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Supply Chain, AIG, and What's Next
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Expert Insight - Sorting it Out: Looking for a Materials Handling Project Champion
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Your Supply Chain Questions Answered! This Week's Question - Should Receiving be Counted as a Product Touch?
Trivia, Supply Chain Stock Index
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September 18, 2008 - Supply Chain Digest Newsletter



Supply Chain, AIG, and What’s Next

Well, this has certainly been an interesting week.

Like most of us around the globe, I’m not sure exactly what’s happening as financial markets meltdown from Moscow to Wall Street. Add to that a hurricane, a crazy election cycle, and all the other tumult we’ve already been dealing with, and it’s easy to get a little dizzy.

As usual, it made me take a step back and try to make some sense of it all. This may veer at times into some areas only on the periphery of supply chain directly, but we all understand SCM operates in the context of business and even the political environment, so I hope it’s all relevant.

First, the current financial crisis – and expectations for slowing oil demand not only in the US and Europe but also China and India – has led to a precipitous drop in oil prices, from almost $150 per barrel just a short while ago to the low $90s briefly this week. It’s now back up to about $100, but is not expected to rise much in the short term, and will likely fall again.

But just for some perspective, I took a look at oil prices at this time last year: it was about $83 per barrel in mid-September 2007. So, oil is still up substantially year on year, and when it reached the $100 per barrel level in 2007, which now somehow seems like a relief, there was widespread dismay, and rightfully so. Logistics is still very expensive at that level.

We also haven’t solved the basic issue, which is demand that just about matches global output. So, while we can expect some modest relief from the worst we had of it for awhile, I can’t look at the mid-term with much confidence. Demand will rise again, and probably soon, and any disruption continues to drive prices higher.

So, I think we will see the same pattern that we have for the past few years – that price increases followed by drops in oil prices simply lead to higher lows. The curve overall continues to ratchet up. If we “settle” at $90 or something, you can expect $120 or more sometime in 2009.

The same is basically true for many commodity prices. The sharp drops we’ve seen are still to levels well above where we were a few years ago, and the basic dynamics haven’t changed.

As the government bails out insurance giant AIG, there are growing calls by the US automotive industry for a similar program to get them temporarily out of their current misery. The latest I’ve seen is for a low-interest $50 billion government loan for revamping plants, car designs, and green technology development.

They’re smart, recognizing in an election year and with lifelines going to Wall Street firms, it will be hard for politicians of any stripe to let the auto industry fail. What may ultimately happen, though, is that the crushing, direct health care costs that are a real burden both to Detroit and other US manufacturers vis-à-vis global competition may reach a “tipping point” that forces action of some kind.

Gilmore Says:
"Credit is tight. That puts an extra premium on managing inventories to reduce working capital requirements – meaning less credit is required to fund operations."

What do you say?
Send us your feedback here

At the same time, we have an election with two very different views on key issues for the supply chain. The Democrats are pushing legislation that could make it much easier for unionization efforts, which is a genie in a bottle that no one is quite sure what will happen if it is unleashed. It is also likely they would push for greater trade barriers and some level of protectionism – the real question is how much, how fast.

That isn’t meant as a political statement – it simply says that if one side wins, we are likely to see more action that changes the global trade and sourcing environment we operate in now than the other – and everyone needs to understand what that might mean to their companies and industries.

All of which is to say, as I have in the past, that we are in an era of simply unprecedented supply chain dynamics. Will oil plummet back to $60, or soon return to a march back to $200? Is your non-union plant suddenly going to organize with a new “card check” law in early 2009?  Will burdensome tariffs be placed on imports from products you are just now deciding to source from China? Will the global economy and new areas of emerging demand get back on track, or will we all retrench to our own geographies for awhile?

If anyone knows the answer to these or other questions, please let us all know.

One more thing. As recently as just last year, a lot of supply chain conversation was around “what to do when your company gets bought by a private equity firm.” Dozens of companies followed that path over the last few years. There’s not much worry about that right now though. The PE’s can’t borrow the money to finance the deals, and many are trying to bail on deals they already signed. Save those presentations on what to do for 2012 or so.

So, it says more than ever that there is a premium on supply chain flexibility, both from a strategy perspective and from a more tactical execution level. How can your company increase agility?

It also says to me that you need to double down your efforts to improve supply chain visibility and “supply chain intelligence” efforts to reduce the latency between when you could know something important and when you actually do.

