Steven M. Purdy
Steven M. Purdy, Vice President, Herbert W. Davis and Company, Fort Lee, NJ 07024-3311, 201/944-5580, www.hwdaviscompany.com.
Abstract. As global sourcing of finished products, particularly from the Far East, grows explosively, the value of inventory and its carrying costs while in the supply chain is becoming a more significant business factor. The time value of inventory investment and the cost of shrinkage in transit and at the multiple points of transfer inherent in long-distance shipping have become important in determining true margin and profitability. Companies sourcing large portions of their product lines offshore are seeking to establish supply chain management business processes and information networks that will support setting supply chain performance standards; planning extended supply chain operations; gathering information on product location, condition and movement; producing documentation to expedite movements; and reporting on performance to standards. This presentation will discuss the background and characteristics of these business processes and systems, issues surrounding their design and implementation, practical considerations and progress to date.
The Logistics Impact of Globalization. Global sourcing of products into the United States and among other parts of the world is growing explosively. U.S. companies are establishing or acquiring more overseas operations, U.S. companies are being acquired by non-U.S. owners, and companies from all over the world are establishing U.S.-based operations and marketing organizations. Wage differentials, proximity to raw materials, expanding markets and economies worldwide, easier communications, and improved transportation are contributing to the building of a truly global sourcing structure and marketplace.
Logistics, the business discipline charged with planning, tracking and managing the execution of the myriad material movements required in global sourcing, has undergone numerous changes and expansions of responsibility over the past 20 years. As the role has changed, the terminology has changed. Initially, it was called warehousing and transportation, implying responsibility for storing and moving inventory. Then, it became distribution, signifying a change in management's attitude that the role was to distribute product, rather than to just store it. When the role expanded to encompass customer service and responsibility for planning and managing finished goods inventory levels, including finished goods inventory ownership, the title became "Logistics." Now with the addition of broader responsibilities in sourcing, purchasing and inventory planning and management, the function is more often called supply chain management.
Today, the inventory planning and sourcing is often global and very often the movements are from third-party manufacturers through a chain of third-party transportation and logistics services providers and government entities. The days of sourcing entirely internally and moving goods with private fleets are fast disappearing. It's simply not practical to try to maintain those kinds of facilities for private use. The introduction of outside parties whose connection with our company is essentially only financial and strictly by contract, rather than by employment and allegiance, adds an element of variability to the process. Yet, all of these outside entities must somehow be closely integrated to manage the supply chain successfully. This is the supplier's problem. In the end, the customer doesn't care how the products get there or who handles them and how many times, as long as they get there complete and in good condition when he needs them.
Shipping distances are farther. The supply chain is longer in distance and time, and the product stops, is held, and is reshipped in more places. The supply chain for traditional domestic distribution of product within the United States usually involves one to three movements: plant to customer, plant to distribution center to customer, and possibly plant to master distribution center to regional distribution center to customer. Individual transit times are usually two to five days, and the mode is usually truck. On international shipments, there may be seven or more points of transfer, including consolidators, customs brokers and agencies, ocean carriers, and domestic transportation by rail or truck. Individual legs for ocean transport may be 30 days or more, plus port time, intermodal transfer time and domestic shipments at both ends, in addition to time in the company's own domestic distribution network. The total time adds up to months.
Time is Money. If inventory is being managed as an asset and the cost of the investment in it is recognized as it should be, a three-month supply chain represents a maximum possible turn rate of four, not satisfactory by domestic standards. On the other hand, the economics of lower cost of offshore manufacture may, and indeed probably does, justify the added transportation cost, the lower rate of turnover and the associated inventory investment. The important thing is to understand the total economics of the manufacturing cost versus transportation and carrying cost tradeoff, and manage it intensively and intelligently.
When the supply chain is very long, it is essential to know what the total cost of getting product to the customer will be, or should be. This is probably the most significant difference between manufacturing or buying products domestically and sourcing globally. Logistics costs are a significant controllable element in purely domestic operations and are being managed more closely than ever. But even locally, getting the data needed to manage well from third-party service providers is not easy. In offshore operations, it is that much more difficult. Often, neither the tools nor the data necessary for improved management are readily available. Concerned companies are breaking new ground. Somehow the cost of the long supply chain in dollars and time, i.e., time converted to dollars, must be planned for, managed and measured, and that cost must be dealt with as a significant controllable element of total product cost.
