Sunday 25th Feb 2018 - Logistics Manager

Fragile future

Walk in to any one of ten thousand retail golf shops across America, and it’s possible to place an order for a custom made golf club from upmarket manufacturer Ping, a Phoenix, Arizona-based company that has been selling high end clubs for almost fifty years.

Over a period of up to 30 minutes, the retailer carefully measures the consumer, producing a precise specification for a golf club – or set of clubs – to meet his or her exact requirements, detailing features such as colour, length, shaft flexibility, and grip size. With so many options available, the number of product combinations is huge: remarkably, only around 65 per cent of Ping products are covered even by 30,000 variations of irons, and it would take hundreds of thousands of individual stock keeping units (SKUs) to account for all of the possible combinations.

At Ping’s manufacturing facility – consisting of approximately 500,000 sq ft of production space, spread over 30 or so buildings on 50 acres, including a foundry – clubs are then custom manufactured to the player’s exact specifications, marked with individual serial numbers, and shipped within 48 hours of order placement. It’s a slick performance, and one that has undoubtedly contributed to Ping’s financial success.

Writ large, the Ping example neatly highlights several of the challenges and issues presently shaping corporate supply chain thinking. From mass customisation to carbon footprints, and from build-to-order to globalisation, Ping exemplifies some of the pressures – and responses to those pressures – affecting businesses around the world. The bottom line: while globalisation has undoubtedly influenced supply chain thinking over the past decade, it will be some of the consequences of that rush towards globalisation that characterise the next decade.

Ping, for instance, is wrestling with the consequences of its own response to globalisation, with the establishment of operations in the UK, continental Europe, and Japan. In attempting to replicate its American success, the company faces the challenge of scaling a system appropriate for one country to one appropriate for many.

Thanks to a decision taken a number of years ago to centralise on a corporate-wide database from NCR Teradata, the prognosis, though, is favourable. The result of that decision: underpinning the company’s transactional systems is an industrial strength data repository capable of growing as Ping expands. The loss of visibility that characterises many moves overseas, therefore, should escape it.

Not every challenge is as amenable to a technology fix, though. Most obviously, there has been a seismic shift in the macroeconomic environment in which supply chains operate. For most of the last ten years, nominal interest rates have been low – close to zero in Japan, and similarly in the US post September 11th 2001 – leading to real interest rates that are either zero or negative, given the rate of inflation. At the same time, manufacturers and retailers have become better at managing their inventories, with a host of initiatives ranging from Just in Time to advanced planning and scheduling algorithms slashing stock levels across the board.

Interest rates on the rise
Roll the clock forward, and the future does not look so benign. Interest rates are rising as inflation edges upwards again – driven by factors such as rising fuel costs and ‘spillover’ price pressures from a booming Chinese economy. Worse, with inventories now at a historic low, a rise in inventory financing costs shows up in the financial accounts with disproportionate impact: a few extra kilos on an already overweight person just disappear, but show up starkly on a slim and trim figure.

Worse still, as globalisation takes hold, supply pipelines are lengthening. Suppliers once located (sometimes literally) just down the road have been replaced by new sources of supply in the Far East and Eastern Europe. Invariably, the impact is a ‘double whammy’ on inventories – extra inventory in a longer supply chain, typically involving slower sea-based shipping modes, and extra inventory as safety stock to buffer against greater variability of supply.

Companies are at last, slowly, waking up to this. ‘Landed cost’ calculations, looking at the overall cost of supply, not just the direct ‘ex-works’ cost, are becoming more common, reckons David Morgenstern, managing director of the lowcost country sourcing consulting practice at e-procurement vendor Ariba. Even so, he warns, ‘there’s still a surprising amount of purchasing “bad practice” around, where companies opt for sourcing from China without looking at the overall cost picture.’

Factor in the impact of freight costs, inventory and tariffs, for example, and the logic of sourcing large castings or sheet metal enclosures from countries such as China, with their lower labour costs, largely disappears: instead, ‘near shore’ sourcing – from Eastern Europe, for example – makes much more sense, even if the factory gate price is higher.

