@ Supply Chain Management

Outsourcing World reports that Accenture has recently won a $6.3 million contract to provide IT services for US DLA (Defence Logistics Agency).

The contract deals with the replacement of DLA’s existing repository for technical data.

The contract covers the following services:

The contract covers the first phase of PDMI, which includes document management services, business process re-engineering, automation of key business processes, change management services, training and organizational design services

Tags: Supply Chain News, Accenture, DLA

IBM has released a new RFID (Radio Frequency Identification) tag designed to combat counterfeit products flowing through a supply chain. Aimed primarily at pharmaceutical companies, the RFID tags are placed on the product at the unit, case and pallet level and is tracked through the entire supply chain. Apparently, a pharmaceutical product changes hands as many as 10 times from the manufacturer to the point of sale.
From the article’s description, the RFID tag seems to be largely a passive tag. As the article indicates, the RFID tracking system is described as follows:

The IBM RFID system for pharmaceutical tracking and tracing uses blended RFID software and services to automatically capture and track the movement of drugs through the supply chain, according to IBM.

I do not claim any knowledge of how the IBM system works but it does seem that its capability depends on adoption across the pharmaceutical supply chain by the many partners that are situated up and down the chain. Also, it isn’t clear whether the unit, case and pallet level tags are identical or different. Since the tag is most likely a passive one, there are software services and objects behind the scenes that collect, organize and report on the state of the products in the supply chain.
So is this Innovation or Application? The latter, I think.

Tags: RFID, Supply Chain Management, RFID Tags, Pharmaceutical Supply Chain

Tompkins Inc has a great web presentation that outlines some of the key steps that any firm undertaking the journey of selecting a 3PL must consider before taking that step.
Jim Tompkins outlines the following warning not too far into the presentation:

A study of third party logistics providers carried out by John Langley Jr., Ph.D., of the Georgia Institute of Technology, with Capgemini, DHL, and SAP, conducted an extensive study about using 3PL services in North America, Western Europe, Asia-Pacific, Latin America, South Africa, and the Middle East to examine critical trends and issues among key markets and key customers in the 3PL industry. You can peruse the executive summary of the study here.
The key takeaways from the above study are:

• 3PL users continue to view a collaborative partnership approach with their 3PL providers as key to improving the user-company 3PL performance. However, unlike in past surveys, pricing has become the most important attribute in selecting a 3PL provider. This is different from last year’s study where value-added services was ranked first. In fact, this year the proficiency of a 3PL provider’s core services was considered more important than the provider’s ability to deliver value-added services.
• 88% of those surveyed view their relationship with their service provider as successful. Although users are generally satisfied with their 3PL providers
• Implementing IT ranked third behind cost pressures and improving supply chain management as a leading factor affecting 3PL user organizations

The gaps identified in the 3PL industry in 2005 were:

• Disappointment with the 3PL provider’s abilities to develop advanced services.
• Need for relationship reinvention, mechanisms for continual improvement, and solution innovation.
• Increasing importance on repeatable and leveraged solutions.
• Emerging role of supply chain integration.
• Global evolution of 3PL usage.

The 2006 study is forthcoming shortly at it can be accessed at the following site: 3PL Study.

Categorized as: News_, 3PL_
Tags: 3PL Trends, 3PL Study, 3PL, Supply Chain Service Providers, Supply Chain Management, Capgemini Consulting, Georgia Institute of Technology, SAP, DHL

Logistics Quarterly has an article about The Coming Wave of Supply Chain Convergence in their latest issue. The lead in describes the following:

Over the past decade, we have seen warehousing companies become logistics companies, watched logistics managers become supply chain professionals

That sort of describes where I work right now as well as my current role. Nevertheless, the author Benjamin Gordon believes that the next big trend in the supply chain industry will be “supply chain convergence”. What does he mean by that phrase? Benjamin defines convergence in the following way:

Convergence is all about the combination of relevant services to provide customers with a broader set of solutions. In the 1990s, convergence meant the fusion of warehousing, freight forwarding, and transportation management to produce lead logistics providers or 4PLs. Companies like Menlo, UPS and Kuehne & Nagel, developed integrated supply chain solutions and enabled customers to reduce the number of logistics suppliers they used. Today, companies are increasingly choosing to compete by combining services. For instance, PWC Logistics acquired GeoLogistics, Trans-Link, and Transoceanic in order to add freight forwarding, event logistics, and project logistics to their arsenal of contract warehousing-based capabilities. Similarly, UTi has acquired Standard Logistics, Unigistix, and market transport in a bid to add warehousing, reverse/value-added logistics, and transportation management to their freight forwarding base. The convergence of logistics services is already well underway.

