1 SCMgr as Global Economist SCMR Norbridge

8/4/2019 1 SCMgr as Global Economist SCMR Norbridge

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ADAPTING RELATIONSHIPS DIRECTION PRIORITIES STRATEGY

16 Supply Cha in M anage me nt Re v ie w · S e p t e m b e r 2 0 0 8 www.scmr.com

Bruno Mallart



ByDavidBovet

David Bovet (dbovet@

norbridgeinc.com) is a partner

in the management consulting

firm of Norbridge, Inc. He is

the co-author of Value Nets:

Breaking the Supply Chain

to Unlock Hidden Profits

(John Wiley & Sons, Inc.).

Uncertaineconomic

timescanbringgreat

opportunity.Forsupply

chainprofessionals,that

opportunityliesinapplying

economiclogictoglobal

supplychaindesignandoperation—orthinkinglike

aglobaleconomist.Here’s

aguidetowhatthesupply

chainmanagercandoand

howtomakeithappen.

W e are bombarded these days with dramatic eco-nomic news: The U.S. dollar is headed south,crude oil has reached all-time highs, and oureconomy is in trouble. So ar, 2008 eels like oneo the most unsettled and unsettling economictimes in years.

What is a supply chain manager to do, acedwith these troubling trends and, even worse, with variability and vola-tility? Basically, he or she must think more like a global economist.The current external economic pressures can oten lead to a single-

minded ocus on costs—and the supply chain manager is clearly expected to help drive operating costs down. But rather than merely reacting, this article argues that supply chain executives are uniquely positioned to take the lead in uncertain economic times. They canchampion change, never more so than when the chips are down andcorporate anxiety is running high.

Here is a guide to what the supply chain manager can doand how to make it happen. First, let’s briey review the tec-tonic economic shits that are driving unprecedented changesin United States and worldwide business—and orcing the sup-ply chain manager to think and act more like an economist.

Three Major Economic ShiftsFrom a supply chain perspective, we can ocus on three major andinterrelated trends among the myriad o economic indicators: (1)plummeting U.S. dollar; (2) soaring uel price; and (3) a slowing U.S.economy. These developments are discussed in turn below.

Plummeting U.S. DollarAnyone who has traveled recently to Europe is painully aware thatthe U.S. dollar doesn’t buy what it used to. In act, since mid-2001the dollar has dropped by 45 percent against the Euro. It has alsodeclined by 15 percent against the Japanese yen and 17 percentagainst the Chinese Yuan (see Exhibit 1).

www.scmr.com Supply Cha in M anage me nt Re v ie w · S e p t e m b e r 2 0 0 8 17

The Supply Chain Manager as

GLOBALECONOmIST




Economist

Exchange rates vary, o course, when they aren’tfxed as they were through 1971. And major swings haveoccurred beore—in the 1980s, the yen nearly doubledagainst the dollar in three years’ time (1985-1988). Still,today’s levels are largely unprecedented. The Swissranc, locked at 4.30 to the U.S. dollar during the 1950s-60s, trades today roughly at parity with the dollar. TheCanadian dollar has also now reached equivalency withthe U.S. unit o currency—signifcant because Canadaremains our largest trading partner.

In addition, exchange rates are highly volatile. The value o the dollar oten changes by a cent or more daily

against the Euro. We know that exchange rates are moredriven by interest rate dierentials than by physical tradeows. And the pressures on U.S. and oreign central bank-ers make these dierentials murky in the uture. Policy makers in the U.S. have been more ocused on the down-side to economic growth while European authorities havebeen more concerned about ination. How these outlookswill change in coming months, in particular with a newadministration in the United States,will make or continued uncertainty inthe oreign exchange markets.

Soaring uel priceEnergy prices are soaring. Crude oil (at$140 per barrel in early July 2008) standsat a level fve times its mid-2001 price.Today’s diesel price at the pump ($4.73per gallon, US average retail, in early July 2008) is up by 64 percent just since the2007 annual average (see Exhibit 2).

