Supply Chain Digest recently asked a number of leading supply chain and logistics thought leaders to share their perspectives on the important issues and trends that will impact supply chain opportunities and decision-making in 2008. SCDigest editor Dan Gilmore summarizes key points in his First Thoughts column (see Supply Chain Impact 2008). Below, we offer our experts full comments.
Tompkins and Associates
I am offering one thought on six supply chain topics for 2008:
Global Supply Chain: Total Delivered Cost - Organizations continue to rely upon Total Landed Cost and this results in not effectively looking at which ports should be used as well as the reconfiguration of their domestic distribution network.
Global Supply Chain: East or West? - Manufacturing in Asia is going south and west in China and to Cambodia, Vietnam and further west. More flows from Asia to the United States are from East to West (through the Suez Canal). This, plus the all water route (through the Panama Canal) are resulting in increases in port traffic on the eastern seaboard and reduced traffic on the western seaboard of the United States.
Global Supply Chain: Strategy - The "World is flat" has become a supply chain reality and topics like:
* Global Supply Chain Operations Strategy, Planning and Organization
* Global Supply Chain Process Improvement, and
* Global Trade and Risk Management
are huge and often times not fully understood. This, when combined with the issue of Total Delivered Cost and East or West, really sets the table for some huge supply chain transformations.
Logistics: Inventory - There continues to be corporate objectives set on increasing inventory turns, but organizations continue to not implement the systems and practices to bring about increased inventory turns, so either the objectives are not achieved or customer service suffers. Very disappointing.
Logistics: Crossdocking and Flow Through - Organizations are grasping the potential for increased utilization of crossdocking and flow through distribution. The next trend will be the enhanced visibility and automation to even further enhance this trend.
Logistics: Network Reconfiguration - As a result of all of the above, it has become clear to many organizations that a major shift in their domestic logistics network is required. The global marketplace, the consolidation of slow moving inventory and desire to increase crossdocking and flow through is resulting in closing several distribution centers and opening others. Organizations not responding to these market trends and reconfiguring their logistics network are encountering significantly higher logistics costs than the organizations that are stepping up to reality.
Here is what I expect for 2008:
Companies are re-examining their international strategic supply chain design decisions with a special emphasis on outsourcing options. This was once seen as an obvious decision (and still is by too many firms and Wall Street analysts), based myopically on comparative labor rates. However, such questions are increasingly being subjected to much more sophisticated analyses that include procurement, manufacturing, transportation, warehousing, cross-dock, in-transit, cycle, and safety stock inventory, port handling, duty, and tax costs, together with an assessment of quality, intellectual property theft, and disruption risks. In short, the “obvious” outsourcing choice of, for example, the Pacific Basin, is often simply wrong.
I know of multiple companies who are rethinking their earlier strategic sourcing decisions, typically motivated by unanticipated supply chain costs that exceeded the labor cost benefit. The issue of outsourcing will, of course, be exacerbated by pronouncements from various presidential campaigns. Unfortunately, rather than a rational discussion of the issue, we can anticipate simplistic appeals to public misperceptions of the job consequences of outsourcing.
The looming recession will result in even more pressure from the senior executive suite to reduce supply chain costs. Unfortunately, far too much effort is still expended on budget reductions within traditional silos. There is no longer any excuse for such myopia but it is still rampant. A far better approach is cross-functional, because the truly relevant bottom line is across operations of the entire firm, not within function. However, the best option, and the one most in line with senior management financial metrics, is rarely attempted: substitute a focus on maximum profitability instead of minimum cost and simultaneously evaluate the impact of supply chain and marketing decisions in the analysis. In this manner the dialogue is now raised to the level of a genuine corporate strategy. This will generate the best road map for navigating any economic environment, especially a downturn.
I think 2008 financial markets are reflecting what DCRA’s supply chain indicators have been alarmingly indicating for a couple of years. We in the US don’t create enough value, and most firms' quick grabs at outsourcing in other parts of the world have proven that, yes, there are big opportunities for short-term profits, but not for long-term sustainable supply chain/business model profits unless you address the outsourced supply chain’s real needs. Boeing’s capitulation that they have problems with their extended outsource supply chain that drives 787 time to market and profitability program could be a crescendo statement of, and realization for, the average business executive that there might be a better way to manage – I hope.
The answer to these challenges for industry and the typical CIO buyers, unfortunately, are not available from 90% of the supply chain software or self proclaimed supply chain experts - but instead requires a quite fresh approach focused on value, cash flow, and light, non-intrusive, web-service, value-add software components that work with existing solutions/technologies. My prediction is, in 2008, it will be born out that firms that look for real solutions to these needs, using the first principles of business value (not tradition or functional supply chain thinking) of these needs will see real business benefits… others will waste their time and money, or worse, will lose market share to those who do manage this “better."
