Supply chains:The post-Y2K frontier

Gains in logistics efficiency have slowed, according to the eighth annual Giants of Shipping survey. Will supply chain initiatives accelerate once Year 2000 technology issues are history?

By Peter Bradley -- Logistics Management, 10/1/1999

WILL THE MILLENNIUM bring about a revolution in supply chain management? Maybe so, but not because there's anything magical or mystical about the Year 2000. On the contrary, the very real, very complex, and very widespread problems related to Y2K computer issues have distracted managers from other business initiatives over the last two or three years. The supply chain may well have been one of the victims of neglect.

One indication of that comes from the results of our eighth annual Giants of Shipping study conducted jointly by the University of Tennessee (UT), Ernst & Young's Supply Chain Consulting Practice, and Logistics Management & Distribution Report. "We've reached a plateau in improving logistics costs," says Mary Collins Holcomb, associate professor in UT's department of marketing, logistics and transportation, "and the root cause is inventory."

Certainly, Corporate America's investment in finished-goods inventory is enormous. On average, respondents indicated that their companies had 46.5 days' worth of inventory in the pipeline, the bulk of it sitting in warehouses. In addition, they reported a median 40.1 average days' sales outstanding--that is, accounts receivable.

For logistics managers, the study's leaders believe, the overall lack of improvement in supply chain efficiency creates an interesting challenge. "The model is still very much flow, stop, flow, stop," says Holcomb. "Many companies say transportation is the problem. But really, it's a symptom. It's a supply chain issue. Transportation is seldom the root cause, but it is a way to open the door to supply chain issues."

The Challenge of Made-to-Cash

Addressing the inventory problem poses a particularly tough challenge for logistics managers. "When it comes to managing inventories, logistics managers seldom have ... control over the entire cash-to-cash cycle," says Karl Manrodt, executive director of UT's Office of Corporate Partnerships and leader of the Giants study. "They have to make improvements in those parts of the process where they can have the biggest impact. For logistics managers, that is in the 'made-to-cash' process."

Rich Thompson, a partner in Ernst & Young's Supply Chain Consulting Practice, defines "made-to-cash" as "the time it takes to convert finished goods to cash." It is during this key process that logistics managers have the ability to improve efficiency. Managers who focus on the entire "flow of goods, or made-to-cash process, open up new opportunities for efficiencies because, in effect, it forces them to look not only at transportation or distribution but also at the inventory," Thompson explains. "You don't need a sophisticated model to do that. You can measure that and begin improving that today."

Nonetheless, substantive changes in supply chain practices may require substantial changes in the way managers view their part of the operation. "From a transportation perspective, it appears many companies have been on auto pilot," says Manrodt. "It's time to re-evaluate how we're flying the airplane." In that regard, models can be helpful. Ernst & Young has begun work on one aimed at developing an understanding of what's involved in the made-to-cash cycle. "The measurement model is being developed to provide logistics managers with a tool to evaluate the entire 'flow of goods' process vs. looking at transportation or distribution measures independently," says Thompson. It also addresses service. The model will allow logistics professionals to evaluate the classic trade-offs between cost and service better. Results from the Giants of Shipping study have been used to develop the model.

The time for that sort of tool appears ripe. Thompson is confident that once businesses turn the corner on the new year and the Y2K technology issues are behind them, many will focus intensely on supply chain initiatives and logistics management. "Ernst & Young believes that supply chain management will be a key management focus in the ... post Y2K environment," Thompson says.

Survey Reveals Spending Patterns

The starting point for future improvements is current performance, revealed by the results of the Giants survey. The study examines shippers' current transportation practices, shipping volumes, modal preferences, and technology use as well as their future buying plans. For the purposes of this study, many of the results are reported for the whole sample and separately for those classified as Giants of Shipping--companies with annual revenues of $3 billion or more.

This year, 360 shippers from a cross section of industries responded to the survey. (See Figure 1.) Of the total group, just over a quarter qualified as Giants. (See Figure 2.)

The companies represented in the survey spend substantial sums on moving goods: 37 percent spend $50 million or more each year on domestic transportation. Among the Giants, 19 percent exceed $750 million in domestic transportation spending. At the other extreme, a quarter of the Giants keep transportation spending under $49 million. (See Figure 3.)

Although impressive, those numbers don't look quite as large when viewed as a percentage of a business's revenues. Most of the companies keep transportation spending under 5 percent of revenues, and a significant portion manage to keep spending under 1 percent. (See Figure 4.) The percentages can vary widely by industry. It is important to note that measuring transportation costs as a percentage of sales is not a complete barometer of transportation effectiveness. Manrodt points out that looking at transportation as a stand-alone business function does not consider the obvious supply chain trade-offs associated with cost and service.

