Posts
In this latest guest post, Douglas Macbeth of the University of Southampton School of Management argues that western economies can no longer afford to pursue a strategy of relentless offshoring - the costs and the risks are far too high...
Let us start with a few propositions which, in my experience, describe the majority of our manufacturing organisations – as well as many others.
• Procurement isn’t well understood at board level;
• There are not enough CPOs who are able to influence board direction and strategy;
• Short-term financial myopia drives decisions;
• Manufacturing is no longer seen as core to western economies – services are more important.
For many years, western companies have been moving away from manufacturing and have chased the world to find the latest low-cost country from which to source everything from materials to complete products.
But why has this happened?
To some extent there is a certain logic – labour and social costs are initially much lower in developing countries. But does anyone really know how to calculate the total cost of acquisition (far less the total life-cycle cost) of anything? And if not, what data is the decision maker using? While the concepts might be easy to grasp, extracting meaningful data out of ERP or traditional accounting systems is enormously difficult. Add multiple divisions and legacy information systems, and the quest for the Holy Grail looks simple in comparison.
Add to this the fact that the proportion of total cost which is accounted for by labour tends to be very low, and it is slightly puzzling why the trend for low-cost sourcing is so prevalent.
The reality is that the difficulties of offshoring are now well recognised. There is often a shortage of appropriate skills in the target location; infrastructures for physical logistics and legal structures to conduct western-style business transactions may be in short supply; time zones, culture, behaviour and attitudes are likely to require careful consideration and it will often be necessary to pay the costs of ex-patriot managers to help in the start up phases at least.
The alternative to the latter is to train up locals – a form of technology transfer which can create competition much quicker than you would like. And while some companies try and limit this by only transferring some of their capabilities, the same supplier might be building up skills across multiple orders. Who, apart from the supplier managers (and in some cases their governments), would have any view over the whole supply chain to see this pattern?
When we add to this the experiences we have just been through with the global financial system meltdown and we have the makings of a real catastrophe which will challenge the perceived wisdom of offshoring.
One major lesson for me from the banking crisis is that not enough people saw how interconnected the world’s financial systems were. Equally, no one had the appetite to perform a proper due diligence and risk assessment on the nature of the assets that were supposedly underpinning the whole house of cards.
However, before we criticise the bankers too much, how many of us can define our extended networks of suppliers and customers and have done a detailed assessment of where the critical risks are located and what mitigations are needed?
Wwe seem to be in the midst of a perfect storm. Some organisations are replacing bank lending to suppliers with their own financial support just to keep transactions moving, there are issues around currency fluctuations which are difficult to hedge against and the recent threat to business credit insurance threatens to further restrict the fluidity of supply chains. Without trust – or at least, insurance – how can any trade function, especially across international borders?
In addition, while there is talk about avoiding the threat of protectionism in international trade, the levels of taxpayer investment, and therefore future taxation, is at mind-blowing levels. It is no surprise that politicians are trying to control the effects of their investments to derive local benefits.
In the midst of all this, the environmental message seems to be getting heard more clearly. One of the features of this, however, will be measurement and concerns about carbon footprints and the true costs of transportation.
The opportunity for procurement to take centre stage here is clear – no other function has the potential to contribute so much. Risk assessment has always been part of the procurement process, but now we have to extend its horizons beyond the suppliers we are directly contracting with and into our extended networks more explicitly. We also need to be involved in the redesign of products to meet the challenges of extended life, reuse and repurposing that the green agenda will drive.
The fundamental need is to restructure supply chains to support these networks, which might still be international in part rather than simply chasing headline price reductions. It might also be necessary to repatriate some activities closer to customers to reduce the risks and costs of international transportation – companies might have a mixed model with different supply solutions for different channels of customer service, for example.
So, this article started by focusing on manufacturing rather than services. Surely we must by now recognise that the reliance of an economy on invisibles is inherently flawed – we must rebuild a balanced portfolio of activities. Of course we still need an effective and reliable financial services sector but we also depend on goods producers, transportation providers, energy and water providers to live our normal lives.
While some of the information and entertainment industries may be less concerned with some of these aspects since their dependence on physical location is less critical, for the rest, physical location must be a mix of close to source and close to consumer. And let us do that in a more considered way, informed by a vision of a more interdependent future.
