Thomas CraigExpert Author Published: 2006-01-27
Supply chain management has grown in company importance and value contribution from its roots as "shipping and receiving".
This is true for large corporations and for small-medium enterprises (SMEs). External events, such as deregulation and international sourcing, have driven the evolution. Questions revolve around the future of supply chain management. Tactical and strategic needs need to be addressed.
Assessment of internal (within the company) and external (outside the company) gaps in supply chain management can provide indications of what must be done. Some of these are:
Ongoing emphasis to compress time and increase inventory velocity. Time to bring new products to market, time to bring in hot selling products to stores and customers-these and other needs to move products more quickly to increase revenue and profits will continue as a pressure point of supply chain management and company demands. Longer time and slower inventory velocity create a great and hidden profit impact to P&Ls with diminished merchandising and sales impact and revenues and with capital tied up for extended time and generating lower returns. All this could reduce profits by 20% to 40%. Lean supply chain management for international, global supply chains will be mandated.
Increased supplier performance. Key to time compression and faster inventory velocity and turns, key to lean global logistics will be improved supplier performance. Experience shows that suppliers fail to meet ship dates or delivery dates over 25% of the time. This is especially so for international sourcing. Better reliability will also require vendors to change over production, make smaller runs and deliver product faster. And they will have to improve quality at the same time. The challenge will be ongoing with changes in where suppliers operate their factories.
Outsourcing transformation. Outsourcing will change. Much outsourcing has occurred to fix the symptoms of problems; it has not attacked the real, underlying problems. Transactions and functional supply chain elements have been transferred to outside parties, often 3PLs.
Supply chain management is a horizontal process that crosses the company and spans countries in scope. Time, distance and the nuances of operating in a vertical organization are challenges. Therefore identifying needs and problems requires that the process itself must be addressed and how outsourcing improves the overall process.
Outsourcing will focus on business process outsourcing (BPO). Supply chain outsourcing will be divided along the lines of key needs. For example, it will be separate for domestic supply chain management and international supply chain management. Or it will divided as to inventory velocity or inventory value with different supply chain processes for fast, medium and slow moving products or for high, medium or low value products. Supply chain BPO will be an active part as firms move to compress time and increase inventory velocity.
The outsourcing transformation will lead to competitive advantages and to increased company and shareholder value. Designing a dynamic and flexible supply chain process will not be a function of 3PLs utilized or a "one stop shopping" approach for 3PLs. It will require a blend of company and multiple 3PL participation. Key to the change will be the development a breed of logistics service provider that will manage the supply chain process, not just manage transactions, such as shipments, or manage one logistics element such as warehousing or ocean shipping.
Focused supply chain role for technology. Supply chain planning and supply chain execution are important areas for operating effective lean supply chains. They are required for strong supply chain performance. They will be process enablers, not silver bullets to fixed poor and flawed processes. Such focused technology applications will facilitate reducing time, improving supplier performance, collaborating among key trading partners and gaining visibility throughout the entire supply chain from purchase order to delivery order. The technology will be scaleable, easily configurable, be hosted by outside service and will be paid for as on a "per transaction" or similar approach. This will reduce the risk and large capital requirements that have accompanied such technology.
Penetration of NVOs as 3PLs into Small-Medium Enterprises. For SMEs that source internationally, the NVO has often been the transport service provider. Large ocean carriers have not aggressively pursed the small-medium shipper. The Federal Maritime Commission has given NVOs the ability to negotiate and establish service contract like agreements with customers. NVO Service Agreements (NSAs) will be used by NVOs to become 3PLs to the SME. This is a growth opportunity for the NVO to move from the traditional freight commodity service into customized, integrated logistics provider. NVOs, as 3PLs, can be the vehicle for SMEs to improve the inbound supply chain and manage supplier performance.
Impediments to supply chain evolution. Shippers want to be lean with compressed supply chain time and with fewer inventories, but there are obstacles to be dealt with. Transport and logistics infrastructure investment are needed both internationally and domestically. China has needs beyond the immediate port areas. The U.S. has needs with bridges, highways and rail equipment. Add the shortage of domestic truck drivers and you have issues that can delay the prompt movement of products at many points in the supply chain. Ocean carriers need to evaluate their ideas of ship sizes and sailing schedules with their customers needs for faster delivery. Increased security throughout the international supply chain will create situations that slow cargo movement; these will need additional technology at ports and other areas. Key to resolution of these hurdles will involve determining who all will pay for the needed investments and changes and how it will be paid.