It is becoming simply essential to me to have network planning type tools available on a near continuous basis to help understand the impact that these supply chain dynamics have on optimal decisions, at multiple levels, and to perform scenario and sensitivity analysis that contemplates multiple potential conditions. You have to make a call, but want to keep the maximum options open if you can.

Credit is tight. That puts an extra premium on managing inventories to reduce working capital requirements – meaning less credit is required to fund operations. Have a conversation with your CFO or controller about what the supply chain could do here. You will probably find a receptive audience.

In general, I am a “cup half-full” person, and think things will actually bottom out here relatively soon. We actually have been in this for awhile now. To that end, I will also note that really smart companies use these kinds of times to innovate while others stand still, and to snatch market share where they can leverage competitive advantage. Use the supply chain to find ways to improve the bottom line of your customers.

Finally, I will say I think the US economy for awhile has been too driven by the financial industry. Those days are obviously gone for many years to come. Whatever form it takes, the “real product” economy is going to have a bigger impact on our economic growth than it has the past few years – and that’s good for the supply chain.

What are you comments on Gilmore’s thoughts on the current dynamics and what it might mean for the supply chain? Can these kinds of times sometimes be used to gain market share and competitive advantage? Is there a premium on supply chain flexibility now? And how do you increase agility? Let us know your thoughts at the Feedback button below.

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This Week's Supply Chain News Bites Only from SCDigest

Supply Chain Graphic of the Week - Retail Chargeback Proliferation

Supply Chain by the Numbers: September 18, 2008

Logistics News: New Dates for Fall Workshops on Best Practices in Distribution Center Design, Operations and Management Announced


Stocks on Wall Street proved resilient, perhaps even oblivious, to the financial troubles lurking both near and on the horizon.  Our Supply Chain and Logistics stock index enjoyed this week’s glass-half-full attitude.  In the software group, Descartes climbed an astounding 10.6% to record its highest price since January of this year.  Also within the group, Logility was up 8.7% - recovering all of last week’s decline.  In the hardware group, Intermec was up 2.5%, while Zebra fell 3.2%.  In the transportation and logistics group, FedEx soared 10.4%, followed by UPS (up 7.4%); however, on the other end of the spectrum, Yellow Roadway slipped a whopping 17.1%.

See stock report.

Each Week:

-Global Supply Chain
-Distribution/Material Handling
-Trends and Issues

Weekly On-Target Newsletter
September 16, 2008 Edition

Sorting it Out by Cliff Holste

Looking for a Materials Handling Project Champion

Essential for Success, they are Sometimes Hard to Find; Building a Vision for What the Completed Project will Really Be


New "Home Page within a Home Page" Focuses on Distribution Management and Materials Handling News and Insight

Distribution and Materials Handling Digest


What was the name of the supply chain program championed by Roger Millikin of textile manufacturer Milliken & Company (and others) in the late 1980s?

A. Click to find the answer below

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Featured Question and Answer:

Should Receiving be Counted as a Product Touch?

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Feedback continues to pour in each week – but we want more and, with this in mind, are pleased to announce our new “Fuel for Thought” program. If your response is selected as our Feedback of the Week, we’ll send you a $20 gas card. Must have complete name and company, and you can only win once every three months. Send in your Feedback regularly! Make it thoughtful if you would like to win.

This week, we received many excellent letters on various order picking and distribution topics.

Our feedback of the week is from Nick Turner of Sterling Commerce, who comments on several distribution-related topics. We also published some letters responding to our piece on Dynamic Slotting at Canadian Tire, plus a nice letter from Adam Krtek of ConAgra complimenting SCDigest, which we are always happy to publish!

Feedback of the Week - On Waveless Picking and More:

It was interesting to see feedback on "Waveless Picking" from my former colleague Bob Carver. It reminded me of debates I had 10 years ago on the same subject with Bob and others. At the time, my thoughts were based around the following proposition, which I think still holds good to a certain extent:

The first implementation of new technology in a warehouse results in small benefits from the automation of existing processes. The major benefits come later from process changes that the technology enables. The problem for businesses and application vendors is that some of these process changes are obvious (for example, RF enabled interleaving forklift put and pull tasks) some of them are less obvious, hard to grasp and often hard to prove - the fact that many warehouses probably don't need wave picking anymore is one of these changes.

As a quick aside, RFID has its parallels - we are seeing that RFID is being used to replace a bar-code scan and the improvements businesses are getting are akin to "move task interleaving" - but what are the deep business transforming process changes that RFID tagging can and will bring to the warehouse?

