Tesla–A different mix of employees compared to other car companies.

Elon Musk, the savvy CEO of Tesla Motor, has recently posted on Twitter his need for “hard-core software engineers” to work at his company.  His electric-car company is looking to add thousands of employees in coming years.  The company is in a major development effort to write software needed for its future autonomous vehicles.

Tesla’s effort, known as Autopilot, is causing it to add employees faster than typical auto makers with such small volume.  Mr. Musk’s strategy is founded in developing this capability in-house rather than relying on outside firms.  In addition, to the major software development effort, Tesla makes cars and all the major components in plants located in southern California that were once owned by Toyota, General Motors and Solyndra.  Tesla even makes seats in an in-house production facility, something that is not common in the auto industry as other automobile manufacturers normally outsource this.

All of this in-house capability has resulted in Tesla’s ratio of employees to vehicle production to be be high compared to competitive luxury car makers.  Jaguar Land Rover recently was expected to sell about 500,000 vehicles and has 36,000 employees, a ratio of 13.8 vehicles per employees.  In comparison, Tesla is looking to sell 52,000 vehicles and employees about 14,000, a ratio of 3.7 vehicles per employee. 

Tesla is expecting much higher sales in the future.  The higher sales expectation combined with a strategy of keeping functions in-house makes Tesla appear much less efficient that competitors. 

The Top Dozen Supply Chain Innovations of All-Time

First Thoughts  

  By Dan Gilmore – Editor-in-Chief  

  April 23, 2015  

  The Top Dozen Supply Chain Innovations of All-Time

I am very keen on the subject of supply chain innovation right now, for a variety of reasons.

First, CEOs across the globe are putting innovation as the top or near top priority for the companies they run. It’s pretty simple why: innovation is what drives the growth and attractive margins. Supply chain in turn obviously has a key role to play in overall corporate/product innovation. This is perhaps most manifestly seen right now in the Internet of Things and how industrial companies especially are currently or prospectively leveraging IoT to create new products and services.

So, supply chains need to both support product innovation, while also innovating in its own domain. But I would argue that supply chain innovation is not well understood. Certainly we don’t have any good ways to measure it.

I have been doing some light collaboration on supply chain innovation with Dr. Jim Rice of MIT, who has also been researching this topic. MIT in fact has something it calls the Forum for Supply Chain Innovation, which is doing research in this area, among other activities.

Hope to have something more to share from the two of us soon on this, but there are a number of issues to be explored, from defining supply chain innovation, to measuring it, to the difference between innovation and continuous improvement and many more.

I am quite excited to be working on these types of questions, which I think will be good for the industry if we can wrestle some of them to the ground.

As some readers may remember, back in 2010 I came up with the top 10 supply chain innovations of all-time. Given my focus on this topic here in 2015, I thought it would be appropriate to repost that list, which I think is a good one. But too add some new value I decided to add two innovations to make it an even dozen.

I will note Rice used my list during his own excellent presentation on supply chain innovation at the MHI annual conference last October.

It was difficult to create this list, because many innovations either have no clear origins or came from a sort of a combined evolution along a number of fronts. This is especially true in terms of much supply chain technology innovation.

So then as now, I was looking for:

• Innovation for which we can identify pretty clearly that some single company or individual(s) was/were responsible for the breakthrough – though of course everything builds off the past

• The innovation had a deep and lasting impact on supply chain practice

That said, here is the expanded list, in reverse order:

12. The First True Network Optimization System: While there there were a few very primitive single commodity network optimization attempts by various academics that were not of much value, the first true “multi-product” network optimization tool was developed by Dr. Arthur Geoffrion and Dr. Glenn Graves, both of UCLA, in 1972. It was formally reported in the literature in a seminal work that appeared in the Management Science journal in 1974. That article is studied by many OR students even today. The network analyzed was that of Hunt-Wesson Foods. Geoffrion and Graves became two of the five co-founders of Insight, which still does this kind of work today, and really created the network optimization industry.

11. The Kiva Robotic Picking System: The idea for the orange AGV-like robots that bring inventory to order pickers was first conceived in 2003 by CEO Mick Mountz, and with the help of some MIT professors Kiva brought the technology to market less than two-years later. In 2012, Amazon spent an amazing $775 million to acquire Kiva – a small company at the time – which is one measure of the system’s value, as Amazon now keeps the technology to itself and eventually into dozens of its fulfillment centers. This was true innovation, and has ushered in the “goods to picker” concept that is now so prominent in materials handling circles.

