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10/24/2010

Filling the Black Holes in Your Supply Chain

Robert J. Bowman, Global Logistics & Supply Chain Strategies

Outsourcing. Multi-tiered supply chains. Shrinking product lifecycles. SKU proliferation. Incompatible information systems. Is it any wonder that companies are still losing track of goods as they make their way to market?

For all of the technology promising “end-to-end” supply chain visibility, there remain a number of “black holes,” where shipments simply drop out of sight for a time. Years ago, businesses might have tolerated such gaps as the natural by-product of complex, global operations. Today, they don’t have that luxury. Efforts to slash inventories hinge on the ability to track product in transit every step of the way.

In recent years, North American companies have stepped up the outsourcing of manufacturing to offshore vendors, especially in China. The trend has increased the number of partners in the supply chain and the distance between them. At the same time, sellers of finished product have sought to widen their markets, adding new customers into the mix.

“In the past, you could have managed an efficient supply chain just by focusing on a small set of suppliers and customers,” says Nari Viswanathan, vice president and principal analyst with Aberdeen Group. “That’s very difficult to do now.”

Black holes tend to appear “on the edge of enterprises,” Viswanathan says. Any time that raw materials, production parts or finished goods change hands, there is the potential for a loss of communication. Yet many companies attack the problem exclusively through internal programs, such as pricey enterprise resource planning systems. They aren’t looking beyond the organization’s walls, to where the gaps are actually occurring.

What’s needed, Viswanathan says, is an underlying information system that links disparate applications across multiple partners. The emergence of the software-as-a-service (SaaS) model is a positive step in that direction, he says.

Physical goods aren’t the only things that are getting temporarily lost in the shuffle. Supporting data and financial flows can also be difficult to monitor, says Aberdeen research analyst Viktoriya Sadlovska. Aberdeen’s own studies have revealed a particular lack of visibility in the areas of trade-document flow and costs that occur on the financial side.

“A lot of companies have a very vague idea of where those costs are accruing and being incrementally added,” Sadlovksa says. “They’re trying to find ways of reconciling their front-end cost estimate with back-end balance sheet results.” The problem is likely to become even more acute with recent implementation of the “10+2" filing requirements of U.S. Customs and Border Protection. The new rule adds data elements that must be reported to Customs prior to an import shipment being loaded at the port of departure. But it doesn’t suggest how companies can achieve the additional visibility.

Information or Inventory?

Black holes disrupt the precise timing that is necessary for keeping pace with customer demand, says Terry Harris, managing director of Chicago Consulting. “The single most important lack of visibility in a supply chain is knowing when a specific item will be ordered,” he says. Lacking such knowledge, companies must carry extra inventory, which weighs down the balance sheet.

Having good visibility means coping with a number of “invisible” issues, such as carrier reliability, efficiency of order-picking processes and, most of all, correct forecasting of demand. Such intelligence can only be obtained through close collaboration with supply chain partners and customers, Harris says.

The other key element in achieving total visibility is knowing the status and nature of standing inventory, according to Harris. In theory, this should be the easier goal to achieve, as it involves knowledge of an existing reality. But inadequate business processes often stand in the way. A vendor might have failed to ship a full order, without informing the consignee. Basic standards could also be lacking, with supplier and customer classifying parts and finished product in different ways.

Companies need to understand what those invisible issues are costing, both in overhead and lost sales, says Harris. They should make a point of dealing only with suppliers that have product on hand and can ship it as quickly as possible.

Suppliers, for their part, must be up-front about any back orders or missed shipments, instead of scrambling to correct the problem before the customer finds out about it.

The same lack of communication exists between sellers of finished products and their ultimate buyers. Even in the age of the internet, many companies continue to operate with paper-based systems, says Richard Yim, vice president of product marketing and services with San Francisco-based SmartTurn. They don’t necessarily inform customers about what’s available or is being shipped.

Small and medium-sized businesses are in particular need of systems that can report the status of orders in real time. “Not having visibility to stock levels creates the need for a high level of safety stock,” Yim says.

Merchandisers can no longer afford to attack the problem by flooding the channel with product. “Push-based” systems, in which supply levels are dictated by guesswork instead of actual knowledge of demand, don’t meet today’s need for mass customization and shorter product runs. Says Yim: “We have to expose the dark spots.”

SmartTurn’s Inventory Grid, a remotely hosted warehouse-management system, allows for the sharing of information across multiple applications and facilities. Data can be entered in a variety of ways, in line with the sophistication of each partner’s technology platform, according to Yim. In the process, a company can understand for the first time which raw materials it is actually using, and eliminate the waste.

Redefining Visibility

In recent years, the whole definition of visibility has changed. It used to mean receiving confirmation via electronic data interchange (EDI) that a purchase order was shipped. Now companies want the ability to track that order from door to door, says Scott Fenwick, senior director of product strategy with Manhattan Associates in Atlanta, Ga. Sellers of fashion apparel go further than that, insisting on monitoring key aspects of the manufacturing process, such as style and color. Still, with the use of so many different tools across partnering organizations, the formation of black holes is inevitable.

Almost perfect isn’t good enough, says Fenwick. He cites the example of a Manhattan customer that achieved 95-percent coverage of product in transit. Because the system lacked visibility 5 percent of the time, it wasn’t trusted at all by internal users, who refused to use it.

“Just getting the data is not the complete challenge,” says Fenwick. “If you’re not looking at your organization from a change-management perspective, you’re not going to get the benefits of visibility. Projects are not going to go forward.”

Complexities often emerge in the course of shipment. Another Manhattan customer was tracking containerized shipments across the Pacific into the Port of Long Beach. It knew the contents of containers down to the case level. But once they got to the port, the orders within each box were divided into two trailers by the deconsolidator. The consignee didn’t knew the precise contents of each truck, or when they would arrive at destination.

The solution, says Fenwick, lay in creation of a centralized Web portal, into which multiple logistics vendors were required to input status information. Such a tool can be especially useful when supply chain partners lack fully integrated information systems.

Tom Kozenski, vice president of strategy with RedPrairie Corp. in Waukesha, Wis., divides supply chain black holes into three broad categories: inventory, labor and shipments in transit. In the case of inventory, he notes that gaps in visibility can occur even within a single warehouse. (A company might do a good job on the receiving end, but lose track of product when it moves through the facility and gets mixed together with other items, he says.) Throw in the many tiers of a modern-day supply chain, and the challenge becomes even more daunting. Upstream supply chain partners might balk at the notion of using advance shipment notices (ASNs), for example, if they don’t want to spend the money to acquire that capability.

On the labor side, visibility is often lacking from a planning and forecasting standpoint, says Kozenski. Companies fail to establish the standards needed to link planning with execution, making it difficult to determine whether a workforce was deployed in the most efficient manner. The problem applies to labor in the warehouse, at manufacturing plants and on the road. A lack of visibility in any of those areas can disrupt the entire chain and take its toll on customer service.

In the area of transportation, a consignee must know whether and when a shipment has been picked up, what’s on the truck and whether it will arrive on time. That level of awareness requires the tracking of product through multiple hand-offs. “Otherwise, when you open the back of the truck, you never know what you’re going to get,” says Kozenski.

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