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Trip Report - Material Handling and Logistics Conference
Supply Chain Graphic of the Week and Supply Chain by the Numbers
Cartoon Caption Contest Continues This Week!
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Expert Contributor: Collaborative Transportation Networks and the Greening of the Supply Chain
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  Newsletter Archives September 23, 2010 - Supply Chain Digest Newsletter

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This Week's Supply Chain News Bites
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Supply Chain Graphic of the Week: Corporate Cash Balances Surge, whlle Capital Investments Fall

This Week’s Supply Chain by the Numbers for September 23, 2010:

Dr. Langley's Streak Ends; Truck Driver Wage Growth Near Bottom; ASN Accuracy Benchmarks; China Orders Inefficient Factory Closed



Sept 15, 2010 Contest


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2010 is Compliance Networks's 10th year of providing leaner, more profitable supply chains for it's customers.

Each Week:

Global Supply Chain
Trends and Issues

Distribution/Material Handling

Weekly On-Target Newsletter
September 23, 2010 Edition

UPS Loves Logistics, China Plays IP Hardball, Acronym Cartoon, and More


by Dawn Salvucci-Favier,

Chief Operating Officer & Executive Vice President

Shippers Commonwealth

Supply Chain Comment: Collaborative Transportation Networks and the Greening of the Supply Chain


HolsteHolste's Blog: As U.S. Manufacturing Product Inventories Continue To Rise, Companies Search For Better Inventory Management Tools

Top Story: Key to Lift Truck Optimization may Lie in Fixing Inventory Accuracy
Top Story: You May Need a New WMS If..
Vendor News: Voxware Inc. Announces 4.0 Of Its Voxware 3 Product Is Now Available


Australia’s Dr. John Gattorna is generally credited with creating what term/acronym relative to outsourced logistics?

Click to find the answer below

Trip Report - Material Handling and Logistics Conference

We are heavy into the Fall 2010 conference season, and I will be on the road for several weeks, trips from which I hope I can share some supply chain insight for SCDigest readers.

I will take the first stab here, having been earlier this week at the annual Material Handling and Logistics conference in Park City, Utah. The event is sponsored by HK Systems, a materials handling company, which has been recently acquired by former competitor Dematic. HK does a nice job both of creating an agenda that addresses a wide range of  supply chain and logistics topics that go far beyond materials handling, and in keeping the event very non-commercial. I hope it continues under the new Dematic regime.

From my view, this year's presentations were especially good, starting with one by Terra Winston of inTerract consulting on a topic that you rarely see at these kinds of events -  how PepsiCo has put together an aggressive program to develop its supply chain talent.


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"PepsiCo is practicing advanced talent management in its supply chain."

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She noted that the recession really had changed how Pepsi and many companies thought and operated, which included leaning out staff that in the end resulted in decision-making being pushed down to lower level managers not used to making those decisions.

An analysis also showed that the company had a lot of "gurus" or technical experts, when they needed more "general managers" capable of broad supply chain thinking. Softer skills in terms of influencing and collaboration were also needed on the team, noting that virtually everything at PepsiCo involved cross functional teams these days. Interestingly, Winston observed that the technical functionaries also tended to be more resistant to change than more broadly skilled supply chain managers.

There were also problems in such areas as succession planning, which wasn't done well, and often resulted in the same talented person being suggested as the successor for a wide variety of positions. The bench for many higher-level positions was thin.

So, the company has been on a journey to change all that. I don't have room this week to detail it all (will soon), but the program includes much more robust talent evaluation and succession planning processes, formal plans for moving managers into new areas where they needed to build skills and experience, and - very interestingly - titles, pay grades and promotions based on experience and competencies that are clearly defined and cataloged for each manager. Also implemented was a new "Supply Chain Associates" program that took similar concepts for new college grad hires. This is very advanced talent management.

Dr. Mahender Singh of MIT gave an interesting presentation on supply chain strategy. The first questions, of course, are what in fact is a supply chain strategy, and does a company really have one? More on that someday soon from SCDigest, but Mahendar used the familiar phrase that "if you don't know where you are going you will surely get there" to remind the audience of the importance of strategy.

A supply chain strategy is a plan of action, and the key is that it must specifically address trade-offs and choices, Mahender says. This is a component usually missing from such plans, he says. Of course everyone wants lowest costs, highest service, maximum responsiveness, etc. - but you simply can't have it all. A strategy should be clear about those trade-offs, and why, Mahender says.

