Manufacturers meet globalization challenges with new supply chain practices, technology

Several hundred of the world's leading telephone and communications companies—including three-quarters of the top 20 broadband service providers—rely on advanced technology from San Jose, Calif.-based electronics manufacturer Redback Networks to meet subscribers' demand for high-speed Internet connectivity. Until recently, that required holding caches of spare parts inventory at 60 locations around the world.

No more. Working with D.W. Morgan Co., a Pleasanton, Calif.-based supply chain consulting firm, Redback whittled its global stocking locations down to 30 while improving its ability to get parts to customers when they need them. Profits have soared as well, with sales tripling, the dollar amount of inventory held remaining constant, and expenses related to expedited shipments virtually disappearing.

These accomplishments are particularly impressive given the macroeconomic forces confronting all companies that—like Redback—operate global supply chains. Surging fuel costs and capacity constraints on key routes between Europe, North America, and the Far East spell rising freight costs. Even once-moribund interest rates have started creeping upwards, raising the cost of holding inventory to levels not seen for almost a decade. Yet some savvy manufacturers are shrugging off these pressures with assistance from sophisticated supply chain practices bolstered by advanced information technology.

“Over the past two years, there's been an increase in supply chain transportation costs of around 20 percent,” notes Pete Ward, a senior manager in the Dallas-based supply chain practice of Hitachi Consulting. But the good news, he adds, is that even with an increase this steep, it's possible to deploy specific supply chain practices to avoid or ameliorate the pain.

The starting point, says Ward, is to leverage the Internet to solicit bids for transportation resources. Just as e-procurement and reverse auctions have revolutionized purchasing of both direct and indirect goods and services, global transportation routes also can be auctioned. Take, for example, The Netherlands-based clinical nutrition manufacturer Royal Numico, which makes use of an Internet-based contract tendering system from Freight Traders, a subsidiary of confectionery and foodstuff giant Mars, McLean, Va.

Initially, Geoff Norris, Royal Numico's international transport manager, was skeptical about the idea. A tough test was therefore set.

“We decided to try the system out on a route that I had personally controlled for six or seven years—road freight being shipped from the U.K. to The Netherlands,” he says. “I was fairly sure that the rates we were getting couldn't be bettered.”

But bettered they were—by a reduction in price of more than 30 percent. What Norris hadn't been aware of—but the online tendering process revealed—was that a carrier's trunk route went almost past the factory gate.

Combined with other supply chain best practices, the system proves even more powerful. The European arm of Dallas-based paper products maker Kimberly-Clark, for example, manages its entire European shipping operations from a centralized customer service center in Brighton, U.K., where multilingual employees field calls from customers who may not be aware that the person they're talking to is located in another country. Kimberly-Clark customers such as Paris-based retail giant Carrefour, for example, can dial a French telephone number and speak in French to a French national located in Brighton.

And with a centralized view of what needs to be dispatched where, the Freight Traders system can identify the lowest-cost way of getting it there, says Peter Surtees, Kimberly-Clark's European logistics director. First introduced in 2003, the system had until recently driven a reduction in freight costs of some 3 percent to 5 percent a year in real terms on the company's entire European network, he explains.

At the present time, in the booming economies of Eastern Europe, though, those gains are under pressure.

“In freight terms, Eastern Europe is a seller's market right now—it's very tough. We're probably doing no more than beating inflation on our Eastern European routes. There's a shortage of both truck drivers and truck capacity,” rues Surtees.

Yet the downward pressure on freight costs isn't being achieved at the expense of carriers' profit margins. The best price quote, explains Freight Traders' Managing Director Garry Mansell, often emerges in situations where carriers are offering capacity that might otherwise be wasted—trucks returning empty from delivering a consignment, for example. “What we aim to do,” he says, “is put the right freight with the right carrier.”

Yet with companies such as St. Louis-based Emerson Process Management, there also are profitable tunes to play with respect to how that freight reaches its intended carrier. Handing it over at the dock may not be as cost-effective as handing it over part-way along the route. In terms of global logistics, it's a supply chain best practice known as “country skipping,” explains Greg Lloyd, president of trade and transportation management specialist Precision Software—now a division of ERP software supplier QAD since its acquisition in September 2006.

It's an extension of 'zone skipping',” Lloyd explains, a concept familiar to U.S. manufacturers as a way of reducing the cost of coast-to-coast shipments. Rather than being shipped individually via a carrier such as FedEx or UPS, multiple packages are consolidated into container loads or truckloads for the long overland portion of the journey. These packages are split apart upon crossing the border of the country that is their final destination. Individual items are then handed over to FedEx or UPS for the cheaper intra-zone journey to their ultimate destination.

