Global logistics: Leveling the peaks of peak season

The latest data reinforces the unpredictability of a truly networked economy. Today, a fundamental change in thinking is required to successfully manage supply chain performance in this new state of permanent volatility.

By Brooks A. Bentz, Partner, Accenture -- Logistics Management, 5/1/2008

For the second year in a row we’ll be feeling less pressure on the overall supply chain network during what we commonly call “peak season.” Why is this happening? Is it a slowing economy? Or are greater forces at work? Can we finally relax, feeling confident that the peak season crises of the past few years are behind us? Sure, growth has slowed in some areas, the economy is sluggish, and rumors and warnings about recession don’t help. The facts tell the tale: For the first time in memory, volume through the West Coast ports has slipped, rail intermodal volume has dropped, and excess capacity has jumped back into the motor freight business. And fuel cost is killing everyone.

Consumer confidence—driver of much of our import trade—is wobbly and uncertain, and this certainly does not portend a robust surge in volume in the late summer and early fall. Topping it off, many consumers of supply chain services have adopted a “wait and see” attitude that has caused them to pause before taking the next step in their global supply chain operations, according to a recent survey Accenture conducted with Logistics Management.

Some of the questions these global shippers are asking include:

• “How should I route my import ocean freight?
• Do I keep running it over LA/Long Beach, or do I shift to all-water to either the Gulf ports or the East Coast—and if so, which ones?
• Do I opt for the Suez route?
• My ocean carrier says they are slowing vessels speeds to save fuel, so what will that mean for my order management cycle?
• And fuel surcharges in every mode are rising out of sight, so should we be moving some of our contract manufacturing back from Asia?

This “permanent volatility” is embodied in the many moving parts of the supply chain. Not only is it changing much faster, but it is moving more frequently in opposing directions.

What these trends mean for your supply chain

Most shippers are concerned about the rapid rise in fuel costs and the decline of the U.S. dollar. However, the silver lining—if there actually is one—is that fuel is not generally a competitive advantage, meaning that for facing competitors with similar supply chains and similar networks, the cost of fuel will not favor one over another—everyone feels the pain.
During the past several years much concern revolved around rising costs due to tightened capacity and infrastructure congestion, and these have not gone away, but they have softened. However, pretty much all shipper concern has been overshadowed by the specter of fuel costs escalating out of control.

Many carriers are taking steps to conserve fuel: Airlines slowed flights on many lanes; steamship lines have cut speeds (particularly on long-haul runs like the Trans-Pac); railroads continue to invest in progressively more fuel-efficiency and alternative-fuel; and trucking has restricted idling, even in advance of environmental requirements that govern road speed and emission standards.

There is an array of forces at work that shippers need to continually watch and react to: Carriers and service providers are focused more intensely on productivity improvements, such as the ports’ attempt to wring more value despite continuing challenges in expanding and improving infrastructure.

But even as the ports work toward these improvements, they can’t escape the challenges that either exist or are on the horizon. Like the fact that U.S. port productivity lags behind other more highly automated facilities; the pending impact TWIC will have on drivers; the ILWU contract covering West Coast dock workers, which expires in June; the ILA contract that covers East Coast longshoremen; rising concerns over environmental issues; and the fact that no one really knows how supply chain security will evolve or who’s going to pay for it.

With all of this in mind, the best strategy to managing a global supply chain over the next few years couples lessening demand with a willingness to spread volume over a longer cycle time in order to improve predictability and reliability.

Could this result in higher inventory in the pipeline? Yes, it could, but the trade-off can be seen as higher margins, less discounting and mark-downs, and better overall performance. Will this mean seasonal surges or peaks are gone forever? Probably not, but the impact and service disruptions will be mitigated for now.

The new normal: a state of permanent volitility in the supply chain

If we were able to take a satellite view of the broader, international supply chain, we would see it functioning much as it has in the past, but changing dimensions at a much more rapid pace. The demands placed on it are increasing as the buying community (merchants, category managers, procurement specialists, and purchasing agents) seeks to drive continual improvements in efficiency, service, and cost.

We label this state of permanent volatility the “new normal.” And to manage in the new normal we have to answer the following question: How can supply chains be re-engineered to be more responsive and adaptive in the face of rapid change? Expectations are up, life-cycles are down, and supply chains are not equipped to respond as quickly as needed in a rapidly changing environment. This is particularly important during seasonal surges where many more pressure points are brought to bear.

