World Trade - September 2008 - (Page 24) SUPPLY CHAIN tion costs and inventory costs. “JIT inventory management was a beautiful thing when oil was cheap,” explains Sinisgalli at Manhattan Associates. “In some cases, holding larger inventories but making fewer deliveries will be the future strategy.” Backhauling will be a top priority to avoid running empty miles. Sinisgalli points to industry studies that conclude that over 10 percent of the 150 billion miles U.S. truckers drive annually are driven empty. “So you can look at this from an environmental perspective as well as from a cost perspective for motivation to develop opportunities to do things more efficiently.” As this trend evolves, companies are thinking about changing their network configuration to include more and smaller warehouses close to drop-off points in an attempt to maintain service levels while reducing transportation costs, adds Sinisgalli. “You will still have the large warehouses around the ports of entry, which will remain the most efficient places to handle goods.” Metersky at Chainalytics adds that what changes the distribution network is the amount of inventory flowing from ‘the make’ to ‘the buy.’ “The demand-pull signals first indicate what is selling where and then they determine where the DC should be located. As sourcing patterns change, so will the driver as to where those DCs are located.” So where does one begin in changing already established networks? Companies need to conduct a network optimization assessment to simulate demand when to consider moving to a near-sourcing model. The manufacturing location should be close to rail and intermodal access. State taxes, labor costs, and real estate costs should be factored into the assessment. “Companies should understand what their inventory holding costs and transportation costs will be with respect to satisfying customer demand,” notes AMR’s Aimi. “Don’t forget to add in the realities of state and local taxes. Know the labor market and the cost of that labor, as well as real estate costs. These are additional factors you must represent when you model because if you leave them out of the modeling process, they could foil your entire plan.” Drayage costs are key for deciding where a DC should be located, yet they are often overlooked, notes Bob Liss, vice president of supply chain for The Allen Group in Dallas. For instance, a company with a DC located in a logistics park adjacent to a rail terminal that is importing over 100 containers per week can save millions of dollars a year on in-the-gate shuttle costs—versus over-the-road drayage costs to points outside the logistics park. Liss adds that drayage costs will only get worse. He reports rising gas prices caused 1,000 truckers to go out of business during the first quarter of the year, with another 2,000 expected to do the same by the end of the second quarter of this year. “With this capacity taken out of the market, trucking rates for drayage are expected to rise between 8 percent to 10 percent by the fourth quarter.” Another strategy helping companies contain total landed costs is deconsolidation, notes Dave Ganor, vice president of Business Development for Contract Logistics at Pittsburgh-based GENCO Supply Chain Solu- The Allen Group A rendering of the Dallas Logistics Hub For example, a computer company might make components in bulk and ship them to a fulfillment center close to markets, where each computer is configured according to unique customer requests. “A retailer like Best Buy might have 10 different choices of a product on their shelves,” explains Aimi. “They can monitor to see which ones are selling so they can issue a slowdown or speed-up to the manufacturer, based on demand.” Chainalytics reports it is noticing another pattern among clients. “It is a strategy called postponement—or delaying for as long as possible the forward deployment of products to as close to customers as possible, holding product back further down-stream in the distribution network,” explains Jeff Metersky, vice president of supply chain strategy practice for the Atlanta-based firm. “Since they don’t know for certain what customer demand will be, they will hold back until they receive the final demand signal that allows them to move products to customers.” Companies are also containing costs by increasing inventory—depending on the nature of the products, reports Metersky. Remember when holding inventory was a bad thing? That strategy is changing to accommodate rising fuel costs. By pushing more inventory into the network, companies can reduce transportation spend by shipping larger shipments or by shipping via more fuel-efficient and cost-effective modes. One of the trade offs companies have wrestled with over the years has been the balance between transportaSEPTEMBER 2008 24 WORLD TRADE
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