, 257 Baby Boomers, 257, 267 Generation X, 257, 267

Index

Generation Z, 258, 267 Millennials, 257–258, 267 Silent, 267 Georgia Institute of Technology, 30, 120 Supply Chain & Logistics Institute, 120 Germany, 138, 193 GF AgieCharmilles, 146 Ghana, 144 Gibbons, Peter, 259 Giffi, Craig, 140 Gillette, 210 Girls Who Code, 262 Giuntini, Ron, 106 Giuntini & Company, 106 GlaxoSmithKline, 214 Global positioning systems (GPS), 210, 219–220 Global Slavery Index, 227 Global Sources, 69 Global trade regulations, 255 Global vision, 135 Global warming. See Climate change Globalization, 5, 16, 88, 91–92, 133–147, 226, 253 Golden State Foods, 99 Google, 67, 86, 208, 211, 217 Government Accounting Office (GAO), 188, 194 Grainger, 82 Grammarly, 208 Gravier, Michael, 88 Green supply chain management. See Sustainability GreenBiz Group, 231 Greenhouse gas (GHG) emissions, 71, 223, 229, 231, 234–235 Greenwashing, 228 GS1, 22, 168, 213 Gutierrez, Si, 50 Guyana, 143 H Hackett Group, The, 60, 242, 247–248 Haiti, 138 Hallmark Cards, 56

277

Handfield, Robert B., 135–136, 155, 163 Hanifan, Gary, 220 Hardgrave, Bill, 213–214, 216 Harmelink, Dale, 125 Harrell, Brian, 200 Harris, Terry, 123, 128 Harvard University, 7, 91 Hasbro, 258 Hauhn, Jay, 65 Hawking, Stephen, 207 Hazmat transportation, 98, 108, 220 Healthcare Transformation Group, 22 Hendricks, Kevin, 30–31 Hero customers, 160 Hershey’s, 228 Herzog, Bob, 19 Hewitt, Greg, 156 Hierarchical supply chain performance measurement framework, 43 Highway safety, 98, 105–108 HNI, 144 Hobkirk, Ian, 114–115 Hofman, Debra, 11 Home Depot, 114, 194–195, 210–211, 217 Honda, 164 Honeywell, 144, 180 Hong Kong, 138, 144 Honsberger, Chris, 177 Hoover, Dave, 144 Horizontal strategy, 8 Houston, Texas, 230 HOVENSA Oil Refinery, 200 HP, 33, 63–64, 71, 124–125 Hugos, Michael, 59 Human Capital Associates, 81 Human rights, 223, 225–228, 232 Human trafficking, 139, 200, 224, 227, 232 Humes, Greg, 180 Hungary, 136 Huntley, Steve, 100–101 Hurricane Harvey, 195 Hurricane Katrina, 193–195 Hyper-local fulfillment. See Micro-fulfillment Hyundai, 33–34

278Index

I IBM, 11, 32, 42, 53, 86, 191 Institute for Business Value, 11 Integrated Supply Chain (ISC), 53 IDC, 218, 229 Imation, 40–41 Imports, 191–192, 196, 198 India, 138, 143, 171, 193, 234 IndiaMart, 69 Indianapolis, Indiana, 172 Indirect materials, 67, 69, 71–72 Inditex, 33 Indonesia, 247 Industries: aerospace, 17–18 distribution, 130 financial supply chain, 240 manufacturing, 76, 88–89 procurement, 68 supply chain planning, 56 supply chain technology, 215 third-party logistics (3PL), 180 airlines metrics, 36 supply chain planning, 55–56 apparel corporate social responsibility (CSR), 227 distribution, 125 globalization, 134, 144–145 manufacturing, 88 third-party logistics (3PL), 173 automotive, 6, 11, 17, 262 customer service, 163–164 financial supply chain, 245 globalization, 144, 147 manufacturing, 76–78, 83, 84, 87–89, 91 metrics, 33–34 procurement, 60, 62–63, 69 supply chain technology, 214–215 third-party logistics (3PL), 173, 180, 182 building products transportation, 103–105 chemicals

