With all its interdependent links, the supply chain remains exceptionally vulnerable to the law of unintended consequences. So why are people surprised when cost cutting in one area has unanticipated effects somewhere else?
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
It was hardly a surprise that when the grocery chain Albertson's announced plans to shut down a DC in Northern California, executives declined to comment on how much money they expected to save. Asked what the grocer hoped to accomplish, spokesmen neatly sidestepped any mention of dollars and cents. "We're doing this to improve our efficiencies and to make sure we remain competitive in an increasingly competitive marketplace," said Quyen Ha, spokeswoman for Albertson's. "There are a lot of opportunities for streamlining and cost reduction."
It's possible that publicly traded Albertson's is leery of releasing too much financial information to its competitors. But industry analysts offer a different explanation: They maintain that many times, executives simply have no idea how much money their supply chain cost-cutting measures will really save.
It's not that billion dollar conglomerates neglect the due diligence. Most spend months, if not years, conducting research and poring over models. It's far more likely, say supply chain consultants and analysts, that they're simply unable to gauge the effect that any given distribution-related decision will have on operations elsewhere along the supply chain. "The assumption is that Albertson's is a pretty sophisticated company and that they understand what they're doing," says Neil Stern, a partner in the Chicago retail strategy firm McMillan-Doolittle. However, "it's really difficult to get to the heart of some of the costs in this area."
George Bishop agrees. "The main issue we see is that people are trying to reduce costs but they don't understand what their cost structure is to begin with," says Bishop, who is senior vice president at LxLi, an industrial engineering consulting firm that specializes in distribution center operations. "If you don't understand your specific costs, you can't make a good decision."
Take Albertson's decision to shutter its San Leandro, Calif., DC in 2006. Once it closes the 439,703-square-foot facility, the grocer will serve 172 stores in Northern California from warehouses in Vacaville and Roseville, northeast of Sacramento. But that's not just a matter of rerouting deliveries and sitting back to watch the savings roll in. The company will need to hire more drivers to cover the expanded territory. And with drivers in short supply, that could prove both difficult and expensive.
Albertson's will also have to expand its 440,000-square-foot Roseville DC by 120,000 square feet to accommodate the added volume. And although Roseville is a full-line warehouse, storing dry goods, produce, deli foods and meat, its refrigeration capacity is limited, so Albertson's will have to add expensive refrigeration equipment at the site.
Then there's the likelihood of labor complications. The San Leandro shutdown isn't scheduled until 2006. But odds are the operation will find itself short-handed in the intervening months as workers decamp for more secure situations.
Penny wise, pound foolish
When it comes to cutting supply chain costs,U.S. industry's track record is a spotty one. Although they're not eager to talk about it, a surprising number of major companies have been burned by ill-conceived supply chain decisions.
Some have fallen victim to poorly thought-out warehouse management system installations. Others have watched the "savings" achieved by installing used equipment evaporate due to high retrofitting costs. "If you're talking about consolidating DCs, it's tempting to use the equipment you already have at another DC," says Bob Babel, vice president of engineering at systems integrator Forte."You need to proceed very cautiously with that. The equipment was bought for one application at a particular DC, and trying to force it into the new DC requires some expertise."
Another common pitfall is failure to plan for the future. Today, for example, many DCs are starting to perform more "value-added" tasks—putting shirts on hangers or adding store-specific labels—before shipping items to retail customers. Because it's not a big part of the business right now, says Babel, DC managers might be tempted to consign these jobs to some dusty corner of the warehouse. But that could prove to be a big mistake. "Providing value-added services might only be 10 percent of your business today," says Babel, "but it could grow to 60 percent in two years. You need to step back and think through the process, and figure out how to perform value-added services within your current workflow. In the end, you'll be able to perform those services better, and service more clients."
Living in a silo
Then there's the very real danger of underestimating the impact a decision made in one part of the company will have on another part of the supply chain."Many companies have created silos where one manager controls a budget for distribution, another guy manages the transportation budget, and somebody else oversees manufacturing," says Bishop. "At the end of the day, the goal is to make budget, and therefore a lot of options aren't looked at very seriously."