And while I’m not suggesting that we should head for a state interventionist system (although that seems to be what is happening) rather, we need to redefine and then persuade our societies’ stakeholders that we need a more enlightened model which recognises and can work with interconnectedness and diversity in a dynamic and entrepreneurial way.
Are procurement leaders up to the challenge?
Professor Douglas Macbeth is director of business development, MSc global supply chain management and supply chain research, as well as professor of purchasing and supply chain management, at the University of Southampton School of Management.
Showing posts with label location. Show all posts
Showing posts with label location. Show all posts
Wednesday, April 29, 2009
Friday, August 29, 2008
Site Selection – Part 2 - A Site for Sore Eyes
When you get right down to it, all logistics (like all politics) is local. HP maintains 88 distribution hubs throughout the world. IBM Corp. has at least one major logistics site on every continent in the world except for Africa, and 28 in all. The Gillette Co. has four distribution centers in the United States and 60 total worldwide. In the United States alone, retail behemoth Wal-Mart has 128 distribution centers strategically located in 38 states.
And yet, there's a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision).
For many years, Expansion Management, a magazine that specializes in site selection, has teamed up with Logistics Today to produce the Site Selector—a tool that offers an objective ranking of the 362 major U.S. cities (i.e., metropolitan statistical areas, as defined by the U.S. Office of Management and Budget).
FINDING THE RIGHT PLACE
The Site Selector was designed to help companies find the right city or region for their distribution needs. Because virtually every company uses motor carriers at some point in its distribution network, access to good roads is an important factor, but it's not the only factor. The city of Trenton, New Jersey, for instance, was ranked at number one (the highest rating) for road infrastructure in the 2005 study, which is not too surprising given the city's proximity to major highways and turnpikes. Trenton is also strategically sandwiched between two major metropolises—Philadelphia, Pennsylvania, and New York, New York.
However, the condition of its roads is not very good at all. Trenton's rank in that category was number 355 out of 362. Taking a look at some of the other categories, we find that Trenton placed well for taxes and fees (number 30), and fair-to-middling for rail access (number 151) and transportation and distribution industry (number 154). All things considered, Trenton finished nationally at number 68, which puts it just inside the top 20 percent.
But because most site selection decisions focus on a region of the United States rather than the entire country, it's also helpful to identify how well a city does compared to other cities within the same region. Trenton, for instance, ranks as the 15th most logistics-friendly city within the U.S. Northeast. The condition of its roads is far less of a factor for companies with supply chains in the Northeast because, frankly, none of the roads in that part of the country are in very good shape, relatively speaking. The one-two punch of congestion and Mother Nature accounts for the perpetual epidemic of orange cones on highways in the Northeast. As a result, road condition is almost a nonfactor for companies making site selection decisions centered on the Northeast.
Chicago Consulting undertook a study to determine the best warehouse networks in the United States, with best indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Bloomington, Indiana. The average distance to a customer would be 803 miles, with an average transit time of 2.28 days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Palmdale, California.
When The Gillette Co., a manufacturer of personal care products, batteries, and other consumer packaged goods, launched its North American Network Study in 2002, the goal was straightforward: Identify the best distribution network that would allow the company to deliver excellent customer service at the least cost. As solutions manager for the company, Louise Knabe's job was to figure out how many DCs Gillette should have and where they should be. Least cost was an important consideration, Knabe points out, because if Gillette's goal had been simply to provide the best possible customer service, the network study could well have suggested putting a distribution center in every state.
"From a logistics and distribution perspective, Gillette measures customer service by order cycle time (time from when the customer places the order until they receive the order) and on-time delivery performance (percentage ol shipments that arrive on time)," Knabe explains. "The strategic DC network design affects the order cycle time because the location of the DCs affects the transit time to the customer."
At the time of the network study, Gillette had two DCs located on the East Coast, one near Boston, Massachusetts, and the other near Chattanooga, Tennessee. The Tennessee warehouse stocked only Duracell batteries, while the Massachusetts warehouse stocked everything else. Neither warehouse carried all of Gillette's products.
So why was this a problem? "Our project analysis revealed that this situation made it difficult to deliver top-quality customer service," Knabe points out. "Let's say I was a customer based in Virginia. That meant I was getting a shipment from Tennessee of batteries and shipments from Massachusetts of everything else. So I've got two trucks showing up with Gillette products on it, which was a bit of a nuisance."
