In the day-to-day processes of business, stepping away from the press of events to entertain Big Ideas is a luxury few have time for. That’s the job of supply chain business school professors.

World Trade asked an eminent group of them to describe ‘one big trend’ impacting the supply chain.

The authors, by the way, will all be giving ‘classes’ in the 2007 World Trade Magazine Supply Chain Management Online University webinar series where they will discuss these topics further (http://supplychainwebinar.worldtrademag.com).

1. The Adaptive Process of Operating in Low Cost Regions

Arnold Maltz

Arnold Maltz, Arizona State University
Including low cost regions in modern supply chains is now a given. But, determining which regions to access for any particular purpose is still as much art as science. Ongoing discussions with key industry contacts suggest that different locations, countries, and regions have their own specific strengths (and weaknesses) and even more importantly, regional positions shift over time.

I believe that tracking and responding to the relative positions of low cost regions will be an ongoing theme for global supply chain managers. Five years ago, China was “the” source for low cost products; now Vietnam is competing against inland China and parts of India for that same position. Add in the importance of market proximity, whether to the U. S., Europe, or emerging urban markets in India and China, and it becomes even more necessary to understand how an area’s character fits with a firm’s global supply chain strategies.

How can buyers discover where to source materials, components, subassemblies and finished goods? What makes a particular area attractive and how long before the next “hot” region appears on the horizon? How does a region structure itself to join the world economy in a mode that means sustainable growth and improvement for its citizens for years to come? These issues are on the agenda (or destined to be so) of supply and logistics managers all over the world.

Supply chain managers are now operating in a global business ecology. As the overseers of the physical movements in the new economy, they face challenges within countries, between countries, and across regions. Researchers and managers need to cooperate so that everybody has the tools and insights needed to support continued economic success in a world where borders are still real, but transcending borders is the order of the day.

2. Managing the Risk Inherent in Global Outsourcing

J. Paul Dittmann, PH.D.

J. Paul Dittmann, Ph.D.,
University of Tennessee

Many firms see globalization as much more than outsourcing. Additionally, they regard its essence being to establish a market presence in other regions of the world, and serve as an engine of growth. Globalization in this context thus means leveraging various regions of the world for potential in several areas which include: Establishing a presence in a global market for growth; resource access; and cost savings.

Of course, outsourcing is frequently a key component of the globalization strategy. But, all too often, the risk inherent in outsourcing decisions is not effectively assessed or managed, putting the firm’s business in jeopardy.

Unfortunately, we see many firms that have not placed their outsourcing strategy within the context of a complete global strategic plan. There is invariably pressure from the top to reduce direct, visible cost. This quickly evolves into an outsourcing strategy to take advantage of the incredible pool of low cost labor in other regions of the world: Asia, Latin America, and Eastern Europe.

When pursuing an outsourcing strategy, it is hard for many companies to stop and consider risk because they are blinded by the huge savings potential. A couple of years ago, on a tour of seven factories in South China, we saw some shocking examples of where these savings are coming from (and the long-term risk therein embodied):

• Factory workers routinely working 11 hours per day, 6 days per week for roughly $100.00 per month
• An extremely intense work pace
• Competent engineers earning a maximum of $12,000/year

In a typical financial analysis, this incredible labor cost savings is balanced against higher inventory and transportation cost. But, many companies are just now realizing that risk might be the greatest potential cost.

What are the risks associated with global outsourcing? A few examples include: Catastrophic delay in delivery due to force majeure or even terrorism; Quality and damage problems hidden by a long supply line; Highly inaccurate forecasts over a long supply line; Currency swings; and Intellectual property issues.

Are these risks causing an outsourcing backlash? There’s no clear trend. At the recent University of Tennessee Supply Chain Forum, for example, one company discussed withdrawing from China, while another firm described taking everything to China. What makes the difference between success and failure? We would argue that the difference is in having a rigorous approach to analyzing and managing outsourcing risk.