Conclusion. Supply chain management will continue to evolve. Emphasis will be on being lean with compressed time and increased inventory velocity. Outsourcing, supplier management and technology will be steps in the changes. The question is how the changes will proceed.
Thomas Craig
Expert Author
Published: 2006-01-20
Supply chain management was designed to take waste out of supply chains-waste as to excess inventory, time and cost.
Supply chains are meant to pull, not push, inventory through the supply chain. This is exactly what lean logistics is also about-removing waste and variation from supply chains; it is what Kanban, Pull, is about with Lean Logistics.
Wholesalers, manufacturers, retailers, distributors, suppliers, 3PLs and every party involved in the supply chain feel the pressure to reduce and balance cost, time and inventory-to be lean. This is true with domestic supply chains; but it is especially true with global supply chains.
Articles titled "Japanese Automakers Taking Market Share from Big Three" or similar titles are misleading. The article would lead the average reader to think that the "Japanese" as a culture somehow have a secret that is allowing them to take over the automobile industry.
However, many in the automotive industry are aware of two critical points. The first is that it is not the "Japanese" who are building the cars that are winning the car wars, as these cars are being built by North Americans in Canada and the United States. The second key point is that it is not the "Japanese" that are reducing manufacturing costs and increasing quality, but rather it is the "Lean Manufacturers". With all of this in mind then, the newspaper article should headline "Lean Manufacturers Taking Automobile Market Share over Mass Producers". This headline would be more appropriate and more accurate.
Lean Logistics has many challenges. Global Lean Logistics especially has the challenge of the additional time required for shipments to move door-to-door over the long distance. In addition, there are many parties involved with each shipment. Some reports say that up to seventeen parties can be involved with one shipment-suppliers, truckers, freight forwarders, terminals, customs brokers, railroads, ocean/air carriers and more. Bringing lean across such an extended, multi-transactional supply chain is daunting. Often the parties are working together and at odds with each purchase order/shipping transaction.
As the competitive environment changes the way companies do business, companies are embracing Lean and Six Sigma initiatives to support cost reductions and quality improvements. Although Lean and Six Sigma programs were initially separate initiatives in most organizations, today's firms see that Lean and Six Sigma do not compete with each other, but rather the two complement each other and provide for dovetailing of continuous improvement activities.
But what does this have to do with Logistics? The quick answer is "everything ". Once we are grounded in Lean and Six Sigma principles, the logistician will realize that Logistics, Lean and Six Sigma form a natural union. This union leverages the strengths and weaknesses of each discipline to create a cultural and operational model that will aid the logistician to solve age-old issues, while improving operations at all levels.
To truly understand Lean Six Sigma Logistics, the best place to start is to know about the Logistics, Lean and Six Sigma.
What is Logistics?
There are as many definitions of "Logistics" as there are logisticians. This is not a bad thing! Logistics is so far reaching, so integrated into businesses that it is hard for one definition to ever meet the challenge of summing up what we do in a few short sentences.
Although logistics does span the entire scope of any business, it is fair to say that any definition of logistics will need to involve the management of inventory. Whether inventory is in the form of hard goods (materials-people) or soft goods (information), logisticians manage it.
What is Lean?
Lean Logistics concepts are deeply rooted inside the lean manufacturing of Toyota Production System. Jim Womack summarizes the key principles of the Toyota Production System as Lean Manufacturing in his book "Lean Thinking". Lean Manufacturing has now been abbreviated to simply being called ‘Lean". Lean and Six Sigma joined forces in Michael George's book "Lean Six Sigma".
In its purest form, Lean is about the elimination of waste and the increase of speed and flow. Although this may be over-simplification, the ultimate objective of Lean is to eliminate waste from all processes. At the top of the list of known wastes, according to Lean theory is the elimination of inventory. More simply, any inventory should be eliminated that is not required to support operations and the immediate need of the customer.
Lean and the Logistician
The impact of Lean on the logistician is significant, as the goal of Lean is eliminate waste (inventory) which will decrease work in process inventories which in turn will decrease process and cycle times and ultimately increase supply chain velocity and flow.
