Supply Chain Automation – The Future is Now

The Back to the Future Day, October 21, 2015, is finally here! The one prediction that everybody’s talking about is the Cubs in the World Series; hopefully the bats will get going for that prediction to be true. Yesterday, as my wife and I pulled into our favorite restaurant for dinner, we saw that a line of Tesla charging stations had been installed in the parking area; while today’s cars may not have a flux capacitor, just like Doc and Marty, you need to find a charging source to get where you need to go.

Why do I say the future is now? Here are a few examples that are happening today that seemed impossible just a few years ago.

1. The first week of October, I spoke at the Zycus conference about supply chain automation, the internet of things and automation of the procurement process through artificial intelligence.
2. On Monday, Rio Tinto announced that its iron ore mines in Western Australia are starting operations with driverless trucks. The trucks will be hauling iron ore from the mine to the plant. It’s the first such operation for Rio Tinto and is another step to driving efforts to be the low-cost producer.
3. While speaking at the Plastics News executive conference last year, I was surprised to learn many of the leading plastics executives are designing factories for lights-out automated operations. There’s little doubt that the war for talent, global pressure for higher wages and changing demographics will drive companies and industries to more automation.
4. Not surprisingly, traditional brick-and-mortar retailers are giving way to supersized, automated warehouses dedicated to e-commerce. These warehouses were once large at 500,000 square feet and now are reaching 1,000,000,000 square feet. In the US, same-day and next-day deliveries are driving larger warehouses in high density population centers. The investment in automation, robotics and technology are all aimed to achieving the supply chain to meet the same day delivery goals and achieving supply chain dominance and competitive advantage.

My prediction for the future is continued automated supply of the chains, aligned objectives and integration, systems integration and distribution of value based on inputs.

The future is now; can’t wait to see what 2025 brings.

Lower Diesel Prices: 5 things to do now

How fast does your team react to available data?

In Supply Chain24/7’s news yesterday, the headline read diesel prices decline for the 12th straight week. “At an average of $2.615 per gallon, the price is down 0.2 cents compared to last week, with prices dropping a cumulative 29.9 cents going back to the week of May 25, when the average price was at $2.914.” What will you do with this data?

The challenge for the procurement and logistics teams is translating this data into cost reductions. There should be a parade of transportation companies eliminating surcharges and reducing cost, but I’m guessing suppliers aren’t coming to you. Your team should be acting on their plan for value enhancement now. One of the key characteristics of a good cost manager is to constantly monitor the suppliers and the supply markets. While there is no doubt that the fuel cost structure for for all freight companies is declining, they’re probably constructing arguments for other areas where costs have gone up. Customers should be prepared for this and be sure that their cost structure reflects the market changes.

Astute supply chain practitioners realize that, if unchallenged, the logistics suppliers will have the opportunity to significantly improve margins, while their costs are essentially remaining the same. The savvy purchaser will:

1. Know the impact of fuel on the pricing structure
2. Ask for the appropriate decrease
3. Shake up the market with a competitive bid (if suppliers are unwilling to pass along the lower cost)
4. Develop a longer term hedging strategy
5. File away the lower fuel price impact data for use in the next negotiation.

What is your plan?

For Moto X, Customer Choice Trumps Cost of Sourcing

The Motorola X, AKA Moto X smartphone is the first mobile device designed under the Google-owned version of Motorola Mobility, and it’s expected to be available to consumers in the next few weeks.  The phone is going to be assembled in Ft. Worth, Texas, and that has supply chain significance because it will be a 2,200-employee case of re-shoring.
In a podcast interview with Chris Versace, Mark Randall, Motorola Mobility’s senior vice president of Supply Chain and Operations says the sourcing decision was essentially driven by a marketing decision, not cost. In the hyper-competitive smartphone market, Randall said Motorola wanted to give consumers the ability to customize their phones as they ordered online and still receive them within a few days. He said the only way they could reasonably do that was to build them in the U.S. for American purchasers.
By choosing various color combinations for buttons and the case, as well as memory, Randall said there could be as many as 2,000 variations of the phone.
Motorola’s decision to re-shore is interesting for several reasons. First, it shows how tightly integrated sourcing and sales can be. It’s an example of mass-produced combined with made-to-order. Second, it raises great questions about managing the supply of the various colored buttons and cases to meet an aggressive order-to-delivery timeline.
Third, the cost differential between assembly in the U.S. and assembly offshore had to be small because the premium Motorola can charge for offering customization cannot be that large. The smartphone market is too competitive.
And finally, this is a “build regionally” decision, not a “build in the U.S.A.” decision. To offer the same speed from order to delivery to consumers in Asia or South America, Motorola will assemble Moto Xs in China and Brazil.

