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Supply Chain Design

ALIGNING THE INBOUND SUPPLY CHAIN WITH COMPANY REQUIREMENTS

Eye For Transport January 2004
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

CEO's and CFOs have to ask themselves four questions.
1) Are we satisfied with our inbound supply chain design?
2) Are we satisfied with the costs of our inbound supply chain design?
3) Are we satisfied with the performance of our inbound supply chain design?
4) Is our inbound supply chain design secure for Homeland Security?

Supply chain success begins at the origin, with suppliers. The impact on costs, inventory and service can be significant if the inbound supply chain does not function well.

Managing and reducing the cycle time--from purchase orders being placed through to inventory and shipments being delivered then on to sales and cash--can have a profound bottom line impact. This, in turn, impacts shareholder value and builds competitive advantage.

The outbound delivery part of the supply chain design also requires great attention. Delivering the perfect order to customers is a key metric. Software focuses on warehouse management and on domestic transport management. Collaboration discusses domestic transport cooperation to reduce costs. Articles highlight domestic supply chain stories.

But the perfect order requires the right inventory--both in regards to the correct SKU/item level as well as the quantities needed. In addition, making sure that products are positioned where they should be when they originate and are sourced in another country can be a challenge. Since a great deal of U.S. consumer goods include products that are manufactured abroad, being able to manage a global supply chain becomes important.

How do you manage the critical inbound half of a global supply chain? How do you direct suppliers and transport providers thousands of miles away in different countries and time zones? You cannot run a global supply chain on emails. So what do you do? Creating a supply chain design that is built on international sourcing is complex.

Possible organization difficulties add to the issues of managing the inbound supply chain. Two key issues exist. First, supply chain management is a process whose success intersects horizontally with an organization that is built vertically with functional responsibility silos. Second, performance is driven by financial measures based on an accounting system that dates back to the Model A; however, business now involves global competition.

The organization can create a fragmented approach, even a disconnect, to the supply chain with each group looking at their individual responsibilities and not at the total supply chain in regards to overall costs, time and results. It's most vital to correctly place inventory when and where it should be, which goes beyond supplier prices and freight costs. Inventory flow and time are two important aspects of your business.

Logistics executives, sourcing executives, CEOs, CFOs and CIOs all need to understand the Asia supply chain design and its impact on their company's success. They should view the dynamics and vagaries of this chain as the realities of their business operation.

Sourcing from China and other countries in Asia means a longer lead-time than with U.S. manufacturers. Transit times, depending on the origin, destination and ports used, can range from 13 days to 40+ days. Ocean carriers have created varying schedules and services with different port calls in Asia and in the U.S. But unlike U.S. transport, the ships do not move from and to major ports on a daily basis. Plus there are many different stages of the container movement, whether it is with the trucker at the origin, then at the origin port, perhaps on a freight forwarder, on the steamship line, maybe then on a transshipment from a feeder vessel to the main ship, to the destination port, then to the trucker to move the container from the port, the railroad to move it inland and another trucker to deliver, then on to the customs broker. All of these, whether a physical or documentation interaction, affect the speed of the container and, hence, the time that the inventory is not available.

Inventory bunching occurs because there is not a continuous, daily flow of product into the supply chain. There can be pronounced gaps in container--and inventory--arrivals. Bunching of inventory and of containers impacts distribution center receiving, labor utilization and cost, warehouse space and layout, service performance, inventory stockout occurrences or excess inventory levels and capital.

When shipping schedules and transit times create gaps with inventory replenishment there will also be increased difficulty in managing inventory being placed at the right warehouses, with the right quantities and right mixes down to the item level. All of this has impact on sales and profits. The cycle time between placing an order with a supplier in Asia and the delivery of the container adds to the total time to turning a purchase order into inventory and into cash.