Once risks are identified, we see a wide variety of strategies that some leading companies are using to manage risk. These risk mitigation strategies are selectively applied depending on the impact and probability of each risk. Evidence is building that those firms who apply a rigorous risk management methodology are much more likely to see the promised benefits from a global outsourcing strategy, as well as realize the payback from their overarching globalization strategy.

 

3. Lean Six Sigma Logistics

Thomas J. Goldsby

Thomas J. Goldsby, University of Kentucky

Much has been written and said of Toyota’s supply chain prowess. Foremost among the company’s capabilities is the storied Toyota Production System, which relies on a “pull” method of material flow and perfect quality in process execution in order to minimize wastes—things that consume resources but lend no value to customers. Toyota’s great success in the automotive industry has served as the foundation for Lean Thinking, the logic and practices now applied in virtually all modern industries throughout the world.

Much discussion has also focused on the continuous improvement methodology of Six Sigma. Six Sigma is a method for understanding and reducing process variation, pioneered by such companies as Motorola, Allied Signal, and General Electric. By recognizing the sources of variation, processes are improved and made more reliable.

While the practices of Lean and Six Sigma are commonly applied in manufacturing, they are rarely used elsewhere in the supply chain. This is changing, though. Leading companies are finding that the application of Lean and Six Sigma makes good business sense in logistics management as well, given that wastes and process variation exist throughout our logistics and supply chain networks.

Lean Six Sigma Logistics embodies the elimination of wastes through disciplined efforts to understand and reduce variation, while increasing speed and flow in the supply chain. In particular, Lean Six Sigma Logistics focuses on Logistics Flow, Capability, and Discipline as the guiding principles for solving logistics challenges. Effective deployment of these principles will help us to bridge our suppliers with our own processes, and then bridge our processes to the customer.

Of course, all of this must happen while we face hypercompetitive markets and shareholder pressures to increase market share and reduce costs. Lean Six Sigma Logistics can help to separate what really matters from the noise and complexities of today’s business environment, leading to the achievement of world-class logistics capabilities.

4. Use of 3PLs

C. John Langley Jr., PH. D.

C. John Langley Jr., Ph.D.,
Georgia Institute of Technology

The year 2006 was an eventful one for users of third party logistics services, and the future is likely to provide even more meaningful use of the capabilities of outsourced logistics providers. Based on results from the 2006 Eleventh Annual Third Party Logistics Study (see www.3PLstudy.com), conducted by Georgia Tech, Capgemini, DHL, and SAP, customers of 3PLs across North America, Europe, Asia-Pacific, and Latin America felt that logistics represents a strategic, competitive advantage for their companies, and that 3PLs played a major role in their logistics and supply chain operations.

Among the major findings of the 2006 study was that future outsourcing practices are likely to continue the use of traditional services such as transportation, warehousing, and customs clearance, which are prevalent today. Additionally, however, value-added services relating to information technology, customized logistics solutions, and 4PL/LLP services are viewed as growing in terms of contemporary interest.

Additionally, 3PLs are viewed as valuable, and sometimes essential business partners for customers whose logistics needs are evolving to any of the global emerging markets, such as China.

When asked about technology enablement, most customers rated this as an area where the 3PL sector is being counted upon for leadership, functionality, and operational capability, but where the report cards to date are viewed as needing improvement. Thus, the IT capabilities of 3PLs are likely to become even greater differentiators of 3PLs than they are in today’s business environment.

Looking to the future, many 3PL-customer relationships are evolving from conventional customer-supplier relationships to true “partnerships.” Accomplishing this objective would allay a frequent criticism from this year’s survey respondents: 3PL providers many times “react” to situations; they do not anticipate and identify opportunities to improve. To be fair, the study results also suggest that customers sometimes limit their 3PL providers from demonstrating their full set of capabilities. The good news is that upgrading the quality of customer-3PL relationships is an objective of 3PL users in all of the geographies studied.

