Earlier this week American Airlines cancelled approximately half of its scheduled flights due to concerns over a potential wiring issue in MD-80 passenger jets.  Over 1000 flights were cancelled on Wednesday and nearly 500 were grounded on Tuesday.  It has been a tough year for the airlines.  Not only are jet fuel prices rising rapidly which is driving carriers such as Aloha and ATA out of business, but operations disruptions are dealing further blows to the bottom line.  A few weeks ago I was in London during the week that Heathrow Airport’s long anticipated Terminal #5 was scheduled to open.  As you have no doubt heard a series of operations failures handicapped the new terminal and its major tenant, British Airways, for much of its opening week.  Fortunately, I have not been directly impacted by any of the operations disruptions or flight cancellations as my travel patterns tend to steer me towards flying United, Delta or US Air.  But even those of us who haven’t been stranded at an airport yet, may be impacted more than we realize.

Airline Disruptions Upset Travelers, but also Slow Supply Chains 

Many of you know may know that American is the largest passenger airline in the world.  But you may not know that American is also one of the largest air freight carriers in the world providing a range of transportation services to shippers.  American’s Cargo operations has the capacity to move 100 million lbs of cargo weekly including everything from small parcel packages to heavyweight bulk pieces up to 300 lbs.  Thousands of businesses rely on commercial airline cargo services to provide expedited delivery of freight to locations worldwide. Freight forwarders are some of the largest customers of airline cargo operations.  Forwarders will purchase capacity from commercial airliners on behalf of their end customers to route international cargo between origin and destination.  So the point is that when an airline cancels flights, it not only has to inconvenience the passengers, but it also must reroute time-critical cargo shipments.   Even though the wide body aircraft such as Boeing 777 and Airbus 340 which carry much of the international cargo were not affected by the FAA inspection mandates, the smaller connector flights which route the cargo to its final destination were affected.  Many businesses depend upon air freight transportation as a critical conduit for their supply chains.  As a result, cancellations and disruptions to air travel impact the bottom line of the airlines as well as the profitability of their business customers.

Growing Transportation Challenges in the Supply Chain 

It seems that transportation challenges are becoming more and more significant issues for supply chain managers in 2008.  Not only must you factor in weather and traffic, but there are an increasing range of political and economic factors that must be considered.  The environment is an increasingly sensitive topic as more corporations are seeking to become carbon neutral.  Transportation processes are receiving a high degree of focus in these corporate social responsibility initiatives.  In January, I wrote about several transportation related issues discussed at the National Retail Federation Show.  These included the growing problem of port congestion and potential labor strikes in the Western US hubs of Long Beach and Los Angeles.   Recently, however there seem to be two new transportation related challenges disrupting supply chains: 1) airline operations disruptions and 2) the falling US dollar.  Having discussed the former, let’s now explore the latter.

The Falling US Dollar 

What does the US dollar have to do with transportation processes and the supply chain?

There was an interesting article in Thursday’s Wall Street Journal about how manufacturers in rural regions of the Midwestern United States are encountering challenges exporting their products.  You might not be surprised to see such a headline.  For the past twenty years we have been inundated with stories of how offshore manufacturers using low cost labor are making US products uncompetitive in the world market.  However, Thursday’s Wall Street Journal story (Container Shortages put US Export Boom in a Box)  had a very different theme.  As the value of the dollar has fallen against the major currencies, prices of US manufactured goods are becoming more competitive in international markets.  As a result, US exports are beginning to grow at a pace not seen in decades.  The problem is that the US has fine-tuned its transportation infrastructure to support the highly imbalanced import flows experienced over the past few decades.  With supply chain trends beginning an unfamiliar reversal, the transportation infrastructure is struggling to keep pace.  One unexpected challenge is the shortage of shipping containers – the big, metal boxes that are used to house goods as they travel on rail cars and steamships en route to their destination.   The Journal stated:

“…Finding enough of the big metal boxes used to be a cinch, because the nation’s massive hunger for imports meant they were constantly arriving and stacking up from Long Beach, California to Long Island, NY.  Shipping companies typically scoured the country for anyone willing to fill outgoing boxes…” 

But most of these cargo containers are used to move consumer goods that are unloaded at retailer distribution centers near major metropolitan areas.  US exports tend to be agricultural products and industrial equipment produced in the rural sections of the country.  The head of container research at Drewry Shipping Consultants was quoted stating:

“There are some places, particularly in the Midwest, where there’s a complete lack of containers.” 

