This Week on SCDigest:
1H 2009 Supply Chain Review and Comment
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
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Guest Expert Insight - My Friends are Getting Old, Your WMS May be Getting Old Too!
Expert Insight - Lean Thinking - What is Lean Leadership?
Expert Insight - Daily Jab - In Search of a Non-Retail Cross Docker
This Week on "Distribution Digest"
Your Supply Chain Questions Answered! This Week's Question - How Can We Calculate the Potential Throughput of our Distribution Center?
Trivia  Supply Chain Stock Index  Reader Feedback

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As investors prepared to celebrate the Independence Holiday, Wall Street continued its three-week slide.  Still, four out of the 22 stocks in our Supply Chain and Logistics stock index managed to finish the week with gains, however slight.

In the software group, Manhattan fell 12.2%, while JDA climbed 4.9%.  It was a good week for the hardware group as both Intermec and Zebra were up (1.8% and 3.3%, respectively).  In the transportation and logistics group, CSX fell 8.2%. Yellow Roadway was down another 7.1% as the week-long negotiation talks with the Teamsters union ended without resolution. 

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My Friends are Getting Old, Your WMS May be Getting Old Too!

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In Search of a Non-Retail Cross Docker

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1H 2009 Supply Chain Review and Comment

First half of 2009 – goodbye and good riddance.

After the financial and Wall Street meltdown of the last four months of 2008, the economic weakness that was already in motion greatly accelerated, leading to something like a “great recession” in the first six months of this year.

So, the economy, unfortunately, really was the main supply chain story of the first half of the year, with publication after publication and pundit after pundit offering advice about “what to do in a downturn” until you almost couldn’t bear to read another one of them.

The demand uncertainty led to much (appropriate) angst over managing inventories. The first place many companies pulled back was in ordering from China. Container volumes into the US fell by 22% in April, for example, as import traffic dropped at rates well above the overall fall in the economy. April marked the 22nd consecutive monthly drop in year-over-year container volumes – incredible.

Gilmore Says:


"The just released Fortune 500 list of the world’s largest companies saw the number of US firms fall to 140, the smallest number ever."

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Though mostly anecdotal, stock outs at retail seemed to surge as a result of inventory reduction strategies, costing manufacturers and retailers, in some cases, badly needed revenue.

Of course, the recession led to a collapse in most commodity input costs that reached a bottom in late February/early March. The price per barrel of oil, using “NYMEX sweet crude” futures, reached a bottom of $33.98 on Feb. 12. Yesterday, it was at $60.14, after spending much of June near $70.00.

Diesel fuel prices dropped to an average “on the road” low of just under $2.00 in most areas of the US the second week of March. Last week, it was at $2.56; a year ago this week, it was $4.61. The odd thing is, as oil prices are now tied to the state of the world economy, we should actually root for oil to stay in the $60-70.00 range, rather than head back south.

Transportation rates were simply in the dumper. Many ocean and truckload carriers have, at least in part, been moving freight at less than variable costs, putting many in severe financial stress. While many truckload carriers have exited the market, leading to a capacity reduction of 15% in the US, demand has fallen even more, about 18%, according to a financial analyst that follows the industry. He also says many more TL carriers are technically bankrupt, but that the banks haven’t yet pulled the plug on them, in part because the asset values are so low now (overseas markets for used trucks, once quite robust, have now dried up). But the bankruptcies could accelerate at any time.

US TL carriers are expected to order just 75,000 new Class 8 trucks this year, with the normal replacement rate said to be somewhere near 225,000. All this could lead to a severe capacity crunch when the economy does recover.


On the LTL side, Yellow Roadway (YRC Worldwide) has teetered on the edge of bankruptcy for much of this year, but so far has managed to remain solvent.


Parcel carrier DHL left the US domestic market at the end of January.


The rails saw volumes drop too, but have been able to keep pricing somewhat firm, versus other modes. That, of course, is the result of not much competition, leading to several pending bills in Washington that would eliminate the rail carriers’ anti-trust exemptions and regulate “bottleneck” pricing, among other changes. Though the vote on one bill was recently postponed to consolidate legislative action, something is likely to happen here in 2009.


China took a hit given the fall in exports, and tens of thousands of manufacturers there have folded. Some, however, say the Chinese government orchestrated much of this, and was happy to see “low end” producers go under or move further west. With a smart and aggressive stimulus program, however, much of it focused on infrastructure, China is still expected to grow its economy some 7% this year.


The just released Fortune 500 list of the world’s largest companies saw the number of US firms fall to 140, the smallest number ever, while China added nine to the list for a total of 37, most of which also rose in position. “Demography is destiny,” as they say.


Still, the drop in US and Western imports did put the break on rising prices out of China. All told, US import prices in May (excluding oil) were down 5.8% versus a year earlier, for example, a continuing trend.