British fastener manufacturer Infast, for example, decided in 2004 to discontinue its British manufacturing operations, opting instead for sourcing from low-cost countries such as India and China and closing down its two Yorkshire manufacturing sites completely. ‘We were committed to moving offshore,’ recalls Robert Sternick, then the company’s chief executive. ‘The two plants were losing money, and the cost of buying fasteners from the Far East was substantially less than we could produce them for here.’

Buffering against demand
Yet an analysis by Midlands-based management consultants Rossmore Group – appointed to help transition the company to a business model based on overseas sourcing – suggested that the closure announcement had been premature. Factoring in the total landed cost, and the additional inventory required to buffer against demand and supply variability while operating with such a lengthy supply chain, led to another solution being adopted: sourcing high volume products with stable demand patterns from low cost Far Eastern suppliers, while the UK operations would concentrate on higher value, low volume products where responsiveness and flexibility was important.

Globalisation also offers other challenges and opportunities. While the broad thrust of the trend towards global sourcing will continue, experts expect to see substantial shifts in the way that global trade is carried out. Colin Maund, chief executive of Achilles, a consultancy, describes a process of ‘national specialism’ as being underway, for example. ‘Countries are playing to their strengths,’ he says. ‘They’re not trying to be all things to all men, but are concentrating on increasingly narrow ranges of abilities.’ China, for example, is focusing on base manufacturing, rather than consumer durables, while India is centring on service delivery and high-quality engineering.

And according to Laurence Dupras, director of supply chain services at consultants BearingPoint, there is likely to be an upsurge in the usage of a new generation of global trade management solutions to optimise and simplify cross border trading – partly to help facilitate total landed costs calculations, but partly also to optimise freight and tariff costs. ‘Of interest to most global companies, trade management technology will be as much used by companies wishing to assess their existing arrangements as by those who are looking at setting up a new global trading model in the first place,’ she predicts.

The impact of supply chains on the environment, too, is another issue that is inextricably linked to both globalisation and commerce in general. ‘Not only are consumers becoming more socially and environmentally responsible, but governments too are increasing their focus on what needs to be done to address global warming,’ asserts Jonathan Jackman of 3M Supply Chain Solutions.

Short term, expect to see more initiatives like Tesco’s equipping a sizeable proportion of its vehicle fleet to run on greener biofuels, and replacing long inter-depot road transport with greener rail freight. Longer term, says Jackman, such quick fixes will be replaced by investment in building wholly sustainable supply chains – including improved transport utilisation through transport management systems, partner sharing and improved supply chain network design, as well as environmentally-friendly distribution centres running on solar power and constructed from reusable materials.

A greater emphasis on productivity and quality is another factor likely to shape supply chains in the next few years, adds Jon Bumstead, strategy and business planning director for DHL Exel Supply Chain. ‘Logistics costs are rising as a proportion of the cost of goods sold,’ he warns – again, the consequence of falling prices as new sources of supply in low-cost economies come on stream. Yet cost-cutting among logistics providers is hardly an option: not only is the cost base already low, but concerns over quality levels in some regions point to the need to raise costs, not reduce them. ‘The chemical industry is moving to Far Eastern production and sources of supply – and is very worried about the quality of logistics providers there,’ notes Bumstead.

Ultimately, none of these challenges is intractable: solutions can, will – and in some cases, must – be found. What they do highlight, though, is the fragile nature of some of the assumptions underpinning today’s supply chains.

Viewpoint

Logistics costs are rising as a proportion of the cost of goods sold – the consequence of global sourcing
Jon Bumstead, DHL Exel Supply Chain

Countries are not trying to be all things to all men, but are concentrating on increasingly narrow ranges of abilitie
Colin Maund, Achilles

“Not only are consumers more environmentally responsible, but governments are tackling green issues”
Jonathan Jackman, 3M Supply Chain Solutions