As a result, exporters are struggling to fully capitalize on the growing market opportunity.  There have been lost orders and shipment delays.  After all, what does a manufacturer do if they cannot find enough container boxes to ship their products to overseas destinations?  Well a more expensive, perhaps easier alternative is air freight.  That is unless it is flying BA through Heathrow or American on an MD-80 or whoever the next target of FAA inspections is….

Best Practices for Managing Supply Chain Disruptions 

So what should retailers and manufacturers do to avoid supply chain disruptions from unpredictable transportation challenges?

Risk mitigation strategies such as diversifying the transportation vendors, port facilities and trade routes utilized in your supply chain will provide some level of resiliency against unforeseen congestion and bottlenecks.  A more expensive option is to buffer additional inventories at strategic points in the supply chain.  But the truth is that no amount of planning or hedging can provide 100% avoidance of transportation related disruptions.  As a result, supply chain managers should place as much emphasis on preventative measures as they do on their ability to quickly to react to disruptions when they occur.  When an air freight shutdown or a container box shortage arises, transportation managers should be able to quickly adapt their supply chain models to route around the bottlenecks.   A key factor that will influence the agility and responsiveness to supply chain challenges is the level of information you have about your transportation processes.  Suppose you shipped an order to a customer in Western Europe earlier this week.  The goods were to be shipped air freight for arrival on Friday afternoon.  Will your shipment be impacted by the problems at Heathrow or at major American hubs?  If you don’t have good visibility to your logistics processes then you may not know who your freight forwarder contracted with for the trans-Atlantic route.

Transportation Management Applications 

The best way to take control of your logistics operations is with a Transportation Management System (TMS).  These applications can provide a centralized, enterprise-wide view of all logistics activities.  With rising fuel prices and the looming economic recession, I suspect more and more companies will be evaluating TMS deployments.  for the second half of this year.  Fortunately, a number of new software-as-a-service models are emerging that can help companies to accelerate the ROI and benefits of their TMS applications.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Consumer Software Deployment Models 

In my last post (http://blogs.gxs.com/keifers/2008/03/23/office-2007-rollout-postponement/), I began a comparison of the software deployment model used by corporations and consumers.  While most corporations of any significant size (50 employees or larger) utilize a completely electronic process to distribute software centrally over the local area network, most consumers use a very physical process to purchase and install software for their home PCs.   When new products such as Office 2007, Windows Vista, Adobe Acrobat 8.0 and TurboTax 2007 are released, most consumers visit a retailer such as Best Buy, Wal-Mart, Tesco or Amazon.com to purchase the actual physical box with the DVD in it.  

It is hard to believe with how digital we have become that this is still the process for software distribution in the consumer sector.  And it causes its fair share of challenges – not just for consumers who purchase the software, but for the retailers, distributors and publishers who have to manage the supply chain for the physical media.  Consider a product such as Windows Vista, which was formally launched a little over a year ago.  We tend to refer to Vista as one product, but it actually ships in five different versions – Ultimate, Home Premium, Home Basic, Business and Enterprise.

The Software Supply Chain Challenge 

As a result, retailers who sell Microsoft’s operating system must ensure that an adequate stock of all five versions of the product is available for consumers to purchase.  Some software publishers sell discounted “Upgrade” versions of the product to users who have already licensed a prior version of the product.  Both the upgrade and new user versions of each SKU must be carried by retailers.  The supply chain issues are compounded for multi-national retailers selling into a diverse group of countries.  The instruction manuals and other enclosures such as advertisements, warranties, authenticity certificates and technical support references must be in the local language of the country where the product is sold.  Some software publishers avoid the challenge of packaging country-specific contents, by shipping multi-lingual materials in all boxes.  The external packaging of the software, however, is usually country specific with pricing in local currency and labeling in local language.  In summary, not only must different functional versions of the product be managed, but publishers must distribute country specific versions of each SKU as well. 