Lean also has a vital cultural element to it that is crucial to the logistician. This is the concept of "Total Cost ". The Lean practitioner does not focus on individual cost factors such as transportation or warehousing, but rather focuses on "total cost of ownership". With inventory carrying costs representing 15-40% of total logistics costs for many industries, making decisions based on total cost has dramatic implications for the logistician. Unfortunately though, many organizations never fully embrace total cost concepts, as poor decisions are continually made based on traditionally visible cost drivers like transportation, warehousing and ill-fated sourcing practices.
What is Six Sigma?
Six Sigma is a management methodology that attempts to understand and eliminate the negative effects of variation in our processes. Based on an infrastructure of trained professionals (Black Belts), Six Sigma delivers a problem-solving model armed with voice of the customer utilities and statistical process control tools. The DMAIC (Define-Measure-Analyze-Improve-Control) process is a map, or step-by-step approach, to understand and improve upon organizational challenges to reduce variation in processes and attempt to achieve "Six Sigma Quality.
At the heart of Six Sigma is the principle of variation reduction. Essentially, the theory is if we can understand and reduce variation in our processes, then we can implement improvement initiatives that will centre the process and ensure accuracy and reliability of the process around customer expectations. For example, if the purchase order-delivery cycle required for your supplier in China is sixty days, and you are averaging sixty days, then you may think all is fine. However, your average of sixty days may reflect the fact that some orders arrive in forty-five days and others are delivered in seventy-five days. It is this variation that results in expedited transportation, out of stocks and all the evils of non-confidence result, the worst of which is inventory build up.
Six Sigma and the Logistician
The concept of variation reduction is paramount to the logistician. As stated above, logistics is about managing inventory. And managing inventory is about managing variation, a driver in both the amount of inventory carried and in stock-out potential. Given the basic types of inventory, variation plays such a vital role in how inventories are managed at all levels.
For example, safety and buffer stock are inventories needed to hedge against unknowns. These unknowns really represent variation. Safety stocks are maintained because of variation with supplier quality, transportation reliability, internal operations process capability and customer demand patterns. If variation from supplier to customer can be understood and controlled, then firms will be able to dramatically reduce reliance on safety and buffer stocks. Implicit in this is the seeming addiction that business seems to have to inventory.
What is Lean Six Sigma Logistics?
Now that the three elements of Lean Six Sigma Logistics have been presented, they need to put them together to fully appreciate how they dovetail and complement each other. Remember:
1. Logistics is about managing inventory
2. Lean is about speed, flow and the elimination of waste ( inventory)
3. Six Sigma is about understanding and reducing variation.
Therefore, Lean Six Sigma Logistics can be defined as: The elimination of unnecessary inventories through disciplined efforts to understand and reduce variation, while increasing speed and flow in the supply chain.
Put this into the global supply chain and the impact can be significant to retailers, wholesalers, distributors, manufacturers and suppliers. Logistics service providers need to understand this too and their impact on reducing waste and controlling variance.
Getting Started
Both Lean and Six Sigma bring disciplines and tools to Logistics. Using these disciplines and tools will allow an organization to uncover and deal with waste (inventory) and gross inefficiencies. Although the tools are very powerful from both Lean and Six Sigma, companies should remember that for Lean and Six Sigma to work in logistics, a fundamental mind shift must occur. This mind shift requires that firms begin making decisions based on the concept of "Total Logistics Costs" and second, they must have the courage to eliminate inventories that are unnecessary. This may sound simple, but reality will prove otherwise. Organizational norms and financial accounting traditions will fight against "Total Cost" and the addiction to inventory will make it difficult to reduce inventory levels.
All in the international supply chain must practice Lean Logistics in order to obtain dramatic, significant improvements. Waste must be identified and removed. Variation must be identified and removed.
Procurement uses strategic sourcing and aggressive cost control to help drive innovation.
By Susan Avery
Purchasing January 12, 2006
Purchasing professionals searching for a good example of early supplier involvement in design need look no further than Eclipse Aviation, a start-up company in Albuquerque, N.M., that designs, certifies and builds very light jet aircraft. With the help of its purchasing staff, Eclipse, which plans to deliver its first jets to customers in April, has been collaborating with key suppliers almost from day one.