No. 10: Taylorism: In the late 1800s, the great Frederick Taylor takes the first scientific approach to manufacturing. In the early 1880s, he invents the concepts of using time studies on the factory floor, and based on that work, the notion of “standard times” for getting specific tasks done. Later develops the concept of incentive systems and piece-rate pay plans. Taylor’s ideas were simply seminal – and often controversial – and dramatically influenced the practice of manufacturing over the next few decades and even to this very day.

No. 9: 3M’s Transportation Load Control Center: In 1982, 3M, like every other company, had to leave transportation decisions to each plant and distribution center. Roy Mayeske, at that time the Executive Director of 3M Transportation, had the idea to centralize transportation planning to look for network synergies. 3M took mainframe software that had been developed for Schneider National – one of its major carriers – and had it modified it to be workable from a shipper perspective. Ship sites called in planned shipments, and then carriers and routings were phoned back. The LCC is now of course a standard logistics practice today.

No. 8: Distribution Requirements Planning (DRP): In the late 1970s, Andre Martin ran operations for Abbott Labs Canada, and found himself caught between manufacturing and distribution managers, who could never seem to get inventory questions right and always blamed each other. Realizing that what was needed was a sort of Manufacturing Resources Planning for inventory distribution, Martin led a successful effort to build the first computerized DRP system, which in turn led to a book that created the software category of DRP, as several technology firms built products based on these ideas. Was in many way the start of today’s supply chain planning software industry.

No. 7: The FedEx Tracking System: After re-inventing the category of express parcel shipments, FedEx went a step further in the mid-1980s with its development of a new computerized tracking system that provided near real-time information about package delivery. Outfitting drivers with small handheld computers for scanning pick-ups and deliveries, a shipment’s status was available end-to-end. The FedEx system really drove the idea that “information was as important as the package itself,” and was foundation of our current supply chain visibility systems and concepts.

No. 6 – The Universal Product Code: Though the idea to use some form of printed and even wireless automatic product identification had been around for decades, lack of standards had precluded individual ideas from gaining any sort of critical mass. In 1970, a company called Logicon wrote a standard for something close to what became known as the Universal Product Code (UPC) to identify via a bar code a specific SKU, an effort that was finalized a few years later by George Laurer at IBM. The first implementation of the UPC was in 1974 at a Marsh’s supermarket in Troy, OH north of Dayton. The invention triggered the auto ID movement, forever changing supply chain practice and information flow.

No. 5: The Ford Assembly Line: Henry Ford actually got the idea for the assembly line approach from the flow systems of meat packing operations in the Midwest, but it was Ford’s adoption of the production approach with a continuously moving line for Model T’s in 1913 that revolutionized not only automobile assembly but took the practice of manufacturing to new levels in other sectors as well. Total time of assembly for a single car using the production line fell from 12.5 labor hours to 93 labor minutes, ultimately making cars affordable for the masses, changing not only supply chain but society.

No. 4: Economic Order Quantity (EOQ): Economic Order Quantity is a mathematical approach for determining the financially optimal amount of product to order from suppliers based on inventory holding costs and ordering costs. The original concept is generally credited to Ford Whitman Harris, a Westinghouse engineer, from an article in 1913, but it was a much later article in the Harvard Business Review in 1934 by RH Wilson that made EOQ mainstream. The formulas are still taught today, and the basis for much supply chain decision-making even in this era.

No. 3: The Ocean Shipping Container: It is hard to imagine today, but until the mid-1950s, there was no standard way to ship products on ocean carriers, and most were shipped on whatever container or platform the producing company deemed best. The result was terribly inefficient handling on both sides of the equation, poor space utilization on the cargo ships, freight damage, and high logistics costs. Enter Malcom McLean, legendary logistics entrepreneur and visionary who invented the standard steel shipping container first implemented in 1956 at the port of New Jersey. Someone would have thought of it eventually, but McLean’s invention started the explosion in global trade.