Shortcomings of Traditional Supply Chain Models 

How do software vendors manage the supply chain complexities associated with retail product distribution?   A traditional “push” supply chain model would utilize a centralized manufacturing facility.  Publishers would attempt to forecast demand for product sales by SKU and by country weeks in advance.   Physical media enclosed in country and retailer specific packaging would be staged at distribution centers around the world to respond to fluctuations in demand.   If only it were this simple.  There are a few challenges with the traditional supply chain model:

• Forecasting Sales – With a push model, software publishers must forecast sales weeks in advance.  These predictions are most complex for new product introductions of major software packages as a high percentage of the retail sales occur in the first few months after launch.  Retailers and software publishers are challenged to estimate post-launch sales as they have no historical demand pattern to build forecast models.  This is not unlike the challenge with DVD new product launches (http://blogs.gxs.com/keifers/2007/12/04/24-hours-to-prevent-lost-sales-holiday-edinomics-part-1/).  Products with seasonal demand such as tax applications also present forecasting challenges.  Income tax packages enjoy peak sales during the few months of the year prior to filing deadlines.  Forecasting errors can be costly leading to either having too much or too few of the right SKUs to satisfy consumer demand. 
• Security and Feature Upgrades – One of the keys to a successful launch is ensuring the consumer can easily install and operate the software without the need to access technical support.  While software publishers go to great lengths to perform a rigorous testing process on new packages before launch, it would be cost prohibitive to test every permutation of hardware and software.  As a result, the time frame shortly after launch results in a high volume of end-user generated bug fixes and product enhancements.  Additionally, the first 30 days after launch is the period in which the highest number of security vulnerabilities in source code are exposed.  It is in the software publisher’s best interests to quickly deploy bug fixes to as many end-user desktops as possible to mitigate risk of a security breech or hardware incompatibility.  Of course, upgrading software code that has already been burned to a DVD inside a shrink-wrapped box is a bit challenging.
• Inventory and Supply Chain Costs – What supply chain costs you might ask?  If additional copies of a SKU are needed, can’t they be duplicated onto media at an almost negligible cost?  While the physical media, cardboard packaging and instruction cards may be low costs, the supply chain expenses can add up quickly.   For each box of software there are inventory carrying costs, transportation expenses and shrinkage losses which must be considered.  Additionally, software products have a short time to obsolescence, particularly immediately following a launch as bug fixes and feature enhancements may be introduced daily.

Postponement

Using a technique called postponement, software suppliers can alleviate many of the demand forecasting and supply chain management challenges experience in the push model.  A new breed of specialized logistics firms is emerging that offer light manufacturing and configuration services.  These firms leverage a network of warehouses and manufacturing facilities located close to the end-consumer in major metropolitan areas throughout the world.  The postponement specialists can therefore efficiently perform late stage product configuration on behalf of software publishers.  

Here is how the process would work for an application such as Microsoft’s Office 2007.  Retailers and the software publisher would establish weekly sales forecasts by analyzing various demand signals.  The forecasts are communicated daily to the third party postponement provider, who is responsible for demand fulfillment.  The postponement specialists will then perform a “light manufacturing” process to create the appropriate number of software packages for shipment to the retailers.  The process involves duplicating the appropriate version of the software with the latest bug fixes onto the physical media and then “stuffing” the country-specific packages with the localized instruction manuals and enclosures.  Using a postponement approach, the software publisher can respond quickly to changing demand patterns while minimizing supply chain and inventory costs.  Although, I have used Microsoft as a hypothetical example above, the process could apply to any software publisher.

A New View of the High Tech Supply Chain 

Postponement specialists also can configure hardware.  In fact, the majority of the volume for these late-stage product completion firms is consumer hardware devices such as mobile phones, personal computers, laser printers, digital cameras and digital audio players.  This is not surprising, since typically, discussions on challenges in the high tech supply chain focus on hardware products.  Rarely do you see the software supply chain discussed in industry forums.  But I am quickly learning that the supply chain for software products can be equally, if not more complex, than the hardware value chain.