corporate social responsibility (CSR), 231 metrics, 31 procurement, 60–61 supply chain planning, 48, 52–53 construction corporate social responsibility (CSR), 231 manufacturing, 80 transportation, 100 consumer packaged goods (CPG), 18–21, 252, 258–259 customer service, 151, 155, 160–161 distribution, 130 financial supply chain, 241, 243, 247 manufacturing, 89–90 metrics, 30, 32–33 procurement, 70 risk management, 201–202 supply chain planning, 8, 50 supply chain technology, 210, 213–214, 217 third-party logistics (3PL), 173 transportation, 105 food and beverage, 6, 20–21 corporate social responsibility (CSR), 227–228, 230, 232–233 customer service, 159 distribution, 122 financial supply chain, 248 metrics, 31, 33, 36 procurement, 66 risk management, 186, 201–202 supply chain planning, 50–52 supply chain technology, 214–215, 217 third-party logistics (3PL), 173, 176–177 transportation, 98, 102, 104, 106 healthcare, 21–26 high-tech/electronics, 6, 11 corporate social responsibility (CSR), 227 customer service, 157–159 distribution, 124–125 globalization, 134, 136–137, 143

Index

manufacturing, 85–86, 88–89, 91 metrics, 31–32, 34, 40–41 procurement, 63–64 risk management, 191, 196 supply chain planning, 48–50, 53 supply chain technology, 214, 217 third-party logistics (3PL), 173, 179, 181 hospitals. See healthcare industrial products, 23 distribution, 128 financial supply chain, 243 globalization, 144, 146 manufacturing, 80, 82, 89–90 procurement, 67 supply chain technology, 219 third-party logistics (3PL), 173, 175 transportation, 101–102 material handling equipment financial supply chain, 240–241 medical devices financial supply chain, 245 manufacturing, 76 procurement, 71–72 mining corporate social responsibility (CSR), 227 office products globalization, 145 oil and gas, 6, 24 corporate social responsibility (CSR), 227 downstream supply chains, 24 financial supply chain, 243 upstream supply chains, 24 pharmaceuticals, 24–25 customer service, 160–161 manufacturing, 87–90 procurement, 64–66 supply chain technology, 214, 216–217 third-party logistics (3PL), 171–172, 178 transportation, 98 retail, 6, 11, 15, 18–20, 26–27 corporate social responsibility (CSR), 227–228, 230–231

279

customer service, 151–154, 156, 160–163 distribution, 114–115, 117–119, 122, 124, 128–129 globalization, 144–145 manufacturing, 77, 86 metrics, 31–33 procurement, 68 risk management, 188–189, 194–196, 201 supply chain planning, 51, 56 supply chain technology, 209–217 third-party logistics (3PL), 173–174, 176 transportation, 104, 108–109 telecommunications manufacturing, 79–80, 88 supply chain planning, 49 Industry 4.0, 86 IndustryWeek, 262 Infosys Consulting, 109, 116, 173, 182, 243 Infrastructure, 137, 140–143, 148, 153, 172, 181, 197, 200, 213, 219, 264 INSEAD, 9, 32 Inshoring. See Nearshoring Insight Partners, The, 111 Insourcing. See Third-party logistics providers (3PLs) Institute for Supply Management (ISM), 226 Intel, 6, 33, 180–181 Intelligent agents, 208 Intelligent highways, 106–107 Intermountain Healthcare, 22 International Monetary Fund, 143 International Rescue Committee, 177 Internet of Things (IoT), 4, 9, 19, 25, 54, 66, 86, 189–190, 202, 210, 218–220, 253 defined, 219 Internet Society’s Online Trust Alliance, 189 Cyber Incident and Breach Trends Report, 189 Internships, 255, 258