Country skipping allows Emerson to consolidate transatlantic shipments in the U.S., delivering them to Europe as a single consignment. Split apart upon arrival in Europe, the individual packages continue to their destination—a tactic that has yielded a [euro] 7.38-million saving in just over two years, with Precision Software providing both the global trade management and the consolidation/deconsolidation application.

As Hitachi Consulting's Ward observes, though, such techniques are just the beginning. Using technology to drive efficiencies based on improved visibility and formal optimization techniques adds a further significant level of savings—with companies such as i2 Technologies and Oracle, notes Ward, being very much in the forefront of the development and deployment of such optimization tools. “The main contender is Oracle's transportation management solution, which it acquired when it purchased G‑Log in November 2005,” says Ward. “Oracle's leading competitor is probably i2's solution—which has a more complex architecture, but does the job well.”

Both solutions aim to take a comprehensive approach to global logistics and transportation management—planning an optimized solution to a specific transportation requirement, executing that plan, and then carrying out a post-shipment audit to determine if the contracted rates, service levels, and incidental charging structures were in fact adhered to—facilitating the claiming back of any monies owed through deviations.

Manufacturers that entrust their shipments to Miami-based trucking and transportation company Ryder System, for example, benefit from the efforts of almost 100 Ryder employees located in two centers in Farmington Hills, Mich., and Fort Worth, Texas, and who use i2's solution to speed customers' shipments as economically as possible.

“We've been an i2 customer for 10 years,” says Kevin Bott, Ryder senior VP and CIO. “As a shipping requirement becomes known to our system, we use the i2 solution to figure out the best carrier and route for the work, notify the carrier to pick up the load, monitor the execution of the plan, and then report back to the customer as to progress.”

Again, consolidation is used to wring efficiencies from the supply chain.

“We can consolidate by geography, or by customer,” says Bott. “Sometimes you have multiple shipments for the same customer, originating in different places—and also consolidate by time, when a given delivery window is specified.”

The gains are significant: A container rate from Miami to Europe is around one-third the cost of sending the same goods as individual shipments, Bott notes. As with overland freight, “Consolidating different shipments into a truckload is always going to be much cheaper than shipping individually as LTLs [Less than Truck Load], stresses Bott.

In general, adds Fabrizio Brasca, director of transportation and distribution management at i2, companies implementing transportation management solutions like i2's can expect to see year-on-year reductions in their global logistics costs of at least 5 percent to 6 percent.

“That's easy; even 8 percent to 12 percent is possible,” says Brasca. That's subject, though, to some important caveats. High levels of LTLs, for example, and high levels of expedited air shipments tend to boost the scope for savings. Modal constraints also impact the benefit calculation. Heavy users of rail traffic have less wiggle room to play off carriers and juggle rate cards.

“Rail, air, and ocean movements have been a challenge for transportation management solutions,” explains John Murphy, director of product marketing for transportation and logistics applications at Oracle. “Trucks can go anywhere—and stop over when required—and are flexible enough that you can play tunes with them. Rail, air, and sea traffic is scheduled, so the optimization engine has to handle it differently. The rate is secondary to scheduled sailing date and scheduled date of arrival.”

In other words, it departs when it departs, and it arrives when it arrives. Getting the freight to the dockside just after the ship has sailed, however inexpensive the rate, misses the boat—literally. And a longer, cheaper routing that arrives just too late similarly constrains the scope for gains.

The biggest barriers may be inside the manufacturing business, though—rather than in its carriers, or its routes, or its customers' requirements. Just-in-time delivery strategies, for example, also constrain optimization engines.

“When you're not working lean, you can have parts sitting in a warehouse for a week—but with lean, you've driven those buffers out,” says Grant Opperman, president and chief strategy officer at D.W. Morgan. “So with lean, the pricing question becomes not what's the lowest cost, but where is the intersection between lowest cost and the certainty that the chosen carrier absolutely isn't going to shut the line down?”

The organization structure has an impact, too.

“One of the biggest remaining problems in supply chain design is the persistency of organizational silos—separate VPs of functions such as procurement, manufacturing, finished goods distribution, and marketing,” warns Jeff Karrenbauer, president of INSIGHT, a software and consulting firm specializing in strategic supply chain management issues. “Each has their own objectives and are run like miniature profit centers—and so are at odds with each other. As long as that persists, truly effective supply chain design is impossible. The objective is to minimize the total cost, not one aspect of it.”