LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work


Lloyd's FTB Asia, April 2004
President LTD Management

Supply chain executives have a daunting daily challenge managing a global supply chain. They must keep customers or stores properly stocked and deliver the perfect order every time. They must balance the need for low costs, proper inventory levels and maximum service. They must ensure that supply chain management is an integral component of the company's strategic direction and plan to create and maintain competitive advantage. If that isn't enough, they have three more challenges to deal with.

Merge the Financial Supply Chain and the Product Supply Chain. A supply chain is not a series of links forged together for a common purpose. That is a nice image. However it minimizes the reality of the chain and how each link in that chain must design its own process to function within the chain. As a result, there are supply chains within each supply chain.

Each chain is really a series of buyers and sellers of products and services. That means that each link participant has his own objectives, and sometimes these are conflicting objectives that can work against supply chain effectiveness. Companies buy and sell and participate in the supply chain for their own reasons. This is an important and sometimes overlooked fundamental of developing a working supply chain process, both for the entire chain and for each link in the chain.

A chain is extended from ultimate buyer back through his supplier to his supplier's supplier and to his supplier's supplier. The mix of trade partners and participants in a chain reflects differences as to size, capital, costs, technology and efficiencies.

There are two flows in every extended chain, the product one and the financial one. With the continuing pressure to generate shareholder value, reduce costs, improve profits, reduce inventories and increase service, a key to achieving these results rests with recognizing and melding two flows and processes.

The diversity of participants adds to the complexity and length of the process. As a result, uncertainties, costs and inefficiencies are created in both the product and financial chains. Uncertainty and inefficiency is compounded for firms located further down a chain, removed from the ultimate buyer. Extended product chains generate inventories both for sales and to buffer unknowns. Likewise extended financial chains generate capital needs for those inventories and sales. The issue is to reduce the extra costs and redundancies, both for capital and for material and logistics, in a chain. The costs are often not visible, as with freight costs, in the total process. But, while fractured among the various firms, they are significant in the aggregate supply chain.
Key topics for c-level executives are inventory velocity and reducing the cycle time from purchase order placement to product sales. Yet the length of global supply chains can extend, not reduce this time. Also the extended payment terms can mitigate company incentives to reduce that cycle time and increase inventory velocity. Extrapolate the inventory, time and capital costs along the extended supply chains and among the numerous trade partners and there is substantial opportunity to reduce total supply chain costs.

Merging the two supply chains, reducing unnecessary costs and inventories, requires recognizing that the two chains exist and are not mutually exclusive. That is the first step. Broaden the focus, both external and internal, among all affected parties. Finance and logistics collaborate. They share information. They gain visibility across the chain. They do not bolt together the two chains. Instead they revise the process, create a new one that sustains the two chains. The impact of all these is to reduce uncertainty, time and risk, which then reduce inventories and capital expense.

Impact of new driver hours of service regulations. The Federal Motor Carrier Safety Administration has implemented new rules for truck driver hours-of-service. The current rules allow 10 hours of driving within a 15-hour, on-duty period and requires only eight hours of off-duty time. Breaks and delays may extend time on duty.

The new regulations, which are to reduce fatigue-related accidents, increase the amount of required time off between shifts. Drivers can drive 11 hours after a 10-hour break, but they may not drive after 14 hours on duty. Breaks and delays cannot extend time on duty. Truckers may not drive after being on duty for 60 hours in a seven-consecutive-day period or 70 hours in an eight-consecutive-day period. This on-duty cycle may begin again after a driver takes at least 34 consecutive hours off duty.

All this will have varying impact on supply chain management. Carriers are expected to need additional drivers and equipment. They may impose tight restrictions on extending times for loading and unloading, to mitigate additional driver impact. Given a possible tight equipment situation without the hours-of-service issue, this may exacerbate the supply of transport capacity and service available for manufacturers, retailers and distributors / wholesalers. Adding drivers and equipment and controlling driver delays will lead to debates between carriers and shippers as to who will pay for all this.

The rules may also mean that companies will have to look at their distribution network configuration. Existing distribution centers may not be able to service their territories as efficiently as before. Additional warehouses may be needed to offset the service contraction and increased transport expense. Their locations, how many and the size will require analysis. Since large retailers are expected to expand into smaller cities as they grow and since that growth would affect network design for inventory deployment and positioning, incorporating the hours-of-service impact will accelerate the network configuration analysis and change.

Supply chain security. "60 Minutes" did a story on problems protecting U.S. supply chains. There is the real potential of terrorists using ocean shipping containers to carry weapons of mass destruction. Such an incident could erode consumer confidence in the safety of all import supply chains and shut down global commerce. That is something the U.S. Government could not accept. To rebuild confidence, the government may be forced to act as it did after the financial scandals with Sarbanes-Oxley. They could expand Sarbanes-Oxley to make CEOs responsible for the security of their own company supply chains.

This risk means importers need to understand their inbound supply chain. Customs and Border Protection has laid out rules and best practices. It is positioning importers to be responsible for the security of their respective supply chains. More may be required than using only Customs-Trade Partnership Against Terrorism (C-TPAT) approved service providers. In addition, securing the supply chain may require that Incoterms that are used may change from CIF or FOB or similar terms to Ex-Works placing the security impetus on the importer from his suppliers' doors to final delivery.