Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Oversight Failures Increase Supply Chain Risks

Supply Chain Risk Management | By •

Supply chain managers often bemoan increasing regulation, and how new regulations or overly stringent oversight increases supply chain costs and makes their day-to-day jobs more complex. But as we have seen in the news recently, failures in government oversight can increase our supply chain risks. 

The oil spill in the Gulf of Mexico is currently not affecting the Port of New Orleans or traffic on the Mississippi river, but the Coast Guard is monitoring the situation closely. As reported in a Boston Globe article, the Coast Guard must prepare for “a sudden course shift that could push the thick gunk into the shipping channel of the Mississippi River.”

According to a Wall Street Journal article, the oil rig that caught fire and sank didn’t have a remote-control shut-off switch used in two other major oil producing nations as last resort protection against spills. Legislators are now asking how the Minerals Management Service, the federal agency charged with regulating off-shore drilling, could have given British Petroleum a permit.

Meanwhile, USA Today reported on a different oversight failure:

The U.S. Transportation Department never conducted required safety checks on 20,000 to 30,000 companies that got special permits to move risky shipments of hazardous materials by road, rail, water and air, records show.

Some companies using the permits have had serious hazardous materials accidents or safety violations, according to data compiled by DOT’s inspector general. This year, for example, a company got a special permit to haul a poisonous and flammable ammonia solution despite having 14 hazardous material spills in the last four years, including four “serious” incidents that caused evacuations, major injuries, highway closures or other significant consequences. The firm also had 11 violations of hazardous materials rules.

Shortly after that article was published, an 18-wheeler being loaded with fuel at a San Antonio refinery exploded, setting off a chain reaction of smaller explosions.

This prompted firefighters to create a half-mile evacuation zone around the fire. The explosion occurred at the intersection of a four lane divided highway. It is not yet clear who or what is at fault: the trucking company, poor terminal automation equipment, or both.

Clearly, regulations serve a useful purpose in many cases. From a supply chain perspective, good regulation and oversight can help supply chains run smoother, but only if they are enforced.

Volcano Disrupts European Supply Chains

Supply Chain Risk Management | By •

I’ve been waiting to hear how supply chains have been disrupted by the Icelandic volcano that is spewing massive amounts of ash into the atmosphere. For those of you have been in a cave over the past week or so, it turns out that the ash makes it dangerous to fly. As a result, most airports in Europe have been closed for several days and air cargo has been grounded. Only in the past few days have some flights resumed.

An article in the Financial Times (“Pressure grows on supply chains”) noted the following:

Air freight accounts for a tiny amount of world trade by weight – about 0.5 per cent for the UK. But the disruption has highlighted how it plays a vital role in supplying key, high-value components to many manufacturers. In spite of its tiny volume, it accounts for 25 per cent of UK trade by value. 

Among the carmakers, BMW and Nissan said they plan to suspend some production this week because of disruption to supplies. Audi said it might have to cancel shifts because of missing parts.

Although all three mainly use suppliers based near their factories and use road and sea for most deliveries, they depend on air freight for a small number of high-value electronic components. Nissan, for example, said it might have to halt production of its Cube, Murano SUV and Rogue crossover models because it lacked supplies of a critical sensor made in Ireland.

Remo Eigenmann, head of air freight for Damco, the logistics arm of Denmark’s AP Moller-Maersk, said the situation had been exacerbated by a fall since the economic downturn in prices to use air cargo. That had made customers who would previously have used other modes or a mixture of air freight and sea freight switch entirely to air freight.

It doesn’t surprise me that the distribution of electronics components has been affected. They are high value, low weight goods.

According to a Boston Globe article, the distribution of high-value fresh produce has also been affected. 

Kenya has thrown away 10 million flowers—mostly roses—since the volcano eruption. Asparagus, broccoli and green beans meant for European dinner tables are being fed to Kenyan cattle because storage facilities are filled to capacity… Kenya exports 1,000 tons a day of produce and flowers—including roses, carnations and lilies…

Again, this is not too surprising.  High value, perishable goods are often routed through Amsterdam in a hub and spoke delivery chain. 

What did surprise me was not reading anything about the pharmaceutical supply chain being impacted. My understanding is that virtually all drugs pass through either Puerto Rico or (more to the point) Ireland for some form of valued-added packaging or manufacturing. This is done to reduce the taxes paid on these products. The disruption of the pharma supply chain has not yet been reported on.

I called Chris Jones, Executive Vice President at Descartes Systems Group, a Logistics Viewpoints sponsor and ARC client, to get his insights. Descartes is a leading provider of solutions for air freight forwarders.

Chris agreed, in addition to electronic components and high value perishables, pharmaceuticals and fine chemicals are industries that heavily make use of air cargo.   