The China “Equation” Isn’t One

Here’s an interesting analysis of sourcing from China from an interesting point of view — the real estate investors who own manufacturing facilities across the United States.
National Real Estate Investor – Made in America Again

The authors refer to a study by AlixPartners that projected the gap in manufacturing costs between the two countries will essentially close in another three years — based on wage inflation, exchange rates and freight costs. That same study also pointed out that between 2005 and 2008 the cost gap had shrunk from 22% to 5.5% between the two countries.
The speed at which China is “catching up” is also catching many analysts by surprise, but it also points out that the China “equation” is not really an equation. An equation represents a balance, whereas the situation in China is very dynamic. Sourcing from China has never been simple; it has always required careful analysis of costs and risks, and one of those risks has always been the fluidity of the situation. Right now, for instance, the Communist Party has been shaken by the purge of a senior official and potential criminal charges against his wife even as it is poised to make a huge transition of power to new leaders. It’s impossible to predict what impact that will have as it plays out.
At the same time, as we consult with companies operating in China we are finding many of their employees are excellent students of supply management. They are enthusiastically embracing best practices, and it’s clear they are not just focusing on exports to other countries, but creating supply chains to serve China’s own huge and growing appetite for consumer and business products. Will this drive new efficiencies and innovations that U.S. companies will want to purchase? Or will it fuel demand that will put upwards pressure on prices?
China is so big, and changing so fast that the answer is most likely, “yes.” To both.

Top Worries for CFOs

A survey of 168 Senior Financial Executives reveals that the top three concerns are:

• Financial exposure
• Supply chain logistics disruption
• Legal liability/harm to reputation

The survey shows that supply chain risk management is very high on Senior Management’s agenda.  Supply Chain Executives should place a high priority on assessing and managing the risks across the entire supply chain.  Companies have significantly reduced capacity during the downturn and are not adding it back any time soon.  The survey was the result of CFO Research Services and Liberty Mutual Insurance Company.

Inventories Still Dropping

I’m catching up on the ISM  Manufacturing Report on Business for November and looking at inventory levels, which are on a 43-month trend downward. The index is 41.3, a 5-point drop from October and in the range that often aligns with a stagnant economy. Since other indicators suggest a slowly recovering manufacturing sector, the inventory numbers are more evidence that companies are creating “planned scarcity.” The cost of credit to carry inventory outweighs the risk of lost sales opportunities because of shortages, and there could be a hope that shortages will support higher prices.

From a buyer’s perspective — that analysis keeps us watchful for inflationary pressure. It’s been a buyers’ market generally for more than a year. It’s time to lock in prices for key categories if you can.  Low inventories also increase risk — especially if parts are coming long distance.  The winter winds are whipping around our office in Ann Arbor, Michigan today — a reminder that weather is not an insignificant risk factor in the supply chain.

Here’s the link to the ISM news release about the November Report on Business.

Riding the economic Tsunami

Darwin probably said it best – the fittest will survive. That’s also the assessment of my colleague in the UK, Robin Jackson, CEO of ADR International. If you haven’t seen ADR’s newsletter, this is what he had to say:

“The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours – if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of currency will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability – imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years.


These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.”

Thanks, Robin. We should all bookmark this. Post it on our desktops and build it into our work plan every day for 2009.

Find more articles by Robin and others at our ADI International web site. 

 

Damage Control = Cost Control

We were thinking here about how Wal-Mart wants to eliminate all returns from its suppliers over the next 2-3 years and it reminded us that even though you expect the carrier or supplier to cover the cost of damaged products — it still makes sense for buyers to take an active role.

Here’s what our consultant Fred Parkinson had to say on the matter.

When products or merchandise that arrive at your loading dock damaged – what do you do? Could the damage have been prevented? What are the actual costs, both direct and indirect, of managing product that has to be returned or discarded?

Prevention 

OK, you can’t control weather or sloppy package handlers, but you can write packaging specifications into your product orders. Purchasing should call on other departments within the company to help develop specifications and shipping requirements that will insure the integrity of the product when it arrives from the supplier. 

Your supplier should also be used as a resource to develop the packaging and shipping requirements because they likely have dealt with damage returns in the past.