A very light jet has maximum take-off weight of 10,000 lb and is able to operate on runways as short as 3,000 ft. Vern Raburn, a former Microsoft executive, created the concept and founded the company in 1998.
Raburn expects Eclipse to revolutionize the small aircraft market with jets that make it possible for passengers to move directly between cities quickly, conveniently and affordably. He says that without compromising safety or performance, the company's flagship product, the Eclipse 500, has a low price tag (less than $1.4 million) and operating cost (less than $300 per hour). The company already has orders for more than 2,360 jets and plans to build 1,000 planes per year, which translates to $1 billion in annual sales. It will start production to fill these orders once it has final approval from the Federal Aviation Administration, expected sometime later this quarter.
Strong supply chain management and a world-class supply base play a big role in making all this happen.
Enter Bill Bonder. Raburn named Bonder vice president of supply chain management in August 2004. Bonder has more than 17 years of supply chain management experience—including serving as executive director of global sourcing at Gerber Scientific and senior global strategic commodity manager at Dell Computer.
As Bonder set it up, the supply chain management organization at Eclipse is clearly focused on both strategic and tactical activities, and supports production ramp-up and customer delivery. One procurement group concentrates its efforts on supplier selection, contract negotiation and supplier relationship management, while another operations group handles production planning and control and inventory management.
Start-up
Besides purchasing components of the highest quality and ensuring that there's ample supply to meet customers' growing demand, the supply chain management team is aggressively managing costs to maintain the company's value proposition of lowest acquisition and operating costs in the industry. It has a formal program that identifies cost reduction opportunities that it plans to expand to support value engineering opportunities. Perhaps most important, supply chain management at Eclipse is focused on managing the company's capital assets. "We are going to have a very high inventory turn rate," Bonder says. "So we look to suppliers for predictability in on-time delivery and velocity to tightly manage inventory and make sure product is moving."
Much of the supply base was already in place when Bonder joined Eclipse. A cross functional team of people with years of experience in the aviation industry and close relationships with key suppliers made the initial selections. For suppliers chosen more recently, the supply chain managers use a strategic sourcing process that also calls for a cross functional team to evaluate and identify potential sources. The team, which consists of individuals from engineering, supply chain, quality and program management groups within Eclipse use rigorous criteria that ensure suppliers are a good fit with the company's corporate objectives. The criteria include financial viability, required quality certifications and systems and proven business practices that are results oriented.
With his high-tech background, Bonder makes comparisons of the production of very light jet aircraft at Eclipse to that of a personal computer, clarifying that the company is an integrator, not a manufacturer. Eclipse purchases most of the components that go into assembling, testing and shipping its product. "Every major piece of the plane is tied to a key relationship," he says.
The company's biggest buys are engines, which come fully assembled from the supplier (Pratt & Whitney Canada) and are outfitted by Eclipse, and the planes' wings, which are built and outfitted by Fuji Heavy Industries. Other large components of the annual spend include systems and avionics.
Suppliers have been involved in product development from the beginning, with some closely collaborating with Eclipse on design of the jet resulting in a better designed airplane in terms of quality, cost and time-to-market. Bonder refers to these suppliers as key partners and points to Pratt as an example. "Design of both the plane and the engine are extremely tightly managed by both Pratt and Eclipse," he says.
Production ramp
Bonder and his team expect to face their biggest challenge in the months ahead. "It's going to be dramatically different," he says. "We are going from establishing an entirely new supply base and not producing any planes to producing two a day, then four, quickly and we will sustain that year over year which is unheard of in the aviation industry." His concerns are making sure that suppliers are doing the right activities not only to support initial production but also that they are making the right investments internally to sustain a very steep ramp moving forward over the next few years.
Bonder believes that Eclipse has developed "a very solid" cross-functional supply chain team that extends past the four walls of the company's facility in Albuquerque to its supplier base. "We are starting to develop some best practices internally to get ready for production that will provide us with a competitive advantage, in terms of having an effective supply chain that delivers results," he says. One is developed partnerships with key suppliers such as Pratt and Fuji that they can leverage for years to come. "They are going to help us be successful," he says. Pratt & Whitney Canada, for one, is making necessary changes in its production process to reduce the time it takes to build its engines destined for Eclipse from 48 hours to eight hours.