Fuel price directly impacts reightcost, o course, thus aecting theentire supply chain. Fuel surchargesare well established in most modes. For

truckload (TL) and less-than-truckload(LTL) reight, as well as or rail intermo-dal, this is usually presented as a percent-age increase (or cents per mile) tied to the

weekly EIA retail diesel price. For LTLrates, the surcharge is oten a percent-age o the base rate per hundredweight.This year the container ocean carriersalso added a uel surcharge to most ship-per contracts, ater years o being theonly mode without an explicit uel priceadjustment. Hardly a day goes by withoutan announcement by a carrier that they are raising their uel surcharge.

Trucking, which accounts or the vast majority o transportation activity in the UnitedStates, has been severely aected. The trucking industry witnessed 935 bankruptcies during the frst quarter o 2008. Independent truckers protested against high die-sel prices across the country on April 1. Truckers world-wide are rustrated, as evidenced by recent protests inSpain, Portugal, Korea, Thailand, and Australia.

Shippers are impacted as well. Building products andother relatively low value-to-weight ratio commoditiesthat move long distances are hurting. A ood manuac-turer, or example, relying heavily on domestic truckloadand LTL reight or nationwide distribution is currently

acing a 26 percent increase in reight budget, at July 2008 diesel prices vs. their 2007 average. This is a rever-sal rom years o at or declining reight rates.

Slowing U.S. Economy The U.S. economy is also slowing dramatically. Takingthe broadest measure, real GDP growth, we see a steady decline rom 2004 when the economy powered ahead

EXHIBIT 1

U.S. Dollar’s Decline

2001 2002 2003 2004 2005 2006 2007 2008

I n d e x e d V a l u e ,

J u l y 2 0 0 1 =

1 . 01.1

1.0

0.9

0.8

0.7

0.6

0.5

Note: Noon buying rates.Source: Federal Reserve Bank of New York.

$ vs. Canadian

$ vs. Yuan

$ vs. Yen

$ vs. Euro

EXHIBIT 2

Diesel Prices Up Sharply

2001 2002 2003 2004 2005 2006 2007 2008

$ / G a l l o n

$5

$4

$3

$2

$1

$0

Note: US No. 2 Diesel Retail Sales by All Sellers (dollars per gallon), weekly averages.Source: US Retail Motor Gasoline and On-Highway Diesel Fuel Prices, Energy InformationAdministration.



by 3.6 percent in real terms, ollowing the slowdown o 2001-02. Each year since 2004 has seen lower growth,down to an anemic 1.0 percent during the frst quartero 2008.

Overall economic weakness impacts the supply chain onmany ronts. From altering sales in many cases, to increasedsales in others (discounters, or instance) and on to creditcrunches and layos, these domestic eects are substantial.But the ocus o this article is on global ramifcations.

The U.S. economic slowdown, combined with weak-ened purchasing power due to the declining dollar, hasresulted in reduced imports. U.S. imports rom China,or example, have allen o dramatically rom the ast-growing trend o earlier years. The nominal dollar valueo U.S. imports rom China grew by an average o over20 percent per year rom 2004 to 2007; it was only 2percent (on a year-to-year basis) during the frst ourmonths o 2008.

This is directly reected in physical trade volumes aswell. Import container volumes were down at many USports during the frst our months o 2008. These declines,generally ranging rom 5 to 10 percent, represent strikingchanges rom steady growth over the past decades.

The ip side or U.S. trade is the boom in exports.Driven by the weak dollar, manuactured exports are upsharply in the early months o 2008. Most U.S. ports areseeing strong increases in containerized exports. Year-to-

date volume at Long Beach, or example, is up close to30 percent. The increases at Los Angeles and New York are 22 percent and 19 percent respectively. One resultis that the supply o empty outbound boxes is tight inplaces where they’re most needed.

Thinking Like a Global EconomistHow can a supply chain manager use these broad eco-nomic trends to advantage? By applying global economiclogic to supply chain design and operation. Change cre-ates not only pain but also opportunity—and today’s tec-tonic shits in the global economic landscape oer many

intriguing openings or the enterprising supply chainmanager.

