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Leveraging Supply Chain ‘Families’ to Gain an Edge

By Tim Brown, Principal, Supply Chain Strategy Practice, Chainalytics LLC

The Wii has become an obsession in my house. And also the source of anxiety and most of the tension. My son strongly favors Super Mario Brothers, but my daughter likes to play Dance, Dance Revolution. I have to admit, I like Wii Fit, myself. If we had 3 Wiis, we could eliminate this tension, but alas, my wife informs me this is not an option in our household. So instead, our family has to work together and share this resource to meet our family’s overall goals for peace and happiness.

Multi-business unit corporations are much like families. In a corporation, each business unit tailors its infrastructure to its own needs while staying within the overall framework of the corporate operating model.

Given the current economic climate, I am seeing more corporate “brothers and sisters” coming together to leverage their network infrastructure and reduce operating costs and fixed assets. I’d like to say that individual siblings are seeing the merits of teaming together – like exploring synergies across regional warehouses -- but in reality, it is the parent (corporate) that is working to develop cross-business-unit network strategies. Perhaps in the same way we are all trying to balance our interests on the Wii.

The benefits to these corporate families of cross-unit network design can be quite substantial. I’ve seen companies reduce their supply chain operations by over 8%. They’ve done it by:

- Reducing facility assets, and subsequent fixed costs.
- Investing in IT and other productivity enablers that an individual business unit may not warrant, but can still benefit from.
- Setting the stage for longer term collaborative tactics such as modal conversion (LTL to multi-stop TL, etc).

But this “coming together” is not without challenges. Here’s what you need to look for:

- Fear. Many may fear losing their position once the collaboration is complete. I’ve seen companies address these fears in a number of ways: from “participate to your fullest or you are terminated” to proactively defining the future organization chart early in the process.
- Closed-mindedness. Many business units see their operations as completely unique. And too often, they can’t imagine anyone being able to effectively replicate their processes. What can you do? Firms can overcome these challenges by establishing a corporate-level charter along with a formal cross-unit project team to conduct a quantitative network design project. Objective third party consultants can be brought in to drive the process, ensure a fair and quantitative approach, and leverage expertise to conduct similar analysis.
- Inconsistent comparisons. In order to support scenario analysis, companies must have a fair “apples to apples” comparison of supply chain operating costs. One challenge is figuring out a way to collect and manage the substantial data required to represent all the networks. Fortunately, established tools and techniques are available to help manipulate substantial amounts of raw supply chain data as well as optimize the product flows in alternative network scenarios.

With limited funds for capital investments and ever-growing demand to reduce costs and assets, supply chain executives will likely find that getting the family together to share may be the best thing to do. As for me? We’re still working on harmony when it comes to the Wii. Perhaps we’ll take up bike riding.

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Weathering Highs and Lows: Seasonality & Supply Chain Decisions

By Jeff Metersky, Vice President, Supply Chain Strategy Practice, Chainalytics LLC

Season's Greetings! At this time of the year, many of our clients are scrambling to satisfy holiday demands or, worse, dealing with excess inventory resulting from inaccurate demand forecasts. Seasonality is often a challenge to many businesses both strategically, trying to balance capacity versus inventory, and tactically, trying to predict demand and operationally manage through the peaks. Over the years, the results of our work has often been impacted by seasonal patterns. The link below is an article we wrote many years ago on the impact of seasonality on strategic supply chain decisions. After the holidays we will release a white paper that looks more tactically at seasonality in an inventory planning context.

Click Here: Weathering Highs & Lows

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Private and Dedicated Fleets: When and Why

By Michael Eaton, Principal, Transportation Practice, Chainalytics LLC

Few of my clients are without some degree of private or dedicated fleet operations. Despite this fact, I’m often asked, “When should fleets be utilized?” The answer requires a look back to the genesis of fleet operations.

Most fleets did not begin as cost savings initiatives. Rather, they began as a real, or perceived, need for service, capacity, or operational flexibility. Indeed, many dedicated fleets expanded significantly as a result of the carrier capacity crisis of 2004 - 2005. Once created, they rapidly became institutionalized and part of a company’s culture. Nowhere is this truer than in private fleets where the drivers, dispatchers, mechanics, and management team become employees. As such, this nepotism hinders companies from reviewing these operations with the same degree of rigor and impartiality as their contract carriers.