I asked Chris about whether it would take longer to unwind these problems for air cargo than for passengers. Chris explained that some cargo flies in the bottom of passenger flights, while other goods are transported on planes devoted to cargo. The economic recession has led air carriers to mothball passenger planes. This has led to almost all passenger flights being full. This means the planes are heavier, so there is less capacity to carry freight. The mothballed planes cannot be brought back into service quickly. Consequently, there is little ability for passenger flights to carry more cargo. 

Our conversation then turned to supply chain risk management. To what extent might contingency planning have allowed companies to avert or mitigate the deleterious effects of this continent-wide disruption to air travel? My view is that for the perishable supply chain, other modes are just not practical, although it might lead to producers taking out more insurance in the future.

Chris agreed that contingency planning around air disruptions is much more difficult to plan for than for other modes of transportation. He viewed this kind of a continent-wide crisis as being a once in a hundred years, or even rarer, kind of event. In such a situation, adding inventory buffers or buying insurance might not make financial sense. He did think that this crisis could serve as impetus for European companies to increase the level at which they source regionally or engage in near-shore sourcing.   

I’d be interested in your views on this crisis. What other implications have not been reported on in the press? What impact has this crisis had on your supply chains? Feel free to email me at sbanker@arcweb.com or post a comment.

Cash for Clunkers: In Praise of Honda’s Supply Chain

Automotive Industry | By •

Last Friday, President Obama signed into law a $2 billion extension to the “Cash for Clunkers” program, after the initial $1 billion in funding was consumed in the program’s first week.  The Consumer Assistance to Recycle and Save (CARS) program, the official name of this legislation, offers consumers up to $4,500 to trade in gas guzzlers for new cars or trucks with better fuel efficiency.

There are valid reasons to both support and oppose this measure.  What I want to do today is knock down what I consider is one invalid reason for opposing this stimulus program.

The Christian Science Monitor reports that these “vouchers in Week 1 helped consumers buy 184,304 new vehicles, more than half of which were foreign makes, mainly Toyota, Honda, Nissan, and Hyundai, according to the US Department of Transportation.”  Based on these statistics, the article goes on to ask if “cash for clunkers” is really a U.S. stimulus package.  This has also been a hot topic of conversation on talk radio.  In listening to some of the commentary, it is clear that many Americans do not realize that our global free trade agreements prevent the government from offering incentives only to U.S. companies.   

Let’s take a quick look, at a high level, at Honda’s supply chain network in the United States.  The company has manufacturing plants, providing high paying jobs, in the following locations:

  • Anna, OH:  This is an engine plant, Honda’s largest in the world.
  • East Liberty, OH:  A factory that uses flexible manufacturing to produce cars and light trucks on the same assembly line. 
  • Marysville, OH:  A motorcycle and car factory.  Again, this is one of the most integrated and flexible auto plants in North America.  It houses stamping, welding, paint, plastic injection molding and assembly, all under one roof.
  • Swepsonville, NC:  A power equipment plant.  This factory has an annual production capacity of 1.5 million multi-purpose power equipment engines.
  • Five other plants, including factories for transmissions, all-terrain vehicles, engines, and cars.  

Honda believes in localization—i.e., in making cars in the region it sells to, and in sourcing (whenever possible) from local suppliers too.  For example, because 90 percent of the steel Honda uses in North America is sourced domestically, its cars have a higher proportion of local content than many cars made by U.S. manufacturers.  This is not just good politics.  In normal economic times, localization is also a good risk management strategy.  Hedging, by having factories across the world, can protect a company against currency fluctuations, regional downturns, and localized political turmoil.  By keeping your eggs in many baskets, hedging strategies are simultaneously successful and unsuccessful by design—negative developments in one area are offset by positives in another.  Obviously, however, these are not normal economic times.     

Further, Honda has long focused on making “green” fuel efficient cars, while U.S. car makers have not.  I don’t think Honda should be penalized for this. 

Finally, the managers that work at Honda’s flexible manufacturing plants can move to other companies and factories in the U.S., teaching their new employers this valuable skill set.  American manufacturing is improved by having foreign manufacturers produce on our shores.   

In short, I’m one American who does not see red just because Honda, a foreign car company, is raking in the green.

SaaS TMS and Supply Chain Risk Management

Supply Chain Risk Management | By •

My colleague Adrian Gonzalez and I are both fans of network-centric, software-as-a-service (SaaS) transportation management systems (TMS).  We see advantages in terms of on-boarding carriers and other trading partners, data quality management, and the potential for benchmarking (see “More Questions About Software-as-a-Service“).  But as I think more about Duncan Watts’ “Too Complex to Exist” article (which I highlighted in “‘Power Curves’ and Supply Chain Risk Management“), I see a potential downside to SaaS that I had not thought about before.