In a nutshell, supply chain leaders can use appliedeconomics to beneft their companies in our ways:

• Reecting updated cost-to-serve economics in prod-uct prices or specifc customer segments and locations.

• Sourcing closer to point o use, partially revers-ing past globalization norms, in order to reduce reightintensity.

• Exploring efcient ways to manuacture and exportmore rom the United States, leveraging the currently weak dollar.

• Downshiting transportation modes and adding dis-tribution locations to save uel and reduce cost.

These strategies can orm the core o a supply chainplaybook that will set your company apart rom the com-

petition. Rather than merely responding to tough times,the supply chain leader can build strategic advantagethrough dierentiated services and perormance. This isa goal truly worth pursuing.

Twelve potential supply chain moves are groupedunder our headings around these themes: Pricing,sourcing, making, and moving. In each case, we outlinethe intelligent supply chain actions to take in light o themajor economic trends identifed above.

Pricing1. Set the right oer. Costs are rising, margins aresqueezed, and sales are tougher to close. This is a good timeto review the total oer—products wrapped with relatedservices, including delivery, installation, and warranty. Arethere specifc customer segments or which we are oeringtoo much? Can we explicitly charge or delivery in certaincases? Can we change our bracket pricing to drive orderingbehavior toward slower, cheaper delivery modes? Are thereother aspects o the current oer that raise supply chaincosts, such as end-o-quarter spikes due to counterproduc-tive sales orce incentives? Should we review pricing andcosts by channel to discern whether we are better o serv-

ing the client direct? These are analyses that take on specialurgency and provide opportunity or margin gains in thecurrent difcult economic environment.

2. Update pricing with cost-to-serve. Freightand commodity prices have been soaring. It may be timeor a signifcant price rise. A ood manuacturer we assist-ed recently reviewed its zone pricing system. Major uelprice increases had made the zone dierentials inade-quate. This led to a signifcant increase in product pricesparticularly or more distant zones. Reviewing customercost-to-serve requently is critical in these times—andmany manuacturers are raising prices at unprecedented

rates as a result. Supply chain managers should lead thecharge to review pricing. Don’t leave it to sales and mar-keting, as many o the cost impacts are best known (andfrst detected) by sourcing and logistics proessionals.

Sourcing3. Balance supply and demand by world regions.Regionalization is a critical means to address uctuat-ing exchange rates and higher uel costs. The idea is tominimize risk o unoreseen currency shits by match-ing supply and consuming market currencies. Also, uelcosts are generally linked to distance, so a more regional


Economist




sourcing strategy can yield benefts or certain productsand demand profles. Products that are in the mid-rangeo their liecycle, but that still experience high demand

variability, are well-suited to regional sourcing, as shown

in Exhibit 3. The ability to shorten the supply chain andrespond rapidly to uctuating demand can oset lowerbut more distant labor costs. This is especially true whendemand spikes require costly airreight rom remotemanuacturing locations.

Mexico is likely to be one o the big benefciaries o regionalization. Even beore the most recent run-up inoil prices, manuacturers were beginning to compareMexican sourcing with China or the U.S. market. Abusiness case originally made or China on the basis o economical ocean reight to North America looks shaky when much o the volume moves by air instead. As uelprices rise, Mexico becomes increasingly cost-competi-tive, particularly where labor content is relatively low.Emerson, or example, recently acknowledged that it ispulling back some production o appliance motors romAsia to Mexico, as part o its “global best cost sourcing”to drive business efciency (See Exhibit 4).

4. Find sources closer to home. Higher uelprices, a greener supply chain, and the weak dollar areencouraging more localized sourcing. A clear example o this is seen in the “locavore” movement, whose propo-nents typically aim to consume ood grown within 100

miles o home or sustainability and philosophical rea-sons. But expensive trucking drives change rom a purely economic perspective as well. Recently, a 170-acre armin Bowdoinham, Maine, began shipping organic veg-etables to the Boston market. At a distance to market o only 144 miles vs. 3,000 rom Caliornia, Locally Knowncan sell fve ounces o its mesclun at Whole Foods inBoston or a dollar less than the equivalent Caliornia-sourced product.