The bigger issue for Gillette, though, was that because neither warehouse had all of the company's products, many customer shipments had to be delivered by less-than-truckload (LTL) carriers, a more expensive transportation mode than truckload. The transit times were longer and the reliability was lower than it would have been if Gillette had been able to get all products loaded onto the same truck. Gillette concluded that in order to deliver top-quality service, it needed to find a way to convert as many of those LTL shipments into full truckload as possible.
That's when Gillette got to work on its site selection best practices, with the goal of developing a network that would locate the DCs close to the customer and make it possible to regularly ship by truckload.
COST VERSUS SERVICE
To answer the questions of how many warehouses it needed and where they should be, Gillette conducted a complete theoretical analysis to identify the best locations. The company factored in such considerations as the location of its manufacturing plants and its sourcing points. Equally important, Gillette looked at where its customers were located, and specifically at who ordered what, and in what volume. "You take those two things and then ask: How do I marry them up and how do I figure out where my warehouses should be?" Knabe says.
"In terms of distribution cost, we looked at the freight cost of going from the plant to the warehouse, and then we also looked at the freight cost of going from the warehouse to the customer," she explains. Using an optimization software tool to evaluate every possible scenario, Gillette asked questions such as: If we had three warehouses, where would they be to minimize our freight costs? The company looked at other distribution costs, including real estate, labor, and taxes, and utility costs, such as electricity ("That ruled out Manhattan pretty fast," Knabe notes). Inventory carrying costs were also factored into the plan.
On the service side, the question Gillette asked was: How can we impact customer service when we're designing our distribution network? According to Knabe, there were two ways. The first way was to set up the distribution network so that Gillette could maximize its use of truckload, which meant stocking all products in all warehouses.
The second part of the answer involves order cycle time. "The location of our warehouses affects transit time to the customer," Knabe says, "so we looked at how many warehouses we needed if we had to be able to get to every customer within 48 hours. And then we asked: How many warehouses would we need if we only had to get to 85 percent of our customers within 48 hours? We looked at our network from both of those angles—cost and service—and figured out what made the most sense."
And yet, there's a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision).
For many years, Expansion Management, a magazine that specializes in site selection, has teamed up with Logistics Today to produce the Site Selector—a tool that offers an objective ranking of the 362 major U.S. cities (i.e., metropolitan statistical areas, as defined by the U.S. Office of Management and Budget).
FINDING THE RIGHT PLACE
The Site Selector was designed to help companies find the right city or region for their distribution needs. Because virtually every company uses motor carriers at some point in its distribution network, access to good roads is an important factor, but it's not the only factor. The city of Trenton, New Jersey, for instance, was ranked at number one (the highest rating) for road infrastructure in the 2005 study, which is not too surprising given the city's proximity to major highways and turnpikes. Trenton is also strategically sandwiched between two major metropolises—Philadelphia, Pennsylvania, and New York, New York.
However, the condition of its roads is not very good at all. Trenton's rank in that category was number 355 out of 362. Taking a look at some of the other categories, we find that Trenton placed well for taxes and fees (number 30), and fair-to-middling for rail access (number 151) and transportation and distribution industry (number 154). All things considered, Trenton finished nationally at number 68, which puts it just inside the top 20 percent.
But because most site selection decisions focus on a region of the United States rather than the entire country, it's also helpful to identify how well a city does compared to other cities within the same region. Trenton, for instance, ranks as the 15th most logistics-friendly city within the U.S. Northeast. The condition of its roads is far less of a factor for companies with supply chains in the Northeast because, frankly, none of the roads in that part of the country are in very good shape, relatively speaking. The one-two punch of congestion and Mother Nature accounts for the perpetual epidemic of orange cones on highways in the Northeast. As a result, road condition is almost a nonfactor for companies making site selection decisions centered on the Northeast.
Chicago Consulting undertook a study to determine the best warehouse networks in the United States, with best indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Bloomington, Indiana. The average distance to a customer would be 803 miles, with an average transit time of 2.28 days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Palmdale, California.
When The Gillette Co., a manufacturer of personal care products, batteries, and other consumer packaged goods, launched its North American Network Study in 2002, the goal was straightforward: Identify the best distribution network that would allow the company to deliver excellent customer service at the least cost. As solutions manager for the company, Louise Knabe's job was to figure out how many DCs Gillette should have and where they should be. Least cost was an important consideration, Knabe points out, because if Gillette's goal had been simply to provide the best possible customer service, the network study could well have suggested putting a distribution center in every state.
