Global Logistics and Supply Chain Strategies - August 2008 - (Page 40) They’ll have to learn quickly. Even the best-laid plans become obsolete when the price of oil jumps $50 a barrel in a decade. David Simchi-Levi, MIT professor and chief science officer with Sunnyvale, Calif.-based ILOG, notes that companies have had dramatic success over the past 20 years with such techniques as outsourcing to low-cost countries, lean manufacturing, just-in-time fulfillment and rapid delivery. The result has been a remarkable increase in supply chain productivity, and cost savings in the billions of dollars. But companies can’t rest on their achievements. In addition to paying more for fuel, they are under growing pressure today to implement green strategies for sustainability. They must also cope with road, rail and port infrastructure that can’t accommodate the projected growth in traffic. And that raises the possibility of supply disruptions during peak shipping seasons. All of which adds cost to the system. A recent analysis by Simchi-Levi revealed a 40-percent increase in U.S. logistics costs between 2002 and 2006. Inventory volumes rose by about 49 percent in the same period. Fuel prices are the obvious culprit, but the uptick in inventories is also the result of companies boosting safety stocks to offset the risk of longer supply lines, caused by outsourcing to China and other low-cost countries. In a world where product travels 5,000 miles or more to reach buyers, some increase in inventories closer to markets is probably inevitable. But that doesn’t mean that companies should flood their distribution centers with buffer stock. ILOG, for one, offers analytical software that helps companies to strike a balance between transportation and inventory expense. The right equation is constantly changing, however, so the exercise needs to be run on a periodic basis. Reverse of Outsourcing? High fuel prices and the greater possibility of supply chain glitches are even causing some companies to revisit their outsourcing strategies. The lure of cheap labor isn’t quite so powerful when other elements are factored in. “Initially, everybody rushed to China for the promise of lower labor costs,” says David Johnston, senior vice president of supply chain with JDA Software Group in Scottsdale, Ariz. “They didn’t do an analysis regarding the additional logistics cost caused by longer lead times. Now, with heightened awareness because of rising fuel costs, we’re at the point where companies truly realize what the cost of going overseas is.” The recent discovery of lead in the paint used for toys made in China, along with other cases of tainted products, have served as a particular wake-up call, Johnston says. The new awareness stems in part from a focus on total landed cost, a calculation that not only looks at the price of labor, but at fuel, transportation, import duties, taxation, unit price and the cost of money as well. The exercise has already prompted some rethinking by supply chain executives. Sharp Corp. has shifted production of flatscreen televisions from Asia to Mexico in order to supply markets in North and South America, according to Simchi-Levi. With the through that exercise every six months. New software applications permit weekly runs, with much more specificity as to individual products. The net result, even with stock boosts in selected areas, can be a reduction of up to 24 percent in inventory investment, Tayur claims. The greater frequency allows companies to react to constant changes in fuel prices as well as customer demand. They can shift modes and enter into short-term leases for warehouse space, in line with current conditions. Even with the increase in energy cost, Tayur says, John Deere cut its cost of doing business by 8 percent a year, the result of optimizing inventory on a seasonal basis. The next step is to apply network design strategies to such activities as postponement, where generic product is customized for local markets at the last possible “Inventory itself is really not the issue. The issue is how you manage the entire logistics supply chain.” — Harpal Singh of Supply Chain Consultants price of TVs falling by an average of 10 percent per month, shipping time is becoming a more critical factor for suppliers. They are less able to support the higher lead times and inventories that come with making product in Asia. Boosting inventory is only one answer to the problem of coping with longer supply chains. And it might not be the best one. Sridhar Tayur, chief executive officer of Pittsburgh-based SmartOps Corp., says agility can be a less expensive alternative. The idea is to respond more quickly to changes in demand signals. That requires a more integrated supply chain, where information is relayed throughout the tiers and manual processes are avoided wherever possible. Tayur has seen a tenfold increase over the last three years in companies showing interest in inventory optimization tools. They are looking for the ability to reset inventory targets on a more frequent basis. In the past, companies might have gone moment. New information technology allows companies to examine multiple scenarios from the standpoint of landed cost. It can also help them to understand the point at which transportation becomes a bigger driver of cost than inventory investment, says Lee Wilwerding, director of total inventory management with i2 Technologies in Dallas. The Wrong Focus Just as they once looked only at labor costs, companies can get sidetracked by focusing only on inventory. “Inventory itself is really not the issue,” says Harpal Singh, chief executive officer of Supply Chain Consultants in Wilmington, Del. “The issue is how you manage that entire logistics supply chain.” Manufacturers have tended to treat their extended supply chains as “islands of automation,” says Singh. Now, with fuel prices on the rise, the logistics function is receiving a fresh look by supply chain man- 40 AUGUST 2008
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