No. 2: P&G’s Continuous Replenishment: Until 1987 or so, order patterns in the consumer goods supply chain were almost totally dependent on whatever the manufacturer’s sales person and retail buyer decided between them. That’s until Procter & Gamble bought a mainframe application from IBM for “continuous replenishment” (which had been deployed a handful of times in other markets), re-wrote it for consumer goods to retail, and as a result dramatically changed that entire value chain by driving orders based on DC withdrawals and sales data.

P&G first implemented the approach with Schnuck’s Markets in St. Louis, with dramatic results in both lowering inventories while increasing in-stock at retail. KMart was next, taking pipeline diaper inventories from two months to two weeks – but KMart never completely embraced the possibilities. A legendary 1988 meeting between P&G’s CEO and Sam Walton led to a CR program there and changed supply chain history, helping propel Wal-Mart to retail dominance and providing the foundation for Efficient Consumer Response (ECR), Category Management, Continuous Planning, Forecasting and Replenishment (CPFR), and more.

  And finally…. (drum roll and envelop please):

No. 1: The Toyota Production System: When James Womack and several co-authors wrote “The Machine that Changed the World” in 1990, it was of course not a Toyota car that had such an impact, but rather the Toyota Production System (TPS) that was the foundation of the company’s dramatic success across the globe. Pioneered by Toyota’s Taiichi Ohno and a few colleagues, TPS not only is the foundation for today’s Lean manufacturing and supply chain practices, but the concepts have penetrated versus every area business. TPS truly did change the world.

Amazon–Robots Roam the Warehouses

Discussion Questions:

1. Amazon has to deal with dramatic swings in demand throughout the year, with 1/3 of the company’s yearly revenue occurring during the holiday season.  How does Amazon handle the staffing of it “picking” operations to deal with the problem?
2. The article seems to imply that the robots will help to alleviate this capacity problem.  How will it help?
3. Other than the robots, what other ideas do you have for how Amazon could relieve the capacity problem?

 

Amazon Robots Get Ready for Christmas

The Squat, Wheeled Machines Move Stocked Shelves to Workers

 

The orange, wheeled robots are the fruits of Amazon’s 2012 purchase of Kiva Systems for $775 million. Bloomberg News

By

Greg Bensinger

Updated Nov. 19, 2014 7:29 p.m. ET

Amazon.com Inc. ‘s robot army is finally falling into place.

The Seattle online retailer has outfitted several U.S. warehouses with squat, orange, wheeled robots that move stocked shelves to workers, instead of having employees seek items amid long aisles of merchandise, according to people familiar with the matter.

At a 1.2-million-square-foot warehouse in Tracy, Calif., about 60 miles east of San Francisco, Amazon this summer replaced four floors of fixed shelving with the robots, the people said.

Now, “pickers” at the facility stand in one place and wait for robots to bring four-foot-by-six-foot shelving units to them, sparing them what amounted to as much as 20 miles a day of walking through the warehouse. Employees at some robot-equipped warehouses are expected to pick and scan at least 300 items an hour, compared with 100 under the old system, current and former workers said.

An Amazon spokeswoman declined to comment.

The robots are the fruits of Amazon’s 2012 purchase of Kiva Systems Inc. for $775 million. In May, Amazon Chief Executive Jeff Bezos told investors at Amazon’s annual meeting that he planned to deploy 10,000 Kiva robots by year-end, up from 1,400 at the time.

After the acquisition, Amazon stopped selling Kiva robots to other companies—Crate & Barrel and Gap were customers—to focus on developing them for its own needs. Primarily, that meant tweaking the software so the robots could move about a warehouse without running into one another or other objects, said one of the people.

At the heart of the robot rollout is Amazon’s relentless drive to compete with the immediacy of shopping at brick-and-mortar retailers by improving the efficiency of its logistics. If Amazon can shrink the time it takes to sort and pack goods at its roughly 80 U.S. warehouses, it can guarantee same-day or overnight delivery for more products to more customers.

The robots could also help Amazon save $400 million to $900 million a year in so-called fulfillment costs by reducing the number of times a product is “touched,” said Janney Capital Markets analyst Shawn Milne. He estimated the robots may pare 20% to 40% from the average $3.50-to-$3.75 cost of sorting, picking and boxing an order.

