A need for speed

A need for speed

Making the case for Agile supply chains as demand volatility
makes
distribution postponement a viable strategy

In the past year, the global drinks conglomerate Diageo has completely changed the manner in which it distributes its products in Asia Pacific.

   The strategy is best described by the name of its new facility in the region, which Diageo calls its 'Singapore Postponement Hub.'

   Now typically the word postponement has negative connotations. But increasingly, supply chains are being designed around that very word.

   Here's how it works for Diageo, taking the specific example of moving Johnnie Walker scotch – one of its core premium brands – from Europe to customers in Asia.

   Ricardo Aguas, Asia Pacific supply chain director for Diageo, said the opening of the Singapore hub a year ago has helped changed the route to market for Johnnie Walker.

   'Previously, we manufactured the bottle in Scotland and sent it to Asian markets by ocean,' Aguas said at the SCMLogistics World 2008 conference in Singapore in October. 'The transit time was too long. The inventory was too large. And market requirements were changing often. So we chose Singapore as our postponement strategy. Scotland sends the naked bottle to Singapore, and the stickering is done here. Postponement is not a new strategy, but it's new for the alcohol industry.'

   The new strategy has helped Diageo better manage demand, as the previous 60-day transit and distribution cycle has been shortened. It's also helped eliminate unneeded cost through better market customization.

   'We usually deliver (individual bottles of Johnnie Walker) worldwide in a (cardboard box container),' Aguas said. 'But in China, they don't want that. So we eliminated a cost on something the customer didn't even want.'

   It's but one example of a new thinking in supply chain that is emerging as demand volatility changes the mindset that cheaper and leaner is always better.

   'The application of postponement strategies is being rapidly applied to new industries as a way to manage demand variability,' said Allen Fukuda, business development executive for supply chain management and managed business process services for IBM Singapore.

   Hau Lee, a professor of supply chain management at Stanford University, said that process-based decisions were gradually replacing cost- and time-based decisions as the factor most heavily influencing supply chain strategy.

   Speaking at the conference, Lee also alluded to the idea of postponement, saying it allowed shippers to better customize their supply chain.

   'People ask me, 'should I come back from China?' ' he said. 'My answer is yes and no. You should do both. Companies need to adapt their supply chains. Sometimes it needs to be continually adapted and matched with the demands of the market.'

   With uncertainty swirling in global economies, Lee spoke at length about shippers building supply chains that were as adaptive as possible, a theme that came up often as the economic crises gripping the globe inevitably provided a backdrop to the forum, as did the wildly fluctuating price of oil and its effect on supply chains.

   'The mantra in recent years has been that lean supply chains are best,' Philip Damas, research director for Drewry Shipping Consultants, told American Shipper in an interview. 'But lean has required minimum production costs, large volumes and long supply chains (usually from China), which work best if you have steady demand with little volatility. In today's volatile environment, a lean supply chain increases indirect logistics opportunity costs and risks, like the inability to respond to changes in demand or the risk of excess inventory.

   'We have argued that importers tend to underestimate the importance of indirect logistics opportunity costs and overestimate the net savings made on lean supply chains.'

   He pointed out the work of David Hummels, a Purdue University researcher who in 2001 wrote in an academic paper called Time as a Trade Barrier that each additional day spent in transport reduces the probability that the United States will source from that country by 1 percent to 1.5 percent.

   'He also estimated that each day saved in shipping time is worth 0.8 percent ad valorem for manufactured goods,' Damas said. 'This is a classic analysis of the benefit of speed in international supply chains and should be revisited by companies which source products internationally. By designing a supply chain where undifferentiated products are produced at source and customized in the end-market – product postponement – companies can benefit from some sourcing cost reductions as well as logistics agility.'

   A DHL executive in Singapore said the company is seeing more and more of the postponement concept, with core manufacturing taking place in the traditional production hubs in Asia, but final touches (like packaging or kitting) being performed nearer to the ultimate market.

   'These are things that can be done near-shore,' said Alfred Goh, vice president of supply chain logistics for DHL's Global Customer Solutions division. 'They give you more agility. There will still be a trend toward near-shoring even with oil prices going down.'

