Global Logistics and Supply Chain Strategies - October 2008 - (Page 46)

network design, looking at how many facilities or distribution centers they should have and where those should be located,” says Tom Sanderson, CEO of Transplace, Frisco, Texas. Sourcing decisions are getting a second look as well, he says. “A lot of manufacturing companies are re-evaluating whether it still makes sense to manufacture as much in Asia, with the combination of a very long supply chain and very high level of fuel consumption, as opposed to somewhere like Mexico, which may have a little higher labor cost but also has a much shorter and much more fuel-efficient supply chain.” Lehmkuhl says Menlo already is seeing some nearshoring among its customers, especially in high-tech industries. “We see huge growth in the Guadalajara area,” he says, noting that Menlo recently shifted its management office from Mexico City to Guadalajara and expanded its operations there “to better support our customers that are changing their manufacturing footprint from Asia to Mexico.” While it is wise for people to revisit these questions, as many are, a re-evaluation will not necessarily result in changes on the ground, says Valerie Tardif, vice president of SmartOps, a provider of network and inventory optimization software based in Pittsburgh, Pa. “We are seeing a lot of network analysis being done at the high level, with people mostly trying to understand where the price needs to be for a barrel of oil before it really makes sense to change networks,” she says. “Companies don’t want to rush into decisions because there can be huge fixed costs involved. Redesign might save a few percentages in transportation costs, but the cost of implementing those changes sometimes wipes that out.” “When I hear all this talk of bringing stuff back from Asia, I have to laugh,” says Chris Ferrell, associate director of the Supply Chain Consortium, a benchmarking group that operates under the umbrella of Tompkins Associates, Raleigh, N.C. “Transportation still only represents 2 percent to 3 percent of total delivered costs so it’s just crazy to think that higher transport costs are going to cause companies to stop manufacturing in China,” he says. “Should folks be taking an opportunity to do a network study and see if there is justification for a second DC or a different distribution center network?” he asks. “Absolutely, because most of these networks were set up at a time when fuel was not even half of what it is today. There probably is a need for incremental changes, but probably not for wholesale changes.” Long term, however, companies will make many adjustments to accommodate higher fuel costs, says Chris Caplice, executive director of the Center for Transportation and Logistics at MIT, Cambridge, Mass. “I think we will see products and packaging being redesigned for more economical shipping and a greater use of postponement strategies. The question we have to ask is what the price of fuel would have to be for it to make sense to start making these changes.” “The only way for a company to know when it should start adjusting its strategies is to figure out its tipping point—the fuel price below which one network structure is appropriate and above which a different structure is appropriate,” says David Simchi-Levi, professor at MIT and chief science officer at ILOG, a developer of optimization technology and supply chain software based in Sunnyvale, Calif. “The tipping point is different for every company, he says, and the best way to find it is to run various scenarios using network optimization tools. Given the current volatility of fuel costs and other factors, these scenarios need to be run more frequently than in the past, Simchi-Levi adds. “In the current environment, companies need to continuously evaluate their supply chain strategy.” Hitachi Consulting, Dallas, advises its clients to reassess their networks on a quarterly basis, says Pete Ward, a principal in the firm. “With today’s technology, once you have built the model, it is not difficult to input new parameters and run different scenarios. You can play with the model and see what you get. At the least, you’ll have something to think about,” he says. “Our customers have driven us to create models that are effectively dynamic,” says Lehmkuhl. “They don’t just want to know what they should do at this point in time. They want to say, ‘here are the seven variables that determine what we should do, so let’s look at them on a monthly basis by feeding real, current data into the model to see if a different decision is justified.’” In doing that for numerous customers, “we have been able to continuously improve the models and make them even more accurate.” Jeff Ryan, vice president at BravoSolution, a strategic sourcing and spend management solutions provider based in Italy, agrees that network modeling should be a dynamic process. He warns, however, that “there is a point where you can drive yourself nuts. You don’t want to rethink a brick-and-mortar decision every other day. You don’t want to be so nervous about this that you keep taking little steps in all different directions.” Modal Shifts One variable that companies can change fairly easily is the choice of transport mode, and these options increasingly are being included in network scenarios, says Robert Schecterle, vice president at Aberdeen Group, Boston. “Network design is not just about where to put facilities, but also which transportation modes to use,” he says. “Companies want to be sure they are using the most fuel-efficient and low-cost mode that will meet their service requirements. With fuel prices going up, we see companies moving away from airfreight and increasing their use of ocean and rail.” “We have been hearing shippers for the last three years talk about their desire to convert to intermodal and now they are taking action,” says Matheson. “They are being a lot more creative around their transit times and delivery requirements to accommodate a modal shift.” This renewed interest in rail intermodal may lead to a shortening of the traditional thousand-mile length-of-haul threshold for use of this mode, Matheson says. “We think there is potential for that to drop down to perhaps 750 or 800 miles in the East, depending on the fuel economics.” The Allen Group, a San Diego-based developer of logistics parks, is convinced that intermodal will continue to grow and has invested in two large logistics parks close to intermodal rail heads in Dallas and Kansas City. The long-haul savings are compelling, says marketing director Jon Cross, but the Allen Group also provides significant savings on drayage. “We offer a flat $75 drayage fee from the UP intermodal facility to our property in Dallas,” Cross says. “If that same trailer were drayed to a warehouse near the DallasFt.Worth airport the cost would be $200. On 15,000 trailers a year, that would be a $2m savings on the drayage alone.” If fuel continues to stay at its current level or goes higher, many industry experts believe the future trend will be for companies to establish more DCs and hold additional safety stock closer to consumption 46 OCTOBER 2008

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Global Logistics and Supply Chain Strategies - October 2008

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