21st century logistics
Forecasting remains relevant in the ongoing document management revolution
By Nancy Bartels, senior editor -- Manufacturing Business Technology, 3/1/2006 12:00:00 AM
With supply chains extending due to globalization, Razat Gaurav, VP of global transportation and distribution for supply chain management solutions vendor i2 Technologies, sees businesses facing two main challenges: managing costs, and securing reliable service.
"Total cost of logistics as a percent of cost of goods sold is going up because of longer distances involved, higher fuel prices, and capacity issues," says Gaurav. "Companies have to manage these costs while still trying to reduce total landed costs. Global sourcing also means more variability in lead times. The scope and opportunity for things to go wrong is high. Reducing variability and getting more reliable service is essential."
Left to its own devices, a supply chain can be brittle, uncertain in its performance, and costly. Enterprise business applications support supply chain management by automating transactions and delivering transparency, thereby lowering costs and increasing flexibility.
Building flexibility into the supply chain is essential, says Beth Enslow, VP at Boston-based AberdeenGroup. Without the transparency to see bottlenecks and work around them, companies are dependent on the "place and pray" strategy—dumping product into the supply chain and hoping for the best, she says.
What customers want, says Matthew Menner, senior VP for supply chain optimization vendor Optiant, "is to look at the entire supply chain and consider alternative strategies. They're building more responsive and resilient structures, taking into consideration not just internal issues, such as production, but also geopolitical issues such as petroleum costs. They're asking, 'How can I plan for my current situation as well as for situations I might only be able to estimate at this point?'" In addition to these general principles and goals, recent discussions with users and providers of supply chain solutions—as well as with market followers—touch upon these areas:
-
Using inventory forecast accuracy to balance for longer lead times;
-
Coordinating the physical and financial supply chains; and
-
Achieving effective, secure movement across borders through trade document management.
The Timken story
Bill Kelleher, director of manufacturing strategy and Lean Six Sigma with Canton, Ohio-based Timken, a power-transmission components manufacturer, knows the challenges firsthand.
"Globalization has changed our business dramatically," says Kelleher. "For 90 years, we made our own steel, all the bearings, did all our own heat treating and grinding, and then packed product in a box and shipped it. Now we have a global supply base. We have 56 manufacturing plants overseas, but still have a significant manufacturing presence here. We have a very complex supply chain, with a lot of components coming together. We time delivery of those components so we can maintain our service-level agreements without generating inventory."
To cope, says Kelleher, Timken is moving from 26 order-entry systems worldwide to a single SAP platform. It's also using supply chain optimization software from SAP partner LogicToolsfor flexibility and transparency.
Using LogicTools, Timken looks at its total cost of outsourcing—including logistics and transportation costs—to determine whether it's cheaper to make products in the U.S. or China.
Timken also uses LogicTools to optimize its inventory and service levels.
"LogicTools helped us answer questions like, where do we put inventory in the supply chain? How do we deal with different modes of transportation? How do we get stuff to where we need it?" explains Kelleher.
Outside help
"Globalization means logistics and transportation planning is just too much for most companies to handle in-house," says Tom Sanderson, president of logistics and transportation services provider Transplace. "It's natural to look for third-party logistics providers [3PLs]."
Even so, he says, outsourcing logistics planning doesn't alleviate the need for supply chain management systems. "These issues are too complicated to deal with on a spreadsheet," he says. "You also need partners who understand the costs. If a manager imports to the west coast and is wondering about alternative routes—say the Gulf of Mexico, or the east coast—how else does he get the information about these alternatives?"
Manufacturers send products to Fidelitone—a Wauconda, Ill.-based supply chain services provider—for labeling, kitting, and delivery to customers. "We've been importing from the Far East since the late 1970s," says President Josh Johnson. "Technology has become so vital now. You can talk about just-in-time inventory all you want, but forecasting today is more crucial. We spend a lot of time predicting inventory requirements."
For example, Fidelitone gave a specialized forecasting tool to its customer, Wauconda-based Aero Products International, whose manufacturing capacity is in China, to define Areo's inventory needs based on customer-service levels.
i2's Gaurav sees a hybrid logistics outsourcing pattern developing.
"3PLs have an important role in international logistics, but companies want to take more control of their planning," he says. "They want to let the 3PLs execute against their plans and then rely on their specialized local knowledge. If you're highly reliant on international sources of supply, you also need some internal level of competence. Otherwise, you're completely reliant on third parties."
Facing financials chain
Managing the physical global supply chain is only half the battle, claims Duncan Jackson, a VP with TradeBeam, which specializes in order, logistics, and settlement activities. Financial supply chains—i.e., letters of credit, invoices, insurance, and other financial instruments—matter too.
In thinking about overseas production, companies need to stop focusing on total landed costs and start thinking about total landed profit, he says. "Labor is just one piece of the story. The logistics, financing, working capital, and tax implications are huge. Working capital is the issue."
Says Aberdeen's Enslow, "Today the financial processes and their affiliated data are disconnected from the physical supply chain. As a result, many companies don't take into account the cost of their capital. They should be asking how they can better manage the flow of money across the supply chain."
In global trade, everything takes longer and involves more people. Every error or discrepancy in paperwork slows down the system and adds cost. Financial and physical supply chains also operate on different timetables, adding complexity. "Going from domestic to international transactions has so many points of friction," Jackson says.
Badly managed, those friction points mean "more than 50 percent of companies that outsource are not seeing results hit the bottom line," adds Jackson.
Better results can be retrieved by coordinating physical and financial supply chains, and "double-dipping," says Enslow. With a single version of the truth from order placement through payment process, "everyone gets the same information at the same time," she says.
According to a World Bank study, global trade volume of merchandise is approximately $8 trillion a year. Of that, 7 percent—more than $500 billion—goes to administrative costs. Automated processes will cut some of that 7 percent.
"You can save one working day of capital by automating collaboration on purchase orders, two or three more on letters of credit, and another two to three days on customs filings," says Jackson.
For example, New York-based Liz Claiborne uses TradeBeam's Import Management solution to monitor movements of goods from overseas factories and notify the U.S. Customs Service prior to goods' arrival at the borders.
As a result, the company improved operational efficiency and got better visibility into import operations. It also avoided regulatory noncompliance, maintained its "low-risk" rating with U.S. Customs, reduced duties paid, and cut cycle times by a week.
Jackson also recommends using supply chain optimization to leverage free-trade agreements.
"The tax structures associated with free-trade agreements can be up to 30 percent of the cost of the goods," he says. "We worked with an automotive OEM that reengineered its entire supply chain to send goods through certain countries to take advantage of tax breaks."
Transplace's Sanderson speculates the cost and complexity of maintaining global supply chains will take some of the bloom off globalization. "Labor is cheap overseas. Other things cost more. If manufacturing becomes more capital- than labor-intensive, some of it may come back here," he says.
i2's Gaurav suggests we may see more "near-shoring" in the future. "Think of Mexico as opposed to China," he says. "For fast-moving items, this is a model companies are looking at."
Enslow agrees that low-cost country outsourcing is not a panacea. "The winners will be both more selective in how they apply outsourcing, and will better manage the logistics aspects of global trade than their competitors."
