This Week on SCDigest:
Supply Chain Beach
Supply Chain Graphic of the Week and Supply Chain by the Numbers
New Cartoon Caption Contest Begins August 3rd!
SCDigest On-Target e-Magazine
This Week on "Distribution Digest"
Trivia  Feedback

Become a Sponsor
SCDigest Home Page  
  Newsletter Archives August 6 , 2010 - Supply Chain Digest Newsletter

Featured Sponsor: JDA Software

The Value of Linking S&OP to CPFR: A Cross-Functional Industry Panel Webinar

Register Now!



Fulfilling the Promise of Multi-Channel Commerce

Multi Channel Operations (MCO) + Multi Channel Integration (MCI) Enables Seamless Multi Channel Commerce Experience

Featuring Guneet Paintal, Principal, SCM Practice at Infosys Technologies Ltd.

Register Now!



Achieving Real-Time Inventory Visibility + Optimizing Lift Truck Performance in the DC

Explores New RFID And Real-Time Inventory Positioning Technology For Plant Warehouses And Distribution Centers

Featuring Toby Rush, President,

Rush Tracking Systems

Register Now!


Making Retail Smarter Videocast Series

Part IV: Building Consumer Goods and Retail Supply Chains that are Lean, Green, Efficient, and Sustainable



This Week's Supply Chain News Bites
  - Only from SCDigest


Supply Chain Graphic of the Week:Investing in Machines, not Workers


This Week’s Supply Chain by the Numbers for August 6, 2010

  • China Workers Living Dangerously

  • Big Carbon Taxes Coming?

  • Boeing Supplier gets Caught Cheating

  • US Ports Really Busy in July

New Contest Begins This Week!


See Full Sized Cartoon and Send In Your Entry Today!


NEW! JDA Webinar Registration

Each Week:

Global Supply Chain
Trends and Issues

Distribution/Material Handling

Weekly On-Target Newsletter
August 5, 2010 Edition

Intellectual Property Rights in China Remain Key Issue; Motorola Sues Electronics Giant Huawei, Claiming Multi-Year Effort to Steal Trade Secrets


HolsteHolste's Blog: Improve Throughput of MHA Systems Up To 35% with Cost-Effective Software Changes

Top Story: As Labor Management Software Starts to Move On-Demand, Already Strong Value Proposition Can Become Even Stronger
Top Story: Thinking Sortation for Distribution? What it will the Costs Be?
Vendor News: New Scanning System Provides Visual Confirmation with the "Green Spot"

Visit Distribution Digest



What important supply chain event happened on April 26, 1956, in the port in Newark, NJ?

Click to find the answer below

Supply Chain Beach

As we enter the last real month of summer, some overall supply chain observations – admittedly coming in part from a beach somewhere on the east coast. My family thinks I am crazed.


I continue to be intrigued by the subject of supply chain flexibility. Hope you had a chance to see the full comments of my expert panel on the subject (see Our Guru Panel Weighs in on How to Define and Measure Supply Chain Flexibility) – collectively, they offer some excellent insight and perspective. Really worth the read.

Gilmore Says:

"Could it possibly be that WalMart's RFID strategy and the merchandising strategy are joined at the hip?"

What do you say?

Send us
your Feedback here

Yet, I don’t think our profession has anything close to a real definition of supply chain flexibility or how to measure it. Dr. Hau Lee of Stanford is certainly right when he says a key component in the definition and measure of flexibility must be time – “Flexibility one month out, versus flexibility three months out, are very different things,” he notes. But just how to use that truism isn’t clear.

Dr. David Simchi-Levi of MIT, in addition to having a very precise definition of manufacturing flexibility focused around how many different product lines each factory can make, also wisely notes that there are at least three areas that impact flexibility: 

  • System design, including the supply chain network
  • Process design
  • Product design, including modularity and postponement potential

The fact that Dr. Simchi-Levi’s three dimensions seem quite right shows the challenge of defining and measuring supply chain flexibility, as it encompasses at least these three and perhaps other components.


But if supply chain and business leaders want to achieve greater supply chain flexibility, I think we need something that gets us closer than where we seem to be now in terms of definition and measurement. As I a few weeks ago, we will do some work on this…


It is clear that executives value flexibility. A recent IBM study of global CEOs includes a whole section on “Building Operational Dexterity,” synonymous with flexibility or agility.