With that intro, would like to offer two lists:
First, some activities I think that are likely to happen:
- Light, not-intrusive, Google-like supply chain applications will grow in influence.
- Successful supply chain technologies will continue to offer more and more solutions/results versus pure technology.
- RFID will continue its implosion from cure to all-things-supply-chain back to a point solution for tracking assets in a closed loop system.
- Drop in dollar versus foreign currency will spur US manufacturers to get credit for how big the manufacturing sector REALLY is in the US. A decline in the false dialog that the future is in service industries and the realization that the future is in “value add manufacturing” of many types.
A better list of things/activities that should happen… will happen with time, but hard to predict exact timing:
- Supply chain applications will be more loosely coupled, human friendly (e.g., Blackberry-like vs. always online) self synchronizing.
- Buyers will demand quantifiable IRR/ROA in weeks from investments and not fall prey to “trust me” technology investments.
- S&OP demand and supply netting solutions that use technology to compress the time it takes to apply science and real analytics will continue to grow. Many of these solutions will be quite inexpensive. You will not get these from major software vendors as it's not in their interest to cannibalize heavy, complicated applications so you, the customer, will have to ask and be discerning.
- Business will begin to understand how to link supply chain efficiency to price. If you buy with a lead, time-based, build-to-order discounts will be available. Increasingly, premiums will be placed on “in stock” merchandise.
- Postponed manufacturing state-side of imported key components will increasingly be seen as a major solution to supply chain and business challenges, as well, some government leaders will get behind as it promotes jobs, IP protection, lower costs for consumers, and more choice. Good enough for Toyota, Mercedes, Hyundai, etc., might eventually be good enough for US manufacturers.
Director, Logistics Executive Council
ARC Advisory Group
Here are my three “big” thoughts/predictions for 2008:
- Continued activity (and hype) around “green” supply chains. From a supply chain perspective, most companies are focusing on the low-hanging fruit: optimizing their transportation operations, LEED certified buildings, minimizing/eliminating packaging, and considering carbon-footprint in network design (Llamasoft, Ilog, Infor, CarbonView, Maersk Logistics, and IBM all have solutions in this area). However, a lot more work is required on the standards front, which is starting to occur (see http://www.arcweb.com/txtlstvw.aspx?LstID=0829cf1a-5f98-40a0-add3-0d57a3f7f928). Also, in my opinion, large-scale progress in this area won’t occur in the US and elsewhere without government intervention (e.g., regulations, tax/financial incentives, etc).
- The business models of software vendors, logistics service providers, and consultants will continue to converge. Simply stated, software vendors will add managed services to their offerings (e.g., i2, LeanLogistics), 3PLs will offer technology-only solutions (e.g., Transplace), and consultants will leverage technology to provide managed services too (e.g., Chainalytics with their benchmarking service).
- On-Demand (aka Software as a Service or SaaS) deployment will continue to gain traction in TMS. Last year we conducted a survey of 28 leading TMS vendors and 60 percent of them expect subscription and transaction fees (a proxy for SaaS deployment) to grow significantly faster than license fees over the next five years. Not all vendors have a SaaS offering today, but they're all heading in that direction, including the large enterprise vendors.
Director, Demand Management
MIT Center for Transportation & Logistics
With oil and logistics costs over the past few years, we'll see more effort in trying to keep these costs down. Many companies will 'slow down' their supply chains by using less expensive and slower transport modes. This will of course mean that inventories will increase - especially in-transit and at just-in-time sites.
We may also see some reversal of the outsouring trend as a backlash to some of the product quality problems from China. But also because many companies are trying to find ways to become more flexible in order to react to more volatile demand. They'll need a manufacturing organization that is willing to expand or contract capacity quickly. Having to negotiate this every time with a contract manufacturer limits quick reaction and some companies may take manufacturing in-house, especially for highly-volatile demand items.
Professor of Supply Chain Management
Georgia Institute of Technology
Here are five trends I believe are worth watching for 2008:
1. Globalization – Continued efforts by manufacturers/retailers to effectively manage global sourcing and global distribution. Continually-changing dynamics of international trade and international trade regulations and policies contribute to making this area a challenge to corporations to manage effectively.
2. Integrated Logistics – Practitioners and academics are still searching for the “holy grail” in terms of supply chain integration, but daily, pragmatic issues continue to stand in the way of needed progress. Example issues include: functional silos within organizations; inability of supply chain organizations to put the betterment of the supply chain ahead of major objectives such as short-term profitability; continually-changing, unpredictable, and frequently irrational demands of customers throughout the supply chain.
3. “Green” Logistics – Is in the process of coming onto corporate radar screens, but companies need to see a cause and effect on profitability before they commit much more than superficial efforts toward green logistics. Everyone knows how important this is, but market analysts and investors likely won’t add much about green logistics into the “plus” column until it starts to impact overall profitability.