Amazon’s fulfillment costs have risen annually since 2009 and consumed 12.3% of net sales in the first nine months of this year, up from 8.4% for all of 2009. In October Amazon posted its biggest quarterly loss in 14 years amid rising fulfillment costs, which jumped 30% to $2.6 billion in the third quarter.

The robots could help Amazon meet demand during the holiday selling season, when it typically generates more than one-third of its annual revenue. The company was forced to offer rebates to some customers after delivery delays in December 2013. Still, Amazon plans to hire 80,000 temporary warehouse workers for the holiday season, up from 70,000 last year. It projects fourth-quarter sales will rise as much as 18%.

As part of its effort to speed orders to customers, Amazon has tested its own network of shipping trucks, enlisted yellow cabs for one-hour delivery and is developing aerial drones to drop packages at customer doorsteps. It is expected to open a Manhattan storefront for same-day package dispatch, returns and pickups.

People familiar with the matter said the Kiva robots have been deployed at warehouses in California, Kentucky and Texas, among others. The full list of warehouses using the robots couldn’t be learned.

At the robot-equipped warehouses, 20 or more shelf-toting robots may be lined up in front of a picker, these people said. Employees remove items from the robot-enabled shelves and place them in bins, which are whisked away on conveyor belts to other workers who box the goods, label the boxes and place them on trucks for delivery.

Kiva was founded in 2003 by Mick Mountz, a former executive at Apple Inc. and failed grocery-delivery company Webvan Group Inc. Mr. Mountz still oversees operations at Kiva.

Write to Greg Bensinger at greg.bensinger@wsj.com

Is the the future? Warehouse voice/video picking technology

Thoughts on Augmented Reality in the Warehouse

By Kevin Gue | 05/09/2014 | 8:06 AM

I was recently sent a video of Google Glass being used in an order fulfillment center. The prospect of using Glass (or similar devices) in warehousing was mentioned by a participant at one of the Material Handling & Logistics Roadmap workshops this summer, so the idea wasn’t new to me. But seeing the video for myself got me to thinkin’.

Google Glass in the Warehouse

In a word, the video is impressive. Whether the implementation is real or constructed for video I don’t know, but it’s easy to imagine that such functionality will soon be with us, if it isn’t already. Very much like voice picking technology, Google Glass directs the worker to proceed to location such and such and “pick three” items, after the location is illuminated by a green rectangle cast before the worker’s eyes. No mistake: that’s the location.

While driving his lift, the worker sees a green arrow indicating which way to turn to get to the next location, presumably following the shortest route. We have therefore solved the “how to direct the worker’s route” problem.

After illustrating a couple of picks and put-aways, the forklift supposedly suffers a malfunction, which is detected by Glass, and the operator is directed to proceed to a maintenance area. There, a maintenance technician appears in the Glass to help the operator effect a simple repair. Off goes the worker for more Glass-directed picking. What could be better?

If you know me, you’re probably expecting a contrarian view. I’ll get to that in a minute. But first, it turns out that research on applications of “augmented reality” in warehousing have been underway for a decade. The first papers I could find on the subject appeared around 2005. Color me embarrassed! The authors are from Germany, where so many of the latest developments in logistics technology are happening.

There is much to like about these developments. As we wrote in the U.S. Roadmap for Material Handling and Logistics, wearable computing offers the industry a significant opportunity to improve operational control and reduce costs. As the positions and activities of workers become more and more transparent to “the system,” human error and inefficient behavior (e.g., picker routing) will become increasingly rare. All to the good.

But one part of the video gives me pause. When the forklift operator slides back the battery cover to investigate the source of a malfunction, a technician appears instantly in the Glass to provide expert advice on the repair. “What is the voltage? Just plug it in and you should be fine.” I couldn’t help but think, “He’s been robbed! Let the man solve his own problem!” In our drive to make all things as fast and easy as possible, we’ve robbed the operator of the joy of problem solving—diagnosis, critical thinking, problem solving—and more importantly, the sense of accomplishment from having repaired that which was broken. Call me the Industrial Romantic, but this just makes me sad!