Retailers are beginning to tout the virtues o otherU.S.-made products as well. Room & Board, an upscaleurniture store, devoted a two-page spread in its latestcatalog to the theme, “Close to home—urniture made

in your own backyard.” Cratmaster Furniture, sold two years ago to Chinese owners, stopped oshoring moreproduction to China as Chinese wages and currency rose, making continued U.S. production more attractive.

5. Seek situations where “arshoring” still works. International sourcing still makes sense in many situations. But the sources are shiting, reecting wageincreases and exchange rate shits that impact attrac-tiveness. U.S. ootwear imports, or instance, are nowgrowing at a aster rate rom Vietnam than rom China,while Brazilian shoe imports are declining. Many mid-sized companies have yet to exploit lower-cost sourcesor products with steady demand and relatively highlabor content. In a project or an airline, as an example,we ound that onboard ood service items (cups, trays,tablecloths, porcelain) could be sourced rom Chinawith delivered savings o over 25 percent. In severalcases, the goods were already being sourced rom Chinabut via American distributors who were not passing onthe ull benefts o the low-cost source.

6. Mitigate commodity and exchange risk rate. Fuel is the most obvious commodity or which toconsider hedging, but the approach can be valid or other

commodities as well as or currencies. O course, timingis crucial. Southwest Airlines is a great example o a com-pany that got it right and acted aggressively. Southwesthedged its jet uel buy to a ar greater extent than itscompetitors. As o late 2007, the airline had hedged 70percent o its uel needs through 2008 at an attractiveprice cap o $51 per barrel. Other airlines were way behind Southwest’s lead, at 14 percent or American,10 percent or Continental, and zero or United. You

needn’t be a giant corporation to hedgeagainst commodity price increases. Butdon’t leave it solely to the CFO—supply

chain and sourcing executives are otenthe best placed to raise the issue, do theresearch, and act on this critical issue.

Making7. Maximize plant utilization. Formanuacturers, weaker demand andhigher input costs mean re-examiningproduction economics. I plant utili-zation has declined, choices includetaking on work or others to better useinstalled capacity, downsizing to small-

EXHIBIT 3

Regionalized Sourcing Works for Many Products

Global Sourcing Strategy (Example)

D e m a n d V a r i a b i l i t y

4

3

2

1

0

0 1X 2X 3X 4X 5X

Low-Cost SourcingFor Stable, High Volumes

RegionalSourcing

For Variable,High Volumes

SpecialtySourcingFor LowVolumes




er (and more modern) acilities, or selling plant andequipment in order to outsource. These make-or-buy decisions become more critical in a difcult economy.Newspapers, or example, have seen their circulationdrop sharply in recent years. In light o this trend andunderutilized acilities, the Boston Herald announced in

June 2008 that it would close its printing plant in Bostonand outsource production to a Dow Jones Co. plant inChicopee, Mass. The act that the printing plant occu-pied six acres o prime real estate in Boston’s South End

was a urther impetus to close the acility and extract thereal estate value o the site.8. Move closer to market. Adding a plant or

a co-packer closer to the major markets makes sense,given higher uel costs—as long as scale economies arerespected. Network modeling or a ood manuacturerselling nationally showed that no amount o distribu-tion tweaking could generate the reight savings that asecond plant, on the opposite coast, could produce.

With the era o cheap transportation at an end, plantsaimed at serving dierent parts o the United States canbe economically justifed ar more easily than fve years

ago. We can expect to see an increase in manuactur-ing plants in America and at smaller scales than beore,particularly or lower value-to-weight products that don’ttravel well. A case in point is the wood urniture plantopened by IKEA’s manuacturing subsidiary in Danville,

Va., in May. This is IKEA’s frst U.S. plant and it reectsthe avorable delivered cost o U.S. manuacturing toserve the company’s growing base o U.S. stores.