Many companies were consumed with worries about the financial health of their supply chain partners, especially key suppliers. That led to all manner of risk mitigation strategies – and some debates about whether or not a more healthy company should spend some of its own money in various ways to keep a tottering supplier on its feet.


The changing dynamics of input prices and demand caused some battles, mostly behind the scenes, between manufacturers and retailers on the prices the retailers would pay for goods. That spilled over in a public way in February, when Brussels-based grocer Delhaize SA, which also owns the Food Lion chain in the US, pulled some 300 products of CPG giant Unilever off of the shelves of its 775 stores in Belgium early this year that it said were priced too high. A compromise was eventually reached.


With the new administration and Congress, US businesses have growing concerns about the potential for “card check” legislation to pass that would make it far easier for workers to unionize. Business groups have lobbied hard to kill or water down potential legislation, but meanwhile, many companies are hiring consultants and developing strategies to weather the storm if the idea does become law.


Also on the legislative front, the US House did pass a “cap and trade” bill in June, though no one, including most of those who voted for it, understands what is in it. The bill’s fate in the Senate is less certain.


There was growing concern earlier in the year over escalating drug-related violence in Mexico, causing many to wonder about the country as a sourcing location even as others were promoting Mexico and “near shoring” strategies. With help recently from the US, however, it looks like some measure of control over the violence is starting to occur there.


Meanwhile, in March, Mexico slapped a large tariff on a variety of US goods, in retaliation for the failure of the US to live up to its NAFTA commitments to let Mexican truckers operate in the US and the Obama administration ending an existing pilot program.


About a year after he announced sweeping changes to Dell’s vaunted supply chain model, Michael Cannon, the company’s first real head of global supply chain, was shown the door at the beginning of the year. The cause has never been made clear. Just last week, GM made the same move with its head of supply chain, Bo Andersson. Some say the “new” GM will need more help from suppliers, and that the hardline approach Bo was known for needed to be changed for a new model. Our friend Fred Berkheimer, head of logistics for Unilever NA, also just retired.


RFID at Wal-Mart, at least, seemed in free fall, with a program at Sam’s Club delayed and almost no apparent activity at the US stores group. In February, Procter & Gamble ended what it termed a “successful” pilot with Wal-Mart on tagging promotional displays, it appears because Wal-Mart simply wouldn’t do anything with the data.


That’s our review of the top supply chain and logistics stories from the first half of 2009 – anything we missed?


A lot happened – a lot of which we would like to forget.


What’s your reaction to our first half supply chain review? Any key stories or themes we missed? Let us know your thoughts at the Feedback button below.

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We received a number of nice letters on our piece relooking at the Hau Lee classic article “ The Triple A Supply Chain .”


That includes our Feedback of the Week from Trevor Miles of Kinaxis, plus good letters from Tom Dadmun of Adtran, Koh Niak Wu of the Singapore Institute of Manufacturing Technology, and Aatish Goel of Infosys, who all agree that the article is as timely now as when it was written in 2004.

Feedback of the Week – On the Triple A Supply Chain:

Agility, Adaptability, Alignment – these are terms we should use outside of supply chain management to describe most processes and systems. 


At the end of the article, you make the statement regarding alignment that “It will be a long journey for most, but I do think it is possible to move increasingly closer to the goal.” I agree, and think that, at the heart of the issue, is that outsourcing is a financial instrument, not an operational instrument.  The same operational flexibility could be achieved by using contract manufacturers to satisfy peak demand while satisfying the bulk of demand from in-house manufacturing, yet, the decision is most often made to outsource manufacturing.  Outsourcing most, if not all, of manufacturing might, indeed, be the correct course of action from a financial perspective, but it adds a huge amount of “friction” to the process of planning the supply chain to satisfy customer demand. 


The problem arises when the suppliers of key components, perhaps even of fully assembled products, get treated from an operational perspective in the same manner as suppliers of commodity materials. As you point out, Toyota specifically, but Japanese keiretsu more generally, has managed to foster the level of trust and collaboration necessary to achieve the alignment required in an outsourced manufacturing model.  In addition, you point out that many, maybe even most, VMI programs fail because of misalignment.


It is not that I think outsourcing is “bad."  I think we have not yet developed the appropriate processes to handle a relationship that, from a legal and financial perspective, needs to be one based on distrust, but from an operations perspective, needs to be based upon mutual trust and shared objectives.


As we all know, Henry Ford supposedly stated that “They can have any colour as long as it is black”.  Clearly, this statement illustrates neither agility nor adaptability, but nevertheless, illustrates that operations people would prefer that the product itself, the product mix, and the volume did not change.  The only variability would be under their direct control, namely the uptime of the equipment.  In this environment, inventory levels could be brought down to nearly zero and everything would run as smoothly as clockwork. 