The recent financial meltdown and power outages that blacked out large parts of the Northeast in 2003 both represent “a dramatic and unpredictable cascade of events” caused by “systemic risk.”  As Watts writes in his article, “Much like the power grid, the financial system is a series of complex, interlocking contingencies.  And in such a system, the biggest risk of all-that the system as a whole might fail-is not related in any simple way to the risk profiles of its individual parts. Like a downed tree, the failure of one part of the system can trigger an unpredictable cascade that can propagate throughout the entire system.” 

Watts also notes that there is “a general trend toward building ever larger and more complex networks. In recent years, hundreds of millions of people have rushed to join online social networks, while billions more rely on e-mail and cell phones to stay connected to friends and coworkers all day, every day.  Technologists wax lyrical about ‘Metcalfe’s Law,’ which posits that a network’s ‘value’ increases in proportion to the square of the number of people or devices in it.”

Once large networks are built and entrenched, it’s difficult for other providers to “break in” to the market with a competing product/service.  Thus, if network-centric TMS becomes the dominant model in the marketplace, it is likely that we will have only a few suppliers, with enough critical mass, providing these solutions.

Watts goes on to say, “In all the excitement, however, we tend to overlook a fact that should be obvious – that once everything is connected, problems can spread as easily as solutions, sometimes more so.  Thanks to globally connected transportation systems, epidemics of disease like SARS, avian influenza, and swine flu can spread farther and faster than ever before. Thanks to the Internet, e-mail viruses, nasty rumors, and embarrassing truths can spread to colleagues, loved ones, or even around the world before remedial action can be taken to stop them.  And thanks to globally connected financial markets, a drop in real-estate prices in California can hurt the retirement benefits of civil servants in the UK.”

So, here is the problem I had not thought about before:  if network-centric, SaaS TMS becomes the dominant model, and we have just two or three big vendors providing these solutions, what happens if one of these networks goes down?  If a traditional TMS solution fails, it is just one company and its customers that are affected.  If a large networked TMS solution goes down, the impact could be much, much broader.  Will supply chain risk management programs at some point in the future need to encompass contingency planning in this area?

‘Power Curves’ and Supply Chain Risk Management

Supply Chain Risk Management | By •

A colleague sent me an article from McKinsey called ‘Power Curves’: What natural and economic disasters have in common by Michele Zanini.  Coincidently, I read a different article that made similar points (“Too Complex to Exist” by Duncan Watts, the chief scientist at Yahoo! Research).  I found both articles interesting because they explain to senior executives why risk management is still important, even if this recession is winding down, and why it needs to be applied in broader ways than many companies are currently doing.

Power curve analysis, as applied to economics, has grown out of complexity theory.  This is how Zanini describes these tools:  “If, for instance, you plot the frequency of banking crises around the world from 1970 to 2007, as well as their magnitude as measured by four-year losses of GDP for each affected country, you get a typical power curve pattern, with a short head of almost 70 crises, each with accumulated losses of less than 15 percent of GDP, quickly falling off to a long tail of very few-but massive-crises.”  You can see what this curve looks like by going to the article, but you’ll need to register first.

The article continues:  “Earthquakes, forest fires, and blackouts yield a similar power curve pattern… The curve highlights a key property of the power law: extremely large outcomes are more likely than they are in a normal, bell-shaped distribution.”  Power law patterns – “with their small, frequent outcomes mixed with rare, hard-to-predict extreme ones” – exist in many parts of the economy. “This suggests that the economy, like other complex systems characterized by power law behavior, is inherently unstable and prone to occasional huge failures.”

Watts makes similar points in his article, citing the following example:  “On August 10, 1996, a single power line in western Oregon brushed a tree and shorted out, triggering a massive cascade of power outages that spread across the western United States. Frantic engineers watched helplessly as the crisis unfolded, leaving nearly 10 million people without electricity. Even after power was restored, they were unable to explain adequately why it had happened, or how they could prevent a similar cascade from happening again – which it did, in the Northeast on Aug. 14, 2003.”

Watts goes on to say, “Over the past year we have experienced something similar in the financial system: a dramatic and unpredictable cascade of events that has produced the economic equivalent of a global blackout…Experts have weighed in on the causes of the meltdown…Although these explanations can help account for how individual banks, insurers, and so on got themselves into trouble, they gloss over a larger question: how these institutions collectively managed to put trillions of dollars at risk without being detected. Ultimately, therefore, they fail to address the all-important issue of what can be done to avoid a repeat disaster.”

Watts argues that ‘systemic risk’ is at the heart of this issue, and that the risk of the entire financial system failing (with all of its moving parts) is not related in any simple way to the risk profiles of its individual parts.  “Like a downed tree,” says Watts, “the failure of one part of the system can trigger an unpredictable cascade that can propagate throughout the entire system.”  It may be that “globally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring.”