9. Export to growing markets. Has the UnitedStates become a low-cost country? Judging by oreigners’eagerness to travel to the U.S., shop in the U.S., acquireU.S. companies and buy our exports, the answer is yes,

at least relative to many other places.Automobiles are a prime example. Thetraditional Big 3 are ramping up theirexports: Chrysler is shiting production

rom Europe to the United States, whileGeneral Motors plans to export romthe U.S. to Europe, Latin America, andChina. BMW is boosting its produc-tion o the X3 premium SUV in SouthCarolina, much o which is aimed atEuropean markets.

Other manuactured productsare ying abroad at a rapid pace.Caterpillar’s sales in this year’s frstquarter jumped 30 percent outsideo North America (vs. only 4 percentinside the region) and accounted or

58 percent o total sales. Evergreen Solar, a ast-grow-ing manuacturer o waer technology-based solar pan-els, has built a new plant in Devens, Mass., in large partbased on booming exports to Germany.

Agricultural products are also being exported at recordlevels. In addition to traditional bulk exports o grain,Midwesterners are stufng empty containers with bulk soybeans, corn, and ethanol byproducts or shipping toAsia. Major markets there include Taiwan, China, Japan,Korea, and Vietnam. North Star Rail Intermodal, or exam-

ple, has gone rom initial startup in the spring o 2007 toshipments o 400 grain-flled containers per week, out o western Minnesota and other parts o the Midwest.

As long as the United States remains cheap and the resto the world grows more rapidly than we do, opportunitieswill exist or increased exports. The supply chain managershould be the frst to suggest an export ocus and the one toexplain how this can be done efciently and economically.

Moving10. Move reight more slowly and cheaply by downshiting modes. Slowing down the movement

o reight is a rational economic response to higher uelprices. Rail, or example, is roughly three times as uelefcient as truck, while barge is about our times asefcient as truck. Typical downshiting involves mov-ing more Asian imports via all-water service to the EastCoast rather than via West Coast ports and intermodalservice. In act, intermodal container volumes are downslightly in the U.S. in 2008 to date ater decades o strong growth, according to the Intermodal Associationo North America (IANA). Meanwhile, Savannah’simport volumes are up, reecting its strong role as thefrst stop or many Asian all-water services transiting the

EXHIBIT 4

Mexico Becomes More Attractive than China

Air % of China Shipments

$140/Barrel (2008)

$72/Barrel (2007)

Mexico Source

IncreasingFuel Costs

China Source

China - Mexico Sourcing Comparison Example

L a n d e d C o s t / U n i t

$90

$85

0% 30% 70% 100%

$80

$78

$75

Economist




Panama Canal. The all-water routewill become even more attractivein 2014, when the maximum vesselsize via the canal will rise rom 4,500

to 14,000 TEUs. We are also witnessing an his-

toric reversal o modal growth ratesbetween rail and truck (see Exhibit5). Ater decades o truck volumegrowth at the expense o rail, we arenow seeing an absolute reduction o truck tonnage and a widening gapwith rail volumes. This reects theuel and economic efciency o railas well as other actors. Within rail,carload volumes are rising even asintermodal declines. (See Exhibit 5)

11. Get closer to customers with more DCs. The optimal net-work equilibrium between cost andservice shits with higher uel cost.Many U.S. distribution networkswere designed and implemented fveor ten years ago when uel was one-fth its current level. The new trad-eo avors more distribution centersin order to partially oset the new,

higher uel charges embedded intransport costs.Overall, i the “old” optimum

called or fve warehouses across thecountry, the “new” optimum expandsto seven or eight DCs. This has many ramifcations. We are likely to see anend to the historical downward trendin the inventory-to-sales ratio in theUnited States (which has declinedby 14 percent rom 2001 to 2008), asmanuacturers add DCs to get closer

to their customers. We will see moreDCs in secondary markets or less-tra-ditional locations in order to minimizeoutbound transportation costs (whichare typically the highest-cost mode inthe system).

Supply chain managers shouldtake the current opportunity to dusto their network models, re-opti-mize the number and location o DCs, and then put warehousing andtransportation out to bid. Weakness

in the trucking sector makes this agood time or RFPs, and new rateswill be needed in any case i addi-tional DC locations are added.

