Other Voices: The end is near

Editor’s Note: The following column by Ken Reuhrdanz, distribution & warehousing market manager, Dematic, is part of Modern’s new Other Voices column. The series, published on Wednesdays, will feature ideas, opinions and insights from end users, analysts, systems integraters and OEMs. Click on the link to learn about submitting a column for consideration.

You’ve seen the signs: Repent. The End Is Near. They’re usually carried by a Cassandra proclaiming the end of the world as we know it.

I’m not sure if the world is coming to an end, but this is the end of an era. A shift has occurred. As a result many companies may need to re-think their supply chain strategies to accommodate this shift.

What is the shift? While there are many changing elements, such as labor costs/availability/turnover, spikes in raw material costs and government regulations, there currently seems to be two forces creating a shift in supply chain strategies. They are the compounding affect of increasing energy costs and the drive towards environmental sustainability in the supply chain expressed as less packaging, smaller DC footprint, less energy usage, dense truck loading and other factors. Both trends work off each other and magnify their impacts.

For example, with “greening of the supply chain” initiatives comes more pressure to source closer to the customer. This philosophy has been established since less fuel is used to transport materials if a supplier is geographically close to the end customer. Add in the high cost of fuel and the importance of supplier location just got more important.

While close proximity reduces fuel costs and supports green initiatives, another powerful benefit to close sourcing - or near shoring - is speed. Retailers like Zara, an apparel retailer with stores in Spain, utilize suppliers/manufacturers that are located 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 quickly have product in stores in a matter of weeks rather than the months required using suppliers located 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. In recent years, we’ve seen a trend towards more frequent deliveries with smaller order sizes supporting “continuous replenishment” strategies. But could fuel costs and green initiatives reverse this trend?  Should supply chain strategies should promote fewer deliveries and increased order quantities?  If this strategy takes hold, look for order minimums, longer lead times to accommodate transportation consolidation, as well as new configurations for order fulfillment systems in the distribution center.

Higher fuel costs are impacting distribution center network design as well. What does the sensitivity analysis on fuel costs do to your supply chain strategy?  While a centralized distribution center 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 less transport costs.

When increased fuel cost and green initiatives happen together, order accuracy becomes even more important than usual. A picking or shipping error results in increased shipping costs plus the use of more fuel to return the item to the distribution center, in addition to the fuel cost to re-ship the correct order. To the above list, you can add the labor cost to re-process the order plus the damage to customer goodwill.

Change a variable, and see what happens to your supply chain. Energy costs have been stable for almost 20 years. This era is over. High energy cost combined with the “greening of the supply chain” initiatives, are cause to re-think our supply chain strategies.

Maybe the end really is near.