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Inventory Replenishment - One (or Even Three) Sizes May Not Fit All

In replenishment logic, most companies use some version of "order point, replenish to max level" policies, meaning as inventory declines to a defined level, it triggers a replenishment order, which is geared to return inventory to some range, not to exceed a predefined maximum.


Such policies are often also executed with three levels of SKUs, or so-called ABC classification, based on normal sales volumes.


To reduce overall inventory levels, consider more nuanced approaches than straight ABC methods. Perhaps your SKU profile is really more appropriately served by an "ABCDEFG" classification that more ideally matches policies to individual SKU characteristics. Policies should also look beyond just volume classifications and consider other inventory drivers, such as supplier lead times, transit times, supplier lead time variability, demand variability and forward-looking forecasts.
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Dan Gilmore

Is "Viasystems" Salvation" Good or Bad for the U.S. Economy?

Buried away on page C7 of last Friday's Wall Street Journal was an interesting story on Viasystems, a maker of printed circuit boards that almost went under in 2002 but has now revived itself - thanks to offshore production.


"Viasystems' Salvation," as the article calls it, was moving manufacturing to China. Viasystems in fact is the only U.S.-based company among the Asian-dominated top ten circuit board makers worldwide. At its peak, it operated 34 plants in eight countries, including several in the U.S. and Europe, but became increasingly uncompetitive in the price-dominated industry. It now plans to maintain just one plant each in those two main markets, moving all other production to China, where it employs tens of thousands.


One of Viasystems' owners is quoted as saying "The whole U.S. electronics industry will be domiciled to China."


OK, Viasystems has been saved. I'm a pretty strong free-marketer, but it simply has to make you wonder whether this scenario, played out over and over again in the U.S. and Europe, is in our overall economic interest. Commenting on this offshoring trend, Morgan Stanley chief economist Stephen Roach said recently that there is "the distinct possibility that job-less recoveries may remain the norm in the high cost developed economies for some time."


Meanwhile, has anyone checked out TV host Lou Dobbs on CNN Financial lately? He's calling on employees to contact the show and report companies that are "exporting jobs" overseas. Apparently, he's going to create some "most wanted list" that he hopes will shame corporations into keeping the jobs here. Dobbs is certainly no union-oriented protectionist - this trend is troubling to observers across the political spectrum.


This isn't just related to supply chain management - it IS supply chain management. Web-based supply chain tools are also making it easier to integrate offshore sites with overall supply chain processes. And when it comes to offshore versus corporate survival, the choice for most of us would be easy. Still..


If you'd like an email copy of the WSJ article on Viasystems, let us know. There's a related piece in our News and Views section, questioning whether offshoring companies really have the economic facts right.


Is the battle decided? Is basic manufacturing lost forever in developed economies? Was there another survival path for Viasystems? Let us know your thoughts.


Side note: after writing this column, I was waiting at the airport and overheard a cell phone conversation from someone who apparently worked at a metal tube company of some kind. He was asking a colleague for his opinion of the market impact (versus today's "made in America" position), of following the new recommendation from corporate - begin offshoring production to China.

This Week:

Do Manufacturers Have Offshore Economics Right?

Supply Chain Cost Drivers

The One Company that Has Withstood the Wal-Mart Juggernaut

Summary and comment below.


Supply Chain Investment News

It was a mixed week for supply chain stocks. ERP companies enjoyed a good week, with Oracle up 6%, and SAP and Peoplesoft also up. Agile Software, a maker of product lifecycle management software, was down almost 12%. Logistics software, 3PL and transportation stocks on Thursday.


  Click here to see performance over the past week, month, quarter and year >>

While we're on the topic of domestic production, approximately how much worth of goods do U.S. manufacturers ship each month?
Answer below


Agree or Disagree?

Reader feedback from the topics in SupplyChainDigest is growing every week! Keep the comments coming! If you would like to keep your identity or company anonymous, please let us know in your response.

Had another strong group of letters again last week, including more comments on the whole training issue, and our Feedback of the Week from Claus Heinrich, who responded to the SC Digest review of his new book, "Adapt or Die."

For more complete comments from readers, click here.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics.



Are Companies Overestimating Cost Savings from Offshoring?
View full article>>

Martin Donegani, a consultant at the Bourton Group, recently penned an article in Assembly magazine that says the supposed cost savings from moving part production offshore is not as great as many believe.


Donegani notes: "Once the contract is in effect, parts are made in batch quantities, shipped in bulk, and may go through extended customs procedures if they come from overseas. There is more handling, more chance for damage and more need for higher enforcement costs. The people who negotiated with, and selected, the outsourcing vendors are still on the payroll. But now we pay other companies to make these items for us and we generate their profits from buying our old parts. At what point do we have to ask ourselves, 'If they are making a profit from selling us our old parts, and we have not reduced our overhead, who is making money now?'"


He makes the argument that the costs of parts and components are mostly variable, and that therefore "if parts that are not on a constrained operation or function are outsourced, and overhead costs are not removed, then the real costs must go up."