More than half the respondents to the survey report that transportation spending is going up at their companies. But that's likely a reflection of growing sales in a healthy economy. In fact, while 36 percent of those surveyed say that spending as a percentage of sales is dropping, another 32 percent report that transportation as percentage of sales is rising.

Trucking Remains Dominant

Trucking is the dominant mode of freight transportation in the United States, so it is no surprise that the lion's share of most shippers' transportation budget goes to motor carriers. On average, the shippers in the survey spend 75 percent of their transportation budget on trucking services. Those include truckload, both national and regional less-than-truckload, private fleet, and surface package carrier services. Spending on either regional or national LTL carriers accounts for 27 cents of every dollar, while truckload service captures the single largest portion, 23 percent. (See Figure 5.) That's consistent with the findings of earlier surveys.

What's not consistent with earlier surveys are this year's findings regarding shippers' plans to reduce the number of carriers they use in each mode. For instance, 32 percent of the shippers say they plan to reduce the number of truckload carriers they use, while 49 percent expect no change and 19 percent expect to use more truckload providers. That contrasts with last year's results, when 43 percent said they expected to reduce the number of truckload carriers used. In no other mode did more than 30 percent of the shippers indicate that they planned further consolidation. Although there's certainly more to come as shippers continue to implement core carrier programs, the numbers suggest much of the work has already been done. (See Figure 6.)

"Reducing the number of carriers used as part of a core carrier program is typically one of the first steps in a focused improvement effort," says Thompson. "The results of the study would suggest many companies have already taken this step."

"Continued consolidation in the carrier base will indeed be difficult," says Manrodt. "In part, this is due to the service and geographic constraints of the carriers. If a significant customer [is located] in an area not well served by one of the core carriers, another carrier with a proven service record will have to stand in the gap. This means that the smaller niche players will be threatened only if one of the core carriers can improve its service and geographic coverage. And if that lane is not critical, it may just not want to play there."

Reliability Crucial for Shippers

That's not to imply that shippers will accept carriers that cannot provide consistently reliable service. The shippers themselves are feeling pressure from their own customers to meet high standards of service. For instance, asked how they believed their customers ranked various service criteria, 78 percent of the shippers said on-time delivery was of the highest importance to their customers. They are not likely to tolerate service providers that interfere with meeting those expectations.

That's crucial, as nearly half of the shippers--47.3 percent--say that their strategy is to gain industry leadership through customer service. Only 27 percent expect to gain an edge through product or market innovation, and even fewer--22 percent--expect to win by being a low-cost leader. And customer service implies a strong, efficient, and reliable supply chain, not only at the strategic level, but also at the execution level, where the company touches the customer--a key role for logistics.

One problem for logistics managers may be that upper management does not widely recognize the potential role logistics can play in executing customer-driven supply chain strategy. According to the survey results, one-third of companies still perceive logistics as a cost center. On the other hand, 26 percent report that their companies see logistics as a strategic component of the business, and another 9 percent see it as a profit center.

Transportation departments that continue to act like a cost center--that is, with a focus on reducing or maintaining costs--may be inhibited from looking at innovative ways to improve customer service, Thompson reflects. He adds that using logistics as a competitive weapon or differentiator in the market is gaining importance with senior management.

Editor's note: The full results of the survey will be presented this month as part of the "Current Research" track at the Council of Logistics Management's annual conference in Toronto. Additional analysis and results are available from the University of Tennessee by contacting Karl B. Manrodt, Ph.D. at (423) 974-5311 or kmanrodt@utk.edu, or by contacting Richard H. Thompson of Ernst & Young LLP at (312) 879-3075 or rich.thompson@ey.com.

Direct to consumer-- and back again

Closely related to the issue of logistics and supply chain efficiency is the shift in the way businesses make use of market channels to reach their customers. Many of the shippers surveyed make use of multiple channels, but in what may be an important indicator of the future, a significant portion--18 percent--sell direct to consumer. And among that group, nearly 57 percent of sales are through that channel. (See Figure A.) Not surprisingly, high-tech manufacturers lead the pack among manufacturers, selling 38 percent of their products directly to consumers.

That may tell a great deal about the future, and it has significant implications for supply chain management and transportation management. "Nearly everyone I speak with is concerned about, or at least thinking about, how to go direct to consumer," says Thompson. "This is driven, in large part, by e-commerce and appears to be affecting nearly all businesses in some way, shape, or form."

One of the major issues for companies that go directly to the consumer is the problem of returns. Catalog-sales companies have long had to deal with a high rate of returns, and that is a problem bound to accelerate as more companies turn to Internet sales to reach consumers directly. "Reverse logistics is a major problem," says Holcomb. "Transportation budgets get eaten alive."

Logistics providers that provide returns-management services are likely to prosper as a result. "I see a big opportunity for a 'Returnit.com' type of service provider," says Thompson.