Catching up on a variety of Feedback this week. We received a few good letters on our article on the Seven Timeless Supply Chain Challenges, as articulated by Dr. J. Paul Dittmann of the University of Tennessee and former Whirlpool supply chain executive. Our Feedback of the Week is on this topic from Dick Locke of the Global Procurement Group, who takes some exception to the Globalization challenge.
Steve Wilson also smartly weighs in on this by recommending another timeless challenge that we agree should make the list.
We also have letters on increasing “speed” and incorporating Lean into distribution operations. See them all below.
Feedback of the Week – On Timeless Supply Chain Challenges:
Regarding challenge 7, globalization, I'm troubled by that constantly recurring list of issues.
I agree that distance can be an issue. However, buying outside of the US doesn't necessarily mean increased distance. Guadalajara in Mexico is closer to Chicago than San Francisco is, and Guadalajara is way the heck down there. If you're in Texas, obviously Mexico is closer than most of the US. I do agree that someone sourcing a volatile, unpredictable product shouldn't have a long supply chain, but the crucial factor is time, not distance. Air freight from China takes only an extra day or two compared to air freight in the US. I wouldn't recommend Asia for a product with an unpredictable demand unless you can afford air freight.
China makes sense for socks and underwear, but not fashion goods. China makes sense for laptop computers, but not desktops because laptops can be flown at a small percentage of their manufacturing costs and desktops cannot.
Exchange rates? What's the risk? It's the same risk as sourcing domestically. It's the risk of your supplier's currency strengthening.
Strengthening with respect to what? With respect to your customers' currencies and with respect to your competitors' currencies. Only companies with no foreign customers and no competitors who source globally are immune to that risk. If you only source domestically, the problem is insidious because your accounting system won't signal a problem. The first warning will come from overseas sales people who report your product is too expensive.
Volatile fuel costs? Well yes, they have been volatile. But volatility affects all potential suppliers, not just those in other countries.
Distance does increase the risk but see comments about Mexico above.
Geopolitical? Well OK, some industries are compelled to go to dodgy places. Some natural resources are in places where you wouldn't build a cell phone factory. If you are sourcing items such as palladium or diamonds or oil, geopolitics is a big issue. But if you have a choice, stay in safer places. Seems obvious, doesn't it?
This issue of risk can be an excuse to avoid the learning challenges that come with sourcing and purchasing globally. One sign of that is if someone tries to build risk into a landed cost formula and uses that formula for a sourcing decision. (Your article 'Getting to Accurate Total Landed Costs" advocates this practice.) Almost invariably, the current supplier will come out best. There's incredible momentum to stay with existing suppliers. The way to handle the risk issue in sourcing is to figure out the lowest cost supplier without considering risk and then see how much has to go wrong before the lowest cost supplier is no longer lowest cost. How much does that exchange rate have to change? Is it likely? Would the same thing happen with other potential suppliers?
What will we do if it does happen? These are very important issues, but they are not part of a landed cost. A good model will quantify most of those risks.
President, Global Procurement Group
Global Supply Management Training
More On Timeless Supply Chain Challenges:
What’s missing is the eternal struggle of cost vs. service. Perhaps this could roll up under supply chain strategy, but it needs to be explicitly recognized. While always a push to reduce costs, it’s also true that customers continue to demand ever higher levels of service, which one can define as high inventory fill rate, short order-to-delivery lead time, and/or “customized” services such as building display pallets and product labeling, etc. Often, high levels of service drive supply chain costs well beyond optimal. Yes, it is possible to improve both, but that presumes relatively low current performance.
Another issue to recognize is simply acknowledging a dynamic environment. Witness the events of the last five years, with the longshoreman strike on the West Coast, the capacity crunch in transportation in 2004/2005, last year’s dramatic rise in fuel prices and, of course, the current “great recession." What was a problem in the past may not be so important in the future, and what was taken for granted may be difficult or scarce going forward.
Feedback on the Need for Speed in the DC:
Here are some other ideas to increase DC speed by analyzing the supply chain to make sure things “stand still” for less time:
1) Cross docking and flow-through means less time standing still;
2) Time between order capture and warehouse picking (i.e., don’t batch all today’s orders for sending to the DC tomorrow – send them as received); and
3) Use waveless picking in the DC to ensure continuous flow (i.e., don’t accept the excuse that waves make DCs more efficient - with today’s WMS and automation technology, this is no longer valid!).
Senior Product Manager, Execution Solutions
Feedback on Lean in Distribution:
I teach a course in Logistics Management at the university level and lean processing is heavily emphasized all along the way, including 3PLs, international logistics, and manufacturing.
Lean more appropriately represents elimination of cost, waste, and reduction of lead time, not just lot-size-of-one kanban manufacturing. There are a lot of opportunities to implement lean/six sigma in a distribution environment, and technology is a necessary driver to accomplish it and remain competitive.
Check out our book Value Driven Channel Strategy: A Lean Approach published by ASQ's Quality Press. We address many of the issues that you have raised. Distribution systems, by their very nature and economic necessity, incorporate a large number of pathologies that can and should be addressed by Lean.
In addition, my numerous value analyses for manufacturers that depend upon distribution networks often indicate that the key drivers of value are not product drivers, but dealer and network drivers. In other words, distribution systems offer manufacturers a potential differential advantage along the lines achieved by CAT. This is a tough pill to swallow for many manufacturers who are product focused and do not understand their markets.
R. Eric Reidenbach