280Index

Interpol, 65 Interstate Commerce Commission (ICC), 97 Inventory accuracy, 213–216, 218 Inventory management, 5, 11–12, 22, 34, 37–38, 76–77, 82–83, 85, 101, 110–111, 114–123, 126, 128, 130, 162–163, 208, 212–215, 252 Inventory optimization, 61 Inventory turns, 32–33 Investopedia.com, 143 Ireland, 143 Ireland, Roland, 160–161 ISO standards, 231 Itamco, 219 Iyer, Gopal, 200–201 J J.D. Power and Associates, 164–166 Jackson, Jason, 195 Japan, 76–79, 87, 138, 227 Jidoka, 78 Job satisfaction, 265 John Deere, 76 Johnson & Johnson, 24–25, 33, 67, 87–88 Johnson, Brent, 22 Joiner, Harry, 256–257 Joint Strike Fighter ( JSF), 89 Joseph (Hebrew patriarch), 120 Joyce, Michael, 158 Just-in-time manufacturing, 78 K Kaigh, Elizabeth, 242 Kaiser Permanente, 22 Kaizen, 78. See also Continuous improvement Kalman, Gary, 139 Kamal, Shehrina, 186 Kanban, 78, 84–85. See also Replenishment Kansas City, Missouri, 230 Karls-Bilski, Kathie, 23 Kasteel, Edgar, 142 Katalyst, 240 Kate McEnroe Consulting, 128

Kenco Group, 129 Kilgore, J. Michael, 140–141 Kimmel & Associates, 259 Klein, Eugene, 186 Kohl’s, 152 Korn Ferry, 117 Kouvelis, Panos, 195–196 KPMG, 106, 178 Kraft Heinz, 228 Kroger, 228 Kückelhaus, Markus, 208–209 Kurdziel, Joseph, 240–241 Kurt Salmon Associates, 212 Kyoto Protocol, 229 L L’Oréal, 130 Labor management, 52, 123 LaHowchic, Nick, 144–145 Lambert, Talley, 106–107 Land O’Lakes, 20–21 Lane optimization, 21 Langford, Simon, 212 Langley, John, 109, 182 Larson, Alan, 79 Last-mile delivery, 107, 109–110 Latin America, 134, 233 Lawrence Berkeley National Laboratory, 245 Leadership, supply chain, 11–13 Lead logistics provider (LLP), 24, 179–181 defined, 180 Lean management, 21–22, 84, 172, 255 Lean manufacturing, 76–85 defined, 77 Ledyard, Mike, 41–42 LGBTQ community, 224 Lieb, Robert, 172, 174, 180 Liebowitz, Stan, 69 Lifecycle analysis (LCA), 231–232 Liker, Jeffrey, 78, 87, 163 Limited Brands, 144–145 Limited Logistics Services, 144 Localization, 136 Lockheed Martin, 56, 89. 130 Missiles and Fire Control, 56 Rotary and Mission Systems, 130

Index

Logistics friendliness, 127 Logistics network. See Distribution network Logistics Performance Index (LPI), 137 Logistics Today, 166 Logistics. See Transportation Logistics-friendly countries, 137 Logitech, 157–158 Long, Douglas, 142 Louisville, Kentucky, 152, 171–172 Low-cost labor, 139–142, 145–147 Lowe’s, 195 Lupin, 171–172 Lyft, 108 M Machine learning, 9, 25, 207–208 Made in a Free World, 232 Malaysia, 156 Malin, Jane, 244–245 Manenti, Pierfrancesco, 206–207 Manis-Anderson, Gina, 224–225 Manufacturing execution system (MES), 90 Manufacturing Insights, 90 Manufacturing, 38, 75–92, 146–147 productivity, 91 Marien, Edward, 7, 102–103, 154 Marsh, 178 Martin, Nick, 234 Mascaritolo, John, 179, 196 Massachusetts Institute of Technology (MIT), 7, 186, 201, 210 Center for Transportation & Logistics, 51, 186, 225, 228, 230, 235 Mastroianni, Mike, 50–52 Matchette, John, 166–167 Material Handling & Logistics, 166, 259, 261, 264–266 Material handling, 115, 120–121, 182 defined, 120 Material handling equipment automated storage and retrieval systems, 115, 121 automatic identification, 121 conveyors and sortation systems, 115, 121, 130