Planning and Managing. It is necessary to plan for each inventory transfer, how long the transit time will be between points and in total, how many points of transfer there will be, and what it should cost to get it here. This is much like developing material and labor standards to establish the standard cost to manufacture a product. There should be standard estimates of shipping costs; service costs for consolidators and brokers, documentation, duty, etc.; and an estimate of the time value cost when all goes well. Actual performance on supply chain events also needs to be measured as is done in manufacturing. Actual data will be collected as the events happen and variances against the estimated standard will be developed. This will, naturally, allow us to determine the actual cost of ownership and shipment, but more important, determine whether the supply chain is operating as planned and to locate and deal with any problem areas. In supply chain management, as with manufacturing, the value in knowing that there are variances and where they were generated is as much or more in the fact that variances represent a method of detecting operating problems as in determining the actual product cost.
Once the supply chain elements and their costs have been defined for your company, there is also a potential for using optimizer-type software tools in making sourcing decisions. An optimizer considers factors such as product cost from various sources, supply chain costs to ship from the sources, product cost and margin objectives, service level goals, and other business factors to assist in making sourcing recommendations before commitments are made.
Shrinkage. Shortages in inventory as a result of damage, loss and theft are called shrinkage. Shrinkage is a fact of life. A forklift driver hits or drops a pallet of goods; product shifts in a container or there is a leak; a pallet is left off or on a truck and lost; a worker or bystander sees and capitalizes on the opportunity to get something for nothing, or an elaborate conspiracy is mounted to divert goods. This is shrinkage. It happens all of the time in domestic distribution. It can be much worse with a long international supply chain. The goods are in transit longer; they are handled more times; therefore, the opportunity for shrinkage is greater. Consumer goods which are easily sellable and have high visibility are particularly vulnerable. We all know the old line about the cheap television set that "must have fallen off a truck."
Shrinkage has two major impacts. First is the obvious economic one. The company has paid for something that is now not there and has to do a write-off, or go through an arduous process of physical or financial recovery through international law enforcement agencies, from a third-party service provider, a carrier or an insurer. The second impact may be more important in a highly competitive business where customer service and having goods on the shelf is key to success. If what was planned is not available, the commitment to the customer can't be met. Of course, an attempt to cover possible shrinkage by ordering extra product can be made. But that's expensive. The extra ordered may not be needed, or enough extra may not be ordered and service problems still result. Either outcome is expensive.
It is essential to know about shrinkage as quickly and accurately as possible. As soon as an incident is reported, we can take three kinds of action: deal with the customer service issues, initiate physical or economic recovery, and take preventive measures for future shipments. Find product to meet the service commitment. Recover what can be recovered in merchandise or compensation as quickly as possible. Take action to prevent shrinkage in the future, including making changes in supply chain service providers and lanes if repetitive patterns of shrinkage occur.
Monitoring shrinkage this well requires a lot of accurate, frequently gathered, near real-time data that not only may not be available today, but for which the infrastructure, policies and procedures, and contractual arrangements with service providers may not exist. This kind of inventory tracking over long time periods and distances is new territory. For the most part, these capabilities are not available on large shipments domestically today, much less globally.
The Process and System. This need to plan and control large volumes of inventory over long time periods and distances is a leading-edge business need requiring leading-edge solutions. The challenges are many. Technology, economics, people and culture, infrastructure, cooperation from vendors, and even finding service providers willing to provide the needed audit and data input functions in return for compensation are all significant issues.
What is needed is a well designed integrated business process supported by an information system that will allow planning how a shipment should move through the supply chain, how long it will take, and how much it should cost under normal circumstances. This will be used not only as a basis for scheduling and control of the actual shipment, but to determine the supply chain cost that must be incorporated into the total product cost to ensure sufficient margin. The process and system must incorporate a method of defining the supply chain, each shipping lane, each transfer point, the transit times, and associated standard costs in multiple currencies. The system should also be capable of generating and processing the documents necessary to move the material. This is the easiest part in the sense that the necessary data can be generated internally.