12. Create a more fexible

distribution network. Whileno one can predict the uture accu-rately, we can be confdent that morechange lies ahead. Thus, whatever

changes are made to supply net-




works, globally and domestically, and to transportationmodes and nodes, exibility must be designed into thesystem. Supply chain managers can take the lead hereby promoting solutions that are inherently adaptableand scalable. Flow control on both the Asian end andat West Coast port gateways can add dynamic routingoptions to import volumes. Importers can transload andredirect reight once it hits Los Angeles/Long Beach toa DC that is running short o inventory. Loads can beexpedited by team-driver trucks in place o intermodal incase o need. And routing tools (or example, GT Nexus)

can be used to track international ows and ag move-ments that need attention or re-routing.The capability to rapidly slot new product sources

into a global supply network will be a key dieren-tiator or many companies in coming years. As soonas one optimization is complete, something else willrequire additional changes. Adaptability—o peopleand tools—is now critically important to supply chainmanagers.

Making it Happen: The EnablersThinking like a global economist, or applying the lessons

o global economic shits to a company’s supply chain, isthe essential starting point or today’s supply chain man-ager. How to make change happen is crucial as well.

To make it happen, the supply chain manager needsan agenda and the right resources. Here is a simplechecklist o key enablers that will allow the enlightenedsupply chain executive to realize the promise o eectiveglobal economic thinking.

• Build a pipeline o initiatives. Review the 12 actionsoutlined above and create a coherent pipeline o short-and longer-term initiatives that will take out cost andbuild perormance and exibility into the supply chain.

• Gain analytical insights. Buildan internal analytical team, as LimitedBrands did when it created its Supply Chain Solutions Center three years ago.

Or use consultants. Identiying the rightmoves or your company at this inec-tion point in the economic environmentmust be based on sound analysis o thesituation and a wide range o alterna-tives.

• Acquire the right tools. Researchand buy the practical tools you needto manage a ar-ung and ast-chang-ing supply network. These can rangerom ull supply chain planning andexecution suites (or example, i2

Technologies or SAP), to specifc tools that create supply chain visibility (such as Kinaxis or E2open), or custommodels to choose routing o each truckload o fnishedgoods (direct ship to customer or via regional ware-house).

• Integrate the supply chain organization. Extend sup-ply chain’s reach so that end-to-end integration becomesa reality. Ideally, the supply chain should include sourc-ing, manuacturing, logistics, and customer service. Toomany companies today still lack this undamental hori-zontal view that’s needed to serve customers well with

the least operating cost and inventory.• Name a Chie Global Ofcer. Companies shouldconsider appointing someone who ocuses on key aspectso global management—rom marketing to supply andhuman resources. U.S. frms in particular can beneftrom greater emphasis on opportunities that do not neces-sarily begin or end at home. Cisco recently appointed achie globalization ofcer. Think about it.

• Stimulate innovative thinking. Find ways to be pushedtoward out-o-the-box solutions. Try attending a new coner-ence this year, maybe one in Shanghai, Singapore, or Mumbai.Launch an innovation program in your department aimed at

getting everyone to air their good ideas, then winnow themdown and eed the best into your initiatives pipeline.

• Brush up your global economic skills. Consider oneo the many seminars oered on global supply chain man-agement, global sourcing, world trade or doing business inChina. Read The Economist magazine.

Nothing will impact supply chain executives more incoming years than the broad economic changes current-ly sweeping the globe. For supply chain proessionals toplay their role at ull potential, global economic thinkingis essential. The right direction and resources can turnthese thoughts into successul reality. jjj

Economist

EXHIBIT 5

Rail Rolls While Truck Declines

2002 2003 2004 2005 2006 2007

V o l u m e I n d e x ,

2 0 0 2 = 1 . 0

0

1.25

1.20

1.25

1.10

1.05

1.00

0.95

Source: Rail tonnage based on DOT (BTS) revenue ton-miles, truck tonnage based onATA truck tonnage index.

Rail

Truck

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