Another best practice is streamlining the extended supply chain. Among issues Bonder and his team are studying are the company's needs at the factory in Albuquerque, its needs regarding components in transit and the inventory suppliers have at their sites whether located in North America or Asia. Taking it a step further, Bonder and his team look to Eclipse's subtier suppliers to determine what they are doing, in turn, to manage their own suppliers.
Although Eclipse has not yet delivered a plane to its first customer, the company has implemented Lean manufacturing processes throughout its operation. "It's the only way to get to the volume that we plan to deliver," says Bonder. The first few jets are going to take the company 30-60 days to build. In time, it will only take about five days
"Eclipse has considered everything from the way the plane is designed to its assembly with an eye toward high-volume production," he says. "Even going forward, we are looking at ways to constantly improve the layout of the factory, future designs and changes that will help us build reliable products as efficiently as possible."
Purchasing learned at press time that Eclipse is pushing back FAA certification date due to production-process problems with one supplier. See www.purchasing.com for more details.
Milestones
Here are a few key milestones at Eclipse Aviation:
1998
Company founded
1999
Initial $60 million private funding
Aircraft development program started
2000
Established corporate office in Albuquerque
Preliminary design completed
FAA type certification application filed
2001
Completed facility expansion and remodel
SAP software selected
Suppliers selected
First metal cut for Eclipse 500
2002
First Eclipse flight
Pilot training program established
After-sale support plans formulated
Order book exceeds 2,000 aircraft
2003
Pratt & Whitney Canada selected as new engine supplier
Fuji Heavy Industries selected as wing supplier
2004
Continued certification testing of components and systems
Initiated construction of seven additional test aircraft
Supply chain management structure in place
2005
Five FAA conforming aircraft in flight testing
How procurement Drives design at ECLIPSE
Two purchasing teams. One covers supplier selection, contract management and supplier management. The other handles production planning and control, and inventory management.
Supplier involvement beginning with conceptual design.
Aggressive cost and capital-asset management.
Best-practice sharing with suppliers at all levels
Application of Lean principles to supply chain and manufacturing
Relationships take on new meaning for the Commercial Airplanes group, says Steve Schaffer, vice president of Global Partners for Boeing Commercial Airplanes.
Susan Avery
Purchasing January 12, 2006
The word "partners" gets tossed around a lot in purchasing circles, and has more meaning for some than for others. For Boeing Commercial Airplanes (BCA), the word partners, or, in this case, "global partners," describes so accurately the company's new working relationships with its suppliers that the company made it the name of its supply management and procurement organization. Steve Schaffer, the company's vice president of Global Partners, tells why:
"The renaming of our supplier organization to Global Partners does a far better job at showing the world that Boeing considers its suppliers an extension of its internal processes," he says. "We wanted something more inclusive."
BCA recently brought together such internal organizations as fabrication, propulsion, global partners, the airplane programs and final assembly under Carolyn Corvi, vice president and general manager of Airplane Production. Schaffer, who assumed his current role in 2004, reports to Corvi and is responsible for managing the company's global partners—suppliers of such direct materials as structures, systems, propulsion, interiors, raw materials and the like. Global Partners supports BCA's 737, 747, 767 and 777 programs, as well as the new 787 Dreamliner and recently announced Boeing 747-8.
Management made these changes—integrating the supply chain—to help reduce complexity in the company's production processes, says Schaffer. "Think of pull production," he says. "We've assembled all the necessary components of the value chain so we can pass information and parts in the most efficient manner." Everyone is aligned and focused on building a Lean and efficient Boeing production system, he says.
Lean initiatives focus on shortening leadtime, reducing assets and improving flexibility and customer responsiveness by eliminating waste. Boeing embarked on Lean in the mid-1990s.
Schaffer points to production of the 737 as an example of one way the integrated organization and supplier partnering have rid the process of waste: Employees assemble the airplane on a moving line that has reduced manufacturing time by 50%. The line signals suppliers when employees are ready for parts, which in many cases arrive at the plant in subassemblies or kits.
To get to this point, Schaffer and his team have worked with BCA's global partners and made some significant changes in flow time, reducing waste and stabilizing production processes.