   Gopalan Natarajan, a supply chain finance director for Unilever, said at the conference that Unilever is focused on building assets that are adaptable.

   'The way the market is behaving today, it calls for a different way of thinking,' he said. 'Where can we create flexibility? Are our factories mobile? How much of my asset infrastructure can I turn around and make plug and play? The challenge to our business is to not be saddled with an investment that becomes obsolete based on changing market demands or commodity availability.'

   He also said the industry would have to come to terms with the fact that pinpoint forecasts for everything from sales to fuel prices were simply not going to be reliable in the future.

   'Most of us are comfortable with a single number,' Natarajan said. 'But these days you have to be comfortable dealing with ranges. It all goes back to flexibility.'

   Lee, the Stanford professor, spoke about the effectiveness of a 'dual response' production strategy, using two factories to better respond to dramatic changes in demand.

   'When demand goes up and down, one of the factories stays stable, while the other factory's production is variable, going up and down with the swings in the market,' he said. 'That way, you can better handle the volatility of demand.'

   Another DHL executive said that whether moving toward agile or lean, companies simply do not examine how effective their supply chain strategy is on an ongoing basis.

   'Generally there is a need for companies to reevaluate their supply chain,' said Richard Owens, senior vice president for DHL's GCS unit. 'Companies tend to look only at their transportation costs and not the cost of inventory, or lost sales or obsolescence. All these indirect costs represent much higher costs than transportation.'

   Aguas, of Diageo, said the goal for his company in the Asia Pacific region (which covers 30 countries and stretches from India to Australia) is to triple turnover to $2 billion within three years. The centerpiece of the revenue goal is the postponement hub.

   'Singapore is not just about warehousing and distribution,' he said. 'There is postponement, so we have a tight integration with our 3PL.'

   When asked if distribution costs went up by employing a postponement strategy, Aguas said Diageo took a more holistic look at its supply chain.

   'We had to look at end-to-end costs,' he said. 'You might think that going through the hub would be an extra cost, but distribution is only a part of total costs. If there's an SKU where we can put a full container to a certain market, then it goes straight to that market. It's not about building volume through the hub. It's about looking at the best route to market for specific SKUs. For us, the hub is not all about costs. It's about responsiveness to market.

   'A single dent or a single particle in the bottle would be taken very seriously by our customer,' he said. 'Our customers (in the region) are not FMCG customers. We're dealing mostly with bars. Only in Thailand have we started dealing with retailers, like Tesco and 7-Eleven.'

   Aside from customization, the postponement hub allows Diageo to better control the size of its shipments to help its customers in countries where alcohol tariffs are high.

   'Excise can be as high as 250 percent in some Asia Pacific countries,' Aguas said. 'You can imagine what this means to distribution. The moment you bring in a full containerload of premium whiskey at 250 percent excise, when that volume equates to six to eight months turnover, you can see what that does to our customers in terms of cash flow.

   'If you can reduce that shipment for actual demand, it makes a big difference. The hub should eventually be a value proposition to the customer,' Aguas said.

   The Singapore hub has been so successful that the company is envisioning another hub developing in North China as demand rises there, he said.

   Other speakers at the conference briefly mentioned different applications of postponement in their strategy.

   'We do put together different supply chains for different products,' said Andrew Chiang, director of supply chain strategy for Gap. 'For our fashion products we work on a different scale than our longer-lasting items.'

   As Damas said, choosing lean or agile depends on what your supply chain partners look like.

   'The agile strategy works when you have low demand predictability but a tight relationship with your customers (i.e. retailers, not end consumers),' said Manish Shakalya, supply services manager for Cadbury India. 'On the other hand, loose relationships and high demand predictability lead toward a lean strategy.'

   Eduardo Hagad, supply chain and logistics director for Philippine pharmaceutical manufacturer Sanofi-Aventis, offered a note of caution. He argued that seeking agility often allowed a company to rationalize excess. 'Predictability comes first, and flexibility comes after that,' he said. 'We talk about speed and flexibility, but is that what the customer needs? Sometimes they just want predictability. Sometimes flexibility means there are inefficiencies. I'd rather work out the problem and not pay for the flexibility.'