I can hear the laughter through my monitor. “Hey Kev, how about you plug into the real world of ROI and quarterly earnings reports like the rest of us!” Having spent most of my academic life thinking about ways to reduce logistics costs, I am not unsympathetic to this objection. But I’m also a worker myself, and much of the satisfaction I derive from work comes from solving problems and accomplishing tasks I feel are important. I couldn’t help wondering what value workers provide in a Glass-directed life—beyond 10 very capable fingers to pick, put, and push.

When I shared all this with my 17 year old son, he said “Dad, did it ever occur to you that not everyone enjoys problem solving as much as you?” Well there you go! This is what makes this subject so interesting to me: what seems to one person “death by robotic instruction,” is to another a faster way to get stuff done (think voice picking). All hail, the diverse workforce. Aren’t we humans wonderful?

An update on required ‘Conflict’ Metals reporting…

Companies Detail Use of ‘Conflict’ Metals

First Reports Filed to SEC on Potential Use of Minerals From a Region of War-Torn Africa

By John Kester and Maxwell Murphy

June 2, 2014 7:28 p.m. ET

A dozen companies including Google Inc., J. Crew Group Inc., and Deere & Co. acknowledged they or their suppliers may have obtained metals from mines in a region known to use mining to fund armed militias, according to filings with the Securities and Exchange Commission.

The admissions were among reports by nearly 1,300 U.S.-listed companies that have filed their first audits on whether their products contained any tin, gold, tungsten or tantalum from Africa’s war-torn Congo region.

A majority of companies whose filings were reviewed by The Wall Street Journal, including Walt Disney & Co., Sony Corp. and LG Display Co., said they haven’t figured out if their products, ranging from electronics to jewelry, are in the clear. Only a handful were confident their supplies were free of conflict metals, among them Barnes & Noble Inc. and Office Depot Inc.

Retailer J.C. Penney Co. , for example, listed an array of goods that could have components difficult to trace, including zippers, lighting and window coverings. The company didn’t respond to a request for comment.

Many companies that demurred said their suppliers either didn’t respond to questionnaires or provided incomplete answers. Others said the complexity of their manufacturing processes made it impossible to give a definitive answer.

Johnson & Johnson, for example, said the majority of information from its direct suppliers was “not complete, accurate or reliable.”

“We’re actively engaging with our suppliers and continuing to educate them on our program’s expectations,” J&J said in a statement. “Our due diligence measures are ongoing as we work to verify all available information from our suppliers.”

Lawrence Heim, a director at Elm Sustainability Partners LLC, which advises companies on conflict minerals disclosure, said, “The credibility and the certainty of the data, through the supply chain, doesn’t really exist completely. Because it is the first time anybody has ever done this, there is a question about the quality of the data.”

Companies spent years and millions of dollars to meet Monday’s regulatory deadline for the rule, which is part of the 2010 Dodd-Frank Act. The SEC estimated conflict-mineral reports would cost companies up to $4 billion in the first year, and drop to between $200 million and $600 million in later years. Companies were projected to take about 480 hours, on average, to complete a report, compared with about 2,000 hours for a corporate annual report.

The measure has been under continuous assault from business groups, which consider it too burdensome.

In March, the U.S. Court of Appeals for the District of Columbia struck down part of the regulation. It said that forcing companies to list their products as “conflict free,” or not, as the rule had required, violated their First Amendment right to free speech. So companies now have to prove only that they investigated their supply chains.

Arrow Electronics Inc. said it would take years before it could clearly determine if all its suppliers, and their suppliers, use smelters certified conflict-free.

“I don’t think it’s entirely unknowable, but it’s a vast undertaking,” Joe Verrengia, director of corporate social responsibility for Arrow.

The SEC, which issued new guidance after the court ruling, has repeatedly declined to comment on how much slack it would offer on inaugural filings.

Plenty of products still contain the four targeted metals from the Congo region. More perplexing, the supply-chain audits have had little impact on Congo’s market share.

Last year, Congolese production of tantalum was estimated to have increased slightly to about 18% of the world’s total, according to the U.S. Geological Survey. The country’s share of tin production was steady at about 2%.

Without a clear thumbs-up or down, investors who want to influence corporate responsibility will have to read the fine print of these reports closely.

Calvert Investments Inc., which oversees about $13 billion in assets and focuses on corporate responsibility, says it will be developing its own criteria and benchmarks from scratch.

