Wednesday, June 18, 2008

Trends in Global Supply Chains

This summarizes a talk by Jacques Roy, Director of the Logistics and Operations Management Department at HEC Montreal as part of the Canadian Leadership Orientation for North American MBA Students sponsored by ACSUS, HEC Montreal and the University of Ottawa Telfer School of Management.

Trends in Global Supply Chains

Roy’s discussion focused on some recent trends in building improving global supply chain management. He discussed four specific trends:

Use of Time-Sensitive Strategies Based on Collaboration

Collaborative Planning , Forecasting and Replenishment (CPFR) is a new paradigm where suppliers and retailers are collaborating to improve forecasting and optimize the replenishment of product. Many of the new strategies are focused around trying to get everyone in the supply chain to collaborate and integrate to improve forecasting, reduce uncertainty and increase products.

Quick response is a strategy using just-in-time strategies to the retail sector. This means shorter order cycles and information is available in real-time. The typical retail supply chain has an advanced design cycle and a lengthy manufacturing and shipping cycle. Roy pointed at Zara as an example of quick response strategy that is creating a competitive advantage. Zara is a popular case at business schools these days. They produce garments locally in Spain, replenish quickly using truck and air shipments. It takes 10 to 14 days to design, produce and deliver its products to retail stores, compared to 3 to 4 mounts for its competition. Zara is swapping higher production and transportation costs for lower inventories and greater flexibility to react to consumer demands.

Increasingly Complex Customer Demands

Customers are increasingly demanding reductions in cycle time, more reliable on-time delivers and a wider variety of products and packaging. At the same time, demands in quality have only gone up. Dell is an example of a company that has done well in creating a supply chain system that satisfies the diverse customer preferences.

Another good example is the systems designed to mix custom paint colors and finishes in-store. This is constantly evolving. Said Roy, “As soon as we think a product is standardized, some new customer demands changes that.”

Impact of Global Sourcing

Lower production or purchasing cost comes with challenges. There are increased transportation, warehousing and inventory costs. The response time can slower which may require higher inventories. Risk is also much higher. There are challenges getting deliveries on time, and quality is a challenge.

Gateways are increasingly congested as well, complicating matters even more. Another interesting trend is that the distribution center, once thought to be a thing of the past, are being opened. The reason for these distribution centers is because of increased outsourcing requiring higher inventories.

Lead time variation studies: Canada: Minimum – 10 days or less, Maximum- 30 days
China: Minimum: 1 – 3 months / Max – 3 to 6+ months

Only 42% of Canadian companies reported a profit as a result of outsourcing production to China. Those who have realized a profit have several things in common. They have gone over to China and spent a lot of time working to ensure quality. They tend to use air shipments more. Finally, they have found other ways to keep inventory low.

Third Party Logistics

Value-added distribution centers are increasingly popular. They may do pick and pack, labeling, kitting, special packaging or co-manufacturing. They may also play a key role in reverse logistics, dealing with returns. The 3PL market in the US has grown from around $10 billion in 1990 to around $120 billion in 2007. Interestingly, Deutsche Post is one of the biggest players. They are bigger air freight in terms of revenue than UPS or FedEx. They also own Exel, one of biggest 3PL providers.

More on this in a later post as are visiting Groupe Robert, a major trucking and 3PL provider tomorrow, and Port of Montreal tomorrow.

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