Is your supply chain out of date?

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As global trade patterns continue to shift, companies must ensure that their supply chain networks perform optimally to ensure competitiveness for the future. A supply chain network that provided the ideal balance between cost and service a few years ago is almost certainly not the ideal solution today. With the cost of logistics on the rise and the cost dynamics constantly changing, companies need to assess the optimal supply chain strategy more frequently.

One of the major changes in recent years is the cost of fuel. The price of standard crude oil on NYMEX was under $25 a barrel in September 2003. By August 2005, the price hit $60. The cost of transporting goods has almost doubled in a few years and many companies have simply absorbed this cost into their operations. But increased fuel costs can be offset to a certain extent by re-evaluating the supply chain configuration.

The optimal configuration in 2003 may have been to operate three distribution centres, while today, costs could be saved by operating four distribution centres. The increased cost of operating a fourth distribution centre can be offset by reduced transport costs and as an additional benefit, companies might find that they can improve service quality at the same time.

While rising fuel costs have hit companies directly, they have also made an additional impact via increased interest rates. Since rising fuel costs drive up prices for the consumer in everything from utility bills to transport, the UK, US, European Central bank, Australia and Japan all put up interest rates in 2006 to tackle such inflationary pressures. For companies that have borrowed money to maintain inventory, this inventory and safety stock is now costing them a lot more than it did a few years ago. The cost/service ratio has shifted and companies need to reassess their supply chain practices.

Another major trend is the increased global sourcing of goods. Outsourcing production to low cost economies means the manufacturer’s business focus changes from producing goods to importing and marketing them. The logistics has also changed from a relatively short supply chain to a much more complex one, with extended lead times and an increased element of risk.

Furthermore, despite the longer distances goods need to travel to reach the end customer now, businesses also need to optimise their supply chain in terms of carbon emissions. The environmental impact of businesses is now being carefully scrutinised by government and consumers, with corporations needing to stand up and have their green credentials counted. In line with the Kyoto Protocol, the UK Climate Bill requires a 60 per cent reduction in carbon dioxide emissions by 2050 and a recent EU agreement aims to cut emissions by 20 per cent by 2020.

The impact of these changes to the global environment is clear from the Council of Supply Chain Management Professionals’ 17th Annual State of Logistics Report published in June last year. According to the report, 2005 logistics costs as a percentage of GDP in the US rose from 8.8 per cent to 9.5 per cent, or US$156 billion (a 15.2 per cent increase on 2004). Transport costs rose 14.1 per cent in 2005 (accounting for 6 per cent GDP) and inventory carrying costs rose 17 per cent in 2005, an increase of $116 billion.

So what can companies do? Network design is crucial. An Aberdeen Group study of 160 companies concluded that: “Companies should increase the frequency of their network strategy assessment to at least once per year.”

The Aberdeen report also found that best in class companies, the top 10 per cent, were more likely than their peers to be maximising the use of network design technologies to support business growth; consider supplier network changes and improve transport costs and capacity.

Network design technologies can also prove indispensable in allowing companies to incorporate local or regional trends into their supply chain strategy. An example of this is the changing face of Europe. From the initial 15 countries that formed the European Union, the region has now grown to 25 countries with 494 million consumers and GDP of 11.5 trillion euros, making Europe the largest economy in the world.

This has thrown up numerous challenges and opportunities for managing the supply chains. From operating country dedicated warehouses, the nineties saw a shift towards pan-European networks and for some, the ideal of a single European distribution centre, the natural location of which was the Benelux region. However, the natural centre of gravity has now shifted eastwards to the Czech Republic.

North America has also seen the emergence of new supply chain patterns in recent years owing to the continued closure of manufacturing and the off-shoring of production to low cost Asian economies. 2006 saw a 3.5 per cent increase in the deconsolidation of container volumes, with many companies moving US distribution centres closer to the ports of entry as a result.

The US East coast has also seen strong growth in port activity due to problems in the West with port unions causing delays, port capacity constraints and rail constraints. There is also a growing trend for shipping lines to sail from Asia to the US via the Suez Canal, since this allows the use of post panamax vessels of over 8,000 TEUs.

Finally it is important to note the changes taking place within China. Highly decentralised and fragmented supply chains, driven by poor transport infrastructure, contributed to logistics costs in 2004 accounting for 21.3 per cent of GDP, approximately double that of the US and Europe. However, as the country invests heavily in major road building schemes and other improvements to infrastructure, this is likely to fall in coming years.

The world will continue to change, the global economy will continue to develop and businesses from one continent may be sourcing goods from another to sell in a third. What worked yesterday is certainly not the optimal supply chain configuration today. ‘Best In Class’ companies and those companies aspiring to this position must apply frequent network design technologies to accommodate these ever changing trends.

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