Bishop outlines the following scenarios as examples of ways in which silo decisions can have unintended consequences:
The procurement department cuts a deal with a vendor to change packaging from corrugated cardboard to a cheaper alternative, plastic. But it fails to consult with the logistics team about the move. Only when the items arrive does the company discover that the DC's highly automated conveyor system can't transport the plastic-encased product. The company is forced to remove the fast-moving item from the conveyor system and assign workers to pick it manually, incurring logistics costs that may well offset any savings from the packaging changes.
In an attempt to cut inventory costs, a buyer decides to place more frequent orders for smaller quantities. Within weeks, the central stock operations report that efficiency in the receiving and putaway process has plummeted as a result.
Executives at the retail level decide to order split-case quantities in order to hold down store-level inventories. They're dumfounded when complaints start pouring in about soaring replenishment and pick costs at the DC.
In a crusade to end stockouts, a retailer decides to maintain central stock at each of its five distribution centers. What it doesn't stop to consider is whether the improvement in service levels will justify the resulting increase in holding and operational costs.
"Even if you're just looking for a short-term fix, you need to look several years down the road so that the changes you make now won't mess you up later," warns Babel. "You don't want to do something in manufacturing that adversely impacts distribution. You don't want to discover in the end that all you've done is push work from one place to another. The manufacturing side may look better, but the DC can't do the work so you end up losing."
build a model
So you've determined that retrofitting your existing distribution center will be cheaper than building a new one. Fair enough, but your work's only half done. Before updating a DC, you need to model the revamped process, analyzing the new workflow and layout. That means you'll need to classify all of the products that move through the site as either fast movers or slow movers, and determine exactly how each type will be stored. You'll also need to find out how many of each kind of product you have in inventory, and calculate their volume and weight.
Many experts say that modeling and slotting should be done at least once a year. But Tom Flock, senior project manager at distribution/logistics systems integrator Fortna, argues that an annual checkup is not enough. He urges managers to perform these exercises every six months or even more frequently if the business experiences seasonal peaks and valleys in demand.
Congestion on U.S. highways is costing the trucking industry big, according to research from the American Transportation Research Institute (ATRI), released today.
The group found that traffic congestion on U.S. highways added $108.8 billion in costs to the trucking industry in 2022, a record high. The information comes from ATRI’s Cost of Congestion study, which is part of the organization’s ongoing highway performance measurement research.
Total hours of congestion fell slightly compared to 2021 due to softening freight market conditions, but the cost of operating a truck increased at a much higher rate, according to the research. As a result, the overall cost of congestion increased by 15% year-over-year—a level equivalent to more than 430,000 commercial truck drivers sitting idle for one work year and an average cost of $7,588 for every registered combination truck.
The analysis also identified metropolitan delays and related impacts, showing that the top 10 most-congested states each experienced added costs of more than $8 billion. That list was led by Texas, at $9.17 billion in added costs; California, at $8.77 billion; and Florida, $8.44 billion. Rounding out the top 10 list were New York, Georgia, New Jersey, Illinois, Pennsylvania, Louisiana, and Tennessee. Combined, the top 10 states account for more than half of the trucking industry’s congestion costs nationwide—52%, according to the research.
The metro areas with the highest congestion costs include New York City, $6.68 billion; Miami, $3.2 billion; and Chicago, $3.14 billion.
ATRI’s analysis also found that the trucking industry wasted more than 6.4 billion gallons of diesel fuel in 2022 due to congestion, resulting in additional fuel costs of $32.1 billion.
ATRI used a combination of data sources, including its truck GPS database and Operational Costs study benchmarks, to calculate the impacts of trucking delays on major U.S. roadways.