Overall, it is clear that customers view their 3PLs as valuable resources, whether they are used in a tactical/operational or a more strategic role. While there is a continually-shifting pattern of use of 3PLs vs. the use of insourcing alternatives, the 3PLs have a permanent position in the strategic portfolio of resources that are counted upon by corporate logistics and supply chain managers

5. Structuring High Performance Supply Chain Relationships

A. Michael Knemeyer

A. Michael Knemeyer,
The Ohio State University

Supply chain relationships can take multiple forms and the degree of closeness implemented can reflect various levels of integration across firm boundaries. Maintaining these relationships may require large managerial time and resource commitments. Therefore, managers should strive to identify methods to establish appropriate levels of tailoring in these relationships based on the business situation and the organizational environment.

Management’s goal should be to establish the correct amount of closeness in their firm’s supply chain relationships, not to just get close for the sake of being close.

The success of any supply chain relationship calibration process will depend on the openness and creativity brought to the table by both parties. Thus, an important first step is to determine who your firm should establish relationships with in the supply chain.

Once this decision is made, the focus should quickly shift to determining the potential of the relationship; identifying possible impediments to achieving this potential; and how best to implement managerial components to capture the relationship’s value. Without the security of the business in place, firms tend to be hesitant to openly discuss the relationship and struggle to establish realistic expectations.

When examining your supply chain relationships, ask, “What is in this relationship for us?” It is this selfish perspective that helps to identify the true motivations for committing resources to a relationship.

Likewise, your supply chain partner should be asking the same question. Whoever has the least to gain from the relationship should provide the basis for setting expectations. If you hoping that a company will choose to commit large amounts of resources to working with your firm, they must see appropriate levels of benefits in return.

Another important part of a relationship calibration process is to clearly understand the environmental factors that will either help or hinder the connection between the two firms. Companies should jointly assess how factors such as management philosophy will affect their ability to achieve their relationship drivers. It is the combination of the relationship drivers and these environmental facilitators that establishes the potential for the relationship.

Once the potential is identified, it will be up to the firms to implement appropriate levels of management effort to realize this potential.

Establishing a clear picture of the relationships expectations from both sides is only the first step in a challenging but rewarding long-term effort to tailor your supply chain connections for enhanced business results. Ultimately, like any relationship, time must be spent ensuring that both sides are realizing an appropriate amount of benefit based on the investments they are making in the relationship.

6. Trading off the positives and negatives of Service Level Agreements

Doug Thomas

Doug Thomas,
Pennsylvania State University

A supplier producing and stocking goods for delivery to a retailer must trade off the negative consequences of stocking insufficient inventory (primarily lost revenue of current or future sales) with the negative consequences of excess inventory (high inventory holding costs).

If a supplier faces high inventory risk and relatively low margin, she may choose a stock level that maximizes her profitability but is sub-optimal from the view of the entire system. For example, if a supplier optimizes her own cost-service tradeoff, she may provide poor service to a retailer who then suffers high out-of-stocks. The fundamental problem here is not poor inventory management practices, but misaligned incentives. The supplier bears much of the inventory risk but receives a rather small fraction of the overall margin. If the supplier provided better service, out-of-stocks would be reduced and the entire supply chain would be more profitable.

There are many types of arrangements between supplier and retailer that might help address this misalignment. One common approach is to negotiate and specify a certain level of service with the supplier. For example, a retailer could require a supplier to achieve a certain fill rate (fraction of demand met from inventory) over a specified review period. Such service level measures are often part of a supplier scorecard. The important question is, are these service level agreements (SLA) effective at resolving misaligned incentives and improving performance?

The short answer is, yes, usually such SLAs do improve performance by providing a supplier incentive to improve service, thus improving the overall performance of the supply chain. Recent research has shown, however, that imposing such SLAs on suppliers can drive strange inventory management strategies. If you are a believer in the “what gets measured gets done” maxim, then you would expect a supplier facing such an agreement to maximize her own profitability while still meeting the agreed-upon level of service. If this is the case, it turns out that changing the frequency of the performance review and nothing else can dramatically affect the ideal inventory level for the supplier. This means that changing from conducting supplier performance reviews on a monthly basis to a quarterly basis could significantly alter the inventory cost for the supplier and the service for the retailer. System performance can be quite sensitive to other terms of the service level agreement as well.

