World Trade - February 2009 - (Page 39)

tion centers in the network to get closer to customers and reduce outbound shipping costs. Analyses by Dr. Simchi Levi, a well-known MIT professor, bear out this thinking. Dr. Levi studied the impact of rising fuel costs on a company’s supply chain network design. The study reveals that rising transportation costs would prompt a design change in the core supply chain design for that company only when oil rises beyond the inﬂection point of $150. Dr. Levi’s analysis to determine the optimal manufacturing mix for the company reveals that with oil at $75, the optimal mix is to produce 22% of goods in its Philadelphia location and 78% in Juarez, Mexico. But as oil rises to $200/barrel, the higher transport costs from Mexico make it less viable. Mexico’s recommended manufacturing share then drops to 54%. A new location within the States takes most of the change, even though it has higher labor costs. The same analysis reveals that even with oil at $125, the optimal distribution network design stays the same, with ﬁve distribution centers within the States. But once oil climbs beyond $150, the optimal network changes to include seven distribution centers. When configuring the right network design, the sourcing executive must consider the following questions: • What costs/barrel were assumed when manufacturing and distribution networks were designed? • What will be the optimum networks at different oil prices, and what is the inﬂection point at which a change in design is needed? • Can a design deliver ﬂexibility to achieve near optimum cost and service at varying oil prices without sacriﬁcing large investments? • Are there speciﬁc customers that have become too expensive to serve, and can this increase in supply chain costs be passed on to them? Inventory management Preparedness in dealing with ﬂuctuating fuel costs and volatility can make or break your organization. buffer inventory will become the right answer compared to frequent milk-runs by suppliers and maintaining a JIT system. While the costs of fuel could continue to rise, the cost of carrying a buffer inventory for retailers and manufacturers will not increase appreciably as long as long term interest rates (which determine 70% to 90% of inventory costs) grow only incrementally. Such a change in inventory management policy has to be accompanied by an agreement on sharing across the supply chain the savings from lower transport costs. When analyzing the right inventory management policy, the supply chain executive must consider: • What costs/barrel were assumed when the current inventory policies were designed? • Have the costs of running a JIT system been considered for the entire value chain? • What is the optimum inventory management policy when oil is at different price levels? • What are the savings that suppliers experience in transportation and other costs when a lean inventory system is replaced with a system that maintains buffer inventory? What’s a supply chain executive to do? Still another critical component in supply chain design is inventory management. With fuel costs rising, inventory policies such as just-in-time (JIT), which were designed when fuel was cheap, have to be revisited. Most retailers and manufacturers that sit at the end of the value chain have pushed the burden of maintaining inventory down to their suppliers. These suppliers, in turn, are holding higher buffer inventories to hedge against uncertain delivery times or supply disruptions, and to still be able to deliver in a JIT fashion. Though the costs of maintaining a JIT inventory system are being eaten by suppliers, rising fuel costs will not allow this for long. If the economics of the entire value chain are taken into account, there will be an inﬂection point in the cost of fuel where maintaining Probably the best place to start is to create a customized and flexible distribution and manufacturing network design that fosters fast response to changing macroeconomics, minimizes costs, and delivers against required service levels. Next, analyze costs of holding increased inventory and the corresponding savings from reduced transportation needs. Conduct this analysis under likely interest rate and fuel price scenarios versus maintaining current replenishment cycles and minimumorder quantities. In addition, design a category-wise sourcing strategy with the right mix of LCCS and near-shore sourcing. Build a decision framework for choosing between time-definite and normal transport services as well as between the modes of air, ocean and ground. Taking these steps will prepare the organization for whatever shifts the price of fuel makes. WT Michael Deering is Managing Partner and CEO for Alaris Consulting with over 20 years of experience in global supply chain management and operations improvement. Bob Forbes is a Partner for Alaris Consulting with over 20 years of consulting and industry experience in manufacturing, consumer products, and retail industries. For more information on our supply chain advisory services, please visit our Web site at www.alarisconsulting.com. For reprints of this article, please contact Cindy Williams at williamsc@bnpmedia.com or 610-436-4220 ext. 8516. 39 WWW.WORLDTRADEMAG.COM http://www.alarisconsulting.com http://WWW.WORLDTRADEMAG.COM

Table of Contents Feed for the Digital Edition of World Trade - February 2009

World Trade - February 2009 Contents Taking Stock in America Confronting Corruption in Latin America Supply Chain Watch Tradewinds Where's the Goods? Where's the Money? Hope on the Horizon Managing Fleets in Turbulent Times The Impact of China's Economic Slowdown on U.S. Supply Chains The Fuel Volatile Supply Chain Getting the Most from On-the-Fly Transactions Managing Supply Chain Risk by Managing China Sourcing Capacity OECD Global Economic Outlook for 2009 'Natural' Agricultural Monopolies No More

World Trade - February 2009

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