Roundabouts over red lights: Logistics innovations keep inventory on the move
George Post, global marketing director, UPS Supply Chain Solutions -- Manufacturing Business Technology, 1/16/2009 11:08:00 AM
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For decades in Europe, traffic flow has been mitigated by the use of the roundabout, a small traffic circle that allows continuous movement of vehicles through an intersection at lowered speeds without any full stops. Unlike traditional intersections with stoplights, vehicles in roundabouts slow to yield to other vehicles in the circle and then merge into the flow. This continuous movement saves time, fuel, and money.
Businesses should apply this logistics innovation to their operations and keep their products moving through the supply chain, without the added cost and time of “stopping” surplus inventory in warehouses and distribution centers.
With the world now a global marketplace, businesses are using suppliers farther from home. In fact, world merchandise trade has more than doubled since 1990(1), which has resulted in supply chains stretching farther across borders and creating new challenges to the global market.
Deadlines to market are tighter and energy costs are rising, which forces transportation costs higher. And while profitability is taking a hit, many businesses have found cost savings by reducing their inventory footprint.
Modern supply chain management has reduced the need for companies to store as much inventory. With the help of a third-party logistics (3PL) provider, companies can better synchronize their production and distribution with customer demand. Using a direct-to-store business model allows the inventory to remain in motion—across borders and around the world.
With parts suppliers based around the world and inventory footprints costlier each year, the automotive industry can benefit greatly from a direct-to-store model. Shrinking the order-to-cash cycle is more lucrative when products are of high value such as automotive parts and components. The higher the value of the goods, the more important fulfillment speed becomes. Also, direct-to-store can provide invaluable time savings when items are out of stock and must be replenished directly from the factory.
However, reducing warehoused inventory does hold some risks. Lack of standing inventory should a customer run out of product and insufficient inventory should a customer want to exchange an incorrect order are just two such risks. Fortunately, direct-to-store can be tailored to a company’s needs with only a certain percentage of products going direct-to-store if need be.
The rewards for a continuously moving inventory far outweigh the risks. Companies that reduce their standing inventory lower their need for capital investments, as the need for new warehouses and expansions shrinks. This model also improves network efficiency, giving a company the ability to respond to seasonal peaks without overbuilding distribution capacity that could become idle during the off-season. And, direct-to-store networks enjoy reduced warehousing and carrying costs, which can be nearly four percent of sales according to Denali Consulting.
For the legendary motorcycle manufacturer Harley-Davidson, the model has worked very well. The motorcycle giant had a complex supply chain with 16 Midwestern suppliers sending separate shipments to its factories in Wisconsin, Missouri, and Pennsylvania. The staff at Harley-Davidson’s Wisconsin distribution center was responsible for receiving and packing deliveries for parts and accessories; the staff then shipped those parts and accessories to hundreds of dealerships across the U.S.
The sheer volume of shipments was increasing the company’s freight expenses, driving Harley-Davidson to evaluate its supply chain efficiency. Since then Harley-Davidson has streamlined its supply chain to send all shipments weighing less than 1,000 pounds directly to the dealerships without ever stopping in Wisconsin. As a result, the manufacturer reduced its transportation costs and increased deliveries of parts and accessories to dealerships.
Harley-Davidson also consolidated its orders to reduce the number of deliveries from multiple times a day to only three times a week. This move had the added benefit of giving the distribution center access to larger stocks of parts, and allowed the company to put more focus on its operations while spending less time worrying about the supply network.
In addition to reducing the number of shipments, this model reduces shipment “touches,” resulting in lowered administrative and handling costs. The reduction eases the strain on a company’s budget to allow for the use of faster transportation options such as air delivery. Faster fulfillment speeds up time-in-transit by as much as two weeks by eliminating distribution center deliveries and the subsequent receiving and sorting processes that follow. Most notably, faster delivery means faster payment by the customer, which is always a good thing.
A competent third-party logistics provider can develop a model to bypass warehouses and distribution centers and keep shipments moving directly from the factories to the customers with no “red lights” in between. Consider the benefits of managing with one provider. With the right coordination and planning, multiple international orders can be combined into one shipment to speed your products through customs, with your logistics provider handling all of the brokerage and documentation and deconsolidation of the shipments at their destination port. A logistics provider should also provide end-to-end tracking visibility for the customer throughout the entire supply chain.
Although there will always be the need for some amount of inventory in the near future, eliminating as many “red lights” as possible in your supply network will yield a more efficient and faster operation that will become a competitive advantage in your industry.
1“WTO Sees Strong Growth,” CNN.com, April 5, 2004, quoting WTO; “World Trade is the driving force behind growth,” International Chamber of Commerce; “Developing countries’ good for trade share surges to 50-year peak,” WTO April 1, 2005, Press Release.
About the author: George Post is the Supply Chain Solutions Global Marketing Director for UPS. He oversees key UPS services that assist automotive and manufacturing sectors move freight and packages across borders.