I do believe that in many cases companies do underestimate the total costs of an outsourced part, especially in relation to increased inventory buffers and international sourcing and logistics costs. And yes, I suppose companies may sometimes fail to fully consider the impact of spreading fixed overhead across a smaller pool of total in-house production activities.


But I'm afraid much of Donegani's argument is wishful thinking. A 30% per part savings can really drive improvement to the bottom line, even if the true savings isn't really 30%. Donegani's column has to be considered in the "assembly" context of the audience he was writing for, which may have some different dynamics than say a pure component manufacturer such as Viasystems, whose story we cite nearby. Whatever the other considerations, I'm not convinced offshoring companies really have the financial analysis screwed up.


Do companies often overestimate the savings from moving production offshore? Are the total supply chain costs completely considered? Let us know your thoughts.

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Where to Look for Excess Supply Chain Costs
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Jim Ayers, a consultant at CGR Management consultants, recently identified four areas where executives should look for opportunities to cut supply chain costs. Ayers cites the following:



Lack of clarity. Notes the problems associated with accounting systems that simply don't shed the right light on true supply chain cost drivers. "Accounting for supply-chain costs rarely goes beyond financial-reporting requirements, and as a result, it obscures, rather than draws out, the details. In the supply-chain context, costs are spread across multiple companies, all of which use similar accounting rule books but have varying levels of willingness to collaborate on cost reduction." One answer - activity-based costing, but the burden of this effort doesn't have to be on-going. Occasional efforts to understand supply chain cost drivers can suffice.

2. Variabilty: Supply chain "visibility" systems show the effects of variability, but not the root causes. These come in two types: "V ariability that's inherent in processes and variability caused by management behaviors... The former is amenable to process engineering, such as Six Sigma. Effective solutions can be formulated using a thorough process analysis. Because that's hard work, companies often look for an IT solution rather than fix the root cause.

Management behaviors are more difficult to change. In many companies, for example, the end of the quarter brings a desperate push to book more revenue. This leads to all kinds of distortions in the supply chain. People scramble to find product to ship; suppliers interrupt schedules to handle rush jobs. One company even pulled products out of inventory for reconfiguration."
3. Product design. "This has a profound effect on supply-chain costs. Poorly devised designs increase supply-chain complexity-another driving force for more elaborate systems to track the mess. Poor design discipline also results in too many products and variations, the use of out-of-production components, hard-to-make and hard-to-fix products, and faulty products that result in complex return processes." Notes how office furniture maker Herman Miller used a combination of process re-design and new technology to dramatically reduce new product introduction lead times.
4. Information sharing: " Supply-chain information sharing, or collaboration, is progressive: Sharing will build gradually as a relationship develops. Often this is a top-down process that starts at the CEO or CIO level. Here, too, low-tech solutions that let you get to know one another must often precede high-tech ones. Good places to start include joint product development, sharing forecasts and actual sales data, and incentive-based joint cost-reduction efforts."

There's no one list, but this is a pretty good start. The article actually encourages CIO's to become less involved in IT infrastructure, and more focused on issues like the above. Good reading.


Does this list match your views of the best opportunities to reduce supply chain costs? Should CIOs be more involved in operational supply chain issues? Let us know your thoughts.

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The One Company Wal-Mart Fears? Costco
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Great story in Fortune about the one company that Wal-Mart has been unable to pummel into submission - warehouse club chain Costco.


Some interesting facts:


Sam Walton actually took many of his successful ideas from Wal-Mart from Sol Price, founder of a west coast chain called Fed-Mart that has direct lineage to today's Costco.

Costco has more sales than Wal-Mart's Sam's Clubs ($34.4 billion vs $32.9 billion) with far fewer stores (312 to 532).
Correspondingly, Costco has almost double the per store sales of Sam's ($112 million versus $63 million).
Costco lives by the principle of marking up goods no more than 14%.
It has thrived by smartly adhering to a "trading up/trading down" strategy that entices more upscale consumers with high end goods at low prices (they rush to get hot new electronics into the store, for example) and bargain prices for commodity goods about which they don't care as much. Sam's Clubs, by contrast, offer fewer upscale goods and locations in fewer "hip" urban locations.
It practices "intelligent loss of sales" by stocking fewer SKUs than many retailers, meaning it may lose a few sales for the customers who must have the less popular versions of a product, but the practice of course "streamlines distribution and hastens inventory turns - and none out of ten customers are perfectly happy."
In the warehouse club market, it has consistently been ahead of Sam's innovation (new products, services, etc.)


Sol Price adds this perspective: "I always felt department stores and conventional retailers were doomed. They lived and died trying to take advantage of customers, and they were inefficient. The more I studied it, the more it seemed the cost of getting goods to consumers was way too high. I'm surprised the department store has survived this long."


The article ends on an optimistic note for those concerned with Wal-Mart's dominance: "The nimble first mover can outrun the powerful colossus; the innovator can stay a jump ahead of the imitator; the quality of leadership can trump the quantity of resources."


Alas, there are no Costco's near me. The article made me want to shop there. If you want the article and don't want to register at the above link, send us an email.


