Commentary: Eliminating the "tunnel vision" approach to supply chain optimization
"Micro-optimization" of individual processes for cost and efficiency produces only isolated benefits. "Macro-optimization" brings widespread improvement to the enterprise as a whole.
Supply chain and logistics executives have been focused on traditional supply chain strategies for far too long. Approaches such as mechanization (for example, pallets and pallet lifts); physical distribution (warehousing, material handling, and freight transportation); logistics automation (automated machinery); and enterprise resource planning (ERP) systems have relegated the traditional, siloed supply chain to a role as a cost center. This "tunnel vision" focuses on optimizing operational processes in order to achieve greater efficiencies and thereby drive down costs.
While that may have been a successful strategy in the past, leading many to take an "if it isn't broken, don't fix it" attitude toward their supply chain management (SCM) solutions, that kind of thinking could doom them to the same fate as once-successful industries that have failed or are in trouble today. Think about companies like Sears, Blockbuster, Life Magazine-all experienced a time as premier brands, but they struggled to adapt when faced with a "perfect storm" of disruptive technologies, an expanded competitive marketplace, new consumption models, and changing consumer expectations. They and others like them focused on cost containment instead of adapting and leveraging new technologies and business models to drive growth.
In our industry, this kind of disruptive change is exemplified by the "Amazon effect," the phenomenon that has raised customer expectations with respect to the speed and visibility of goods in-transit and the demand for same-day delivery. In contrast to the old-line businesses like those mentioned above, modern supply chains are adopting new technologies and business models championed by innovation leaders like Amazon.com. We now have a global marketplace that offers easy access to a broad variety of products and satisfies customer expectations regarding the speed and visibility of goods in transit, while also focusing on innovation with an eye toward growth and consumer satisfaction. Nevertheless, if companies continue to view their supply chains as a linear, static cost center, the result will be a dead end. Those embracing a model that relies on cooperation and collaboration across the industry rather than siloed, internal operations are and will be the winners.
In this new world, the key to successful supply chain strategies that will meet increasing customer demands revolves around one concept: macro-optimization.
Micro- vs. macro-optimization
Traditionally, organizations have run their orders and shipments through an optimization engine based on a siloed network, resulting in their SCM solutions being "micro-optimized."
When supply chains are driven by micro-optimization strategies-that is, they are treated as a cost center instead of as an asset, and they are inwardly focused on a single existing network-they become static and inflexible. As a result, models, prices, and agreements become outdated as soon as they are put in place, and companies are unable to react to changes in the market.
For example, in the micro-optimized approach, no matter how efficient the optimizer is, it will always leave some portion of a shipment un-optimized because it is working with slightly outdated information, therefore there is a finite amount of opportunity in that data set. On average, users of optimization software will find that this lag time results in 4 to 10 percent suboptimal output from micro-optimization.
Comparatively, macro-optimized approaches embrace a new supply chain model, one that relies on cooperation and collaboration as well as the connection of many supply chains, as opposed to focusing on an organization's own supply chain. In a macro-optimized model, companies are able to adapt to customer demands because this approach allows for modifications within supply chain processes; for example, they can adjust to fluctuations in available capacity and have visibility into optimization opportunities that may be available through multiple networks. Micro-optimized approaches cannot allow for modifications, because there is a limit to its effectiveness, as it is inherently limited to an organization's own orders, rates, and carrier capacity.
When organizations adopt macro-optimization, two essential elements are required for success:
1. A global trade network (GTN): A connected, collaborative network enables companies to have access to a broader, deeper community of shippers, trading partners, carriers, freight forwarders, and so forth. The power of a network lies in its ability to bring clarity and certainty to a volatile situation and its ability to offer "on-demand" connections to thousands of potential carriers.
2. A single-instance, multitenant environment: This environment allows for the aggregation of data from multiple companies, where real-time visibility is a reality. Data is captured, analyzed, and operationalized to an organization's advantage.
Here are two real-life examples:
Capacity constraints can be a daily concern for shippers. In a micro-optimized approach, a shipper ends up overpaying for a less-than-truckload (LTL) pick-up, because the individual shipper has no ability to take advantage of the additional empty space in the truck. With macro-optimization, shippers can share capacity on less-than-truckloads or on backhauls. Additionally, in macro-optimization, if a shipper always moves freight on a particular lane but never has a return load, another shipper could use that empty capacity on the backhaul for one of its difficult lanes. In this scenario, both shippers saved money, and the carrier didn't waste "empty miles."
As another example, a group of small-parcel shippers located in one major city can use macro-optimization to pool their freight while also engaging in the cost-saving option of "zone skipping." In this situation they pool and move their freight by local carrier several zones away, and then tender their parcels for delivery to a major carrier like UPS to avoid expending the time and resources required to complete the shipment themselves. This option is not available to them if they stay in their own, siloed operations. But with macro-optimization through a global trade network and a single-instance, multitenant environment, the power of the network takes hold and provides new cost-saving opportunities.
Our industry can leverage such disruptive technologies to compete in an expanded competitive marketplace. Taking a macro approach helps companies engage in new consumption models; adapt to natural disasters and other causes of damage that are out of an organization's control; adjust to changing trade agreements and customs requirements; and meet changing consumer expectations driven by the Amazon effect. Changing from tunnel vision to a wider view will be key to the future of our industry. Macro-optimization is the strategy that can make it happen.
Doug Surrett is Chief Product Strategist for the technology and supply chain services company BluJay Solutions (www.blujaysolutions.com).
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.