Unfortunately for operations people, as Koh Niak Wu points out in his reply, “high-mix/low-volume manufacturing environment is steadily dominating."  This describes the demand side of the equation.  Outsourcing and off-shoring is adding an equal level of complexity on the supply side.  While poured concrete is most certainly an inhibitor to adaptability, so too are long-term supply contracts that are focused principally on the lowest price.  These often reduce the adaptability of an organization tremendously.


Agility, or more correctly the lack of it, is the result of decisions made early on in the design, engineering, construction, and purchasing/contracting phases.  People with greater knowledge in the design and engineering space tell me that 80% or more of the cost of goods sold is determined during these stages.  That still leaves a great deal which can be managed in the short term through agility. 


At one time, there was a big “Design for Manufacture” push in Engineering/Design.  I would like to see this concept extended to “Design for Delivery,” which would include, for example, capabilities for late-stage configuration to customer order.  But all complexity cannot be designed out of the product or variability designed out of the supply chain, which is where the need for agility comes in.  The Advanced Planning Systems designed in the early 1990s that focussed on optimizing the supply chain at the tactical planning level, have proven not to be nimble enough at the operational planning and execution level.  One can even make an argument about their lack of adaptability given the 12-24 month implementation cycles.  What is needed for agility is the ability to plan, monitor, and respond very rapidly in a collaborative manner across at least 2 tiers of the supply chain.  And nearly all decisions made at this level require compromise between competing and “soft” requirements. 


People are best suited to make these compromises, provided that they have some way of evaluating alternative courses of action based upon both operational and financial metrics.


Trevor Miles

Product Marketing


More On the Triple A Supply Chain:

Nothing remains the same except change, to use a quote from an old ballad. The Triple A supply chain is all about how quick you can sense change and adapt to it. Since that article was written, we have had swings in demand, transportation capacity crisis, over capacity in transportation, oil @ $140 a barrel, off shoring, onshoring, good economy, bad economy, interest rates all over the place, acquisition mania, bankruptcy galore and who knows what will happen with the Swine Flu?

Focusing on one area of the supply chain for efficiency or efficiency overall will solve "a" problem.  When the problems change quicker than the weather in New England - "As they say, if you don't like it, wait 5 minutes" - then you need a different strategy or approach to the multi-faceted problem.

Only a holistic approach to the overall supply chain - from supplier's supplier to customer's customer  - that is analyzed in a holistic S&OP process, with all parties weighing in, with data and analysis producing information to make thoughtful decisions - that's how to align and adapt. Add a culture that can manage change well and you have the third, very necessary ingredient - Agility - Then I say…. " Bring it on!!!!"

Thomas L. Dadmun
VP, PMO - Program Management Office

Hailing from Singapore and having been able to study the patterns for different industries, I appreciate this Triple-A framework. The high-mix, low-volume manufacturing environment is steadily dominating and it is precisely because of this, the framework will kick in. In such an environment, agility is key to meeting the differing needs of consumers. Michael Mahoney (CPIM) has a book that describes this explicitly.


I also appreciate the phrase "Efficient supply chains often become uncompetitive because they don’t adapt to changes in the structure of markets". I opine that the more efficient a supply chain becomes, the more tailored it becomes to serving a particular market segment. This is akin to a facility that is volume-focused -- we iron out all the kinks to ameliorate processes catering to a current market, but once the shift in consumer demand occurs (or in this case, the age of mass customization), the costs begin to be uncompetitive.


Focusing on the efficiency of the supply chain is important, but it pays to bear in mind the definition of efficiency with the changing markets.

Koh Niak Wu, Ph.D.

Singapore Institute of Manufacturing Technology

I really liked the message that’s been conveyed in this article. There are two points that I would like to make:


1. With respect to the phrase “Efficient supply chains often become uncompetitive because they don't adapt to changes in the structure of markets," I feel that it is pertinent to specific industry segments or product categories and can’t be generalized and applied to all. Efficiency will be definitely important in sectors where it is a mass production environment or in a process manufacturing set-up. Companies which cater to few big customers in such environments will be focused on keeping production costs as low as possible and operate on high efficiency levels.


2. The other point I would like to make is that in a networked supply chain, it is imperative that the company’s key supply chain partners, especially on the supplier’s end, should also be operating as per the company’s model. If the suppliers are not agile or adaptable, then even though the company is following that approach, it might not help on a sustainable basis.


Aatish Goel

Associate - Core Process Excellence Practice


Q. About on average, how much more CO2 does truck transport emit versus rail to the same amount of freight?
A. Trucks today will emit about 6 times the level of CO2 versus equivalent rail transport, exluding any emissions to get the freight to and from the rail head.