"From a logistics and distribution perspective, Gillette measures customer service by order cycle time (time from when the customer places the order until they receive the order) and on-time delivery performance (percentage ol shipments that arrive on time)," Knabe explains. "The strategic DC network design affects the order cycle time because the location of the DCs affects the transit time to the customer."
At the time of the network study, Gillette had two DCs located on the East Coast, one near Boston, Massachusetts, and the other near Chattanooga, Tennessee. The Tennessee warehouse stocked only Duracell batteries, while the Massachusetts warehouse stocked everything else. Neither warehouse carried all of Gillette's products.
So why was this a problem? "Our project analysis revealed that this situation made it difficult to deliver top-quality customer service," Knabe points out. "Let's say I was a customer based in Virginia. That meant I was getting a shipment from Tennessee of batteries and shipments from Massachusetts of everything else. So I've got two trucks showing up with Gillette products on it, which was a bit of a nuisance."
The bigger issue for Gillette, though, was that because neither warehouse had all of the company's products, many customer shipments had to be delivered by less-than-truckload (LTL) carriers, a more expensive transportation mode than truckload. The transit times were longer and the reliability was lower than it would have been if Gillette had been able to get all products loaded onto the same truck. Gillette concluded that in order to deliver top-quality service, it needed to find a way to convert as many of those LTL shipments into full truckload as possible.
That's when Gillette got to work on its site selection best practices, with the goal of developing a network that would locate the DCs close to the customer and make it possible to regularly ship by truckload.
COST VERSUS SERVICE
To answer the questions of how many warehouses it needed and where they should be, Gillette conducted a complete theoretical analysis to identify the best locations. The company factored in such considerations as the location of its manufacturing plants and its sourcing points. Equally important, Gillette looked at where its customers were located, and specifically at who ordered what, and in what volume. "You take those two things and then ask: How do I marry them up and how do I figure out where my warehouses should be?" Knabe says.
"In terms of distribution cost, we looked at the freight cost of going from the plant to the warehouse, and then we also looked at the freight cost of going from the warehouse to the customer," she explains. Using an optimization software tool to evaluate every possible scenario, Gillette asked questions such as: If we had three warehouses, where would they be to minimize our freight costs? The company looked at other distribution costs, including real estate, labor, and taxes, and utility costs, such as electricity ("That ruled out Manhattan pretty fast," Knabe notes). Inventory carrying costs were also factored into the plan.
On the service side, the question Gillette asked was: How can we impact customer service when we're designing our distribution network? According to Knabe, there were two ways. The first way was to set up the distribution network so that Gillette could maximize its use of truckload, which meant stocking all products in all warehouses.
The second part of the answer involves order cycle time. "The location of our warehouses affects transit time to the customer," Knabe says, "so we looked at how many warehouses we needed if we had to be able to get to every customer within 48 hours. And then we asked: How many warehouses would we need if we only had to get to 85 percent of our customers within 48 hours? We looked at our network from both of those angles—cost and service—and figured out what made the most sense."
Site Selection -Part 1 - Location, Location, Location
On-time delivery is a fundamental premise behind supply chain management, and it's a key benchmark on the road to achieving the perfect order. Although same-day delivery is available from several logistics providers, any company relying on the fastest and most expensive transportation options to fulfill its delivery obligations isn't going to be in business very long. The old adage, "Build a better mousetrap and the world will beat a path to your door," is now hopelessly out of date. It's no longer good enough to build that better mousetrap—you also have to build a better distribution network from which you can optimally service your customers. According to a study undertaken by consulting firm ProLogis Global Solutions, the number-one challenge for supply chain professionals is to create a distribution network that can deliver on customer demands while still keeping costs in line.
High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.
The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.
"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.
Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.
"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-
The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.
"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."
STRIKING THE PROPER BALANCE
A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.
"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."
Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.
A distribution network plan, Harmelink suggests, should answer the following questions:
How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?
Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.
High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.
The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.
"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.
Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.
"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-
The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.
"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."
STRIKING THE PROPER BALANCE
A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.
"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."
Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.
A distribution network plan, Harmelink suggests, should answer the following questions:
How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?
Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.
Subscribe to:
Posts (Atom)