Advisory Board: Time to re-think your supply chain?
Think about being closer to suppliers and customers, in proximity as well as in relationship.
By Ken Ruehrdanz, market development manager, Dematic Corp. -- Modern Materials Handling, 10/1/2008
It is the end of an era. A shift has occurred. Many companies may need to re-think their supply chain strategies to accommodate the shift. It involves more than just labor costs/availability/turnover, spikes in raw material costs and government regulations. It is the compounding effect of rising energy costs and the drive toward environmental sustainability in the supply chain (i.e., less packaging, a smaller DC footprint, less energy use, dense truck loading, etc.). Both trends work off each other and magnify the impact.
For example, with the “greening of the supply chain” initiatives, there is more pressure to source closer to the customer. Less fuel is used to transport materials if a supplier is geographically close to the end customer. Factor in the high cost of fuel and supplier location gets even more important.
While close proximity reduces fuel costs and supports green initiatives, another powerful benefit of close sourcing (near shoring) is speed. Retailers like Zara (an apparel retailer with stores in Spain) use suppliers/manufacturers in Spain or nearby Portugal, thereby cutting transportation time. Supply chain speed helps retailers like Zara realize a competitive advantage. Zara can take a fashion idea and have product in stores in a matter of weeks versus many months using suppliers in Asia.
Wow, this supply chain supports green principles, saves costs using less fuel, and “speed to market” is making the company more responsive to customers while gaining advantage over competitors.
Then, there is the issue of delivery frequency and order quantity. The trend has been toward more frequent deliveries with smaller order sizes, thereby supporting “continuous replenishment” strategies. Could fuel costs and green initiatives reverse this trend? Maybe supply chain strategies should promote fewer deliveries and increased order quantities? If this strategy takes hold, look for order minimums and longer lead times to accommodate transportation consolidation, as well as new configurations for order fulfillment systems in the DC.
Higher fuel costs also affect DC network design. What does the sensitivity analysis on fuel costs do to your supply chain strategy? While a centralized DC that generates volume efficiencies may make sense for some supply chain strategies, others may consider a regional DC network that allows closer access to the customer, typically within 350 miles, requiring lower transport costs.
Now let's go inside those DCs. Order accuracy has always been important there. When higher fuel costs and green initiatives happen together, order accuracy becomes more important. An error means higher shipping cost and use of more fuel to return the item to the DC, in addition to the fuel cost to re-ship the correct order. Add to this the labor cost to re-process plus the damage to customer goodwill, and order accuracy gets even more important.
Materials handling systems contribute both to accuracy and energy efficiency. Package conveying and sorting technology can be designed to automatically slow down during periods of low carton flow. Why run at top speed when it is not required? Control systems can monitor activity on the system and help you use only the power required to do the job. Operating at slower speeds also means reduced wear and tear on equipment, and therefore longer system life and lower maintenance costs.
Change a variable and see what happens to your supply chain. Energy costs have been stable for almost 20 years. That era is over. High energy costs combined with “greening of the supply chain” initiatives, are cause to re-think your supply chain strategies.
| Author Information |
| Ken Ruehrdanz can be contacted at |
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