P&G "Forced" to Shorten Supply Chains, As Are Others

FT.com / Home UK / UK - Oil price forces P&G to rethink its
distribution

OK, I’m catching up on an old post since I saw a very similar story
in the NY Times yesterday. First the FT story:

There’s been a lot of good discussion here about whether companies
are
truly “forced” to raise prices (or “forced” to do anything…
that’s pretty passive-aggressive, if you ask me).

The word “forced” comes up again in a different context - Procter
& Gamble being forced, or choosing, to improve their supply
chains given high global oil prices.

“A lot of our supply chain design work was really developed and
implemented in the 1980s and 1990s, when our capital spending was
fairly high as a cost of capacity and oil was 10 bucks a barrel,” said Mr
Harrison in an interview with the Financial Times.

“I could say that the supply
chain design is now upside down. The environment has
changed,” he said.

“Transportation cost is going to create an even more distributed
sourcing network than we would have had otherwise.”

This year, P&G launched a comprehensive review of the design
of its supply operations, in response both to rising energy costs
and its increasingly global expansion.

Rather than just passing along costs to consumers via price
increases (oops,
they are doing that too), P&G is taking action on the costs
they control.

A “Lean supply chain” looks not just at unit labor costs (or
unit manufacturing costs) but also considers supply chain and
logistics costs. Now, every company considers these costs, many
underestimate the “true” costs of long supply chains. It’s easy to
underestimate the risks of a long supply chain breaking down or
being slow to respond to market changes.

Is your company using Lean to rethink long supply chains, given
how the cost tradeoffs have shifted with higher oil prices? Or are
they looking deeper than that?

The
NY Times chimed in with a similar piece, more generally talking
about how long slow supply chains are bad when energy costs are
high. Funny, some companies thought long, slow supply chains were
bad when oil was cheap — they were called “Lean.” The long, slow
supply chain is even slower now…. thanks to the expense:

Big container ships, the pack mules of the 21st-century
economy, have shaved their top speed by nearly 20 percent to save
on fuel costs, substantially slowing shipping times.

Toyota, the king of Lean, has always put manufacturing as close
to the customers as possible. Sure, it took them a long time to
start building Lexus (Lexii? Lexuses?) in Canada and they’ve been

slow to move Prius production to the U.S., but they clearly
move in that direction. Toyota isn’t try to ship everything from
China.

One exciting startup, for all of its problems, Tesla Motors is
getting this right — if only because of the high oil prices, not
because of any Lean dogma. But really, if you were starting a car
company, wouldn’t you copy Toyota instead of joining the flock
that’s rushed to China and maybe regrets it?

Tesla planned to manufacture 1,000-pound battery packs in
Thailand, ship them to Britain for installation, then bring the
mostly assembled cars back to the United States.

But when it began production this spring, the company decided to
make the batteries and assemble the cars near its home base in
California, cutting more than 5,000 miles from the shipping bill
for each vehicle.

“It was kind of a no-brain decision for us,” said
Darryl Siry, the company’s senior vice president of global
sales, marketing and service. “A major reason was to avoid
the transportation costs, which are terrible.”

Just as a final reminder — I’m not against free trade. I’m
against companies making sub-optimizing decisions based just on
labor costs.

Oh, and I almost forgot… the “just-in-time” boogeyman raised
its head. The NYT and WSJ *love* writing about the “risks” of JIT.
It’s been a while (earlier
blog posts listed here). The NYT says:

In addition, the sharp increase in transportation costs
has implications for the “just-in-time” system
pioneered in Japan and later adopted the world over. It is a highly
profitable business strategy aimed at reducing warehousing and
inventory costs by arranging for raw materials and other supplies
to arrive only when needed, and not before.

What? A true “just-in-time” strategy works with LOCAL suppliers.
Why does Toyota put their suppliers right along side (or inside)
their factories? Because SHORT supply chains = just-in-time. If you
try to do “JIT” with long China supply chains, of course you’re
asking for trouble. Even a Yalie can figure that
out. Oh wait….

Jeffrey E. Garten, the author of “World View:
Global Strategies for the New Economy” and a former dean of
the Yale School of Management, said that companies
“cannot take a risk that the
just-in-time system won’t function, because the whole
global trading system is based on that notion.” As a result,
he said, “they are going to
have to have redundancies in the supply chain, like more
warehousing and multiple sources of supply and even
production.”

How about shorter supply chains instead of redundancies and more
inventory? Look to Toyota or “the neighborhood effect” (new
buzzword alert!) I like it better when we called it “just-in-time”
– from Toyota’s definition, not Dean Garten’s.

Final, final thought: I have nothing against Yalies. It’s just a
funny line from a Simpsons episode.