Supply Chain Under Scrutiny

Dec. 21, 2004
Manufacturers increase buffer stocks, shorten distribution distances, and contend with enhanced security.

In the hours following the destruction of the World Trade Center's twin towers on Sept. 11, employees on foot and on bicycles in New York City became vital links in the global supply chains the UPS Logistics Group manages for its manufacturing customers. Now, nearly two months later, from selectively building buffer stocks to seeking sources of supply closer to their production sites, U.S. manufacturers continue to rework their supply chains to adjust to a dramatically changed business environment. For some, including companies in the automotive, electronics, and consumer products industries, it will result in higher costs of doing business as they carry larger inventories and pay for security-related freight charges. "Any industry that depends on air freight as a key component in its supply chain is destined to feel a short-term increase," says Richard J. Bolte, president of BDP International Inc., a Philadelphia-based global logistics company. By year-end, he predicts, there'll be "a myriad" of new shipping regulations emerging from the federal government. However, as they scrutinize their supply chains for the weakest links, it's unlikely many manufacturers will be scrapping the JIT production-management systems in which they've invested heavily for more than a decade. "I do not think that just-in-time is in any way dead," states Brook Foust, an analyst at Doculabs Inc., a Chicago-based technology consulting firm. "Most of what we're hearing is that this long-term trend toward rationalizing the supply chain, making it more efficient [and] more timely cannot be changed" because of the competitive world in which manufacturers operate, says Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, an Arlington, Va.-based business research group. What will manufacturers be doing? Rochester, N.Y.-based Xerox Corp. already is putting greater emphasis on business-resumption contingency planning, specifically to deal with the possibility that catastrophic incidents could bring down an entire plant. But, emphasizes Bill McKee, manager of corporate public and media relations, "this planning does not require a build-up of expensive inventory." Other companies, however, are adding to buffer stocks. Referring to a post-attack sampling of his customers, Stephen M. Smith, president of Pitney Bowes Distribution Solutions, a division of Pitney Bowes Inc., Stamford Conn., says, "I don't know of anyone who said they would be able to keep the same lean techniques or inventory levels that they had planned on." And for good reason. For example, as a result of new security procedures, delivery times to the U.S. from Asia may now take eight weeks, compared with six weeks before Sept. 11, notes David Riviere, an Atlanta-based partner of Andersen. Companies "really need" to understand how to plan inventory levels "in the face of variability," insists Sean Willems, co-founder and chief scientist at Optiant Inc., a Somerville, Mass., provider of decision-making software. In practice, this means focusing on supply variability as well as demand variability and optimizing inventory levels "instead of choosing rules of thumb," he says. At the same time, U.S. manufacturers' continuing concerns about the reliability of transportation and the security of inventory information could result in greater domestic production of such items as auto parts and electronic components as suppliers locate closer to their customers. "Not just a local supplier creating a warehouse. Not just smaller suppliers participating in larger value chains. But actually international suppliers trying to establish an American [presence]," says Doculabs' Foust. There's now an urgency for translating into reality what's been "a lot of talk" about using the Internet to bolster collaborative planning and to improve information flow along the manufacturing supply chain, suggests Susan Helper, an associate professor of economics at Case Western Reserve University's Weatherhead School of Management, Cleveland. "If there is going to be a disruption somewhere in the chain, it's really great [for solving the problem] if the whole chain can know all about it," she stresses. In the meantime, the trend in U.S. manufacturing toward outsourcing production will continue, believes Optiant's Willems. It's "sort of a freight train that you can't stop," he quips. "The cost advantage is just so tremendous." However, in the post-Sept. 11 business world, Willems sees a need for a new kind of collaboration among OEMs, contract manufacturers, and Tier 1 suppliers. Companies that have thousands of parts going into their products --"like a Kodak or a Nortel" -- need to actively manage the supply of critical components. "Let [a contract manufacturer such as] Solectron manage all the 12 ohm resistors and the different capacitors, but you manage the LCD displays and the memory," counsels Willems.

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