“What we’re looking for at this stage is reasonable due diligence efforts,” said Bennett Freeman, a senior vice president at Bethesda, Md.-based Calvert. “We will be looking for more companies reporting in greater detail soon.”

—Emily Chasan contributed to this article.

New approach to making product on-demand.

Discussion Questions:

1. This article describes a new system for making items using flexible single-worker cells.  What are the advantages and disadvantages of the system compared to using an assembly line?
   
2. What if you were a company facing the need to produce one million printers in a relatively short period of time (1 month).  Would it be feasible to use this approach?
3. Develop a framework that includes volume (high and low), flexibility attributes (such as product options and short term volume changes), and work content (the labor needed to build one unit) that describes when this new single-worker cell approach would most likely be appropriate.

 

Japanese Firm Uses a Single-Worker System to Make Its Products

With the Help of Digital Tools, Any Roland DG Employee Can Build Any Product

By  Mayumi Negishi

WSJ – June 1, 2014 4:48 p.m. ET

The Japanese manufacturer Roland DG has replaced it’s assembly line with single-person stalls call a D-Shop, inspired by Japanese noodle stands. The D-Shop can produce a wider variety of products in lower quantities than an assembly line.

HAMAMATSU, Japan—At Japanese manufacturer Roland DG Corp., assembling thousands of parts into wide-format printers is as easy as coloring by numbers.

That’s because Roland DG, a small company with about $300 million in annual sales and 966 employees, makes everything from billboard printers to machines that shape dental crowns using an advanced production system known as “D-shop.”

Under this method, workers in single-person stalls assemble products from start to finish, guided by a 3-D graphic and using parts delivered automatically from a rotating rack. Every worker is capable of assembling any variation of the company’s 50 or so products.

Noodling Around

The evolution of Roland DG, which is 40%-owned by digital piano maker Roland Corp., started in 1998, when it became one of the first companies in Japan to abandon the assembly line in favor of one-person work stalls modeled after Japanese noodle stands. With orders coming in smaller and smaller lots, Roland DG decided it needed a manufacturing system in which a single worker could build any one of its diverse products.

Since then, Roland DG has been experimenting with increasingly high-tech aids and instruction manuals to make that happen.

On a recent day in Roland DG’s factory in Hamamatsu, a city in central Japan, one employee was assembling from scratch an industrial printer that ultimately would be more than twice her size and weigh almost 900 pounds. Another worker who had just joined the company’s fleet of part-timers was making a prototype milling machine. Yet another was assembling the dental-crown milling machine.

Anyone, Anywhere

A computer monitor displays step-by-step instructions along with 3-D drawings: “Turn Screw A in these eight locations” or “Secure Part B using Bracket C.” At the same time, the rotating parts rack turns to show which of the dozens of parts to use. Meanwhile, a digital screwdriver keeps track of how many times screws are turned and how tightly. Until the correct screws are turned the correct number of times, the instructions on the computer screen don’t advance to the next step.

Workers are rarely confused, but when they are, there’s a button to press that will bring the floor manager running to help.

A Roland worker making an industrial printer follows prompts on the computer (1), pulling pieces from the rotating parts rack (2) and using digital screwdrivers (3) that track number of turns and torque. Roland

The system is so simple that nearly anyone can assemble products anywhere, company managers say. When Roland DG is flooded with orders, it sends out for part-time workers. After a two-day training session in which the workers practice connecting wires and screwing screws, the teams start assembling printer parts or small printers and cutters. “We can move people instantly to make products that are in demand. There’s a great deal of flexibility,” says Masaki Hanajima, general manager of production manufacturing.

Veterans, meanwhile, are able to assemble two machines simultaneously, or run one finished product through tests while assembling the next. “Our goal is to double productivity,” Mr. Hanajima said, adding that productivity has risen 60% since the end of 2010 at the company’s factories in Japan.

Pat on the Back

Roland DG says its use of digital tools has reduced defects and helped it keep workers motivated in a market crowded with competitors. It also has helped maintain quality in Roland DG’s factory in Thailand, the company’s first outside of Japan.

The computer even gives workers a pat on the back at the end of the day, with the message, “Otsukaresama deshita.” Loosely translated, that means: “You must be tired, and we thank you.”