By the way, I did eventually figure out the mystery behind my disappearing scroll bar.  After 30 minutes I of searching through Microsoft Word “Help,” I switched over to Google and found the answer in a total of 3 mouse clicks…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved

GXS has been in the process of rolling out Microsoft’s Office 2007 to our employee base over the past few months.  I am one of the few employees who are lucky enough to have been handicapped with this upgrade for about six months now.  The user interface for Office 2007 is substantially different than previous versions of Office such as 2003.   The most significant change is to the menu commands which use ribbon bars rather than the traditional “File”, “Edit”, etc. pull down menus.   As a result new users spend the first few days with Office 2007 struggling to perform basic tasks as they fumble through the new menu structure. 

The upgrade to Office 2007 is ironic in many respects.  For years users have complained that new versions of Microsoft Office provide few, if any, new features of practical value.  This cannot be said for 2007, which offers a number of powerful capabilities.  So in some respects – we got what we asked for.  The trick is mastering the power of the new user interface. My conclusion after six months as an Office 2007 user is that the challenges are not with the actual applications.  Word, Excel, Outlook and particularly PowerPoint have a lot of new powerful features available.  The real problem with the latest version of Office is the “Help,” which is absolutely useless with basic issues such as trying to find out how to add a header.  For example, the scroll bar disappeared in my Microsoft Word application a few weeks back.  Since then I have been trying to figure out how to get it to reappear.  Searching for the term “Scroll Bar” using the “Help” feature returns lots of fascinating, but completely unhelpful results such as:“Why can’t I include a POSTNET bar code or FIM-A code on envelopes or labels?”

One of the industry associations GXS has been working with recently is the Global Supply Chain Forum sponsored by Stanford University.  The forum is comprised of representatives from many of the world’s largest manufacturing companies as well as some of Stanford’s leading faculty such as supply chain thought leader Dr. Hau Lee.  Dr. Lee has introduced a number of revolutionary ideas over the past few years, but there is one particular insight that stands out in my mind:

“Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”

This is a concept that I think becomes more and more critical every day that goes by.  To illustrate my point, let us examine the high tech industry as an example.   More specifically, consider the sub-sector of high tech that manufactures computers and related peripherals.  This is a relatively young sector that was first started back in the 1960s and 1970s.  However, during its short history the supply chain model has undergone a radical transformation. 

Mainframe Value Chain 

When the first mainframes were introduced a single vendor often functioned as the sole source for all computing needs.  OEMs such as IBM and Honeywell manufactured not only the finished mainframe product, but most of the components as well including the memory, storage (DASD) and processors.  The operating system, database and even some applications were developed by the same vendor who manufactured the hardware.  If the mainframe broke or needed an upgrade, the hardware OEM provided the repair and service. 

2008 PC Value Chain 

Contrast the mainframe model to the complex, multi-tiered value chain in today’s computer industry.  I work on an “IBM Thinkpad.”  However, while the logo on my laptop says IBM, the manufacturer of the machine is actually a Chinese company – Lenovo.  Although Lenovo is the OEM, it only contributes a small fraction of the content of the laptop.  The components inside the laptop are sourced from third party suppliers (Kingston for memory; Seagate for storage; Intel for microprocessors).  Also noteworthy is the fact that Lenovo does not typically sell the machine directly to end users.  My laptop was purchased through our company’s preferred distributor – CDW.  The software on the machine is made by another group of specialized companies.  Microsoft publishes the Windows operating system and Office application suite.  Other software vendors such as Adobe, Symantec and Apple provide other applications such as document viewing, desktop security and digital music.  And when my laptop breaks, who do I call?  Not Lenovo, but a 3^rd party such as a high tech distributor, 3^rd party logistics provider or a contract manufacturer for warranty support and repair. 

The point here is that the computer industry has migrated from a vertically integrated model to a highly specialized, heavily outsourced model.  This type of highly outsourced model in which OEMs outsource much of the manufacturing and supply chain management to suppliers is growing more common in all discrete manufacturing sectors.  Examples can be found not only in high tech, but also aerospace, automotive, consumer products and industrial equipment.