In its latest financial report, Boeing reported that BCA generated $16.7 billion in revenue for the first nine months of 2005, up 7% from the same period one year ago. During that period, BCA received orders for 641 airplanes, bringing its backlog to $98 billion. Looking ahead to 2006, the company's forecast continues bright due in part to contribution of its value chain.
"Our goal in Global Partners is to take 'real costs' out of the value chain and take the savings to the market in the form of more competitive airplane pricing," says Schaffer.
The equation One way they're doing this is by putting more responsibility into the hands of suppliers, who are no strangers to Lean manufacturing techniques—they've learned right along with Boeing.
In a Lean and efficient production system (with a moving line), suppliers are delivering higher level subassemblies and systems solutions to the plant floor. That means that BCA is using fewer suppliers. Schaffer and his team have worked to trim back BCA's supplier base from 3,800 key suppliers to 1,200 today.
Boeing began reshaping the value chain by aligning with its key suppliers, says Schaffer. "Today the alignment continues deeper into the value chain as these key suppliers work with their own subtier suppliers, who previously may have had a direct relationship with us," he says. "This is eliminating transaction costs, promoting efficiency through the value chain and helping all our suppliers expand their work base to become more competitive."
BCA has long-term strategic relationships with a core supplier base made up of companies that provide it with structures, systems, propulsion, interiors and raw materials. These global partners, Schaffer says, are a competitive strength and reinforce the company's value equation. That is, they exceed rigorous performance requirements, including: demonstrated performance on first-time quality, timely delivery and competitive prices—what Schaffer's organization refers to as Quality, Cost and Delivery (QCD)—around the world technical capability and capacity, access to capital, and enabling technology and strategic positioning. If there's a problem, the partners work through it together rather than Boeing having to deal with each supplier individually. "We help each other through the tough times and are always there to meet the next challenge," he says. "Through supplier councils, we actually become accountable to each other, with success as a team the ultimate goal."
Schaffer and his team are more than satisfied with performance of BCA's partners, which they measure using a balanced scorecard process. "We measure ourselves by meeting our business plan that supports our stakeholders—our customers, suppliers, investors and Boeing employees," he says. "Our performance shows that deliveries and revenues are increasing as the market recovers. And, we continue to increase our margins, which is a sign of productivity throughout the whole value chain. Of course, healthy margins earn you the right to invest in new products and remain competitive in the marketplace."
Now, suppliers are involved earlier than ever before in the Boeing Production System—and have taken on more risk in doing so. Case in point is the 787 program. Rather than provide suppliers with detailed specifications for the 787 that never took into account the capabilities of BCA's global partners, Schaffer and his team asked them for solutions.
Looking ahead, he sees subtier suppliers becoming even more aligned with specific Boeing programs.
How They Buy:
Measure supplier performance with a scorecard
Cut supplier base from 3,800 key suppliers to 1,200
Form long-term strategic relationships with key suppliers
Establish supplier councils to make suppliers accountable to each other
Why They Outsource
Steve Schaffer, vice president of Global Partners at Boeing Commercial Airplanes, shares a few thoughts on outsourcing:
"Some critics say we chase labor rates around the world and that we will place work at any price to make a sale," he says. "But the industry has evolved over the years to become competitive worldwide. Most countries are aggressively investing in new technology and building a very capable industrial base from which to compete."
Market access is a business reality in competing in a global market where Boeing's sales are 70% overseas. "So, any time we can match this capability and access airplane sales in a particular region, that translates to a win/win for our customers, supplier partners and employees," he says.
"Every day our success is decided by the governments and airline customers that select Boeing. We are not the decision makers, our customers ultimately are."
Purchasing January 12, 2006
Managing supply risk in a lean manufacturing environment requires a corporate obligation to remove waste and expand quality in the supply chain, says Ken Marcia, director of supplier development at United Technologies Corp. in Hartford, Conn. "The only way to sustain continuous improvement in a three-tier supply base is to use available technology to manage purchasing and materials management data and identify risks to non-quality," he told the recent CPO’s Summit in Boston, sponsored by Aberdeen Group and Purchasing. "Otherwise there’s no way to avoid these supply risks."