Ms. Negishi is a staff reporter for The Wall Street Journal in Tokyo. She can be reached at mayumi.negishi@wsj.com.

Resilient and Cost Efficient Supply Chains

Discussion Questions:

1. Carefully explain the difference between a “resilient” and an “efficient” supply chain.
2. What is the difference between recurrent risks and disruptive risks?  How should each type of risk be dealt with?
3. What strategies do the authors suggest for making a supply chain both “resilient” and “efficient” at the same time?

Industry News – May 7, 2014

Supply Chains Can Be Both Resilient and Cost Efficient

Relatively few managers have done much to protect their supply chains from critical, costly disruptions, even though they know that disasters like the 2011 Japan tsunami and Thailand floods can hit business for months, a recent MIT Sloan Management Review article notes. The problem, according to the authors, is that  protective measures can be at odds with supply chain managers’ goal of improving cost efficiency.

The most obvious steps to protect against serious supply chain disruptions – increasing inventory, adding capacity at different sites, using multiple suppliers – “undermine efforts to improve supply chain efficiency,” Northwestern University Kellogg School of Management Professor Sunil Chopra and City University of London Cass Business School Professor ManMohan S. Sodhi wrote for the magazine’s Spring 2014 issue.

The authors say, however, that managers actually can reduce the risk of major disruptions while improving supply chain efficiency by taking certain steps, such as supply chain segmentation, to achieve both goals.

“Supply chain efficiency, which is directed at improving a company’s financial performance, is different from supply chain resilience, whose goal is risk reduction. Although both require dealing with risks, recurrent risks, such as demand fluctuations that managers must deal with in supply chains, require companies to focus on efficiency in improving the way they match supply and demand, while disruptive risks require companies to build resilience despite additional cost,” they wrote.

Addressing the risk of a fire in a supply plant may require a company to hold additional inventory, which it can’t do “without a substantial loss in cost efficiency,” the article says. “By contrast, recurrent risks such as demand fluctuations or supply delays tend to be independent. They can normally be covered by good supply chain management practices, such as having the right inventory in the right place.”

Supply chains have become much more cost efficient since the 1990s, as managers improved planning and execution to mitigate recurrent risks, the authors note. “However, reliance on sole-source suppliers, common parts and centralized inventories has left supply chains more vulnerable to disruptive risks,” the say. “Low-cost offshore suppliers with long lead times leave companies vulnerable to long periods of shutdown when particular locations or transportation routes experience problems.”

So what’s a manager to do to keep the supply chain both resilient and efficient?

The authors analyzed a network model of a supply chain “that could be made more resilient by building some reliable but high-cost facilities among other lower-cost facilities that could fail and disrupt the supply chain.” They compared these costs to the relative losses from misestimating the disruption probability.

Managers, they say, can design supply chains to contain risk to one part of the network rather than allow a disruption it to ripple through the chain. To reduce supply chain fragility through containment while improving financial performance, companies can segment or regionalize the supply chain, the authors say.

The article cites the example of Spanish fashion retailer Zara, which is known for successfully using “responsive sourcing” from Europe. For years, however, the company also has used lower-cost offshore suppliers for basic items like while T-shirts, after realizing that making everything in Europe wasn’t the most profitable way to do business. Zara continues to produce its “trendiest” items in Europe, the authors note. Moving some production to lower-cost countries also reduced the effect of a potential disruption in one geographic region, they say.

“Large companies can segment their supply chains to improve profits and reduce supply chain fragility,” the authors say.

Lake Forest, Illinois, industry supply company W.W. Grainger also uses segmentation to reduce risk, keep fast-moving items at its stores and distribution centers and slower-selling items at a distribution warehouse in Chicago, the authors say. This design lowers transportation costs and isolates the effects of potential disruptions, they note.

Companies also can contain disruption effects by regionalizing supply chains rather than simply locating production where costs are lowest, the article says.  Japanese automakers didn’t do this and, as a result, the 2011 tsunami disrupted production in plants worldwide for months, the authors note. Regionalizing supply chains allows companies to lower distribution costs and reduce risks, they say.

“Even when implementing a risk mitigation strategy seems expensive,” the authors wrote, “it is important to remember that in the long run, doing nothing can be much more costly.”