I learned my warehousing and WMS skills in a business where next-day delivery was the norm and same-day delivery was losing its place as a competitive differentiator. We never designed an implementation with wave picking because if we waited long enough to build efficient waves, we would never pick the orders in time. We pre-cubed orders by delivery route by service level to an approximation of what would fit on a pallet. When we had enough orders to make such a pallet, it was released for picking. Obviously, at peak times we had many such pallets ready for release so we released in the order that they had to leave the Central DC by line haul to the Regional DC (where they were cross docked onto local delivery trucks). This pallet became the carrier for a "pick and pass" process through the warehouse. This way, the priority orders were always being automatically pushed to the top of the queue and released for picking. We managed replenishment in real time based on pick face quantity, not expected demand, or wave requirements (mainly because the customers hadn't given us the rest of the day's orders yet, so we didn't know what demand was!). We didn't know it at the time, but we were operating what today might be called a "continuous flow" or "continuous replenishment" model.

The only drawback that still comes to mind is the potential need for a staging lane for each route. If the DC is short of space in the shipping area, this could be a problem. In B2C environments, where the outbound lane choice would more likely be only for parcel carriers and associated zone skip lanes, then the choice is smaller and the opportunity for a continuous flow much higher as a result.

I have also seen DCs with several miles of buffer conveyor installed so that waves can be stopped between pick and pack so that more urgent orders (only now with enough volume to be released as an efficient wave) can overtake the earlier picks. If the order release was in small chunks by priority, then maybe a few hundred thousand dollars could be saved on hardware.

Continuous flow also helps with an interesting point of view I got many years ago from Rod Inger, who at the time was at Cranfield University in their well respected logistics and supply chain dept. Faster supply chains don't rely on trucks traveling at 150 mph - they rely on the order standing still for less time. As you undergo supply chain improvement projects, analyze where and for how long an order stands still and understand why this is the case. Some can be justified (the need to build a truck load for example) others not ("we work more efficiently with a back log") . However, with wave picking, you deliberately increase the time an order stands still and the reasons for this may no longer hold true.

Nick Turner
Sterling Commerce

On Dynamic Slotting:

The analysis of item movement and order sizes also has to be repeated for major seasonal variations. The layout of items used in the summer is not efficient for the winter.

But there is another very subtle purpose for doing this type of analysis that can be used to improve both warehouse efficiency and reduce transportation costs. The goal of the warehouse is to minimize selector travel time, the goal of transportation is to minimize empty truck space. Both goals can be better met by management of the ordering process. The extreme example is preventing stores from ordering potatoes on weekend deliveries. There is no reason why long shelf-life produce items should take up space on limited weekend deliveries. Likewise, by properly managing the days stores can order shelf-stable items, the retailer can increase the "pick density" and truck utilization for inbound loads. In effect, restricted ordering creates a "virtual slow mover warehouse" by concentrating orders for low-priority items on specific days and loads.

The challenge here is that the benefit at the warehouse comes at an inconvenience for the store. In a wholesaler supported environment, there has to be an incentive for stores to accept the inconvenience. This can be implemented with a surcharge on items ordered on their "day off." Then the retailer has an incentive to order the slow movers on the designated days.

Bill Bittner
BWH Consulting

Useful thought process here, I think. But we should remember that turn rates originate in the stores, and reflect consumer demand. The supply chain serves the stores, not the other way around.

Differentiating between faster and slower moving items is material to the shelf replenishment process too. Slow movers tend to accumulate shelf inventory in excess of demand, while the fastest movers run chronically out-of-stock. Both conditions coexist on the same shelves and within the same supply chain.

This leads the discussion back to the In-Store Implementation issue I've been hammering at so much recently. Exclusive focus on the distribution and logistics portions of this challenge will yield unsatisfactory outcomes. Integrating a plan-do-measure discipline for shelf-level compliance will lead retailers to sounder practices, both in the stores and up the supply chain.

James Tenser
VSN Strategies

On SCDigest:

I just recently graduated from Arizona State. Keep up the great work at SCDigest. Your publication has helped me in many projects in school and now provides me great benchmarking opportunities to discuss with co-workers. I look forward to many more great issues.

Adam Krtek


Q. What was the name of the supply chain program championed by Roger Millikin of textile manufacturer Milliken & Company (and others) in the late 1980s?

A. "Quick Response" - the idea being to react more quickly to replenish stores based on actual consumer demand. The concept set the stage for much additional thinking in the consumer goods-to-retail chain even to today, but wasn't effective enough to save the US apparel manufacturing industry, as Millikin had hoped.


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