Your parts supplier may guide you to its corrugated supplier, who will likely have a packaging engineer or designer whose services would be available to you free of charge. 

The transportation carrier should also be able to provide or recommend shipping solutions that will get the product to your dock without being damaged. Maintaining good supplier relations will help you in times like these when you need to draw on their expertise.

Costs

The hidden costs associated with returning damaged product may include:

·      Warehouse labor costs, both at your facility and at the suppliers plant, that result from handling the damaged goods three or four times.

·      Administrative labor costs of notifying the supplier of the problem, submitting claim forms with the carrier, arranging for pick ups and expediting a replacement shipment.

·      Inventory costs associated with carrying a larger safety stock if the problem is a reoccurring one.  If the product is being imported the pipeline will be substantially longer, which will also have a big impact on how much safety stock has to be carried.

·      Accounting labor costs to process and handle multipliable invoices and credit vouchers.

·      Cash flow issues while claims are being settled or waiting for credit.

·      Lost sales revenue from being out of stock and customer dissatisfaction which may result in loss of business long term.

All good suppliers and carriers will cover the obvious expenses, but when you calculate these hidden costs – you can see why it’s in the interest of buyers to take active steps to prevent damaged goods from arriving at their plants.

 

Roller coaster diesel prices may be masking a new carrier pricing cycle

They took off like a rocket and fell like a stone. The spike and subsequent plunge in diesel prices over the last six months has quieted many analysts who are normally quick to give you a prediction of fuel costs. Roll in the unknown effects of a global credit freeze, a stock market free-fall and you have a shipping environment unlike anything we have seen in the past.
David McClimon, who has spent over 28 years in the transportation industry and most recently ran Con-way Freight, is now advising some of our clients on their transportation and logistics issues. I asked him to contribute to this blog, and here’s what he had to say….
——
Before the spike, carriers had been chasing a declining level of tonnage, keeping rates low. During the price spiral, fuel surcharges swung the price pendulum emphatically the other direction. As fuel prices came down, common wisdom would expect the pressure to keep rates down would exert itself again. This seems especially true as shipments in core industries such as auto have dropped dramatically. In short, any company that is still shipping should be in the driver’s seat on prices.
Before we all celebrate too much, though, there are warning signs ahead. The surge in diesel fuel prices put many marginal carriers right out of business. According to America’s Commercial Transportation research group, more than 45,000 vehicles, or 3% of the tractor fleet, have disappeared from the industry since last year. Carriers with at least five trucks are going out of business at an accelerated pace. The American Trucking Association reports that in the first quarter of 2008, 935 operations shut down. This is up from 385 in the first quarter of 2007 and is the highest quarterly failure rate since the 2001 recession.
Don’t expect the contraction to end quickly, either. There are analysts projecting truck capacity in the U.S. to drop at a rate of 2% per quarter, or 6% by mid-2009. Add that to the number already gone and we might have a total capacity loss of more than 10% over an 18-month period.
When the economy turns, capacity is not likely to come back as quickly as demand, and prices may rise accordingly. Of course, no one is ready to predict the timing or the pace of a turnaround, so there is considerable uncertainty in the market.
Whenever uncertainty is high, risk is also preeminent. Here are some ways to mitigate risks if your business expects to survive this recession and capitalize on a recovery:
1.    Be sure your fuel surcharges are current – based on latest, falling prices. With barrel prices collapsing a week’s change could be a big change.
2.    Assess the financial health of your most important carriers. Do they have the resources to deliver right through a recession? Failure of a strategic supplier could disrupt your supply chain during a downturn. Weigh the benefits of leveraging now with the risk of losing the low-bid carrier to bankruptcy and the cost of lining up new carriers when the capacity is scarcer and carriers have the upper hand.
3.    If you see an opportunity to take advantage of current overcapacity, do so carefully. Evaluate each situation individually. You might be able to lock in long-term base rates that make you look very good in 18-months, but only if your carrier is still in operation. There is no good reason to leverage your current advantage into a supplier failure.
In summary, look through the wild swings of fuel surcharges to the fundamentals that are still at work in logistics. Don’t get caught up in driving prices down unless you have carefully assessed your supplier.
Establish relationships, because if you plan on being in business 18 months from now, you want your primary carriers to be in business as well. Those shippers that have been able to develop long lasting relationship with their carriers, vs. taking advantage of short term pricing pressure opportunities will be in the best position when the power of the pricing pendulum swings in favor of the carrier.