281

data collection systems, 121 forklifts, 108, 115, 121, 130, 219–220 lifting, positioning, and overhead handling, 121 order picking, 115, 121, 130, 212 packaging and shipping materials, 121 warehouse automation, 129–130 Mathers, Jason, 230 Matheson, Jim, 83 Mattel, 259 Mayo Clinic, 22 Mayor, Tom, 106–107 McDonald’s, 126, 228 McEnroe, Kate, 128–129 McGinnis, Thomas, 66–67 McGregor, James, 140 McKesson, 65–67 McKinsey & Company, 23, 107, 186 McLean, Malcom, 133–134 McMakin, Tom, 143–144 McMillen, Tom, 83 MediLedger Project, 66 Medtronic, 50 Meier, Jon, 102 Meller, Russ, 27 Memphis, Tennessee, 172 Menlo Worldwide, 180 Mentoring, 258, 260. 263 Mercy, 22 Meseck, Greg, 178–179 Metersky, Jeff, 140–141 Mexico, 138, 142, 146–147, 192–193 MFG.com, 70 MHI, 207, 209, 217 Michigan State University, 255 Micro-fulfillment, 128 Microsoft, 207 Miller & Chavalier Chartered, 198 Miller, Tan, 43, 218, 260 Minevich, Mark, 143 Minghini, Jason, 129 Minneapolis, Minnesota, 230 Mobile devices, 206 Moen, 175–176 Mollenkopf, Diane, 261

282Index

MonarchFx, 12 Mondelez, 228 Mongolia, 143 Moody, Patricia E., 59–60, 62–63 Moore’s Law, 209, 221 Moot, Meredith, 117 Morales, Juan, 252 Morgan, Beth, 253 Moser, Harry, 146 Motley Fool, The, 218 Motorola, 79–80 Muda, 77. See also Waste reduction/elimination Mulherin, Tom, 62 Muller, Gerhardt, 97 Musk, Elon, 207 Myanmar, 143 Myerson, Paul, 163 N NASA’s Kennedy Space Center, 215 Nasca, Don, 128 National Association of Manufacturers, 91 National Center for Supply Chain Automation, 206 National Institute of Standards and Technology (NIST), 190 Natural disasters, 185, 193–196, 223 NCR, 179, 196 Nearnberg, Jay, 160 Nearshoring, 134, 145–147 defined, 134 Nelson, Dave, 60, 62–63 Nestlé, 33, 173, 220 Netherlands, 138, 219 Netscape, 67 Neuhaus, Klaus, 71 Neural networks, 208 New Orleans, Louisiana, 194, 230 New York Mercantile Exchange (NYMEX), 99 New York Times, 18 New Zealand, 139,191 Secure Export Scheme, 191 Next-day delivery, 3, 16, 152 Nichols, Ernest L., Jr., 135–136, 155

Nigeria, 144 Nike, 33, 71, 88, 173 Nissan, 164 Nobel Prize, 224 “No fault found,” 159 Non-vessel operating common carrier (NVOCC), 145 Norfolk, Virginia, 230–231 North Carolina State University, 163 Northeastern University, 87, 172, 174 O O’Marah, Kevin, 11–12 Offshoring, 4, 91, 134, 137, 139–147 defined, 134 Ohio State University, 177, 252 Ohno, Taiichi, 77 Oliver Wight, 160 Oliver, Keith, 7 Omni-channel distribution, 25, 111, 114–116, 130, 174, 216, 253 Onica, Terry, 262–263 Online marketplaces, 67–70 Online rating service, 69–70 On-site evaluation, 142 On-time delivery, 110–111, 120, 124, 137, 151–156, 171, 179 OPEC, 98 Optical scanners, 206 Order fulfillment, 88, 115–117, 151–156 Order management, 30, 33–34, 37 Orient Overseas Container Line, 147–148 Orion Engineered Carbons, 231 Oshkosh Corp., 245 Outsourcing, 17–18, 20–21, 49, 57, 89, 91, 98–99, 103, 113, 134, 141, 171–182, 251, 259. See also 3PLs P Painter, Corning, 231–232 Panama, 143 Pane, Camillo, 30 Paquette, Larry, 59 Partnership in Protection, 191 Parts distribution, 33–34 Patterson, Tom, 120

