Are global supply chains too risky? A practitioner's perspective
Today’s longer, more complicated supply chains are open to risks that managers may not have encountered before. Here’s a practical look at the new global realities—and what you need to do to survive and prosper in this new, riskier environment.
By Mark Crone, Director, Supply Chain Planning and Analysis at Limited Brands, Inc. -- Logistics Management, 4/1/2007
In the classic story of the Trojan War, the Greeks offer the Trojans a gift too tempting to refuse. As the story goes, the infamous wooden horse is taken behind the city’s walls only to have Greek soldiers emerge from its interior and conquer the city. The Trojans’ mistake, of course, was failing to see the risks associated with what appeared to be a benefit.
Much like the Trojans, you may have unwittingly let risk infiltrate your supply chain. And, much like the soldiers emerging from the wooden horse, the risk that could be unleashed may do considerable harm to your business.
Why is risk management in the supply chain so important now? You’ve spent years streamlining operations, reengineering processes, integrating with partners, implementing enterprise systems, and—the final stroke of mastery—moving production to low-cost, offshore locations. You’ve done all of this in an attempt to improve the service you provide customers at a more competitive cost. Congratulations, you now have a global supply chain.
But now you learn the rest of the story: Creating the global supply chain has also brought new risks that you may not have encountered before. Adding to those risks are a number of well-documented challenges facing the international and domestic transportation markets, such as rising freight rates, infrastructure disrepair, and the new cost of security in both time and money. Some issues, like the domestic driver shortage, represent cyclical phenomena that we have seen in the past. Others are more evolutionary, resulting from a new global economy.
The simple fact is that in today’s longer, more global supply chains, product moves over greater distances and across more borders than in the more localized supply chains of the past. The coordination and execution required for international shipments has always been a challenge. But now we find that market conditions, security considerations, and regulatory pressures are converging in such a way that makes the task even more daunting.
Much has been written about the tactical responses to these evolving challenges. Diversifying port usage, avoiding peak import periods, and using more air freight and dedicated carriage are all possible responses. However, these largely short-term fixes are not sufficient to address the longer-term challenges, which require more in-depth structural responses.
So how should supply chain practices change to reflect the new global realities? I’ll explore the longer-term implications and possible strategic responses—from a practitioner’s perspective.
A changing equation
What new factors and responses must be considered? First, we need to recognize that the most far-reaching supply chain change centers on where companies now source product. In this regard, the three drivers of sourcing strategy—cost, quality, and service—now have a new important sibling: risk. We need to think of risk as a key attribute driving our supply chain decisions.
Supply chain managers have long recognized the idea of risk. Yet the focus has traditionally been on demand risk—that is, how to respond to variability in demand. With the advent of more global supply chains, supply-side risks have become a greater concern, particularly those that affect lead time and/or cost.
Lead-time risk increases in the global supply chain because there are more potential constraints that could slow a shipment at any point in its journey. Throughput at the origin or destination port may decrease, rails may back up, or cargo inspections may increase due to terrorist-threat level.
Cost risk increases for several reasons. First, the inputs to transportation (for example, fuel) might spike at any moment, resulting in higher freight rates. In addition, costs may increase due to forced mode shifting. That is, you may be forced to use a more expensive mode to reduce lead-time risk or to secure transportation capacity during certain peak periods.
The practical implications of these potential risks are that supply chains become harder to manage. Companies find that they need to hold more inventory to account for lead-time variability. Many have already backed off the “leanness” that once characterized operations.
One big reason: the transportation reliability required to support such practices no longer exists. Similarly, rapid replenishment strategies will become less common, and just-in-time practices will take a hard hit—especially in cross-border commerce.
Cost risk forces companies to become more flexible in how they source and route products to market. Financial practitioners are masters at managing risk and have long understood that flexible global manufacturing capacity can be used to overcome shifting exchange rates.
Supply chain managers would do well to adopt a similarly nimble approach.
Rethinking the strategy
How can we more formally incorporate risk into supply chain thinking? As risks increase and the equation changes, companies will need to modify their strategies to manage their supply chain assets more intelligently. During my time as both a practitioner and a consultant, I’ve seen three ways to better manage assets by reducing supply chain risk and lowering attendant costs. These approaches focus on reducing transportation content, using transportation more efficiently, and rethinking the global sourcing strategy.
- Reduce Transport Content.
Think about your supply chain as a map with sources, distribution points, and destinations all connected. The length of those connections indicate the amount of transport “content” in your supply chain. Think about how to make the cumulative length shorter. Rethinking your distribution network is an obvious place to start.A single national distribution center (DC) requiring long-haul transportation might not make the most sense today. Instead, regional distribution facilities close to the production sources, to the ports, and to the demand points may be wiser. For importers, using facilities near ports to perform a value-added service that would otherwise be done at far inland DCs can help minimize inland transportation while lowering costs. Direct-to-destination delivery from overseas factories may be an option as well. By increasing order size, building consolidated multi-product containers, pallets, or cartons, product can flow directly to the destination with fewer “touches.”