Marcia notes that "spend analysis, for example, always provides compelling data for change." That’s why design for manufacturability, lean manufacturing, quality-driven supply chain development, strategic sourcing, low-cost sourcing and supplier talent development "all are interrelated and require management commitment throughout the corporation," Marcia adds. He said when inventory turns go up, waste can be dramatically reduced, but that doesn’t happen unless engineering, manufacturing, procurement and the suppliers are committed to cooperation. In today’s world, he says, energy price increases, inflation and supplier bankruptcies all can derail a company’s performance. So, Marcia suggests that enhanced supplier-selection programs, 100% monitoring of supplier performance and supplier self-help programs are the way of the future for quality supply base activities that overcome risks.
----------------------------------------------------
"The only way to sustain continuous improvement in a three-tier supply base is to use available technology to
manage purchasing and materials management data and identify risks to non-quality."
—Ken Marcia, director of supplier development, United Technologies Corp
Magazine Article, Source : The Manufacturer US
Zone : Logistics and supply chain
Published : 05 Jan 2006 16:21
Third-party logistics providers offer a valuable service for manufacturers and distributors, making for more efficient processes as supply chains go global—and get more and more complex.
Matt Bolch reports
T hanks to the Internet, global communication and improved transportation infrastructure, it’s easier than ever to forge international business ties.
But just as the objects you see in the side-view mirror in your vehicle may appear closer than they really are, inking an international deal for raw materials, or finding a global customer for your finished goods, is only a first step in a journey toward fulfilling those obligations.
With the continued push toward efficient manufacturing processes such as lean and six sigma, it’s not enough to know that critical parts are on the way or have been shipped. You need to know where they are in the supply chain, whether they’ve cleared customs, whether they’re sitting in a warehouse or if they’re on the last leg in a journey to your loading dock or your customer.
Keeping up with inbound and outbound shipments on a global basis is not a core competency for manufacturers, which has led to the rise of third-party logistics (3PL) providers. Total annual revenues of US-based 3PL providers in 2004 was about $85 billion. Fourth-party logistics (4PL) providers, a relatively new innovation, manage supply chains from various suppliers while acting as the intermediary between the manufacturer and its suppliers. Both types of providers can help manufacturers negotiate the maze of shipping goods around the corner or around the world.
While software improvements have made keeping up with shipments easier than ever, outsourced logistics suppliers are facing a perfect storm of conditions that threaten their ability to keep up with demand, says Brooks Bentz, a partner at Accenture and a senior executive in the supply chain management practice. Accenture can help manufacturers find logistics partners or manage those relationships, he notes.
Shipping volume into the US has increased, hampering the ability to unload goods on the West Coast in a timely fashion, Bentz says. Higher fuel prices, railroad capacity concerns, and a shortage of truckers also contribute to tight capacity.
“I don’t see it getting better in the short term,” says John Vande Vate, executive director of the Executive Masters in International Logistics program at the Georgia Institute of Technology. Global sourcing and the push toward Lean manufacturing are divergent trends that must be aligned for shipping pressures to ease.
Some companies, most notably Wal-Mart, are offloading goods from ships too large to fit through the Panama Canal and ferrying them overland by rail before loading other ships that transport goods to Gulf of Mexico or East Coast ports, Vande Vate says. Larger boats are not the answer, especially for smaller-volume shippers. “When one of those big boats hits the port of Long Beach, it takes a while to unload, and that’s not good for the little guy,” Vande Vate says. “It may help [larger shippers] on price, but it’ll hit the little guy.”
The consolidation of 3PL providers also threatens smaller manufacturers, according to a survey of 40 of the largest global providers conducted by Accenture and Northeastern University. Considerable consolidation has taken place in the industry, and these mega companies are focusing on the largest customers, leaving many small and mid-size customers to fend for themselves. However, the survey indicates that niche 3PL providers will spring up to fill this void.
Survey participants say that rising costs and downward pricing pressure are continuing challenges, and while radio-frequency ident-ification looked like the next innovation, they don’t feel it will gain traction in their space.
Concerns about infrastructure and pricing aside, customers just want to know one thing: where’s my stuff? The question of visibility looms large for everyone in the supply chain, and it’s an area where technology is being deployed with great success to help customers answer that burning question.