Benjamin seems to differentiate convergence in the past (which could be said to be about consolidation of multiple competencies under one broad roof) and convergence in the future (which could be said to be about proliferating specific services under the broad roof already created in the past). However, he rightly points out that this convergence is being really driven by the customer of integrated supply chain services i.e. large MNCs that have gone global (through outsourcing and in search of global markets for their products) in a substantial way. If today that seems largely one directional i.e. MNCs in the developed world driving globalization, that will change in the near future but integrated supply chain service firms will benefit nevertheless.
However, Benjamin draws my attention to something more substantial:

In the current decade, we are beginning to see the emergence of the next big wave of convergence: the combination of outsourced logistics with other forms of outsourcing. For example, in a recent survey of logistics CEOs at the International warehousing and Logistics Association (IWLA), we found that, out of five topics, the subject that generated the highest level of interest was titled: “Where logistics outsourcing converges with other outsourcing.”

I’m not biting. Yet. It is undoubtedly true that engaging a supply chain services partner might seem a lot like outsourcing your IT or accounting or manufacturing from the point of view of the customer and thus there might be an expectation from the customer that instead of using 5 solutions providers for as many outsourced functions, it might be better to use just 1 or 2 integrated solutions providers. Therefore, one might take the view that this might drive convergence of the solutions providers themselves.
Benjamin cites the following in support of his thesis:

First, just as GM’s move (over 15 years ago) to dedicated contract carriage with Schneider, ushered in a new era of dedicated contract carriage growth, so GM’s moves in IT outsourcing may represent a broader trend. Second, logistics outsourcing contracts are likely to follow the same path as the IT outsourcing route. Third, aggressive IT outsourcers are seeking logistics partners. Some are even pursuing mergers. Companies like EDS, Accenture, and other IT firms are looking at logistics acquisitions as a way to extend their outsourcing capabilities. Meanwhile, logistics companies like New Breed and Menlo are bolstering their IT capabilities in a bid to accomplish a similar goal, but from a different direction. Convergence is already underway!

I would offer the following: Outsourcing/offshoring takes advantage of real economic disparities distributed across the globe. It is cheaper for an MNC to produce an unnamed branded shoe for 50 cents an hour or day, whatever the case might be, in some third world country. It is also true that 50 cents an hour or day is a boon as far as employment goes in that part of the world as well. However, the production/shipment/marketing/sales of the shoe involves several competencies. If you outsource your competencies to a third party (rather than retaining those competencies when you offshore your production), then you’re indirectly narrowing the range of competencies from which you can then derive competitive advantage. Moreover, you’re unwittingly giving leverage to third parties when it comes to negotiating power for those same services. Some of that leverage is probably mitigated by the fact that third parties can be switched in and out but that is true only for commoditized products and services. This can be boiled down to the following that it makes sense to outsource non-value added processes but not value-added processes. From the point of view of a customer, outsourcing non-value added services to a third party creates a middle man of non-value added services that can only function profitably on scale and breadth of services offered. While the third party is hired with the idea that on an ongoing basis, better services will be had for cheaper prices, the third party will try (or die trying) to offer “value” as a justification for same or higher prices for services rendered. However, that brings up an interesting paradox – while it is specifically non-value added processes that a firm initially outsources/should ideally outsource (non-value added from the point of view of a customer), the third party can only exist by creating value in those outsourced services – otherwise, it really wouldn’t be profitable except in the scenario that third parties would merge into 1-3 large entities in order to create efficiencies of scale.
This is why I think that such convergence would be limited because firms survive by creating competitive advantages in the portfolio of value creating activities that they engage in or offer. Offshoring makes sense in that line of thinking. Outsourcing any activity other than non-value added services doesn’t make sense.
An interesting aside, I’m plagued by the idea that all this designation of value added or non-value added services is being driven by some accounting allocation of overhead. That would be horrible.

Categorized as: Reviews_, Supply Chain Management_
Tags: Supply Chain Management, Supply Chain Management Trends, Outsourcing, Integrated Logistics Service Providers, 3PL, Offshoring, 4PL

In Theory of Base6

Supply & Demand Chain Executive magazine has an article about the Six Key Trends Changing Supply Chain Management Today. Whatever be the success rate of prognosticators or prophets like Tim Vaio, your own success is predicated by your ability to spot successful trends, sport mastery of those trends and support others in acquiring mastery over those same trends. So here are Tim’s six trends that are changing Supply Chain Management:

Trend 1 – Demand Planning Begins at the End of the Cycle

Tim writes that:

…as sources and capacities for manufacturing have increased, more companies have moved away from focusing efforts on plant-level production planning and are adopting more of a demand-driven focus of trying to influence and manage demand more efficiently.