You can’t let your prejudices determine the effectiveness of your operations. As you review existing fleet operations or even consider new ones, you must ask if your fleet is cost effective and right sized. Generally, I’d suggest the following questions at a minimum:

1. Are contract carriers readily available for the lanes I need to cover?
2. Do I need to provide services not readily available in the contract carrier market?

• Back of store delivery services
• “Key Drop” or unique security requirements
• Driver assembly services
• High per load drop count/small drop size

3. Does short length of haul and high repeatability yield high potential utilization?
4. Do I place value on highly visible “branded” equipment on the roads? A single catastrophic accident can negatively affect brand image.
5. And most importantly: Is the fleet option reasonably cost effective compared to available alternatives?

Assuming you answer a resounding “yes” to these questions, and fleet operations are already in place, what are some of the early warning signs that your fleet may be growing without appropriate impartial review? Ask yourself:

1. Is the average length of haul increasing?
2. When new lanes appear, is my standard practice to give them to the fleet?
3. Has the frequency of short term rentals been increasing?
4. Am I routinely validating the availability of cost effective contract carriers for these moves?
5. Do I have the ability to effectively model these continuous move fleet operations in the context of available one way carrier rates?

Private and dedicated fleets are important for many operations. But routinely asking questions and conducting impartial reviews of needs and capabilities will help insure that a fleet is correctly sized and cost effective. Benchmarking yourself against contract carriers will also help protect against the inevitable questions that arise from senior management. “Is our fleet the right size and cost effective?” I hope you can answer a resounding, “Yes”.

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Transportation BI Really Delivers

By Bill Loftis, Principal, Transportation Practice, Chainalytics LLC

A client once said to me, “We have no way to know if we are getting better or worse in transportation. All we know is if costs are going up or down.” No wonder. With fuel ranging between $45 and $147 per barrel, rates dropping 15% on some lanes, and the never-ending cycle of network and operational changes taking effect, these ever-changing transportation variables make it hard to evaluate cost improvements. No doubt transportation “performance” has historically been nebulous at best.

I was encouraged last month as I attended CSCMP. Several companies have implemented significant transportation business intelligence (BI) approaches to measuring performance and are putting these new capabilities to good use. As one company dubbed it: accountability enabled by actionable reporting.

If you are wondering what the difference is between Trans BI and conventional metrics, you’re not alone. The most important thing to grasp is that the information is much more precisely and meaningfully displayed with a well-designed BI tool than in traditional reporting. With traditional reports, companies measure inbound transportation spend at a summary level. In many cases, a user will find no abnormities, and no reason for further monitoring. However, with Trans BI, companies can more precisely measure -- like evaluating costs for each vendor’s inbound lane. In one example, a company used Trans BI to examine its inbound lanes, finding 3 lanes with costs much higher than targeted, lanes undetected by a summary report. In this case, the utilization opportunities resulted in over $849,000 savings, eliminating 31 trucks per week. I can tell you the users were ecstatic to say the least. For those of you wanting additional details on this example, I have included it in a presentation that I shared at the annual CSCMP conference in September.

In the spirit of fair and balanced reporting, a skeptic could argue that the same information could be made available with standard reporting, so why the additional Trans BI? It is partially true. You can get more precise information with regular reports, but the problem with regular reports is that they are far too unwieldy to manage and understand. Imagine reviewing this detailed information for hundreds or thousands of vendors -- it simply cannot and certainly would not be done. With the use of Trans BI dashboard technology, one can browse through the views, progressively clicking into problem areas, and quickly find operational areas that require monitoring and correction.

What does this mean? As one client shared: this gives them “metrics as we go.” Isn’t that a wonderful image? Normal metrics, at best, explain why something happens, but are too slow or too high level to actually enable change. Trans BI quickly manages more precise information with alerts that enable a user to step in and make operational changes in a matter of days.

We are seeing many more opportunities, and you will see several listed in my CSCMP presentation. But I honestly think the strategic benefits you see in the presentation are more important than tangible. As a result, I will be re-writing my Best Practices template to include Trans BI. I think Trans BI is as important to sustaining best-in-class performance as benchmarking, regular procurement events, and TMS. What do you think? Please let me know at info@chainalytics.com.