Exostar works with 3PL providers to help customers keep up with shipping and transportation information in one place. “There’s a problem with the portal approach,” says Bill Angeloni, president and CEO of Herndon, VA-based Exostar. “A company with 20 suppliers, each with a portal, has to go to 20 places to find their goods. One-to-one interaction is incredibly inefficient. We think the market will move toward a hub-and-spoke concept” like the Exostar solution, Angeloni says.
Since companies in the supply chain have varying degrees of sophistication, a single platform provides one common standard that everyone can adhere to. “Of our 22,000 customers, many of them are small,” Angeloni says. “Connectivity has been a problem, but there are so many opportunities to become connected, to receive information and push that back into the system to communicate.” An integrated database allows the creation of custom reports and exception dashboards to manage information flow as well as overcome those certain glitches before they become major disruptions. Exostar derives four-fifths of its business from the aerospace and defense industries, so data security remains a key component of the company’s solution.
SAP’s 10th Annual Third-Party Logistics Study 2005 shows improvements in overall service levels but echoes the Accenture study in listing pricing as the most important attribute in selecting a 3PL provider. In the 2004 survey, value-added services were ranked first, according to the survey compiled through a collaboration between SAP and Georgia Tech, Capgemini, and DHL.
“The industry is driven by change,” notes Till Dengel, SAP solutions manager for logistics service providers. “It’s very competitive, and [providers] constantly have to come up with new service offerings and deal with new regulations in a global environment.” And that’s why SAP released its Global Trade Services offering in 2002, which is being used by more than 200 customers in 17 countries, says Matthias Weber, solutions marketing manager for the GTS product. Manufacturers face numerous challenges, including buying and selling products globally, dealing with ever-tight import and export requirements, working with government authorities that have modernized their IT systems and operating in an increasingly complex global environment. “GTS enables manufacturers to manage imports and exports on one platform in one place,” Weber says of the product. “It mitigates the risk of international shipping.”
But any solution is only as good as the weakest link in the supply chain, says Jeremy Sacker, vice president and general manager for North America at Eqos, a software company that pioneered Web technologies for business-to-business supplier management. The company has dual head-quarters in Burlington, MA, and London.
Before joining Eqos, Sacker worked for Best Buy on supply chain issues, and he says that gains suppliers and their customers have achieved over the past two decades are being erased by new suppliers with “prehistoric” communication capabilities and the increased volume of off-shore goods flowing through strained US port facilities. “We’re having to solve the same problems all over again, and I fear the problem is going to get worse before it gets better,” Sacker says. “But having said that, the adoption of technology will increase in developing countries and help improve efficiencies in manufacturing and supply chain.”
Eqos designed a collaborative interface used by trading partners in the supply chain that helps coordinate the flow of information and provides that all-important visibility. It also can allow partners to make sure international labor standards are met and create close ties among users through the interchange of historical data and other communications that can allow customization of services. While EDI remains a popular way to transmit data, electronic data interchange is not common in developing countries, Sacker says, and newer collaborative technologies will receive a greater share of attention in the future.
Regardless of what technology is deployed, that spirit of collaboration lies at the heart of any successful 3PL implementation, says Helmut Porkert, president of Strategic Procurement Solutions, based in Hilton Head, SC. “A manufacturer needs to select a supplier based on their knowledge, not the bid price,” says Porkert, who retired from ChevronTexaco, where he was global chief procurement officer responsible for the company’s supply chain. He’s also executive-in-residence at Georgia Tech, where Porkert lends his expertise to the college’s logistics program.
Price, of course, remains an important consideration, but a healthy working relationship can bring savings through reduced inventory levels and dependable deliveries. Depending on the complexity of a manufacturer’s supply chain, a company can expect to spend six months to a year researching 3PL providers before picking a supplier or suppliers, he says. Porkert encourages three- to five-year contracts and close working relationships, establishing benchmarks of acceptable performance and agreed-upon metrics to measure that performance.
Performance is the ultimate measure, whether shipments are moving across the city or across the world. When 3PL providers were caught up in the supply disruptions caused by last year’s gulf coast hurricanes, Porkert says that customers didn’t want to hear excuses. “‘I don’t care about that,’ they said, ‘I want my stuff,’” Porkert notes. And regardless of company size or industry, knowing where your stuff is at all times remains key.
