Tuesday, February 11, 2014

Logistics on steroids

Logistics and transport can be classified as the arms and legs of any supply chain; playing a crucial role in timely conversion of inputs into outputs, ensuring coordination throughout the whole process. A slight change in production processes is usually supplemented by a shift in associated logistics. Likewise, a disruption or improvement in transportation channels could alter the whole production process.

The question that comes to one’s mind then is:

“What is causing these dynamics to change so quickly?”

The articles assigned for this week highlight key factors that help explain part of the ongoing rapid transformation. These include “Security threats, rising wages, new emerging hubs” (PwC reports), Natural disasters, oil prices (web articles and McKinsey quarterly).

Improved methods of production:
The biggest culprit is the ever improving methods of production. Given the increasing focus on boosting efficiency and cutting down costs, manufacturers look for avenues to save time, effort and money hence adjusting their supply chains to frameworks like lean manufacturing, six sigma, theory of constrains etc. For example Tesla makes use of lean manufacturing by using highly specialized robots that can perform multiple tasks during car assembly, which help reduce time, space and movement required to put together various parts of the car, improving overall throughput rate. So Tesla can assemble more cars in the same given time which means Tesla’s demand for raw material would also increase. This generates pressure onto suppliers who would have to adapt to increased demand without increasing shipping times as well as on Tesla itself which has to ensure that it chooses the right channels to avoid supply disruptions.

Lean manufacturing at Tesla[1]

Change in market trends:
The PwC article highlights cost as a growing concern directly impacting production costs. Earlier in the day it was cheaper to get labor-intensive work done in growing markets, however with wage inflation and fuel costs on the rise, manufacturers are now forced to rethink their strategies by factoring in transportation and handling costs. The declining benefits gained from having the production done overseas factoring in the transportation costs, means that it is more feasible to manufacture locally. A prime example of this shift is Apple Inc. [2], which has decided to shift part of its production back to the US, setting up factories in Arizona. Therefore the products offered by the company will be the same but the logistics involved will completely change. Another reason for this shift was to gain more control over production which Apple had outsourced earlier, this would again have logistics around movement of product parts to change.

Apple’s Arizona sapphire factory[3]

Change in market demand (Consumer taste & behavior)
Changes is consumer tastes and behavior is also catalyzing a change in the way companies handle logistics. These changes can range from product composition, practicality to delivery speeds. Increased awareness, space and time constraints have led manufactures to adhere to environmentally friendly practices without compromising on product quality.  A couple of examples include practical car design by Gordon Murray[4] and Eco-friendly furniture by Herman Miller. As general awareness is increasing, the consumer focus is shifting on green products which needs to be incorporated into product design. Changes could range from finding suitable suppliers, setting up recycling channels to reducing production carbon foot print.

Secondly, increased technological advancement has an inverse effect on the amount of time people have at their disposal waiting for communication delays and delivery times. The channels have multiplied and evolved over time. When the internet went public people only had dial up access which was faster and cheaper than regular communication channels. However, improvements have transformed the measly data speeds over phone lines into high speeds over broadband and fiber optic at an affordable cost. The internet has since then given rise to online stores providing customers flexibility to purchase from the comfort of their homes, while benefit to retailers who can avoid overheads incurred due to maintaining large stores. While a few have benefited a few have also suffered, such as Best Buy. Today, only a few electronic retailers exist in the form of physical stores. Others have given in to competition from online stores offering cheaper prices.

Environmental and security factors

The underlying calculation for any intricate supply chain network no matter how effective, can be thrown into disarray by natural disasters. Though the probability for such occurrences might be slim they can bring systems to a complete halt which requires companies to resort to their contingency plans or figure out alternate methods to continue production. Any stoppages could result in heavy losses due to the inability to meet demand. Most recent examples include; eruption of Grimsvotn volcano cutting off air travel to Europe, roughly cancelling 600 flights a day from North America to Europe[5], Monsoon flooding of factories in Thailand causing a global shortage of hard drives[6]; Earthquake in Japan affecting global supply chain for memory chips[7] and lastly how Dell had to resort to acquiring supply using rented aircraft to meet demand when the eight day port strike occurred

Landscape of IT manufacturing in Japan 

Rising security threats also adversely affect supply chains as added security causes delivery times to rise sharply. An event could bring everything to a dead stop, therefore redundancies need to be factored in. Both the aforementioned factors force companies to spread out the risk of being hit by developing adaptable supply chain networks. A good example as mentioned in the article is, the switch to “Just in case”. With manufacturers looking to reduce their inventory at hand vis-à-vis mitigate the risk of shortages, new hubs are created to provide delivery of goods from local distribution centers allowing to keep the inventory levels low, and saving transportation costs. However, the development of such hubs would increase the load on existing transportation channels.

Nearing channel capacity

Demand/reliance on rail travel: An overloaded train in India

Rising competition has increased the battle for access to transportation mediums. Globalization has allowed people to move goods and services across the globe, however this exponential growth in demand has to process through the fixed routes causing traffic to increase. The article on “10 interesting facts” estimates that 20 million containers cross the world at any given time, which gives a fairly good idea to the magnitude of transactions occurring. Rising demand then forces the cost of transportation to go up which translates into lower profit margins causing continual shifts and efforts to finding feasible supply chain networks.

  • How do you think companies are coping with surmounting pressures caused by complexity of logistics and strained transportation channels in an attempt to remain competitive?
  • Are manufactures solely relying on innovation or sharing costs with customers?
  • Lastly how are such changes affecting the whole ecosystem?

IKEA, is one example that comes to my mind. Instead of shipping the products to customers, which requires an additional step, they get the customer to manage the logistics of delivery and assembly in turn helping them keep costs low and saving space due to disassembled product storage.

[1] http://www.techspot.com/news/53267-teslas-model-s-factory-is-full-of-advanced-robotics.html
[3] http://fairerplatform.com/2013/11/apple-gt-advanced-make-sapphire-arizona/
[4] www.theengineer.co.uk/in-depth/interviews/automotive-engineer-gordonmurray/
[5] http://www.cbsnews.com/news/iceland-volcano-ash-upends-air-travel-in-europe/
[6] http://www.crn.com/news/storage/231900987/massive-thailand-floods-likely-to-cause-widespread-hard-drive-shortage.htm
[7] http://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supply-chain.aspx

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