- Use Transportation More Efficiently. Each time you ship a load you are occupying and paying for a fixed asset for a short period. How do you increase utilization of that fixed asset? In the past, you may have tried to minimize inventory through the use of small, frequent deliveries. A better approach may now be to seek larger, more-efficiently consolidated shipments.
High-volume businesses will have an advantage here. But companies without the big volumes might consider altering their shipping patterns to consolidate more product or seeking out a third-party to leverage their volume with others. Better planning pays dividends here, regardless of the volume. In particular, smoothing demand and longer lead times should help to secure capacity at lower prices.
- Re-examine Sourcing Strategy. A more far-reaching option may be to rethink the wisdom of global sourcing entirely. This is an extreme method of reducing transport risk. But the reality is that from a total profitability perspective, sourcing certain items overseas may be less appealing once all costs and risks are considered. Lead-time risk is an especially big concern for importers, especially those with seasonal or fashion products. As a security-conscious infrastructure becomes ever more constrained, reliable lead times are an increasingly dicey proposition.
Ultimately the sourcing decision can only be made by a thorough cost/benefit analysis. Of course, the benefits of sourcing overseas can be substantial. But, sourcing decisions should consider the transport cost and lead-time risks associated with chasing the cost benefits.
Real-life solutions
Let’s now look at some real-life examples of how companies are adopting these types of solutions to minimize risk. My company, Limited Brands, is looking into various options to reduce the level of transportation content in the supply chain while improving speed.
For instance, we are building the capability to “switch on” node bypass opportunities when volumes warrant. So rather than flowing product across a fixed path regardless of volume, we want to be able to alter paths dynamically in order to maximize transportation efficiencies. This is no small task as a variety of logistics services still need to be performed in connection with any given move. But now multiple locations must be able to perform them.
The dynamic bypass approach is being pursued in concert with a proposal to open regional DCs. These DCs will allow product to move in full truckloads as far as possible into a market prior to breaking bulk. As a result, product produced in region will be used to satisfy regional demand without excess movement. While this will add expense in terms of inventory investment, it will reduce the overall cost of getting product to market. In addition, our company is exploring the possibility of shifting production between manufacturing locations to reduce the expense of moving product from certain regions of the country.
Lastly, Limited Brands is implementing planning improvements to smooth demand for truckload capacity. By avoiding large unplanned spikes in demand, we believe that we will be able to utilize low-cost carriers more often.
Garden Ridge, a chain of home décor stores in the Southeast, is taking similar steps to reduce transportation content. It has recently implemented a direct-to-store shipping program during peak seasons. Rather than bring product into their Houston DC, only to reship it to the stores, Garden Ridge has begun to build consolidated loads in Asia. These loads now move directly to stores upon import. The company pays more for the overseas consolidation service, but the cost is more than offset by the reduction in transportation content.
One U.S.-based apparel retailer that I studied rethought their global supply chains in a more fundamental way. It sources first-run product with long lead times in Asia. Harder-to-predict replenishment product, on the other hand, is manufactured closer to market. While the retailer incurs higher production costs on these items, it is able to capture additional margin through a more rapid response than if it had sourced everything in Asia.
Implementing the solutions
Implementing the good ideas is the hard part. As you go about the process it’s helpful to keep these thoughts in mind:.
- Educate Your Peers and Customers.
Helping your partners understand the new environment is critical. When peers and customers understand the realities of the new marketplace, they will be far more likely to buy into any change initiative. In fact, they may already be hearing the same message from other suppliers or observing the same thing in their own operations. - Get out of Your Silo.
Virtually every firm suffers from the silo effect. Even the most savvy supply chain professionals will make suboptimal decisions if their organization has created incentives for functional optimization. Get out of your silo and force the organization to reach supply chain risk decisions that are optimal for the entire enterprise. - Walk Before You Run.
Start with the simple, obvious opportunities. A broad stroke “Excel-based” analysis may help uncover significant consolidation and node-bypass opportunities to increase efficiency and minimize risk. In the long term, opportunities might be uncovered via sophisticated systems enablement. But, you can achieve much through a basic exploration of your existing supply chain. - Follow the Money.
Risk is an amorphous concept. It’s hard to justify new practices based on things that may or may not happen. Supply chain change won’t take place without economic justification, so think about looking at historical data and creating “what if” scenarios. - Leverage Third Parties.
Tremendous expertise and leverage resides outside of your organization. Look for third-party partners that have implemented the processes before and specialize in providing the services you’re looking for.
This is the new reality facing companies engaged in global commerce. In some ways, the heightened risk may be considered a threat. But a more insightful perspective is that it presents an opportunity for supply chain professionals to fundamentally rethink their operations.
I covered the aspects of the new environment, offered some options for dealing with it, and recounted real-world examples of solutions in action. Does it contain all of the answers to supply chain risk? No, but I hope it at least will keep the Trojan Horse from rolling up on your shores.
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