There’s a photo from 1971 that John Kent, professor of supply chain management at the University of Arkansas, likes to show. It’s of a shaggy-haired 18-year-old named Glenn Cowan grinning at three-time world table tennis champion Zhuang Zedong, while holding a silk tapestry Zhuang had just given him. Cowan was a member of the U.S. table tennis team who participated in the 1971 World Table Tennis Championships in Nagoya, Japan. Story has it that one morning, he overslept and missed his bus to the tournament and had to hitch a ride with the Chinese national team and met and connected with Zhuang.
Cowan and Zhuang’s interaction led to an invitation for the U.S. team to visit China. At the time, the two countries were just beginning to emerge from a 20-year period of decidedly frosty relations, strict travel bans, and trade restrictions. The highly publicized trip signaled a willingness on both sides to renew relations and launched the term “pingpong diplomacy.”
Kent, who is a senior fellow at the George H. W. Bush Foundation for U.S.-China Relations, believes the photograph is a good reminder that some 50-odd years ago, the economies of the United States and China were not as tightly interwoven as they are today. At the time, the Nixon administration was looking to form closer political and economic ties between the two countries in hopes of reducing chances of future conflict (and to weaken alliances among Communist countries).
The signals coming out of Washington and Beijing are now, of course, much different than they were in the early 1970s. Instead of advocating for better relations, political rhetoric focuses on the need for the U.S. to “decouple” from China. Both Republicans and Democrats have warned that the U.S. economy is too dependent on goods manufactured in China. They see this dependency as a threat to economic strength, American jobs, supply chain resiliency, and national security.
Supply chain professionals, however, know that extricating ourselves from our reliance on Chinese manufacturing is easier said than done. Many pundits push for a “China + 1” strategy, where companies diversify their manufacturing and sourcing options beyond China. But in reality, that “plus one” is often a Chinese company operating in a different country or a non-Chinese manufacturer that is still heavily dependent on material or subcomponents made in China.
This is the problem when supply chain decisions are made on a global scale without input from supply chain professionals. In an article in the Arkansas Democrat-Gazette, Kent argues that, “The discussions on supply chains mainly take place between government officials who typically bring many other competing issues and agendas to the table. Corporate entities—the individuals and companies directly impacted by supply chains—tend to be under-represented in the conversation.”
Kent is a proponent of what he calls “supply chain diplomacy,” where experts from academia and industry from the U.S. and China work collaboratively to create better, more efficient global supply chains. Take, for example, the “Peace Beans” project that Kent is involved with. This project, jointly formed by Zhejiang University and the Bush China Foundation, proposes balancing supply chains by exporting soybeans from Arkansas to tofu producers in China’s Yunnan province, and, in return, importing coffee beans grown in Yunnan to coffee roasters in Arkansas. Kent believes the operation could even use the same transportation equipment.
The benefits of working collaboratively—instead of continuing to build friction in the supply chain through tariffs and adversarial relationships—are numerous, according to Kent and his colleagues. They believe it would be much better if the two major world economies worked together on issues like global inflation, climate change, and artificial intelligence.
And such relations could play a significant role in strengthening world peace, particularly in light of ongoing tensions over Taiwan. Because, as Kent writes, “The 19th-century idea that ‘When goods don’t cross borders, soldiers will’ is as true today as ever. Perhaps more so.”
Hyster-Yale Materials Handling today announced its plans to fulfill the domestic manufacturing requirements of the Build America, Buy America (BABA) Act for certain portions of its lineup of forklift trucks and container handling equipment.
That means the Greenville, North Carolina-based company now plans to expand its existing American manufacturing with a targeted set of high-capacity models, including electric options, that align with the needs of infrastructure projects subject to BABA requirements. The company’s plans include determining the optimal production location in the United States, strategically expanding sourcing agreements to meet local material requirements, and further developing electric power options for high-capacity equipment.
As a part of the 2021 Infrastructure Investment and Jobs Act, the BABA Act aims to increase the use of American-made materials in federally funded infrastructure projects across the U.S., Hyster-Yale says. It was enacted as part of a broader effort to boost domestic manufacturing and economic growth, and mandates that federal dollars allocated to infrastructure – such as roads, bridges, ports and public transit systems – must prioritize materials produced in the USA, including critical items like steel, iron and various construction materials.