One of the key drivers of a more effective supply chain is connectivity among trading partners. As supply chains lengthen and become complex with more trading partners, connectivity across the landscape becomes critical for performance. Connectivity must become more agile and adaptive, which is progressively more challenging as the rate of change increases across the supply chain.

This was born out in an Accenture research project conducted in 2005, predicting a continuing and significant shift in manufacturing from western nation “home countries” toward Asian nations. While this fact is no longer surprising, the rate of change may be. (See Figure 1.)

The message for this year is more along the lines of using the absence of disruption causing a huge seasonal surge to take a bit of a breath. And we can examine how to deal with this new normal state that is likely to be with us for a while. The data from our 2005 survey reinforces the unpredictability of a truly networked economy:

• fewer than 25 percent of recently surveyed supply chain management executives believe their off-shored operations have delivered against cost/service/quality goals;
• only 17 percent believe they can achieve improved performance from more off-shoring;
• depending on the function, 5 to 8 percent intend to move back on-shore, while others who are staying off-shore are moving more “near-shore.”

Accenture’s 2007 survey of supply chain executives highlighted a number of supply chain challenges facing global products companies. Some of these were revealing in an age that is widely viewed as highly enabled by technology. Seventy-five percent of respondents said they lack enterprise-wide automation for global supply chain processes while nearly 80 percent identified pipeline visibility as their top concern.

A key element to operating effectively during peak season or any other time of the year is the ability to rapidly and accurately understand operating costs, yet 90 percent reported inadequate cost information to support financial planning activities and 65 percent reported inadequate staffing for global supply chain and trade compliance activities.

New management skill sets needed

As supply chain professionals looking forward to this year’s seasonal surge, what capabilities should we build today to help plan for an uncertain future? What should we tell corporate leadership to help them understand why today’s supply chain demands are unlike anything seen before?

Today’s world-class performers need to operate their supply chains dynamically based on demand characteristics of the products and channels they serve. One size does not fit all.
Different channels require different disciplines and capabilities and today, few companies have one-dimensional, single-product supply chains. Therefore they must have a diverse set of strategies and capabilities for coping with seasonal demands and related challenges. The capabilities that enable this are vital to avoiding a perpetual state of “brush-fire management” that overtakes many supply chain organizations during the seasonal blitz. Key elements include:

1. Visibility and event management systems to react to supply chain delays and disruptions.
2. Flow path analysis to balance low cost country sourcing (LCCS), demand variability, and transportation costs, particularly in light of the falling value of the U.S. dollar.
3. Inventory planning and order management capabilities to execute defined flow path strategy.
4. Financial management tools to estimate total landed costs, incorporate in cost of goods sold, and reconcile actual costs, including risk.
5. Customs processes and systems to accommodate import volumes in a scalable way.
6. Performance management to measure end-to-end global supply chain and extended list of supply chain partners.

These capabilities bespeak the necessity for investment in powerful new enabling technologies, such as supply chain visibility and event management, supplier collaboration, supply chain costing, international transportation management, and trade compliance.

What to do next

Past experience has demonstrated that building these capabilities has been challenging and many supply chain executives have been frustrated when trying to build a compelling business case: No business case, no funding. So, how do we structure arguments to create a compelling case?

You must conduct a rigorous and objective assessment of the state of your data. You can’t do anything without fundamental supply chain data, typically at the transaction level. You then need to examine your network of freight flows and services. Conducting flow-path analysis enables you to determine how the network is functioning today so you can develop predictions on what is to come.

You then need to actively share information, which means collaboration across departments, business units, and even among trading partners so that there is a comprehensive and clear picture of business operations.

And a key part of the solution is developing the total supply chain cost, not just the freight cost. Sounds easy, but it isn’t. There are always a variety of ways to move product through the supply chain, each with its own set of cost and service trade-offs. Developing and evaluating alternative scenarios, based on fundamentally sound data, will make the business decisions readily apparent.

Finally, producing the classical cost-benefit analysis solidifies the rationale for taking action. Mapping the benefits of the optimum scenarios to the capabilities required for successful execution is the foundational step in building the business case for change. Supply chain executives bear the brunt of making the business case for change. They’re the only ones with the deep functional knowledge that is necessary to construct the supply chain of the future. This requires a missionary zeal to crusade within the firm and among trading partners.
In the final analysis, it doesn’t matter if it’s a large or small peak surge. A fundamental change in thinking is required to successfully manage supply chain performance in a state of permanent volatility. We must move beyond the business as usual approach of “uh-oh, here comes another peak season” and the resulting fire-fight that often accompanies a reactive approach to managing business.