Lengthy replenishment times can contrast with the dynamics of sales in regards to what products are needed, the mix, the volumes and which warehouses and stores need to be stocked. Inventory is not the end; it is a means to the actual end, sales and profits. Increased replenishment time can magnify the differences between what the sales plan and forecast are predicting versus what may be currently occurring and needed. Amending and re-prioritizing purchase orders for product items add to the challenge of managing the supply chain. The de facto result can be a static inventory replenishment trying to meet the needs of a complex, dynamic sales environment. Short product life cycles can further exacerbate the situation.

Supply chain security also adds to the delivery time with imports. Ocean carriers must have the containers and documentation available before a ship arrives at the port. This has caused some suppliers to not make shipments as quickly as needed to meet the advanced manifest requirements. As a result, containers have moved to other carrier services, perhaps with longer transit times, or been delayed for transport on the following week's vessel. All of this further increases the inventory replenishment cycle time.

Positive Actions. Cycle time must be compressed through being reduced both externally and internally. Accomplishing this will require numerous changes; there is rarely one change that can create ongoing improvements.

1). Build the inbound supply chain design backward from the customer or store. Do not treat it as a separate subset of the overall supply chain. Design, align and streamline with the corporate requirements in mind. Obtain company wide buy-in, at the top and at the key points of supply chain contact and interface so that everyone is on the same page and concurs.

2). Incorporate the three keys of process, people and technology into your supply chain. Identify gaps and redundancies. Analyze outsourcing as an option to developing what is needed for your supply chain. Look at 3PLs and 4PLs. Look for lead logistics providers that will focus on the supplier and the entire supply chain. Avoid providers who just want to manage shipments and, as a result, miss the real needs and issues.

Creating an effective product flow requires managing a process, not a series of transactions such as purchase orders or shipments. Orders and shipments are standalone items and, as such, are only parts of a more comprehensive process. The transaction view and approach is reactionary and reinvents each purchase order and shipment instead of incorporating them into the ongoing process.

3). A supply chain design should be flexible and agile. The lengthy cycle time may be acceptable in a perfect world with complete certainty, but that is not the real world. The supply chain must recognize and accommodate dynamic changes in priorities and needs. Frequent expediting and using premium freight can be a sign that an inbound supply chain has problems.

For example, with multiple container size orders, prioritize and release finished items as they are ready instead of holding until the entire purchase order has been completed. Not every order is hot. Not every product can carry higher freight costs. Use a mix transport approach. Blend different price and transit times, steamship line services, carriers, ports, MLB, all-water and other options.

4). Focus on suppliers and purchase orders. Supplier performance is critical to supply chain results. Freight is a derivative of the purchase orders and supplier performance.

5). Make your supply chain design visible. Place and manage purchase orders, suppliers and transport providers online, at the factory and from the factory to your door. Do this down to the SKU and item level. Use exceptions and event management to monitor, control and manage key needs..

6). Collaborate with all key parties in the supply chain, both external and internal. Work with suppliers and transport providers so that they understand what you are doing. Share your plan. Be open to their operations and to the input that they have. Each party has a responsibility and role in the supply chain and its success. Collaboration--and integration--are good for lean organizations to share resources toward a common goal.

7). Measure your supply chain. Have a solid metric. The metric should be a part of your plan that has been agreed to by the corporation. Delivering the perfect order--complete, accurate and on time--is beneficial for the outbound supply chain. Reverse it for the inbound portion. Or consider an inventory-related metric since having inventory properly positioned is the purpose of this endeavor. Measure days of inventory held, or inventory turns and improvements, from the present supply chain performance.

Conclusion. The inbound supply chain has a critical role in a company's success. This success has significant impact on profits and on corporate viability. Executives must understand and demand high performance from their supply chain. The supply chain must be aligned, designed and managed to meet the corporation's requirements. There are no silver bullets or shortcuts to leading-edge supply chain design.

Success begins at the origin, with suppliers. The supplier and managing this performance in a dynamic and complex environment is vital.