283

Index

Pay, Rick, 81–82 Pella, 103–104 Penn State University, 35, 109, 116, 173, 182, 243, 255 Center for Supply Chain Research, 35, 109, 182 PepsiCo, 33, 173, 178 Perfect order, 11, 43, 109, 120, 124, 153–156, 179 Performance measures, 41, 43, 167 Petzl America, 130 Pfizer, 66–67, 160, 214 Philippines, 156 Philips Consumer Lifestyle, 159 PIC USA, 176–177 Pipeline management, 261–262 Planning See Supply chain planning Plante Moran, 164 OEM-Supplier Working Relations Index, 164 Platooning, 107 Player Group, The, 242 Player, Steve, 242–243 Playtex Products, 89–90 Point-of-sale (POS) data, 19, 51, 56, 160–161, 163, 194, 211 PolyOne, 101–102 Port of Rotterdam Authority, 219 Port of Rotterdam, 219 Port Security Grant Program, 200 Port security, 188–189, 191–192, 200 Porter, Michael, 7–8, 91 Porter, Steve, 82 Porterville, California, 128 Postponement, 41, 118 Predictive maintenance, 24, 218 Predistribution management, 123 Prest, George, 209 Price erosion, 157–158 PrimeRevenue, 244 Priority Software, 216 Procter & Gamble, 18–19, 30, 32, 71, 155, 173, 210, 217 Procurement, 38, 59–72, 84, 87, 124–125, 135–136, 164, 240 Product data management (PDM), 89

Product defects, 158–159 Product development, 81, 83, 85, 88–90, 124–125, 136, 159, 164–165, 190, 240–242, 247 Product lifecycle management (PLM), 25, 66, 88–90, 205, 215, 231–232 defined, 89 Product obsolescence, 157–158 Product recalls, 186, 210, 214–216 Profitable Ideas Exchange, 143 Programmable logic controllers, 206 Progressive dispositioning, 157 ProLogis, 124 Prototyping, 87 Pull system, 77–78 Purchasing. See Procurement PwC, 10, 146, 187, 246, 260 PWG Distribution Solutions, 259 Q Quality, 78–80, 84, 88, 90, 225–226 Quick response, 163 R R. Michael Donovan & Co., 37 Radiation detection equipment, 197 Radio frequency identification (RFID), 19, 25, 65, 121–122, 206, 209–220 defined, 212 Radjou, Navi, 263 Raman, Kamal, 145–146 Raytheon Technologies, 76 Real-time locating system (RTLS), 215 Recruitment, 253–263 Recycling, 70, 125, 157, 234 Refrigerated warehouses, 230 Regional fulfillment, 156 Regional logistics assessment, 142 Regulations, 264 environmental, 225–229, 234–235 transportation, 97–98 Remanufacturing, 231 Reno, Nevada, 172 Replenishment, 15, 19, 52, 114, 160–162, 171, 211–213

284Index

Repp, David, 115 Research and development (R&D), 24–26, 91 Reshoring Initiative, 146 Reshoring. See Nearshoring Resilience, 186–188, 200–202, 242, 264 Resource Logistics Group, 100 Returns management. See Reverse logistics Reverse auctions, 67 Reverse factoring. See Supply chain finance Reverse globalization. See Nearshoring Reverse Logistics Association, 159 Reverse logistics, 38, 110, 113, 156–159, 174, 214 defined, 158 Richter, Andres, 216 Ricoh, 145 Rider University, 43, 218, 260 Global Supply Chain Management Program, 43, 218, 260 Rightshoring. See Nearshoring Rio Tinto, 227 Risk management, 64, 98, 178–179, 185–202, 240, 243, 245–248, 264 metrics, 246 Risk mitigation, 61, 187–188 Risk screening, 199 Rivkin, Jan, 91 Roberts, Tom, 244 Robotics, 4, 6, 19, 26, 105, 115, 129–130,153, 190, 206, 208, 252 Roche Diagnostics, 90 Rogers, Stephen C., 17–18 Rolling forecasts, 242–243 Rosenbaum, Robert, 38–40 Roussel, Joseph, 39, 260 Royal Dutch Shell, 24 Logistics Management Services (LMS), 24 Russia, 143 Rutgers University, 255 Rwanda, 143 Ryder System Inc., 235–236

