Global Logistics and Supply Chain Strategies - September 2008 - (Page 54)

quately insulate themselves from harm when they only considered the availability of low-cost of labor. “It’s one of the biggest mistakes that they made,” says David Johnston, senior vice president for manufacturing and wholesale distribution at JDA Software of Scottsdale, Ariz. “They didn’t look at the cost of additional inventories to cover longer cycle and lead times, and they didn’t prepare for increased logistics costs. They’re now suffering because they didn’t do any modeling or consider the additional risk mitigation costs required.” To offset some of the expenses they are now saddled with, Johnston notes, many companies today are either moving back to the U.S., at least for some functions such as packaging, or they are relocating nearshore. Some have rediscovered Mexico. Of course, there are myriad other strategies for cutting cost and, not incidentally, reducing risk. Some companies are looking to lower network inventory by stocking facilities closer to ports of entry. Others have increased the proportion of product they move by rail; even with longer lead times, they save money. Any number of cost-saving strategies are on the table these days, Johnston says, but the primary ones involve adopting planning systems and taking what he calls a more holistic approach to inventory network optimization in a multi-echelon environment. “Companies are investing not just in technology but in the organization so that there is a full-time focus on strategic optimization around modeling of the network, contingency planning, and multiple and alternate sourcing strategies,” he says. “Also, they are modeling the right modes of transportation. Customers who are successful are the ones who have the technology and have a process in place that’s focused on strategy, not just operational efficiencies.” Johnston says he realizes there’s nothing new in diversifying one’s pool of contract manufacturers or having a secondary supply of materials in place in case of a disruption. But there is a renewed focus on them, and that’s because there’s really no other choice, he says. “Companies know it’s an additional cost to maintain those [secondary] relationships, but it’s a requirement to mitigate the risk. Before, it was all about fewer suppliers, but it’s just too risky to do that in today’s flat world.” Enlarging the supplier base is not enough without increased levels of collabo- ration and visibility, however. Tight communication ensures better projections of material requirements and inventory data, and provides for the early warnings about supply so companies can adjust production and protect customer service levels. The communication Johnston speaks of is vital inside and outside any company. “You have to break down the silos across the supply chain, and that’s not easy. Customer service, demand management, distribution planning and production planning—all need to be connected tighter, so the production plan is driven by prioritized customer demand, etc. It’s not an easy task, and it requires technology to make those connections.” It also demands that executive management bring the metrics used in those different disciplines into better alignment as well. Interestingly, most companies have the information they need to optimize any number of processes and mitigate risk, Johnston says. But they have to identify where the data is, determine its accuracy and “assemble” it so holistic decisions can be made. While you can’t plan for every conceivable risk, a serious audit by a supply chain network design company can protect you from a reasonable number of them, says Jeff Karrenbauer, president of Insight Inc. of Manassas, Va. Such a question-and-answer session can spotlight just how high the stakes are for companies. Take a manufacturer’s sourcing policy, for example. “I would ask you to rank/order all of your raw materials in terms of finished product volume and finished product profitability,” Karrenbauer says. “I want to know the most critical raw materials in terms of the endgame. Then I want to know how many suppliers you have for each one of those. “Oh, you have one supplier in a Third World country with an unstable government. “That’s called stupidity,” he says. “It’s certainly called unnecessary risk.” Karrenbauer is highly critical of most supply chain practitioners when it comes to risk preparation. He quotes an Aberdeen study that found that only 11 percent or so of the companies studied had any kind of risk management program in place. “The other 90 percent are placing the biggest bet in the history of Las Vegas—and the bet is, nothing’s gonna happen.” But stuff does happen, and supply chain network design can help ward off some of those problems, says Karrenbauer. But beginning and ending a risk audit with analysis of suppliers is not enough, in his view. The tools that were used to design the supply chain in the first place should continue to be utilized for contingency planning. “You ask, for example, what happens if I lose this or that facility? Do I have enough capacity to replace it, and if so, where?” The need for a business continuity plan is critical, he says. “You need to be able to say, ‘If this plant goes down for a fire or strike or hurricane or terrorist attack or whatever, I know what I’m doing next.’ And you know that because you hammered that all out when things were calm. “And you must do that for every important—and you get to define ‘important’—supplier, manufacturing location, DC, port, all the critical nodes in the network, and all the critical transportation links in the network.” Planning does not take care of itself, Karrenbauer says. “As long as contingency planning is left unstructured, it gets driven out because the phone’s ringing, you’ve got meetings all day, etc. There’s never time to do the planning that’s necessary. But what does it cost you to take care of the customers keeping you in business? That’s what you have to keep in mind.” Karrenbauer decries the mentality that demands prudent management of an investment yet is hesitant to invest in managing risk. “Wall Street doesn’t get it,” he says. “It can’t even spell ‘supply chain’.” He says that same type of thinking is what drives so many companies to Asia where the cost of labor is admittedly a much better bargain than that in the U.S. But the narrow focus on labor causes companies to minimize a long line of potential problems. Karrenbauer recalled a client whose relocation team advised against moving sourcing operations to Asia two years ago. “When the client looked at everything, not just the buck-anhour labor, but the cost of raw materials acquisition, the technology transfer, the 12,000-mile supply chain (remember, this is way before the oil price run-up), duties and taxes, inventory for 8 to 12 weeks—you add all that up, and the sum of all those costs overwhelmed the labor cost savings. And we haven’t even talked about intellectual property theft or quality problems. “They told their boss not to do it. They should not be doing Pacific Basin outsourcing. This is not a buy-America polemic, by the way. It’s just looking at the numbers. 54 SEPTEMBER 2008

Table of Contents Feed for the Digital Edition of Global Logistics and Supply Chain Strategies - September 2008

Global Logistics and Supply Chain Strategies - August 2008 Contents Editorial GL&SCS Exclusive Fast Forward Up Front Cover Story: Free The Enterprise: Busting Silos in the Supply Chain Business Process Management Merits New Look fromCorporate Strategists Ships and Ports Explore Many Ways to Go Green The Right Information Should Help Avoid Any Kind of Risk Industry Voices

Global Logistics and Supply Chain Strategies - September 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.