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How Fast Should You Move Your Inventory? Sometimes, Speed Kills

By Omer Bakkalbasi, Principal, Inventory Planning, Chainalytics LLC

In the current battle-scarred economy, as with any economic downturn, “cash is king”. When sales are stagnant or declining, where is the easy target to generate cash? Inventory, of course. Why not? I see plenty of hype to goad you on. I’m sure you’re probably bombarded with news articles and case studies from software vendors that boast of their success in minimizing inventory and increasing turns in the supply chain. “Lean” and “Six-sigma” experts “preach” that inventory is the “bad cholesterol” that clogs up streamlined operations. I continue to read in the press and, unfortunately, hear from our clients that inventory is “a necessary evil,” and should be avoided at all cost. Beware! This myopic focus on inventory reduction is dangerous.

Inventory is necessary, but is not evil. And if you manage it effectively, it can be a significant dial to turn. Inventory impacts both the balance sheet and the income statement, with both helpful and harmful effects. As a liability, inventories tie up working capital, generate expense to store and handle, and increase the chances of obsolescence. But as an asset, the right inventory improves revenue, helps meet customer expectations, reduces transportation costs, and helps procurement take advantage of economies of scale.

Inventory turns should not be a target you set, but the driver to achieving your enterprise’s goal. The right inventory turn will help you meet customer expectations, minimize your total cost, and maximize your company’s ROI. The wrong inventory turn will create stock outs or service failures, eat away at working capital & operating costs, create obsolescence, and unnecessarily shrink your margins.

The key to succeeding with inventory is not how fast it flows through the system, but how you mix the right products in the right locations to achieve the highest profitability. Instead of focusing solely on turns, you should also look to a set of metrics that allow you to maximize profits. Our favorite is gross margin return on inventory investment (GM ROI). Forget turns which drive the organization to spending inventory dollars on fast-selling, low-margin items -- not to mention the creating upward pressure on the transportation budget. Rather, view products by profitability contribution, and thus spend your inventory investment more wisely.

Also, you should differentiate your inventory policies on more than just turn velocity or some variation of simple “ABC” classifications. After all, not all products are created equal. When you are solely focused on simple metrics like turn velocity, you have a tendency to apply blanket approaches to inventory, disregarding differences in variability and value. A recent Aberdeen study found that Best-in-Class companies are more than 3 times as likely to differentiate their inventory policies as compared to Laggards. At a minimum, you should consider velocity, variability and value, but in addition, consider evaluating margin contribution, life-cycle stage (i.e., newly introduced or end-of-life product) and shelf life.

Myopia on inventory velocity – fueled by the hype – is dangerous, even in this economy. Succeeding in this environment requires you to step back and consider the impact of your inventory decisions on profitability. After all, sometimes speed kills.

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Lower rates and fewer carrier partners… have your cake and eat it too

By Gary Girotti, Vice President, Transportation Practice, Chainalytics LLC

The for-hire carrier market is extremely soft, and shippers are taking advantage of it. Just one look at the results from some recent procurement events shows proof (see figure). Shippers are enjoying double-digit rate savings. But at the same time they are reducing their carrier base. Is this near-sighted?

Not really. It’s not only shippers that are altering the relationship, it’s also the carriers. In the shadows of this depressed market, carriers have altered their networks at unprecedented levels. So, shippers' decisions to bring their freight to market are not solely based on cost (yes, it’s one obvious large objective), they are also based on a need to realign their network of providers to those carriers that align best with their operations.



Reducing the number of carriers you work with can have a number of benefits. By focusing on fewer carriers, you have greater opportunity to build stronger, more focused relationships, enabling you to work with each carrier uniquely. These tighter relationships can theoretically improve service and capture operational efficiencies. For example, with fewer touch points in the delivery network, promotional programs, seasonal fluctuations, and periodic routing changes are more easily managed and efficiently implemented. In addition, appointment setting, yard management, EDI communications, and claims management can all be managed with fewer internal resources.

But you can push it too far. If you’re left with too few carriers, the operational savings won’t offset the potential rate increases you could become vulnerable to when the market stabilizes.

So, how many carriers is enough? The mathematical answer is one less than the number at which an additional carrier does not reduce line-haul costs enough to offset operational costs of managing more carriers. If quantifying the operational costs was easy, the result would be obvious. The reality is that the number will come through experience and some trial and error. To this end, it is a good exercise for shippers to monitor each carrier’s service failures, turndown rates, and shipper interactions by lane. This will provide you a good sense of the balance you’re achieving.

Even if big rate reductions won’t materialize in 2010, it is still a good practice to realign your carrier network to better match the current carrier market and explore opportunities to reduce your carrier base.

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