In order for the plan and standard costs to be useful, there must be an ability to record actual performance and costs against them. The system design and development side of this is not especially difficult. It revolves around flexibility in importing data from diverse sources. The technology and infrastructure of gathering far-flung data are also not that difficult. The Internet has great potential for moving the needed data from remote locations to our supply chain management system, and there are commercial services in many parts of the world as well. Also, some third-party providers, particularly parcel carriers, may already be able to provide at least some data to your system on the status of shipments through their systems.
Generally, though, the actual data recording side is difficult. We are now going outside our own comfortable and somewhat controllable domain into a diverse world of multiple cultures, languages, legal systems, bureaucracies, currencies, and business practices, different from ours, but with hundreds of years of tradition behind them. At a minimum, for the process to work, the arrival and departure of shipments at a point need to be known quickly, as well as any costs associated with the transfer. The problem is getting service providers to provide this information quickly, accurately and in a form that we can use. This may mean providing equipment and training, as well as paying service charges, if it can be done at all. A downside of making this kind of investment with third parties is that it inherently reduces flexibility in obtaining services in the open market. Making an investment in a vendor implies continuity and makes change more difficult.
In some cases, it may be impossible to get the needed services and there may be gaps in the coverage. In that case, it may have to be accepted that the best that can be done is to assume that if something arrives, it must have taken the intervening time to get there. The actual costs will then have to be spread back over the process by logic once they are known, much like "backflushing" labor and material in a manufacturing control system when detail data is not collected at each manufacturing operation. It's not fast and neat, but it may be the best that can be done. It at least provides some insight into what has happened after the fact.
The detailed tracking of inventory to manage shrinkage is even more difficult. This is not often done in the supply chain even within the U.S. It would involve labeling each master carton in a shipment with a bar-coded "license plate," storing the identifying data about the carton in our database, and having each individual carton scanned at each transfer point. To start, if there were a third-party manufacturer, he would have to produce and correctly apply the label and transmit the associated data (product code, quantity, lot code, etc.) to the supply chain system. Again, it could require investment at vendor sites, would reduce flexibility in sourcing, and would depend on the vendor doing the job well.
The flip side of this, and just as difficult or more so, is getting the license plates read at each transfer point. To do the job right, every carton has to be scanned every time the material is out in the open, such as being put into or taken out of a container or truck. This doesn't necessarily mean breaking down pallets. The bar code can be read through shrink-wrap as long as the label is accessible. If this is done, and it may mean doing it both when a load is broken down and when the product is reloaded for further distribution, we will know exactly what we have, and where shrinkage, if any, has occurred. This will allow the remedial actions outlined above to begin immediately.
Another potential benefit of knowing that much about the constitution of the inventory and its location is the possibility of deploying dynamically to distribution warehouses, or even allocating and shipping directly to customers when the shipment is landed. Being certain of what is actually in stock on the leg of the shipment prior to landing will allow stock to be allocated and the inventory to be cross-docked for shipment into our domestic distribution network, or shipped direct to the customer, shortening the supply chain and providing more prompt service.
Getting Started on Supply Chain Inventory Management. How do you decide whether supply chain inventory management is a significant issue for your company? First, undertake an analysis that considers the following:
If the answer to even one or two of these question is yes, you should be considering developing a more formal sophisticated approach to supply chain inventory management.
The next steps are to develop business objectives for supply chain management improvements, develop a conceptual design for how supply chain management ought to operate to best benefit your company and its customers, and survey the marketplace for solutions. The possibilities range from purchased package software to using the available supply chain management value-added services of third-party logistics providers, to outsourcing the entire process. This is a new market and there are new and expanding approaches being introduced frequently. From there it's a matter of doing a cost/benefit analysis to determine how much investment in improved supply chain management can be justified and what the payback period will be, choosing an approach or integrating a mixture of approaches, and proceeding with development and implementation.
Today, these issues and techniques seem leading-edge and perhaps somewhat remote. Soon they will be in the mainstream. As offshore sourcing expands, supply chain inventory management will become an essential part of managing well. Recognition of the true impact of long supply lines on total product cost, margins and service levels will bring the issue to the forefront for multinational companies. Those that are first in properly managing the supply chain well will emerge as the competitive leaders in the global marketplace.