Hyster-Yale’s footprint in the U.S. is spread across 10 locations, including three manufacturing facilities.
“Our leadership is fully invested in meeting the needs of businesses that require BABA-compliant material handling solutions,” Tony Salgado, Hyster-Yale’s chief operating officer, said in a release. “We are working to partner with our key domestic suppliers, as well as identifying how best to leverage our own American manufacturing footprint to deliver a competitive solution for our customers and stakeholders. But beyond mere compliance, and in line with the many areas of our business where we are evolving to better support our customers, our commitment remains steadfast. We are dedicated to delivering industry-leading standards in design, durability and performance — qualities that have become synonymous with our brands worldwide and that our customers have come to rely on and expect.”
In a separate move, the U.S. Environmental Protection Agency (EPA) also gave its approval for the state to advance its Heavy-Duty Omnibus Rule, which is crafted to significantly reduce smog-forming nitrogen oxide (NOx) emissions from new heavy-duty, diesel-powered trucks.
Both rules are intended to deliver health benefits to California citizens affected by vehicle pollution, according to the environmental group Earthjustice. If the state gets federal approval for the final steps to become law, the rules mean that cars on the road in California will largely be zero-emissions a generation from now in the 2050s, accounting for the average vehicle lifespan of vehicles with internal combustion engine (ICE) power sold before that 2035 date.
“This might read like checking a bureaucratic box, but EPA’s approval is a critical step forward in protecting our lungs from pollution and our wallets from the expenses of combustion fuels,” Paul Cort, director of Earthjustice’s Right To Zero campaign, said in a release. “The gradual shift in car sales to zero-emissions models will cut smog and household costs while growing California’s clean energy workforce. Cutting truck pollution will help clear our skies of smog. EPA should now approve the remaining authorization requests from California to allow the state to clean its air and protect its residents.”
However, the truck drivers' industry group Owner-Operator Independent Drivers Association (OOIDA) pushed back against the federal decision allowing the Omnibus Low-NOx rule to advance. "The Omnibus Low-NOx waiver for California calls into question the policymaking process under the Biden administration's EPA. Purposefully injecting uncertainty into a $588 billion American industry is bad for our economy and makes no meaningful progress towards purported environmental goals," (OOIDA) President Todd Spencer said in a release. "EPA's credibility outside of radical environmental circles would have been better served by working with regulated industries rather than ramming through last-minute special interest favors. We look forward to working with the Trump administration's EPA in good faith towards achievable environmental outcomes.”
Editor's note:This article was revised on December 18 to add reaction from OOIDA.
A Canadian startup that provides AI-powered logistics solutions has gained $5.5 million in seed funding to support its concept of creating a digital platform for global trade, according to Toronto-based Starboard.
The round was led by Eclipse, with participation from previous backers Garuda Ventures and Everywhere Ventures. The firm says it will use its new backing to expand its engineering team in Toronto and accelerate its AI-driven product development to simplify supply chain complexities.
According to Starboard, the logistics industry is under immense pressure to adapt to the growing complexity of global trade, which has hit recent hurdles such as the strike at U.S. east and gulf coast ports. That situation calls for innovative solutions to streamline operations and reduce costs for operators.
As a potential solution, Starboard offers its flagship product, which it defines as an AI-based transportation management system (TMS) and rate management system that helps mid-sized freight forwarders operate more efficiently and win more business. More broadly, Starboard says it is building the virtual infrastructure for global trade, allowing freight companies to leverage AI and machine learning to optimize operations such as processing shipments in real time, reconciling invoices, and following up on payments.
"This investment is a pivotal step in our mission to unlock the power of AI for our customers," said Sumeet Trehan, Co-Founder and CEO of Starboard. "Global trade has long been plagued by inefficiencies that drive up costs and reduce competitiveness. Our platform is designed to empower SMB freight forwarders—the backbone of more than $20 trillion in global trade and $1 trillion in logistics spend—with the tools they need to thrive in this complex ecosystem."