What does this sort of Demand Planning boil down to?

Companies should conduct an enterprise-wide internal Demand Review to gather information from all aspects of the organization. Goals are then set to gain consensus on what will be sold each month for each product line or category and the resulting revenue. Of course, the driver of the Demand Review process is continuous improvement of forecast accuracy.

Peel away all the language and that’s what is at the core of demand planning – Forecasting : with better accuracy, more sophistication, more integration with other functional areas within the firm. Like I have indicated elsewhere, there are two diametrically opposite ways of fulfilling demand. If you take the “forecasting” route, the competency that the firm focuses on would center around better information gathering mechanisms, tweaking forecast models and the like. The demand fulfillment capability of the firm i.e. its manufacturing or procurement or whatever other function it has will work to the forecast no matter how good the forecast or forecast frequency i.e. how often forecasts are updated – daily, weekly, biweekly, monthly, quarterly etc. On the other hand, if you take the “lean” route, the competency that the firm focuses on is its demand fulfillment capability. Sure, such a focus would make use of forecasts but forecasts would serve a confirmatory role rather than a directive role which is the key difference. The severe irony of the matter is that while lead times are being increased (with outsourcing et al) for manufacturers, forecasting is being reintroduced albeit in a more sophisticated (and perhaps) and complete/holistic fashion. Such timing indicates that for the right kind of inventory now being factored into the supply chain (because of long lead times), the benefits are quite substantial but for the wrong kind of inventory now being factored into the supply chain, the benefits are quite dismal, even counterproductive.

Trend 2 – Globalization

In elucidating this particular trend, Tim is very focused on one aspect of Globalization – the inbound part of the Globalization scheme of things. Globalization as a trend is irrefutably true and its effect manifests not in one but two directions. Globalizations affects not only how and where companies acquire/produce their products or raw materials but also how and where they sell their products. On the acquisition side of Globalization, a firm’s supply chain is affected by longer lead times, bottlenecks at ports and transshipment points, increased reliance on logistics (and perhaps the reappearance of logistics as a source for competitive advantage), cheaper raw material or production costs and a whole slew of other effects. Tim’s thoughts on the matter are as follows:

A well thought-out supply chain network design can optimize the supply chain network and the flow of materials through the network. In doing so, network design captures the costs of the supply chain with a “total landed cost” perspective and applies advanced mathematical technology to determine optimal answers to both strategic and tactical questions.
The following are strategic questions answered by a well thought-out network design:
Where should facilities be located?
How many facilities should I have, and what capabilities should they have?
What kind of capacity should they have?
What products and services should they handle?
Whose manufacturing and distribution orbit should they source?
Which contract packers or contract manufacturers should I use?
How can I achieve operations synergies through integrating acquisitions?

This is the stuff that makes up my bread and butter on a daily basis. I consult using advanced mathematical optimization techniques in order to answer precisely all of the above questions in a systematic fashion. I should blog about this and that’s one of the posts sitting in my pipeline – How to adapt mathematical optimization to Supply Chain Network design and implementation.
The other aspect of Globalization is that demand is now worldwide. That means that there is a whole set of capabilities that one has to develop in order to successfully sell, compete (with local competitors) and thrive in a foreign land. Note the tremendous success that both Toyota and Honda have had selling within the US. The point to note is that they produce a significant portion of their demand for local markets locally i.e. lead times are shrunk instead of expanded. That’s something to think about.

Trend 3 – Increased Competition and Price Pressures

I would not really think of this as a trend but as a consequence of pervasive globalization. If everyone has jumped on the Globalization bandwagon, then it follows that they’ve or they’re in the process of leveraging significant cost advantages. Tim writes that:

Product innovation and brand equity no longer allowed them to command a higher price in the market. In order to continue to compete with that commoditized product the firm made significant cost improvements with supply chain redesign and technology.

So how are companies adjusting to this consequence of pervasive globalization?

Companies are looking to their supply chains in two ways to help offset this trend. First, they are looking at ways to reduce cost and are creating a more efficient value chain to remain cost competitive. Second, companies are looking at ways they can provide value-added services to meet the demands of more sophisticated customers.

