Supply Chain Is Under Siege
By Daniel Sears
Senior Consultant, Tompkins International
Supply chain is the difference between the planned margin for your product or business and the margin you achieve. Your supply chain will either help you maintain your margin, exceed your margin expectations, or it will erode your margin. At its core, supply chain is still the movement of goods; however, in today’s global unichannel marketplace every business support function plays a role in making sure your planned margin is achievable.
Supply chain at its core is under siege. Transportation and distribution face significant challenges across all industries. Record low unemployment being the root cause for much of the disruption. While the solutions will be unique to each business, they will be the result of synergizing support groups to the supply chain and the elimination of silos.
Below is brief description of how supply chain is under siege and some questions every supply chain executive should have answers to while creating a solution.
As the eCommerce marketplace continues to grow so does the need for distribution centers (DC), automated material handling, and labor. Your future state planning must answer several questions as you conduct your supply chain analysis?
- Where should your DCs be located?
- Should they be owned or leased?
- What is the labor market in the area?
With unemployment being at an all-time low, understanding the labor market in your area and surrounding areas over the next five years should be the primary concern for distribution managers. Traditionally firms sought to purchase land from a distressed farmer and prop up a DC literally in the middle of corn fields. However, in a constrained labor market this strategy is causing quite the dilemma. Growth is now outpacing many firm’s ability to acquire labor in rural areas. Amazon’s continued expansion and new minimum wage of $15 per hour only compounds this problem in virtually all markets.
DCs in larger cities have the option of increasing wages to be more competitive in the marketplace; but DCs located in small towns can easily run out of viable candidates and end up recycling employees that have been terminated. Automation and robotics are the easy answer to limit the need for labor.
What you need to know if you are a Supply Chain Executive:
- How does your estimated sales growth translate into increased distribution head count over the next five years?
- Peak and average day?
- Can you hire, train, and retain this many people?
- Particularly at peak.
- Does it make sense to go multi-nodal and spread your labor needs across multiple markets, while simultaneously getting closer to your customers and reducing outbound transportation costs?
- What is the current capacity of your distribution center in outbound units?
- How does that compare to your current and projected average daily volume?
- How does that compare to your peak volume?
- What are your automation options for slowing your dependency on human capital?
- How are HR and Accounting researching and defining the maximum you can pay per hour?
Depending on the current state of your distribution operation, in a worst-case scenario the cost analysis for implementation may not reduce enough headcount to justify the expenditure. Despite this negative perception automation is still the best way protect your operation for future growth in this labor shortage. The paradigm shift at hand is the switch from automating to reduce current head count to automating to reduce future dependency on human capital because of shortage in available labor.
The transportation market is suffering from a driver shortage. The shortage has been caused by several factors:
- Increase in demand due to economic growth.
- Millennials not wanting to drive trucks.
- Major retailers tightening delivery windows.
- Implementation of the electronic logging devices.
These factors have forced costs to sky rocket. It is a perfect storm of retail demanding faster more frequent service and drivers being capped at essentially 550 to 600 miles per day, when previously it was common place for a driver to stretch his or her day to 700 to 800 miles. With more than 50,000 driver positions open Congress would need to lower the driving age to 18 to attempt to keep up with current demand. Surprisingly, wages have not increased significantly to attract more drivers to the profession. I believe the starting wage for entry level single drivers will need to approach $.72/mile guaranteeing them a six-figure income. This disruption in the marketplace has made transportation cost reduction seemingly impossible.
Due to the volatility in the market place, cost reduction may not be consistently achievable. However, your best opportunity to reduce costs is to focus on tactical operations, strategy, and spend management. These are the three pillars of transportation management. Tactical operations cover day to day operations such as load tracking, dynamic routing, mode selection, and carrier tendering. Strategy often seems like a luxury, but it is critical to the future state of your network. Modeling the future state of your network allows you to properly plan for demand and customer service changes.
Developing carrier relationships and creating a cadence in which your network is open for bid protects your network. Using the data exported from your TMS and WMS to do continuous improvement activities is the best way to lower cost when finding lower rates is not always possible. Spend management is underrated but it is your best way to make real time decisions to drive out cost. Identifying cost changes and drivers through a thorough freight audit and pay process is the first step in making real time cost related decisions. Every transportation manager should have financial, on time performance, and shipment detail reports to uncover anomalies and track carrier and customer trends. Those reports should be leveraged to improve tactical operations, generate continuous improvement ideas, and assist in the creation of your transportation strategy. When done correctly each pillar, which requires its own expert, should work cross functionally with each other.
What you need to know if you are a supply chain executive:
- Based on your transportation spend, does it make sense to hire experts to perform tactical operations, spend management and strategy?
- If not, which of these can be outsourced?
- Do you have real time shipment visibility and corresponding cost analytics?
- Do you have a cadence for supply chain network design, transportation modelling, freight strategic sourcing, inbound freight conversion, and technology assessment?
- When shipping to major retailers do you have picture evidence of every pallet level shipped to a customer to help prevent charge backs?
- Is real estate and HR engaged with your supply chain network design?
- Is IT able to support new supply chain software and at what cost?
Import and export is the hottest topic in supply chain. The trade war between US and China continues to send ripples throughout that industry. If the trade talks fail CNBC is reporting that the US is planning tariffs on the remaining goods imported from China. This could happen as soon as December. Measuring the impact of these tariffs should be done in a landed cost analysis for all products imported. This will include the price of the product, tariffs, consolidation, currency conversion, duties, transportation fees, customs, and any handling charges. As part of your supply chain strategy it is now vital to have a global trade management package as part of your TMS. This will allow you to track and compare landed cost at the SKU level. Landed cost must be the cornerstone of conversations regarding sourcing, consolidation strategies, and planned profitability. Your 3PL partners should provide this data in addition to assisting with long-term and short-term strategies to minimize cost exposure. Industries like automotive, that have thousands of component parts, are at significant risk. Ford has reportedly lost 1 billion dollars to metal tariffs. This does not include the potential money lost on component part price increases. Most electrical component parts for vehicles have sub component parts that are made in China. These parts will face tariffs if an agreement is not reached. Suppliers will have to decide on whether it will be necessary to pass this cost increase on to their automotive manufacturing customer.
Lead time and service percentage is more important than ever. Purchasing cushion inventory to account for days at the dock, intermodal failures, customs, and / or a too aggressive port to door quote is going to cost you more money in tariff expense.
Purchasing, transportation, distribution, sales and finance need to collaboratively decide on the inventory level or the amount purchased. This is particularly important when purchasing seasonal apparel that is often a one-time buy.
What you need to know if you are a supply chain executive:
- How are purchasing and transportation collaboratively making decisions to mitigate cost increases using landed cost at the SKU level?
- Are Finance and Accounting supporting?
- What are your alternative sourcing strategies to reduce your dependency on Chinese made products?
- What is the timeline and potential cost impact?
- What products can be pulled forward in production?
- Do you have a product consolidation strategy and a container optimization strategy?
In today’s global unichannel marketplace, supply chain managers are facing challenges on multiple fronts and the solutions require the expertise from multiple business support groups working collaboratively. The most effective supply chain strategists will be using the data from their TMS and WMS for network design, transportation modeling, and freight sourcing. Coupling that process with the analysis of transportation and distribution metrics will uncover opportunities for cost reduction. Supply chain is under siege and a flexible data driven process is needed to fight back.