For a variety of reasons, longer horizons are usually (but not always) preferable for both parties. Recent research suggests less “end-gaming” behavior occurs with longer horizons, and suppliers tend to not overreact to variability in demand. Longer reviews also tend to drive a more consistent service level over time.

In summary, inventory SLAs can indeed be effective at aligning supplier and customer incentives. These agreements will generally help rather than hurt supplier performance but it is worth thinking quite carefully about the terms of the agreement, in particular, the consequences of meeting the target and the frequency of performance review.

7. The Impact of Reduction in Supply Chain Variation on Shareholder Value

Farzad Mahmoodi

Farzad Mahmoodi, Clarkson University, and Heimo Losbichler, Steyr University (Austria)

In today’s global economy, companies are expected to provide competitive returns to shareholders. For publicly traded companies, the total return to shareholders is measured by the increase in stock price plus the dividends paid.

Clearly, a company’s stock price is impacted by a variety of factors. However, in the long-term, stock prices tend to be driven by company profits as measured by EVA (Economic Value Added). EVA defines the true profit a company generates after deducting the total cost of doing business (i.e., operating costs, taxes, and cost of capital) from the revenues. Unlike the traditional financial measures, EVA enables managers to determine whether they are earning an adequate return. If the long-term trend in EVA is positive a company earns a higher return than other investments of similar risk and shareholder value is created.

There are three basic drivers of EVA: revenue growth, cost reduction, and asset reduction.

Supply chain management should be viewed as a powerful tool affecting all three drivers of financial performance/shareholder value. While holding the right mix of inventory could result in revenue growth, providing the same level of service with a lower amount of inventory (safety stocks) would result in shorter cash-to-cash cycle time and higher liquidity, allowing firms to grow faster and create shareholder value.

Variation in demand, supply and lead times is a critical, but widely unrecognized, driver of inventory costs. Unfortunately, many managers are trained to think in terms of averages and do not fully appreciate the importance of the variation around those averages.

It is such variation that causes many of the costly supply chain disruptions and forces companies to keep excessive amounts of safety stocks. As the supply chains become longer and more complex, it is even more important for companies to measure and control supply chain variation to improve their financial performance and maximize shareholder value.

8. New Product Launches and the Supply Chain

Ravi Anupindi

Professor Ravi Anupindi, University of Michigan, Ann Arbor

Innovation is a key competitive weapon in today’s marketplace. And yet, companies have trouble getting their products to market.

Prominent failures highlighted in the recent press include delays in the launch of Airbus 380 that potentially wiped off five billion euros of the value of its parent company and Sony’s struggle to make sufficient Play Station 3 consoles for the holiday season.

In a recent study, Hendricks and Singhal (2006) investigated how product introduction delays affected operating performance. Based on a diverse set of 450 firms that experienced product introduction delays, they reported that delays have a statistically significant negative effect on profitability; in particular they observed an average decline of 5.99%-7.62% on Return on Assets (ROA) and 12.59%-16.65% on Return on Sales.

Despite this, a recent study by the IBM Institute for Business Value finds that on-time and on-budget rates for new products in the consumer products industry have declined by 7%-8% in the past three years.

These studies imply that developing and launching new products is becoming harder. Why is this so? While increased intensity of competition might partly explain this, we believe that the lack of a better understanding of the critical role of supply chain in innovation is one of the key contributing factors.

Traditionally, product launch decisions have been considered a marketing function. The success of a new product and its launch, however, critically depends on all aspects of the supply chain from design to sourcing to manufacturing to distribution. To ensure the success of a product launch, one needs to pay close attention to supply chain design, sales and operations planning, as well as supply chain coordination. The criticality of the various supply chain activities will depend on the nature of the innovation. Finally, companies need to create a launch process, identify key stakeholders (marketing, supply chain, finance, and operations), establish key metrics and develop a dashboard for launch readiness and success

9. Revitalized Supply Chain Command

Dr. Sandor Boyson

Dr. Sandor Boyson, Director, University Of Maryland College Park

We are currently moving into the third global supply chain transformation of the past century.