S Sabermetrics, 29–30, 42 Saddle Creek, 119–120 Safety stock, 38, 49, 85, 160 SAIC, 245 Salary survey, 261, 264–265, 268 Sales and operations planning (S&OP), 50–53, 61 defined, 52 executive sales and operations planning, 52–53 Sam’s Club, 211, 217 Same-day delivery, 226 Sample, Matt, 66 Samsung Electronics, 217 Sanderson, Bill, 99–100 Sarkar, Suman, 18 Saujani, Reshma, 262 Saunders, Scott, 176–177 Savii Group, 224 Savings fatigue, 241 Savu, Pete, 80–81 Sawchuk, Chris, 60–61 Schannon, David, 71 Sciarotta, Tony, 159 Science, technology, engineering, and math (STEM) degrees, 262 Scott, Alex, 87 Seaports, 133–135, 140–142, 147, 188– 189, 197–198, 200, 219, 230–231 Seattle, Washington, 230–231 Secondary market, 66–67 Sedlak, 119 Seikel, Andy, 166–167 Sembrot, James, 106 Sensors, 206, 219–220 September 11, 2001, 188–189, 191, 195, 200 Shah, Ajay, 49 Shanghai, China, 230 Shareholder value, 30–32, 255, 261 Sheffi, Yossi, 51, 186–187, 201–202, 235 Shipment consolidation/deconsolidation, 101–102, 104 Shipper/carrier relations, 100–102 Shoemaker, Greg, 63–64, 124–125 Siefkin, Greg, 54–55

Index

Sierra Leone, 138 Sikich, 190 Silo mentality, 8, 10, 49, 71–72, 75–76, 81, 201 Singapore, 138, 156 Singhal, Vinod, 30–31 Site selection criteria, 126–129 air cargo service, 127 interstate highways, 127 railroad service, 127 road and bridge condition, 127 road density congestion, 127 road infrastructure, 127–128 taxes and fees, 127 transportation and warehousing industry, 127 waterborne cargo service, 127 workforce and labor, 127–129 Site selection, domestic, 176–177, 255 Site selection, global, 134–142 Six Sigma, 63, 79–80, 255 defined, 79 lean Six Sigma, 80–81 60 Minutes, 153 Slavery, 223, 227–228, 232 Smart boxes, 198 Smart manufacturing, 85–86 Smith, Amy, 196–197 Smith, Christopher, 245 Smits, Paul, 219 Soft skills, 256–257 Solectron, 49 Solo Cup, 243 Somalia, 138–139 Sonoco, 105 Sourcing. See Procurement South Africa, 143, 193 South Sudan, 139 Southeast Asia, 233 Spar, 201 Srinivasan, Mandyam, 82–83 Stallkamp, Thomas, 69 Stanford University, 9, 32, 83 Stank, Ted, 253 Stanton Chase International, 252 Stanton, Daniel, 10, 243 Starbucks, 33, 177–178, 228

285

Statista, 154 Statistical process control (SPC), 79 Statistics, 29–32 Statoil, 243 Stegner, Jonathan, 63 Stillman, Enan, 107–108 Stock, James, 158 Stock-outs, 15, 18–19, 49, 80, 160–161, 163, 212, 214 Stoufer, Bill, 36 Stoughton, Massachusetts, 127 Strategic sourcing, 255 Supplier management, 17–18, 22, 57, 60–63, 84–85, 164 Supplier reduction, 62–63 Supplier relationships, 225–226, 231, 255 Supplier scorecards, 29, 39, 41–42, 177, 231 Suppliers, global, 135–136 Supply chain education, 252, 254–256, 258–263 Supply chain evangelists, 39 Supply chain finance, 182, 243–245, 248 defined, 244 Supply chain integration, 53, 174 Supply chain management defined, 6–7 first coined, 7 Supply chain manager competency model, 255 Supply chain metrics, 29–43, 80, 82–84, 157 Supply chain monitoring, 226–228, 231–232 Supply Chain Operations Reference (SCOR) model, 16, 33, 38–41, 54, 79, 113, 260 defined, 40 SCORcard, 39 Supply chain planning, 4, 15, 20, 30, 47–57, 205 concurrent planning, 20 defined, 48 systems, 54