Supply Chain versus Supply Chain 

The key take-away from the discussion above is that OEM manufacturers are increasingly dependent upon a community of outsourcing partners to achieve success.  Factors that can go wrong (and do go wrong) are, in many cases, completely out of the control of the OEM.  In these new value chain models, companies are actually not competing with other companies, but instead their supply chains are competing with other supply chains.  This crucial concept, first introduced by Dr. Lee, is critical for channel masters in today’s supply chain to understand.  However, while it may seem obvious, the majority of today’s leading retailers and manufacturers continue to structure models that prioritize the near-term financial performance of their own company above the overall long-term competitiveness of their supply chains.  The term “partner” continues to be utilized ever more frequently to describe suppliers in a value chain.  However, the approach of most channel masters remains more adversarial than collaborative.   The largest exception is, of course, the Japanese manufacturing community which has structured itself around kereitsu relationships between OEMs and key suppliers. 

Consider the following “company centric” paradigms that are becoming more commonplace in today’s supply chains.

• Performance Scorecards and Penalties – Retailers and manufacturing OEMs have instituted elaborate chargeback mechanisms that penalize suppliers for problems arising during routine order fulfillment.   Not only are these penalties designed with the goal of optimizing the buyer’s business processes, but each retailer and manufacturer has different measurement criteria.  As a result, suppliers are forced to comply with terms such as delivering during tightly monitored 2-hour receiving windows and labeling of pallets with customer-specific serialized barcodes and text.  While these processes simplify receiving for the buyer, they add cost and complexity for the supplier and friction to the overall relationship.
• Open Account – Large buyers are moving from their traditional letter of credit processes with overseas suppliers towards open account models.  The goal of the migration is to reduce banking fees for the buyer, but in many cases the side-effects to suppliers are significant.  Without a bank-guaranteed letter of credit to use as collateral for short term financing, suppliers struggle to fund raw materials purchases, manufacturing plant payrolls and other operating expenses.
• Extended Payment Terms - In an effort to hold on to cash longer, buyers are extending payment terms with suppliers to periods of 60 or 90 days.   Extended terms create a cash flow issue for suppliers who must now seek out short term loans to fund their operations.  For smaller suppliers with lower credit ratings, these expensive short term loans compromise profit margins and increase the overall cost of goods sold.
• Vendor Managed Inventory – More and more customers are looking for their suppliers (or a 3^rd party) to hold title for inventory until the point of consumption or sale to the end-customer.    Buyers prefer these types of models as they shift the inventory carrying costs to the supplier’s balance sheet along with the risk of product obsolescence and retail shrinkage.  For high volume channels, large suppliers can benefit from the added demand visibility and end-customer insights available through a VMI program.  However, for many buyer-supplier relationships the risks and costs are heavily unbalanced in favor of the customer.

What do suppliers as valued partners in the relationship receive in exchange for these terms?  Buyers will offer appealing terms to suppliers willing to engage in customer centric business processes:

• Greater share of a customer’s wallet as the supplier becomes the preferred vendor for a particular product line
  Broader scope of services that may include many value added services that increase the average revenue per unit sold

Suppliers must weigh the pros and cons of such arrangements to determine their best strategy.  Often the tradeoff is a choice between revenues and profitability. 

What are the EDInomics of supply chain to supply chain competition?   B2B integration technology can be the key to unlocking the potential of collaborative relationships in a value chain.  B2B can be used to enable a variety of strategies such as multi-echelon demand visibility, collaborative product development and third party supply chain finance.   But the technology is rendered ineffective unless the channel master in a relationship has a long-term, supply-chain wide perspective on their activities.   Unhealthy suppliers introduce performance drag, cost overhead and higher risks to the overall supply chain.  While these factors may not be visible in the buyer’s next quarterly income statement, they will most certainly define the long term success of the buyer.  After all, as Dr. Lee states “The weakest link in the supply chain defines the supply chain.”

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.