In an age where cost competitiveness largely determines business success, the pressure to reduce costs has become the supply chain manager's constant companion.
Art van Bodegraven was, among other roles, chief design officer for the DES Leadership Academy. He passed away on June 18, 2017. He will be greatly missed.
On the athletic field, the race may go to the swiftest. But in business, it's likely to go to the most cost competitive. And in an age where cost competitiveness largely determines business success, the pressure to reduce costs has become the supply chain manager's constant companion.
But cutting costs doesn't require the latest management program or the newest software. Cost reduction opportunities typically abound within today's operations; you just need to know where to look. When it comes to the supply chain, areas to investigate include the following:
Inventory. Inventories have always offered an easy target for cost reduction efforts because they're visible. And with inventories growing as a result of offshoring, the need for careful management and close attention is greater than ever. But careful inventory management is not to be confused with arbitrarily slashing stocks. Rather, it's a matter of completely rethinking how they are built and maintained—to challenge the math behind them, to reengineer replenishment, to really understand customer demand, to look at deployment alternatives. And to mercilessly clean out the trash—the pain of the write-offs goes away after a while.
All inventories are worth a close look: raw materials, work-in-process, finished goods, supplies, and
consumables. The impacts can be enormous—a
smaller asset base for improved return on investment, capital expenditures redeployed into productive assets and activities, or cash conservation during tough times.
Transportation. There's more to cutting transportation costs than beating the lowest rates out of your carriers. In fact, that can be counterproductive. Sometimes, higher nominal cost with greater flexibility and reliability is a better way to go.
When it comes to reducing transportation costs, there are more profitable avenues to take. For example, if you haven't evaluated your company's fundamental transportation structure and mix in years, a total rethinking of carriers, modes, and alternatives can pay big dividends. And while you're at it, take a look at your overnight parcel shipping costs. It's easy to fall into the habit of using premium-priced expedited service to make up time when things go wrong upstream in the supply chain.
Though it's often overlooked, inbound transportation frequently offers a host of cost reduction opportunities. When vendors and suppliers specify carriers, when freight is "free" on over-minimum orders, or when price quotes include freight, inbound freight cost becomes a black hole. If you can get your suppliers to shed some light on those numbers, you may uncover some excellent prospects for cost reduction.
If your freight volumes fluctuate, you may want to consider using third-party logistics service providers, whose leverage and experience can result in great savings and improved execution. Obvious candidates for outsourcing include operations whose fleet is sized for peak volumes, or whose drivers are a fixed-size crew of fulltime employees.
If you're running a private fleet, examine that operation as well. You're likely to uncover ways to save money by boosting productivity and equipment utilization. You may even discover new opportunities to earn revenues from backhauls.
Facility layout/design. Most distribution centers are intelligently designed for the day they open for business. But over the years, the products handled, customer order profiles, and customer demands tend to change. A fresh look at layout, slotting, putaway, "hot" SKU pick/replenishment, cross-docking, and mechanization (or de-mechanization) alternatives can give new life to a facility.
The secret to success lies in understanding the delicate inter-relationships among inventory levels, material sources and arrival patterns, the material handling systems' capabilities, demand patterns, information and systems support, and the nuts and bolts of work flows, processes, and timing.
Material handling systems. Time is not usually kind to mechanized systems, but tweaking and fine-tuning can sometimes restore a system's performance to original levels. Removing bottlenecks, finding shortcuts, and elevating both performance and reliability can have profound impacts on both service levels and operating costs. Payback typically requires the most modest of investments.
Labor. Workforce management can provide both cost and performance opportunities. But your approach should include the application of process redesign, performance standards development, clear work/task assignment, flexible workforce planning and scheduling, hands-on floor supervision, and visible performance reporting—ideally in an environment of high-performance continuous improvement.
Facility network rationalization. Where your DCs are located, what size they are, and what missions they fulfill within the supply chain can make the difference between failure and success in overall cost and service levels. Even companies that have built networks with elaborate modeling and simulation tools redesign the network every five years or so—or even more often in the case of fast-changing global supply chains.
Understanding that the network needs to include facilities with different missions is a key to the construction of a balanced network. Just as one size does not fit all in evaluating facilities within the network, a single network solution doesn't work for every company. But getting the network right builds the ultimate foundation for managing transportation costs, planning inventory investment, and containing facility/operations costs.
Sourcing and procurement. As with transportation, the key to reducing sourcing and procurement costs is not to browbeat suppliers into cutting their prices. A better approach is to set up process improvement and cost reduction teams in partnership with key suppliers—and to find suppliers who want to play in this brand-new ball game. There's little limit to what can be accomplished via this approach.
Everything in the relationship is fair game—packaging, ingredients, processes, physical handling, and product development—anything that can raise your quality, improve your manufacturing reliability, and enhance your relationship with your customers.
Employee retention. What does this have to do with cost reduction? Plenty. High turnover will raise your hiring and training costs. You also have to factor in the lost productivity and the potential for increased errors and customer service failures during the new employees' learning curve. This is a multi-million dollar opportunity in many companies. If you haven't already done so, sit down and calculate the real cost of turnover to your company. The total will almost certainly astonish you.
How do you stop the revolving door? First, invest whatever it takes to find the right people in the first place. Second, create a culture in which leaders lead—and listen—and contributors are recognized and rewarded. Third, weed out the low performers early; this will send the right message to the "keepers." Fourth, make sure your operation is wage competitive. Fifth, set turnover objectives, and track actual turnover regularly. Analyze turnover reasons critically—and honestly—and execute programmatic solutions for the problems you find. Sixth, when you reach your target objectives, set new ones, and go after them.
How much might any of these cost reduction efforts be worth? It's hard to say without knowing the individual situation. Years of experience suggest, though, that double-digit improvements in productivity, in throughput, in transportation cost, in labor cost, and in inventory investment are well within the realm of possibility— even probability.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
Chief supply chain officers (CSCOs) must proactively embrace a geopolitically elastic supply chain strategy to support their organizations’ growth objectives, according to a report from analyst group Gartner Inc.
An elastic supply chain capability, which can expand or contract supply in response to geopolitical risks, provides supply chain organizations with greater flexibility and efficacy than operating from a single geopolitical bloc, the report said.
"The natural response to recent geopolitical tensions has been to operate within ‘trust boundaries,’ which are geographical areas deemed comfortable for business operations,” Pierfrancesco Manenti, VP analyst in Gartner’s Supply Chain practice, said in a release.
“However, there is a risk that these strategies are taken too far, as maintaining access to global markets and their growth opportunities cannot be fulfilled by operating within just one geopolitical bloc. Instead, CSCOs should embrace a more flexible approach that reflects the fluid nature of geopolitical risks and positions the supply chain for new opportunities to support growth,” Manenti said.
Accordingly, Gartner recommends that CSCOs consider a strategy that is flexible enough to pursue growth amid current and future geopolitical challenges, rather than attempting to permanently shield their supply chains from these risks.
To reach that goal, Gartner outlined three key categories of action that define an elastic supply chain capability: understand trust boundaries and define operational limits; assess the elastic supply chain opportunity; and use targeted, market-specific scenario planning.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”