I can’t see how a streamlined supply chain would be the answer to increased competition and price pressure. There are only a limited number of modes for transportation between low cost manufacturing/procurement and end markets, in fact, only shipping exists as a mode for those who are looking at mass production avenues overseas and end markets in the developed world. Given that ports are congested and transportation prices continue to go through the roof, there is little that a firm can do in order to mitigate these effects from a cost perspective. In my opinion, the viable alternative is creating a more efficient value chain. If one goes back in history awhile, one would find that Japanese manufacturers were in precisely this situation – end markets being largely overseas and having a low cost manufacturing base. Their source of competitive advantage focused on quality and being lean – that’s a generalization but I think a largely true one. Fast forward fifty odd years, I hear very little about supply chain quality but I do hear a lot about supply chain processes. Is there such a thing as Supply Chain Quality?

Trend 4 – Outsourcing

Since I work for a warehousing cum 3PL firm, I am quite familiar with outsourcing. As Tim writes:

As many companies step back and examine their core competencies some realize that outsourcing parts or all of a supply chain can be advantageous. With marketplace improvements around (1) information mediums and systems (2) cost and quality of global manufacturing and distribution and (3) product design capabilities companies are gaining additional synergies by outsourcing all or parts of their supply chain.

This is a trend that is happening right now and I’d think that we’re well into a five year cycle of this trend playing out. I wonder if having outsourced all or most of a firm’s supply chain and/or manufacturing, there is a way to compete on the basis of R&D or superior product development or marketing. There might be a way to compete but I am not convinced of the sustainability of such competition or so derived competitive advantages.

Trend 5 – Shortened and More Complex Product Life Cycles

Around the time that globalization was beginning to make its debut as a buzzword, mass customization was also a buzzword. You could hear about how you could customize, mix and match, tailor, add, subtract from your particular product. If you saunter down to any car manufacturer’s website – say Mercedes, Acura etc, there is no dearth of options that you could play around with. Compare that with the Apple iPod series (an unquestionable megahit) and you can have that in two colors and quite a limited number of hard disk sizes. What’s up with that? I’m guessing that MP3s have not reached the point of commoditization – there’s still a cool zip factor associated with MP3s.
Tim writes:

Today many companies are under pressure to develop innovative products and bring them to market more rapidly while minimizing cannibalization of existing products, which are still in high demand. In order to meet the needs of both customers and consumers, companies need more efficient product lifecycle management processes.

I’m pretty sure that PLM is going to be an ongoing trend. It is often said that a person can manage three or four variables in their head at a time but that’s simply insufficient with today’s myriad interrelated and interacting processes.

Trend 6 – Collaboration Between Stakeholders in the Extended Supply Chain

I’ve heard of collaboration in supply chains from day one. However, collaboration that one encounters in real world supply chains are spotty and sporadic. Tim writes:

As supply chains continue to develop and mature there has been a move toward more intense collaboration between customers and suppliers. The level of collaboration goes beyond linking information systems to fully integrating business processes and organization structures across companies that comprise the full value chain. The ultimate goal of collaboration is to increase visibility throughout the value chain in an effort to make better management decisions and to ultimately decrease value chain costs. With the right tools, processes and organizational structure in place collaboration provides key people throughout the value chain with the information needed to make business-critical decisions with the best available information.

And,

Companies that expand the usage of sales and operations planning have greater visibility across their owner enterprise and respective value chain, gain the agility necessary to improve the PLM process, improve promotional planning, minimize unnecessary buildups of inventory, increase revenue predictability and execute customer service expectations.
The S&OP activity enables information systems to connect the value chain participants around key demand information, such as customer forecasts, and around key supply information, such as supplier inventories and capacities.

The kind of collaboration is absolutely necessary but one must keep in mind the underlying philosophy of demand fulfilment or how is it that the firm is planning to execute the demand fulfillment activity. The above trend (an ongoing and probably going to intensify) drives collaboration through a mathematical version of reality driving up the risks from uncertainties that are spread throughout the supply chain.
Tim also writes about the role of supporting technologies in the coming supply chain management future. Among the usual suspects are represented quite well:

As supply chain networks have become more complex the need for greater and improved supply chain technology solutions has become critical. Enterprise resource planning (ERP) and best-of-breed supply chain management (SCM) solution providers have made significant investments in developing solutions to address the needs of manufacturing and distribution companies in areas, such as:
Network and Inventory Optimization
Product Lifecycle Management
Sales and Operations Planning
Manufacturing Optimization
Logistics Optimization
RFID
Procurement
Business Intelligence

These technologies have enabled the supply chain