He added that strategy needed to go beyond "best practices," not only because they may not be right for your company, but because they can be "brittle." Mahendar noted, as we have here as well. that Dell's make-to-order model  that seemed invincible for awhile (he noted Michael Dell once said something close to "Selling PCs through retail is archaic.") but now the company is singing a different tune.

Even more interestingly, Mahendar noted your real supply chain strategy is not what you say but what you really do - the often disconnect between what's on paper and what is happening on the ground. He also showed some interesting work where he analyzed what activities a company was really doing in the supply chain, and whether they contributed or not (or were even contrary to) the stated strategies and objectives.

He also noted that companies too often fail to understand that business or market strategies can usually be changed much faster than the physical supply chain - and that companies ignore that reality at their peril . For example, one company whose CEO announced plans for mass outsourcing, without understanding there were $30 million in DC lease commitments.

Changing gears, consultant Jack Kuchta gave an interesting presentation on ways to increase distribution center space - though he acknowledged that most companies would be happy to have that problem in today's low demand environment.

It may sound basic, but Kuchta said it is important to understand whether the increased space needs are moderate (say under 15%) or large (say 25% more space needed), and whether it is temporary or permanent. This gives you four quadrants on a matrix, and there are often different approaches that should be considered depending on what the scenario is. As a simple example, relatively small and temporary space constraints should usually be addressed with little or no capital investment.

He also noted that logistics managers must make it clear there is a direct, inverse correlation between increasing storage in a DC and the level of throughput/productivity. "It's just true," he said.

He made some interesting points, for example the cost of walking/driving past excess and obsolete inventory, and how at some point the costs of old inventory outweigh the value of the goods. At that point, get rid of the inventory any way you can, from tent sales to exporters to donation or scrap if necessary.

Kuchta actually has a book with 153 ideas for saving space (up from 144 ideas a few years ago), and he went through a number of them in his presentation. A couple I liked were rethinking floor storage and the number of keys or rows for each SKU, as Kuchta illustrated how doing that can increase total storage capacity - but in the end often at the cost of some loss in fork truck efficiency.

He also said the goal is to "look for air," which may lead to building storage areas over floor office space, dock doors, etc. Another idea I liked was changing beam lengths from say 96 inches to 108, putting three instead of two pallets in a section. That eliminates enough uprights such that over a 75-foot long run of racking, you get a whole other section of storage. Who knew?

 Dr. Toni Doolen of Oregon State University presented some very interesting insight - and highly practical, versus what too often comes out of academia - on what accounts for success or lack thereof of "Kaizen events" in manufacturing. Kaizen events are a Lean technique that involves short (3-5 days) exercises in which generally a cross functional team tackles and actually implements a solution to some focused problem or goal (such as reducing set-up time by 50%.)  They are designed to involved little or no hard dollar investment ("Creativity before capital.")

While the research, which analyzed  many dozen separate Kaizen events across eight companies,  found about 80% of the events were successful in meeting goals, an important percentage did not achieve their goals in the short term (after the 3-5 day event) and in the long term (initial improvements were lost over time).

Again, there was a lot more than I can do full justice to here, but Doolen found that the level of clear management support and the level of planning for each event by the facilitator were closely associated with initial event success. That may sound obvious, but an insight not so obvious was that as companies have more of these events - and in some case mandate a given number of events per year per work area - managers can become less engaged and leaders have inadequate time to well prepare. More can turn out to be less.

Long term success was in part driven by institutionalizing the processes, such as performance reviews, that should occur after the Kaizen events - steps some companies let slide. Also key was the team in the work area itself feeling like it really owned the results in a "shared sense of responsibility."

There were several other goods sessions - including I hope my own - that we don't have room for here. We will summarize the above sessions and some other ones in our On-Target newsletter over the coming weeks.

I am headed out to CSCMP and San Diego Sunday night - would love to meet SCDigest readers while I am out there. Summaries and highlights coming as always next week for those of you that aren't headed to San Diego.



Any reaction to the conference session ideas presented here? Do you like these types of trip reports? What else would you like to see from them? Let us know your thoughts at the Feedback button below.

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It's been awhile, but we did definitely want to include some of the other letters we received on our First Thoughts piece on The Probability of Supply Chain ROI, which argued for thinking about ROI as a probability range, not a single number estimate.