The study says that CEOs are looking to simplify processes as a key weapon to increase flexibility, primarily by reducing the time it takes their organizations to respond. However, the CEOs also recognize that a certain amount of complexity, especially in terms of supply chain interactivity, is a necessity. They hope to keep that complexity, however, “behind the curtain,” in terms of what a customer sees or experiences.


Interestingly, the CEOs most focused on operational dexterity were also those that were most focused on moving to even more variable cost structures, as shown in the figure below. (I must confess to being unclear about the CEOs who said they were pursuing both more fixed cost models and more variable costs models – maybe the strategies vary by business units).


View Larger Image


Source: IBM CEO Study 2010



In general, achieving more variable cost structures implies today higher levels of outsourcing. Let the contract manufacturers and 3PLs invest in the assets, and strike deals that allow the company to flex volumes up and down with relatively little cost penalty. A great deal if you can get it.


Of course, corporate desire for more “variable costs” always comes after a recession, especially a deep one as we’ve suffered through, when almost every company wished it had lower fixed costs in the face of sharp decreases in demand and revenue. The accounting text books will show you, however, that in good times more profit is usually made from a higher percentage of fixed over variable cost, for the simple reason that “fixed costs” are just that, staying the same as revenues rise.


But the trend towards more outsourcing seems inevitable, meaning some things supply chains are doing in-house today will done by someone else tomorrow – but adding complexity and value to those who remain coordinating those ever more virtual supply chains. That’s the good news.


And at the risk of being redundant, if CEOs want more operational dexterity, as the IBM study tells us, given the truism that “what gets measured gets managed,” don’t we need a better way to track whether we are actually getting more flexible or not? Or is it just “gut feel”…


At times, when I talk to some companies or see presentations at various conferences, I despair that we are getting so good in our supply chains that there just won’t be much left to write about or discuss in the future. What some companies are doing out there today is simply impressive; just consider how amazingly far we have come in the past decade in terms of the practice and precision of supply chain management.


As just one example, I saw a presentation from a supply chain executive at Sara Lee this spring that detailed how they were using a comprehensive, integrated approach to operational metrics to drive performance that was stunning in its approach – and that left me wondering how a company could ever go off the rails with a feedback and control system such as that.


If we make the same level of progress in the next 10 years as we have in the past decade, we will have reached an incredible state of supply chain greatness.


And then… some recent supply chain challenges in the high tech industry give me hope I will still have something to say and add down the road.


I don’t know if you’ve noticed, but a global shortage of many basic electronics components has lead to a mini-crisis, with wireless network companies such as Ericsson, Nokia, Alcatel-Lucent and others reporting pretty significant hits to revenue in Q2 because they simply couldn’t deliver the goods to customers.


It’s pretty simple what happened – when the recession started in 2008, many Asian suppliers went out of business or greatly cut back capacity (stopped buying new equipment, etc.). Now the economy, especially in tech, bounces back, and suddenly there simply is not enough supply to go around.


Ironically, network giant Cisco, which almost a decade ago got caught with some $2 billion in excess inventory when it failed to react fast enough to the last recession, this time around is battling delivery and lead time issues from the component shortage that has its channel partners hopping mad. One large public reseller earlier in the year blamed its own revenue shortfall on Cisco’s inability to deliver.


Apparently, many could see the supply problems developing more than a year ago. Was it simply impossible for the OEMs to do anything about it? Or could better supply management , planning and response have avoided the problems for some of these high tech giants?


I am not sure, but what I do think is going to happen is that continued supply chain improvements are going to also mean leaner and leaner operations – making risk management a critical discipline and meaning we will see more and more supply chain disruptions for those who don’t get it right.


So I think we can still have lots to talk about for a few more years…


Amid the big news of WalMart restarting its RFID program, focusing on apparel and specifically men’s jeans and “basics” with an approach that seems quite sensible this time around (Will WalMart get RFID Right this Time?), I also caught this bit of news.


WalMart just ousted the head of its US apparel business, among other recent changes related to disappointing results in apparel.


The Wall Street Journal reported last week that WalMart “last month said that it was going to focus more on basics like underwear, socks, T-shirts and jeans.”


Could it possibly be that the RFID strategy and the merchandising strategy are joined at the hip, with the goal of turbo charging profits in jeans and basics in part by making sure inventories are just right?