Will Costco continue to stand strong against the Wal-Mart challenge? Are there lessons here for other retailers? Let us know your thoughts.

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Feedback of the week - Claus Heinrich on "Adapt or Die"

I was honored to read your recent review of my book "Adapt or Die." Thank you for the constructive feedback. You are indeed correct that the statements made by the book cause many highly interesting debates about the direction, timing, and extent of the trend toward adaptive supply chain networks.

We at SAP are learning much from this debate. 

In any case, many thanks and I would of course be happy for any further feedback. I must confess however, I do still remain at odds with you on the timing! [Of the business transformation predicted in the book - we thought it would take more time.] I am in fact sometimes wondering, when viewing projects that our customers are undertaking whether my prognosis of 5-8 years was maybe even a bit conservative!

Claus Heinrich


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On "Why aren't we investing in more training?":

I'd like to comment on this issue of training.  It is my opinion that many companies out there under utilize the vendor training that is offered.  Tight timelines and budgets on implementations are usually the points I hear.  Everybody wants to get the application running as quickly and cheaply as possible, and as soon as there is a cost overrun in some area, training is one of the first to get cut back.  After many implementations, on both the vendor and customer side, I have heard time and again, "Sure, we know we can use training, but we just don't have the money to send all those people."  So what happens is, the "Train the trainer" concept is employed.  This involves a usually abbreviated training schedule with a brand new user or (if lucky 2-3 users) that must go back and educate the entire user community at the company.


What this leads to is a user group that has no real idea how the application really works, so they start guessing on set up and use.  After a short time, the application appears to falter in its intended use, which causes expected results to fall short of targets.  I have seen this many times, and the outcome has the potential to create an adverse relationship between vendor and supplier that may take some time to repair.  Or worse, the customer will stop using the software all together.  When the relationship is fixed, and both sides look at the situation, what generally happens is the customer pays the vendor for the proper training for the right users.  Of course this adds even more cost to the project that could have been avoided in the first place.


I would love to see a more focused effort to get as many good users trained as possible so the application can be set up and run as intended.  Of course there is never time or money to do this at the beginning of the project, but it's always available at the end.


Michael Adorjan

LogisticStrategies, Inc



General supply chain education versus application training is indeed vastly under utilized. I don't mean to split hairs but there is a difference between general supply chain education versus application training, in my mind. Application vendors know their product and offer training on how to use it. The problem is that many of the resources using it have been doing their jobs for years and very possibly for the same company. They believe that they know the right way to plan inventory both for supply & demand. Unfortunately, their management doesn't believe that and hence they are bringing in a new application(s).


The problem is that the workers will find ways around the application or demand customizations that will allow them to do the same things. Management thinks the application is the solution but still OK's the customizations instead of changing the processes to take advantage of the application(s) they just paid millions of dollars to install. If we do what we have always done, we will get what we have always got. This will not get the expected value out of supply chain applications. Resources need to be educated as to why a new process can help and be given a say in how to measure and reach the expected results.


I think the main reasons that education investments are not made are:

Workers are already overworked and management can't/ hasn't explained to them that proper education will reduce the workload.
Workers fear that reduced workloads on current tasks or more efficient processes will result in more new tasks.
Management believes that the application not education and process change is the answer.


John F. Blakowski, CPIM, CIRM

CSC Consulting, Inc.

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On "Next-Generation Productivity Gains from IT" :

I was fascinated by the comments by Brian Arthur that you included. His examples of "significant sources of next-generation IT productivity gains" are right on. There are many areas of productivity gain that can be attacked by the IT community. We've only begun to mine the sources of waste and profit loss. Deeper analytics and real-time decision-making systems will sustain IT growth for many years.


However, his comments about the continued US technology dominance over off-shore technology seems to me to be so much "it can't happen here" bunk and "US uber alles" rhetoric. He says "...But, as the U.S. endures a never-ending squeeze at the lower end of advanced technology, I believe it will retain its position at the top. One reason is that advances in technology proceed from advances in science, and the U.S. has sufficient leadership there to carry it for several decades more." This is scary to me.


I was wondering if Mr. Arthur has looked very close at the profile of the graduate school student body's in science programs in US academic institutions. Take a look and you'll see that the majority of these students are coming in from off-shore (and then mostly returning home.)

Couple that with the fact that the half-life of many technology areas is less than five years. How does that add up to a continued multi-decades of leadership for the US?

You need intellectual horsepower to tackle the new problems and provide a differential solution. The problem is that there is subtle leakage of this brainpower to the offshore centers. This will catch us by surprise; you just don't have the Icon of a "sputnik" satellite being launched to provide a national catalyst to renewed, competitive science/technology investment. We shouldn't think we can't lose the science leadership or that it won't happen quickly. We may continue to train the technical leaders of the future in our advanced science programs. They just don't work here after getting the education.


Erv Bluemner

RedPrairie Corporation
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While we're on the topic of domestic production, approximately how much worth of goods do U.S. manufacturers ship each month?

A. Well, it varies of course based on economic conditions, but in October, U.S. manufacturers shipped about $340 billion worth of goods, which was up 2.2%.
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