In good supply chain risk management, we put in place contingency plans for highly unlikely events, such as an earthquake knocking out a factory.  What if, for example, a massive earthquake occurs in China where you source a key component?  You’d likely require your supplier to have a disaster recovery plan in place, as well as store safety stock outside the earthquake zone, and you’d look for alternate component suppliers in different parts of the world.

In short, we should think of the economy in the same way we think about natural disasters.  Major systemic imbalances and corrections are not uncommon, and everyone should be wary of new economic theories that claim otherwise.  Companies with robust strategic planning processes are better prepared to handle this kind of turbulence, as I highlighted in my recent posting “Integrating Strategic and Supply Chain Planning at Emerson“.

Integrating Strategic and Supply Chain Planning at Emerson

Supply Chain Planning | By •

I am doing some research on “Supply Chain Management in Times of Turbulence” and one of my premises is that firms with a robust strategic planning process are better equipped to deal with large, unexpected events, like the current global recession.  What does a robust strategic planning process look like?  How does strategic planning integrate with supply chain planning processes?   In an attempt to answer these questions, I called my contacts at Emerson Process Management, one of our clients and a company with a sterling reputation in planning.  This is how they do it.

Emerson sells project-based solutions to clients in a variety of industries.  The company is organized into regional business units, and regional leaders have profit and loss responsibility, so they take the time to understand the political and economic drivers of the countries they operate in.  Their sales teams are also expected to talk to key customers and learn what sorts of political barriers could prevent them from doing business in specific countries.   

Emerson’s strategic planning process consists of a five year look back and a five year look ahead.  It is an annual process, so the five-year look back and look ahead are refreshed every year.  In the five year look back, the company attempts to learn from history to improve its ongoing strategic planning process.  It divides the five year look forward into three scenarios:

  • The profit scenario looks at things from the shareholder’s perspective.  It asks the question: If we had low growth or no growth, could we still make money?  This is the conservative scenario.
  • The company also has a growth review.  It asks questions like: What if this product introduction really took off?  What if a competitor’s weakness in a particular region led us to gain significant market share there?  What if this industry grows much faster than we expect?  This is the high growth scenario. 
  • Finally, there is the “complexity review” which asks the following questions: How complex do we have to be?  Can we reduce the number of suppliers we deal with or the number of parts we produce?  This complexity review incorporates supply chain risk management and can drive the company to more, rather than less, complexity. 

For example, Emerson is very concerned about supplier risks and it has developed a three-by-three matrix to analyze supplier risk.  On the vertical axis, the company places suppliers in boxes based on total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates.  On the horizontal axis, the company assesses the financial robustness of its partners.

If suppliers are placed in the top right hand corner of the matrix (high supply risk/high financial risk), Emerson requires these suppliers to develop and present business continuity plans.  The company may also require its product development team to find alternate sources of supply for key components.  Finally, Emerson decides how much inventory it needs to store in particular regions of the world, outside hotspots, to protect it from disruptive events like swine flu or the recent political turmoil in Thailand.  A complexity risk analysis can lead to multi-year targets for engineering, procurement, supply chain, and other parts of the organization to reduce the risks associated with particular suppliers. 

These reviews feed into Emerson’s process of determining where to build new plants, which plants to close, and which ones to expand.  Longer term sourcing decisions also come out of this analysis.  For example, to expand in Brazil, the company may decide to increase sourcing in Brazil.  Year-by-year sourcing targets are then needed.  While Emerson also has a one year budgeting process, many of the key targets for the supply chain teams actually emerge from the strategic planning process and are based on the five year plans.          

Emerson’s sales and operations planning (S&OP) process is the major point of integration between the strategic plan and the ongoing execution of those plans.  The company’s S&OP process provides an ongoing monthly, rolling supply/demand balancing process that looks forward two years and provides “rough cut” capacity plans for its factories.  Emerson’s S&OP process is truly global.  Dozens of key executives from around the world participate in a highly-structured, four hour decision-making process in which the CEO takes an active role. 

Emerson has experienced substantial organic growth in recent years, far more than was predicted in its strategic plans.  Key supply chain executives stress they could not have accommodated this growth without a robust and global S&OP process. 

There is a price to this type of planning process.  The average executive at Emerson spends 40 percent of their time in planning-related activities.  However, strong companies get even stronger during times of turbulence.  Emerson appears poised, once again, to come out of this recession with more market share than before the recession started.

Emerson’s approach to planning is not necessarily a road map for all companies to follow.  The processes described here, for example, may not work as well for consumer goods companies.  But for project-based companies, it is hard to imagine a more thorough process.

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