We really are making supply chain progress.



Any reaction to Gilmore’s supply chain thoughts from the beach? Let us know your thoughts at the Feedback button below.


Send an Email

Web Page/Printable Version of Column


Do you use an RSS reader? Do you have a MyYahoo! or personalized Google page?

For these and more you can have SCDigest delivered right to your personal pages, all week long.

You can subscribe to our RSS feeds in two ways:

  1. Copy our RSS link into your RSS reader - it's easy!

  2. Click on a button below to quickly add it to your favorite readers.

We received a good number of emails, a few of them private responses from consumer goods manufacturers asking to remain anonymous, on our First Thoughts piece on retail "chargebacks," and asking whether, even as controversial as the practice is, whether manufacturers might consider going the chargeback route too in some cicumstances. (See Thinking about Supply Chain Chargebacks.)

That includes our Feedback of the Week from Mark Wilder of the T. Marzetti Company, who says he sees some real problems with retail chargeback program today.

You will find he good letter and several others below.

Feedback of the Week: On to Chargeback or Not?

As a transportation manager within the food industry, I see the chargebacks for late delivery being levied by both our Retail and Foodservice customers. Mr. Gilmore has a pretty good grasp on the subject. My answer to his question would be that other industries should not adopt the chargeback practices of retailers, at least as they currently are being done.  

Some of the inequities I see are:

  • The chargebacks are frequently out of proportion to any efficiencies that may be caused. For example, one customer has a penalty of $1000 per day for late delivery, even on LTL quantity orders where the transit time can routinely vary, and even if they are notified in advance. Within the food industry, this sort of penalty can easily exceed the profit margin or even the total invoice value on small orders.
  • The chargebacks are incurred for reasons outside the manufacturer's control. Many of these penalties apply in the case of weather delays, unavailability of receiving appointments, or even when the purchase order is submitted to us with inadequate lead time! In many cases I have seen chargebacks incorrectly applied due to errors in the customer's system, such as misidentified arrival dates or purchase order numbers.
  • The chargebacks are a one-way street. I have never heard of the shippers being compensated when the receiver causes inefficiency. What happens when the trucks are delayed at the receiving dock because three guys called in sick, no lumpers are available, or the WMS crashed? Does the customer pick up the detention charges, or the late delivery penalties that may be incurred for other orders on the same truck?

In my opinion, this practice amounts to establishing just another profit center for the retailers. Eventually these charges must be rolled back into a manufacturer's pricing, and added to the consumer's cost.      

Mark Wilder
Distribution Manager
T. Marzetti Company

More on Chargeback or Not?


Obviously manufacturers and retailers are different animals.  If Boeing can’t get fasteners, customers may not get 787’s and lots of employees (and other suppliers) will have nothing to do.  If WalMart can’t get Campbell’s Pork and Beans customer will probably just buy Van Camp’s instead.  Yes there is lost efficiency, but it is not as big a deal as undeliverable 787s.

That being said, everyone want to receive the perfect order – on time, right quantity, damage free, right documentation - it doesn’t matter where in the chain you sit.  But beating the supplier into submission through chargebacks does not work any better than it does with your children.  Instead, consider the win-win strategy outlined by Vested Outsourcing where suppliers and their customers understand and work toward a common set of desirable outcomes.  Both profit when planes are flying through the air and beans are flying off of the shelf.

Steve Murray

Principal Consultant and Chief Researcher

Supply Chain Visions


Chargebacks should only be used with great consideration, mainly, did a late delivery not due to weather, accident or natural causes, etc., result in the retailer losing sales that exceeded what they normally would of sold?

I think too many are playing the chargeback game as profit center, which most of our fathers or grandfathers would consider un ethical.  


Paul Soper

Refrigerated Delivery Service



I do think that non-retailers should consider use of chargebacks, and that it would help improve supply chain efficiency.

However, this would be such a culture change that it would take years to enact. The change management issues internally and with suppliers would be huge, and it would impact product pricing and many other factors.

The only way I believe it could happen in practice is if one large player in a given industry sector was the pioneer and made it work, leading others to follow.

Alec Dimengo

Newport Beach, CA



What important supply chain event happened on April 26, 1956, in the port in Newark, NJ?


The first standard ocean shipping container capable of also being transported by truck was loaded on a boat bound for Houston by its inventor, Malcom McLean's SeaLand company.