The first era of enterprise supply chain globalization was the era of vertical integration. The Ford Motor Company ran the first truly global industrial supply chain. By the early 1920s, Ford owned the entire production process: assembly plants in the United States (and elsewhere), lumber camps, inter-modal transportation assets such as railroads, steamships lines and airplane fleets.

The second era of enterprise globalization has been the era of ‘viral virtualization,’ a term borrowed from viral marketing, suggesting that outsourcing increases exponentially.

Contrast Ford’s approach with the virtual supply chain model of companies like Sun Microsystems today. Sun never touches 90 per cent of the server computers it sells globally. Rather, a supplier receives a Sun customer order directly and ships back to the global customer via third-party logistics companies.

This business model of outsourced supply chain can drive cost efficiencies and operational flexibility, but it has also led to a heightened perception of eroded strategic command and control and loss of network coherence. A recent survey conducted by the Electronics Supply Chain Association, for example, revealed that sixty-nine per cent of respondents claimed that they now have less control over critical supply chain processes such as order promising, risk analysis and management, inventory management and forecasting than they did previously.

The next era, the era of revitalized command, is already upon us.

The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances; at the same time, it is showing an emerging bias toward more direct absorption and control over assets in its network. This bias is clearly demonstrated in the recent intensification in outward U.S. cross-border merger and acquisition activity as a preferred method of investment. It surged from US$16 billion in 2002 to US$29 billion in 2003 and nearly US $31 billion in 2004 (Deloitte 2005).

Nor are these trends limited to OECD multinational corporations. China’s emerging global enterprises are reaching overseas to acquire assets directly.

Another key feature of this corporate search for heightened control in an era of rising transport costs and increased risks of natural and political disruption is an emerging tendency to locate higher value activities closer to regional home markets.

The implications of these shifts in corporate supply chain strategy and design are significant. As enterprises and regions re-position themselves for the next phase of competition, we should expect to see big changes in the logistics/outsourcing industry.

For senior supply chain executives, an imperative will be on employing more sophisticated supply chain “value at risk” models that will not only show the ROI on specific product and service supply chain configurations, but will also enable the calculation of Risk-Adjusted ROI to accommodate for differential asset and value exposures.<

10. Transforming Supply Chain IT Into ‘Business Technology’

You can’t just add IT to mediocre supply chain processes and expect results. But savings are stellar when the project’s done right. By Gail Dutton

When Nike, in a well-known fiasco, implemented its new supply chain software system in 2000, it lost $200 million. Its failure wasn’t an anomaly, either. Gartner, Forrester and other leading IT analysts regularly report systemic disconnects between IT and business processes that are responsible for poor returns on investment. The bottom line: IT supply chain projects typically succeed only one in three times.

No wonder execs view IT skeptically.

On the flip side, Home Depot, Intel, Sun Microsystems and others achieved stellar results netting savings of millions when they used IT to revamp their supply chains.

The difference between success and failure? It lies not so much in what you do as in how you do it.

Build a better case
Building and supporting a business case itself for supply chain management has, traditionally, been one of the biggest stumbling blocks to the success of any IT project. As Bill Gauld, principal at The W Group and former CIO for media giant Pearson plc, elaborates, “If a company buys new machinery, it goes through stringent review.” When the supply chain decides to upgrade its IT systems, however, “there is a lack of the same level of rigor.” Why not? It often comes down to the fact that logistics and supply chain operations aren’t comfortable vetting IT projects, citing a lack of technological expertise.

Consequently, the business case for a project involving IT changes often is developed by the IT department—which can never know supply as well as the supply chain execs. And, regardless of who develops the case, it isn’t necessarily aligned with market realities (like infrastructure conditions), which can significantly impact results. But, on the other hand, the dilemma is that if the business case is developed by the logistics department or other business units, they’re likely to overlook technical solutions that could significantly enhance operations.

A prime example of the perils of such disconnects is what happened to an electric utility company. As Gauld describes the predicament, the company’s goal was lowering supply chain costs and reducing the time needed for repairs. To do this it built warehouses in remote areas near major transmission lines and “almost overstocked them,” according to Gauld, to make parts available nearer where they were likely to be needed. At the same time, IT was trying to optimize inventory systems to run lean. The conflicting strategies resulted in a lot of travel time from population centers to the well-stocked—but remote—warehouses and, ultimately, the transformation of those warehouses into fabrication shops when the utility backed away from the project.

