In my last article, I discussed how efficiencies in the transportation system have opened up international business opportunities and enabled the incredible growth of Internet-based commerce. Even so, logistics expenses still represent a significant portion of the cost of doing business for most companies that deal in physical goods.
In the past, manufacturers traditionally focused on production and material costs in their attempts to control expenses and improve margins. Those gains are becoming harder to achieve now that most of the “fat” has been cut, so companies are looking to logistics costs — warehousing and transportation — for savings. For sales and distribution companies (retailers, e-tailers like Amazon, and companies pursuing both strategies such as Wal-Mart, Target and Best Buy) have even more reason to focus on logistics, as it is a major part of their costs.
Major retailers and their suppliers have gotten together to develop a consortium called Collaborative Planning, Forecasting and Replenishment aimed at better understanding the dynamics of the supply chain and developing a framework for improved efficiency in getting goods from the manufacturer to the store shelves. CPFR, as the name implies, looks at the replenishment process — the size and timing of shipments through the distribution system, and how buyers and sellers can work together to forecast and plan those shipments and the resulting inventory at warehouses, distribution centers and retail stores. Similar efforts in the past have included Quick Response in the apparel industry and Continuous Replenishment for groceries, among others.
At the same time, technology companies are continually developing equipment and software to support any new ideas for adding efficiency to the process. The end result is an improved supply of the goods that the customers want, where and when they want them (fewer stock-outs), along with minimum inventory in the supply chain, faster delivery, and lower overall costs. And it all works as a result of collaboration, when all parties work together to achieve a result that is good for the customer and all of the supply chain participants as well.
Today’s so-called lean supply chains are a marvel of coordinated activity that makes the most of inventory, warehouses and transportation to deliver goods where and when they are needed. Lean supply chains, however, are fragile. With less extra inventory to make up for any mistakes or disruptions, disturbances can have a major impact very quickly. A fire at a component plant in Georgia, for example, could shut down production at assembly plants all over North America within days. On a larger scale, the tsunami in Japan affected auto plants worldwide very quickly.
Now that major supply chains have been optimized for fast and low-cost operations, companies are learning to back away from the highest achievable efficiencies to provide some protection against risk. It’s insurance — a cost of doing business that may not be needed but this protection is extremely important to have if disaster does strike.
Reprinted from Portsmouth Herald / Seacoastonline.com – December 17, 2013