That includes our Feedback of the Week from Dr. John Hanson of the University of San Diego, who offers some complementary thinking to our ideas. You will also find several other good letters on the topic, mostly in agreement, but one reader who thinks the concept is all wet.


Feedback of the Week - On the Probability of Supply Chain ROI:

There are two issues involved in this that need to be considered.  The first is the hurdle rate.  The “right” but simplistic answer to this is that the cost of money (the hurdle rate) depends on the use of the money not its source. Therefore, each project should have its own hurdle rate, increasing with the risk involved. 

Most executives I have dealt with do this in an arbitrary way, jacking up the hurdle rate in proportion to their level of discomfort with the projections.  Unfortunately there is no definitively correct way to do this, but it is possible to construct market tests in some situations.  For example, the pricing of business application software will reflect what a broad selection of customers accept as an appropriate hurdle rate given the benefits they expect.  The second issue is the distribution of possible outcomes around some expected value.  Two projects with the same expected value can have very different distributions of outcomes, particularly if there are binary (succeed/fail) results involved. 

Here we have to deal with utility – the fact that decision-makers have different tolerances for risk.  The tolerance varies not only between individuals, but also with specifics of the case (size of the investment, possibility of a loss, etc.).  Again, there is no right answer, but I am a great believer in simulation to establish the sort of curves used to illustrate the article.  In the end, all you can really do is show the curves to the decision-makers and ask them if they are buying or not.  At least if they have confidence in the curves they probably won’t be arbitrarily adjusting the hurdle rate!

Thanks for addressing an important issue that many folks just don’t get, although good managers do tend to get it instinctively.


John D. Hanson, Ph.D.

Assistant Professor

Supply Chain Management Institute

School of Business Administration

University of San Diego

More On the Probability of Supply Chain ROI:


Good topic.

Going back fifteen years ago, a multi-national company I worked for used a similar approach.  Essentially, the deterministic IRR calculation was considered the "most likely" number. Then, through evaluation of borderline cases and a consensus-building meeting, we also estimated a "pessimistic" and an "optimistic" IRR. The optimistic, pessimistic and the most likely numbers made up the parameters of a Triangular Distribution which allowed for calculation of the likelihood of each IRR instance.

Any likelihood estimation method, including Monte Carlo simulation, will have to make a probabilistic assumption, and I have seen Triangular Distribution assumption to be flexible, robust and easy to use. Most importantly, the results of the overall approach was considered credible, since (1) management played a part in establishing the "pessimistic" and "optimistic" numbers, and (2) it was possible to calculate the likelihood of each IRR instance within the range.

Keep at it, Dan. 

Omer Bakkalbasi, Ph.D.

Solvoyo Co.


I definitely agree with you that the simplistic “one number” approach for calculating ROI will no longer satisfy the requirements of today’s Capital Review Committee.  I am familiar with Doug’s methodology and it does an excellent job of introducing the concept of probability into the decision making process:  for many large-scale projects, this level of review is fully justified.  Where it is not, one should at least use the simple Expected Value approach, i.e., the value of the event times the probability of its occurrence.

Regardless of how you calculate it, senior management is going to take a very conservative look at whatever you present.   From conversations I have had over the past year or so, I would change the acronym to:

R  for REAL.  Forget anything about “soft” savings!

O  for OBVIOUS.  No fancy footwork or prerequisite requirements – even a board member can understand it.

I  for INSTANTANEOUS.  If it does not payback inside of a year, you are not going to see any funding


Bill Petersen


Monte Carlo simulation is not solving the key problem of estimating ROI for projects with lots of uncertainty, particularly for R&D. The uncertainty of individual components in the R&D projects may change the make up of the critical path and thus fundamentally chance the required skill set and task list.


For example, say I want to solve fusion. The fact that I may use Monte Carlo simulation to estimate the uncertainty of delivery of a supercomputing coil does not materially affect the risk of not knowing what you do not know.


Only for projects that are trivial and have been done a dozen times over would the critical path be known and if you have done it a dozen times you really don't need Monte Carlo to tell you how to get to ROI.


It does create pretty pictures though.

Theodore Omtzigt



Australia’s Dr. John Gattorna is generally credited with creating what term/acronym relative to outsourced logistics?


4PL – meaning a outsourcer whose job is to manage other outsources; often now called a “lead logistics provider.”