While such cases still exist, the situation is improving, notes Nick Owen, a member (“our term for partner,” he says) of PA Consulting Group. Not only have execs recognized there is a real communications gap, but the function of IT itself is changing from managing information to managing business. “In the past five years, IT has come much closer to business,” so much so that Forrester analyst George Colony is calling for renaming information technology (IT) to business technology (BT).

Be results oriented
Six Sigma, lean manufacturing, CoBIT (developed for IT) and other frameworks that aid in the decision-making and prioritization process can help can lend dispassionate analysis to ensure that the supply chain project is doing the right things the right way. “Any method will yield benefits,” Gauld says, because they all complement each other.

Those frameworks all point to the fact that, “you can’t just add technology to an existing process,” Gauld emphasizes. “See if the process makes sense first, and if technology can improve it.” Think in terms of function. What do you want the system to accomplish? Do you still need the existing processes? Can some processes be combined? Has the supply chain changed since these systems were put in place?

When Sun Microsystems looked at its supply chain that way, it tossed the existing system out the window and completely redesigned its operations for the way its business runs today. The results cut logistics costs by 20 percent and resulted in a leaner, more nimble supply chain.

One of the early issues it addressed, once the basic framework was established, was definitions. That’s not as straightforward as it sounds.

For the supply chain, it may mean defining terms as basic as “net sales.” The term seems self-explanatory, but does it include sales before or after any discounts or rebates? Were marketing expenses included in that figure? That sort of detail has to be determined throughout the supply chain before the information really can be useful.

Mega-supply chain projects like Intel’s are still rare.

Although Sun completely replaced its supply system, such mega-projects are in the minority. Instead, companies are focusing more tightly on key pain points.

At ocean carrier NYK Line, the pain point was errors in bills of lading and customer shipments. They accounted for twenty-five to thirty IT failures per day. “Those failures had a real business impact,” according to Sunny Gupta, founder and CEO of iConclude, and resulted in needed information getting stuck in the system and disrupting shipments.

NYK’s solution, developed and implemented by iConclude, was to automate IT error alerts, so that the most common errors are fixed automatically. That single change allowed two of the three people who responded to these errors to do other work and decreased the time to resolution from the 12-24 hour norm to about two minutes.

Visibility
The visibility of the entire supply chain in real time is one of today’s overarching goals, and automation plays a big role in that. Nonetheless, more than half of supply chains are still managed manually with phone, fax and paper, making it virtually impossible to have visibility into the overall supply chain, according to Ken Ramoutar, director of product marketing, Sterling Commerce in Dublin, Ohio.

Sterling brought together its application and connectivity solutions for a user-friendly system that connects all suppliers electronically, to give real-time visibility to the entire, global supply chain. Connections range from very simple to quite complex, depending upon users’ needs, and integrate to manufacturers’ ERP or production systems through such connections as a Web portal or through the Sterling Collaborative Network, for example.

The system can take specific actions based on predefined rules. For example, materials can be ordered, certain orders can be cancelled or supplies rerouted to optimize existing materials according to prevailing conditions. Benefits, Ramoutar says, include dealing with more current information, thus deploying materials and people more effectively, managing inventory more efficiently and therefore better meeting downstream demand. The product has just rolled out, but Ramoutar says that “a typical $1 billion company could save $10 to $30 million in annually in terms of managing the supply base.”

“Supply is more visible than human resources, so any supply chain project has to have very precise control.” As Gauld adds, “There are no second chances, so the supply chain isn’t where I’d put unproved technology. You want rock-solid, predictable performance here.”

That’s why, when Home Depot began its supply chain improvements at the customer level, it rolled them out a few stores at a time. Its centralized automated replenishment program is a case in point. Deployed for 20 percent of the sales volume in 2005, it shifted employees’ selling time to 70 percent—up from 50 percent in 2000. By automating inventory control through the checkout