4. Information Technology – Everyone also knows how important effective IT is to corporate and logistics/supply chain success, but cost-overruns and ineffectiveness of some IT investments make this a challenge area to manage effectively. Software providers are challenged to develop new technologies that customers will be willing to pay for, and large, integrated ERP providers having difficulty developing and packaging functional software attractively for customers to invest.
5. Security – Of great, global significance, but public policy is being driven by those who are ignorant of and uncaring about supply chain realities. Too much “well-intended” effort by otherwise uniformed people may severely impair efficiency and effectiveness of freight movements.
While I agree with the objectives of Green Logistics and Security, they do not provide obvious benefits to the bottom line (although properly managed, I believe they can and should). For that reason, I would think that Globalization, Integrated Logistics and IT would/should get more of the investment dollar. While I surely believe it is essential for all companies to be a “good global citizen,” I would think it is also necessary to be a “good global, profitable citizen.” (Not too much that bankrupt companies can do to help with the bigger picture.)
Here are a few of my predictions for 2008:
- The rate reduction party of 2007 will end in and around Q2. Shippers have been enjoying very large rate reductions from bids in 2007 and late 2006. That will end as carriers pull back capacity and hit the wall on margin reduction potential.
- Carrier bankruptcies will increase in 2008, with at least one 1,000 plus unit TL carrier going under or selling out and several mergers and/or failures in the LTL market.
- Fuel may or may not increase much in 2008 but it will be a huge issue for shippers this year. Yr/Yr fuel surcharge numbers will look bad to C-level executives and with limited rate reductions to hide the impact, transportation executives will be under pressure to get this number down.
- Freight volumes will continue to fall in the first half of the year, but will stabilize in the second half.
- There will be a big emphasis on switching to Intermodal from over the road TL pushed by lower fuel surcharges for IM and better service consistency as RR volume stabilizes.
- The biggest challenge for shippers will be working with carriers to maintain service levels as carriers exit unprofitable markets and lanes.
- The biggest challenge carriers will face is staying afloat as lower volumes and reduced margins will crunch their cash.
The Wharton School
University of Pennsylvania
I think within store execution will emerge as an important area. A few years ago there was much talk about the challenge of the last mile in e-commerce, i.e., getting product to the customer’s house. I see an analogy now in bricks and mortar retailing, in that supply processes to the back door of the store have received much attention, but things break down for many retailers within the store.
Many retailers report numerous execution short falls, including stock outs on the shelf due to inadequate stocking from the backroom, inventory record errors, and incorrect signage and pricing, all of which hurt the quality of a customer’s experience, and therefore sales. Also, most retailers view in store labor as a cost to be minimized, rather than an asset to be leveraged. As a result, many stores have a minimum number of store associates earning minimum wage, and this is having a huge negative impact on the top line. Circuit City is a highly publicized example of a retailer that cut store staff and then saw sales plummet.
Research Vice President
At the macro level during 2008, supply chain management organizations will be forced to divert their attention away from strategic initiatives like innovation, instead they will have to focus more time and effort on tactical and operational issues driven by economic and competitive pressures.
In a recent SCM user study, we found that across industries and type of organization, tactical issues like reducing costs and improving customer service dominated the top three priorities of participants, with more strategic issues like addressing innovation and improving agility at the bottom of the list. Even supply chain globalization trailed as a focal point for SCM investment. Some of the drivers and trends we have observed in our interactions with our clients are:
- Escalating energy costs, especially fuel, have become SCM budget busters and SCM organizations will continue to struggle to bring overall SCM costs back in-line.
- Supply chain globalization is about to enter a new phase, driven by the recognition by many organizations that their initial off shoring decisions were made with a myopic focus on product cost and not a thorough evaluation of total delivered cost.
- While global off-shoring will continue to grow at a rapid pace, though likely closer to home markets, the technologies to support global trade management will grow much slower. We find that many organizations have or plan to out-source their global trade functions to third parties because they lack the internal expertise or staff to manage global trade in-house. We find a growing shortage in skilled global trade resources, which will constrain internal adoption of GTM technologies and will favor service providers with a broad portfolio of trade services.
- Most organizations have used brute force and basic SCM technologies to remove the low hanging fruit from supply chain costs. The next level of cost reduction is going to be more difficult and require more organizational sophistication and creativity to identify different ways to streamline processes and remove costs.
- Greening the supply chain will impact all SCM organizations driven by government, employee, customer, supplier and shareholder pressures.
- Supply chain execution (SCE) convergence, the merging and synchronization of transportation and warehousing processes and activities, is finally starting to materialize in the technologies that support SCE thought solutions and are nascent at best.
- While SCM trails other areas of businesses, we see a widening gap between the older technology resistant workers and younger technology savvy “digital natives” that have grown up personally exploiting technologies as part of their day-to-day existence. The “consumerization” of technology will play a growing roll in SCM systems over the next several years and organizations resistant to allowing workers access to technology will struggle to hire and keep workers, even in SCM.