286Index

Supply Supply Supply Supply Supply

chain predictability, 138 chain profession, 251–266 chain project roadmap, 41 chain reliability, 138 chain security, 186–193, 196–200, 216, 252 security audit, 191, 193, 198–199 security seals, 193, 196 self-assessment, 191 Supply chain synchronization, 157 Supply chain talent, 43, 252–266 management, 23, 61, 78 recruiting, 137 shortage, 116–117 Supply chain villages, 172 Supply chain visibility, 11, 21, 31, 52–53, 56–57, 109, 119, 144–145, 152, 200–202, 210, 212, 219, 232, 235, 245, 248 Sustainability Index, 231 Sustainability, 138, 182, 223–236, 264 defined, 224 Sustainable sourcing, 70–71 Sweden, 138, 191 StairSec, 191 Sweidan, Adam, 228 Symphony Consulting, 157 Synchronization, 19 Syria, 138–139 SYSCO, 186 T Taiwan, 147 Tajikistan, 143 Target, 114, 117, 189, 210–211, 228 Tariffs, 146–147 Tarnef, Barry, 193 Taylor, David, 68 TDK InvenSense, 50 Terrorism, 185, 188–189, 191, 200, 232 Tesla Motors, 69, 207 Thailand, 156 Thakarar, Sam, 71 Theft, 186, 188, 193, 200, 212–213, 215 Third-party logistics provider (3PL), 20, 24, 103, 113, 171–182, 235, 259 defined, 173

Thorn, John, 29–30 3D printing, 16, 87–88 3M, 23 Timmermans, Kris, 220, 241–242 Tompkins International, 16, 35, 109, 118, 125, 130, 157, 175 Tompkins, Bruce, 12, 157 Tompkins, Jim, 16, 35–36, 109–111, 118–119, 175 TomTom, 91 Toombs, Ken, 109 Topping, Linda, 253 Torgeson, Ole, 176–177 Total cost of ownership (TCO), 141 Total cost of supply chain, 140–141 Total Quality Management (TQM), 79 Total supply chain cost, calculating, 155 Toyota, 76–78, 83, 85, 87, 163–164 Toyoda Automatic Loom Works, 77 Toyota Industrial Equipment Manufacturing, 240–241 Toyota, Toyota Production System (TPS), 77–78, 83 Track and trace, 22, 24–25, 65–66, 190, 214–218 Trade deficit, 146 Trade flows, 186 TradeIndia, 69 Training, 199, 206, 236, 252–253, 257–261 Transparency International, 139 Transparency, 71, 225, 228 Transportation management system (TMS), 103–105, 121, 236 defined, 103 Transportation management, 176 Transportation modes air, 36, 95–97, 107, 111, 152, 154, 172 expedited, 4, 34, 52, 63, 96–97, 111, 120, 141, 144, 152, 154

Index

intermodal, 95, 97, 108, 231 motor carriage, 20, 24, 95–111, 117–119, 121, 123, 133, 135, 154, 193–196, 220, 230–231, 234–236 pipelines, 6, 111 rail, 95–97, 108, 111, 135, 220, 231 water (ocean), 95–97, 104, 108, 111, 118, 133, 135, 139–140, 144–145, 219–220, 230 Transportation Security Administration (TSA), 189 Transportation, 95–111, 235–236 brokers, 102 costs, 3, 20–21, 34, 37, 95–100, 111, 126, 139–141, 181 industry consolidation, 100 Triple bottom line, 70, 225 Truck drivers, 98–100, 105–108, 236 hours of service, 98, 105–106 quality-of-life issues, 99–100, 105–106 shortage of, 99 Trucks and trucking dry van, 97 flatbeds, 97, 108 freight rates, 97, 100, 105 less-than-truckload (LTL), 20, 96, 103–104 private fleets, 96, 101–102 refrigerated vehicles (reefers), 21, 97, 108, 230 tankers, 97 truckload, 20, 96, 98, 104 Turkey, 143 Turkmenistan, 143 Turku School of Economics, 137 Tyco Integrated Security, 65 Tyson Foods, 201 Tyson, John, 201 U Uber, 106, 108–109, 206 Uber Freight, 21 UCCnet, 211 UK Modern Slavery Act, 228 UN Guiding Principles on Business and Human Rights, 227

287

Unilever, 70–71, 173, 210, 243, 247 Sustainable Living, 70 United Kingdom, 138 United States Gypsum, 80–81 University of Arkansas, 213 RFID Research Center, 213 University of Denver, 215 University of Edinburgh, 91 University of Kansas, 36 Supply Chain Leadership Center, 36 University of North Texas, 117 University of South Florida, 158 University of Tennessee, 12, 41, 82, 253, 255, 261, 263 Global Supply Chain Institute, 253, 263 Vested program, 41 University of Western Ontario, 30 University of Wisconsin, 7, 102, 154 UPS, 108, 152, 172, 217, 234 UPS Supply Chain Solutions, 172 Worldport, 152, 172 Upshoring. See Nearshoring Urban warehouses, 128 US Bank, 244 US Bureau of Industry and Security, 198 US Customs and Border Protection (CBP), 189, 196–198 Automated Targeting System (ATS), 198 US Department of Commerce, 199 Office of Regulatory Policy, 199 US Department of Defense, 4, 122, 211, 213 TRICARE Management Activity, 66 US Department of Energy, 99 US Department of Homeland Security (DHS), 189 US Environmental Protection Agency (EPA), 224–225, 234 US Federal Drug Administration, 171 US Food and Drug Administration (FDA), 65–67, 90, 214, 217

288Index

US Government Sentencing Guidelines, 199 US Merchant Marine Academy, 97 US State Department, 217, 232 US Virgin Islands, 200 US-China trade war, 146–147 USPS, 152 Uzbekistan, 143 V Valentine’s Day, 156 Value chain. See Supply chain management Value stream mapping, 80–81, 84 Vector SCM, 180 Vehicle and shipment tracking systems, 193 Vehicle management system (VMS), 220 Vehicle-to-vehicle communications (V2V), 106–107 Vendor compliance program, 119 Vendor-managed inventory (VMI), 162–163 Vertical strategy, 8 Vietnam, 143, 147, 156 Vincennes, Indiana, 128 Virtual workspace, 89 Visual control, 78 Vitasek, Kate, 41–42 Voice recognition, 122, 208 Volkswagen, 88, 144, 173 Voluntary Interindustry Commerce Standards Association (VICS), 161–162 W Waffle House, 195–196 Waffle House Index, 195–196 Walden, Joe, 36 Walgreens, 66 Wall Street Journal, The, 140, 152, 213 Walmart, 11,15, 26, 63, 66, 68, 71, 108, 114, 117, 126, 128, 152, 160–161, 173–174, 194–195, 209–213, 217–218, 228, 231

Retail Link, 68, 160–161 Walmart Foundation, 195 Warehouse execution system (WES), 115–116, 205–206 defined, 116 Warehouse management system (WMS), 115–116, 121–122, 130, 205–206, 210 defined, 117 Warehousing Education and Research Council (WERC), 42–43 Warehousing. See Distribution Warehousing functions Order picking, 121, 130 Packaging, 121 Prepackaging, 121 Putaway, 121 Receiving, 121 Sortation, 121 Storage, 121 Unitizing and shipping, 121 Warner-Lambert, 160–161 Washington Post, The, 233–234 Washington University, 195 Boeing Center for Supply Chain Innovation, 195 Waste reduction/elimination, 70, 76–77, 80–81, 84–85 Water consumption, 70, 224, 227, 232–234 footprinting, 233 replenishment, 233–234 Wengel, Kathy, 25–26 WestJet, 56 Whirlpool, 217 White, Burton, 110 Wiehoff, John, 109 Wikipedia, 86 Wilcox, Shanton, 243 Will, Al, 259–260 Williams, Gray, 157 Wilson, Mark, 254 Winston, Andrew, 229 Wireless technology, 115, 122, 130, 215, 220 Womack, Jim, 84–85

289

Index

Women in the supply chain, 227, 261–263 Workforce reduction, 259 Working capital, 243, 245, 248 World Bank, The, 137–138 World Customs Organization, 192 SAFE Framework of Standards, 192 Wright, Jonathan, 86–87, 158 X XStream Trucking, 147

Y Yahoo!Finance, 195 Yarbrough, Jim, 193 Yonko, Greg, 65, 67 Young, Ned, 206 Yum! Brands, 228 Z Zero-based budgeting, 241–242 zero-based mindset, 241–242 Zweier, Kevin, 37

WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA.