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In International Market, Local Supply Chain Defines Pricing Strategy

In May, I took a trip to Shanghai, China, for a project to establish a partnership between a Chinese horticultural company and a Holland breeding company. It was a win-win collaboration for both, not only helping the Holland company to break into the Chinese market with minimal resource, but also upgrading the Chinese company with new product varieties without adding R&D investment. During the meeting, there was only one concern from the Holland company: the price for the new products in Chinese market were set lower than the Holland company expected. The Holland representative could not accept the recommendation from the Chinese company. After all, the same types of flowers are sold at a premium in other global markets!  In order to understand this pricing recommendation, we visited the horticulture supply chain in that region, from flower growers, to flower market, to flower retailers. After examining the entire supply chain, the representative agreed with the lower pricing strategy today for future long term growth.

Production – Flower growers

When the Holland representative saw the greenhouses in the region, he commented: What a low cost production!  The farmers enjoy the benefits from local natural geographic condition. All things being equal, such as the amount of fertilizer used for every square meter of land or type of greenhouse equipment invested, it costs the U.S. growers five times more than the Chinese growers in labor, not just because of cheaper labor in China. The underground water system in the Eastern China region provides the Chinese growers a natural watering system. Therefore there are much less labor required to water and grow the plants. On top of it, the government subsidizes the greenhouse facility investment, which lowers the production cost even more.

In the different areas of the same region, there are significant differences among greenhouse business models. We visited the greenhouses managed by the young generation of growers, who are connected using the internet and smartphone like an iPhone or Android phones. They are educated and ambitious.  They want to grow the best plants and dominate the market. Due to the economy of scale, they can not only achieve lower cost from higher production efficiency but also receive a volume discount for plants and farming materials. From them, I see the picture of tomorrow’s Chinese agricultural industry.

Farmers working in greenhouse, Photographer: Zachary Long
Lunch and Learn with young farmers, Photographer: Zachary Long

The traditional farming model co-exists with the modern farming management. Many individual farmers manage only two or three small greenhouses in their backyard. All farming work is done by the family members. Those individual families unite together to form an organization. The organizer of the group sells their harvest together and also combines their purchasing of raw materials to lower the purchasing cost. The organizer benefits from the commissions of sales.

Chinese boy sorts flowers
Chinese boy sorts flowers - Photographer: Zachary Long

With the advantages from Mother Earth and the effective business model in the local market, the production of flowers is efficient and lean, and thus minimizes the production cost.

High quality flowers fresh from the fields, Photographer: Zachary Long

Distribution – Flower Market

A visit to the local flower market explains why premium pricing will not work even though the growers grow high quality flowers. The local market consists of the first level wholesalers and the second level distributors. Wholesalers ship the flowers by truck from their fields to the market. Distributors will buy from several wholesalers for different varieties and then deliver them to retailers.

During the consolidation and distribution process, there are two major factors contributing to damage of flowers:

1)      Packaging. There is minimum packaging for the flowers.  In other global markets, the flowers are carefully packed in paper cartons or in buckets for best protection and petals expansion. In China, the growers only use a single layer of plastic cone to cover the petals.  This kind of packaging method does not provide much protection for flowers during transportation.

Typical packaging of flowers, Photographer: Zachary Long

2)      Shipping.  From the growers to the market and from the market to the retailers, the flowers are firmly stacked inside trucks or cardboard boxes without any space to breathe. In the same size of truck, the Chinese farmers can ship almost 20 times more than the U.S. farmers can.  I joked that the extreme loadability was such an effective way to minimize their supply chain “carbon footprint”!

Flowers stacked in a truck, Photographer: Zachary Long
Flowers packed in cardboard box for distribution, Photographer: Zachary Long
Creative way of transportation? Photographer: Zachary Long

The ruthless transportation minimizes the transportation cost for flowers, damages flowers during transportation, and causes a much lower price for flowers without perfect presentation.

Customers – Retailers

Retailers and the final sales of flowers determine the brutal transportation in some way.   The majority of customers of retailers are not individual consumers like you and me, but businesses! It may be a phenomenon only in China that businesses buy a lot of flower baskets for business openings or events. So, flowers are not sold for a long vase life but a very short exhibit life of a few hours. Under these kinds of circumstances, flower quality is really not a selling point unless those flowers are used for a wedding ceremony.  Unfortunately, unlike luxury products, such as a purse, flowers are not a product defining a consumer’s social status. Therefore, consumers pay less attention to flower quality so retailers will not push upstream distributors to improve flower quality by minimizing damage from transportation.

Flower basket for business event, Photographer: Zachary Long

Summary

For any global company breaking into a new market, it is extremely important to evaluate the local supply chain in its entirety from upstream to downstream. By understanding the local supply chain, the company can define its marketing and pricing strategy without disconnecting from the local market. The Holland company would price itself out of the market without understanding the entire process from growing to transportation. Through a complete investigation into each component of the supply chain for these flowers could we fully grasp the individual dynamics of the Chinese market.  Any international company needs to fully assess the specifics, find the local expert who understands the unique market characteristics in order to implement the correct marketing strategy. This article is a case of horticultural product going into a new market. However, the learnings from this case can apply to many other products and industries who are seeking opportunities in the international market.

Special Thanks to my husband and photographer Zachary Long who provided photographic coverage in China.

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From Wii to Zhu Zhu Pets – A Black Friday Phenomenon

Before this Black Friday, I had no idea about Zhu Zhu Pets. Then over night, I learned about its hot sales situation from all Media outlets. A Google News search yields 2249 results as Zhu Zhu Pets have become this seasons’ most desired products and hottest news topic. This situation reminds me of the Nintendo Wii three years ago. Both Wii and Zhu Zhu Pets created such a unique Black Friday phenomenon: a hot product caused a huge buzz during Black Friday sales and “disappeared” from retailers’ shelves due to a supply shortage. Do you remember that Wii was sold at a premium in the black market three years ago? The same thing is happening to Zhu Zhu Pets, which is now being sold for as much as $50 at eBay, five times more than its original price!

There are a few things in common between Nintendo Wii and Zhu Zhu Pets:

1. Both are great products at a low price, creating great value for budget-cautious consumers.  Wii is less than $200 and it is a game console designed for everyone in the family.  Zhu Zhu Pets, the fuzzy robotic toy hamsters, are less than $10 and targeted at children. Both are well designed products with a great pricing strategy, which made them stand out from all other competing products in their respective categories.

2. Both products experienced surprised high demand exceeding the forecast and supply, and hence results in a shortage. From a supply chain point of view, out-of-stock is never a good thing because it means loss of revenue, especially when consumers can easily switch to competitive products. However, for both cases, because the uniqueness of the products, consumers will patiently wait for the products to be back on the shelf.  We can see Wii as a good example. The market size for Wii did not shrink because of the supply shortage. I don’t like to diminish the importance of supply chain, however, it’s far more important to develop a great product to stimulate the market. The challenge for the supply chain here is how quick the products can be replenished from overseas and available for customers again.

3. Both cases might use a clever ploy to make the item more desirable by having a short supply. There were many speculations that Wii used this marketing scheme three years ago to make Wii such a popular product and continue to be one of the top console systems. (Example: Nintendo’s Wii: Privily, Why So Rare Art Thee?). Today the buzz caused by the shortage is behind us. We can see Wii’s piled up at any electronic store this year. I suspect that Zhu Zhu Pets is using the same ploy to make this inexpensive fuzzy toy the most desired product of this Holiday shopping season. The question is whether this cute robotic hamster can be the toy remaining on the shelf for years to prove its value proposition. Wii did it. I finally own a Wii console three years after its first launch. Now, let’s see if I will able to buy a Zhu Zhu Pets for my child after three years.

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How Supply Chain Service Drives Customer’s Loyalty – My customer Experience with Zappos

Being a supply chain professional, the “sad” thing is that I always translate my real life experience into supply chain practices and theories. This time, I would like to tell a story of my Zappos ordering experience and how I see their supply chain service.

I was shopping for a pair of shoes for my wedding. I didn’t buy the shoes from a local store because I wanted to find something cheaper. The first thought coming to my mind for online shoes shopping is Zappos, which can explain the good reputation of Zappos being the leader of online shoes shopping.

The goal of supply chain management is to provide the right product at the right place with right price. Online shopping eliminates the barrier of place, but it requires an efficient delivery. On their easy to navigate website, I found the style of shoes I was looking for at a discounted price (supply chain theory: availability of right product at right price). It showed three pairs in stock for my size, so I placed my order online.  In 10 minutes after completing the entire transaction, I felt I should have waited to search more options, so I wanted to cancel the order. Then I realized Zappos didn’t provide me the option to cancel online. I had to call their 24 hours customer service hotline. With my professional habit, I also measured how long I was waiting while calling customer service, roughly 30 seconds. Since 24-hour service is provided, the waiting time of less than one minute is more than acceptable, although I wished they provided me the option of online cancellation to eliminate my call to their CS.

Shortly after I cancelled the order, I decided to order the shoes again. What an unpredictable customer behavior…However, when I tried to place a new order online, I noticed that their stock availability became two. My supply chain instinct told me that their stock availability was not updated simultaneously when my first order was cancelled. I decided to call CS and see if they could reactive my old order, instead of placing a new one.

Samantha in CS answered my call (now she @samiamquinn is my twitter follower @BettyFeng and following because of my tweet about Zappos CS). Over the phone, I could feel her warm personality and joyful smile, totally contradictory to the cold voice of a CS from CHASE credit card I recently experienced.  She placed a new order for me and upgraded my order to VIP for next business day delivery. Samantha explained that since my order was placed after cutoff time, I should receive my order on Monday morning. As someone working in logistics, I fully understood what cutoff time meant, so I didn’t expect my order to be batch processed until the next morning and picked up by their carrier UPS at the end of the next day.

To my surprise, I received shoes from Zappos the next morning! I have shopped online many times before but never experienced such quick delivery. As a regular customer with knowledge of supply chain management, Zappos order processing and fulfillment amazed me. The order was placed at 10:30pm in the night, shipped out of the Zappos warehouse in Shepherdsville, KY, and delivered to my home in Orlando, FL at 11:15am the next day.  The whole process can be illustrated as the following:

Zappo Order Flow

The email time stamp of order shipping confirmation was 2:30am, so it’s from a 24 hours operated warehouse. I looked up all of flights from Louisville to Orlando in the early morning for more insight. It seems only the flight was leaving at 5:46am and arriving at 10:03am could make the final delivery at 11:15am.

Needless to say, with my knowledge in order management, I understand how many activities and challenges are behind this 13-hour process from order to delivery.  The speed of order processing and delivery is something extraordinary. For regular order processing, it normally takes one or even two days lead-time to let the system batch process customer orders and check their credit,  then have the warehouse pack the product and ship it out by the end of the business day. Below are three key components to enable Zappos make a delivery at such speed:

  1. 24 hours customer service. I’m guessing Samantha in CS kindly manually processed my credit and dropped my order to a delivery request. Generally the late night order is after the cut-off time so it’s unlikely to have been processed by a system batch job.
  2. 24 hours warehouse operation. This is the most important factor for their incredible speed. Without 24 hours operation in the warehouse, the delivery request will not be picked, packed and shipped by early morning for a late night order.
  3. Close partner relationship with UPS for early morning pick-up, or multiple pick-ups in a day. This is most likely the reason why Zappos’ warehouse is located close to UPS’ main global hub in Louisville, KY.

Like Zappos’ logo indicated: powered by service. Zappos uses customer service as their brand to achieve customer loyalty, especially when customers have a lot of choices. Zappos demonstrated to me an exceptional example of customer service not only through their CS rep, but also through their supply chain. Their supply chain system and management for order fulfillment is overall robust and agile, except the fact that I can’t cancel an order online and their stock availability can’t be updated immediately after order cancelation. I mentioned in my earlier article that supply chain is a revenue driver, because supply chain services of order fulfillment and on-time delivery directly impact customer satisfaction and loyalty. I know the case I just experienced with Zappos was extraordinary, but you can expect that I will be their long term customer after such a great experience and will happily recommend Zappos to others. I also believe that a company willing to do extraordinary things for their customers with a higher standard of supply chain service will be competitive and successful for the long term.

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Identify Hidden Costs From Total Acquisition Cost

For any rational consumer who makes a purchasing decision for a product or service, total acquisition cost (TAC) is often part of the decision process.  The goal is to obtain the best product or service with the least total costs for the long term.  These kind of decisions happen every day in our daily life,  from a decision whether we should buy energy saving light bulbs, to a more expensive but gas efficient car, or to a much more pricey new house but with much less requirement of future maintenance. In the business world, the theory is the same.

The definition of Total Acquisition Cost (TAC) can vary. But generally speaking, TAC in supply chain management should be the sum of total costs associated with receiving and using of a product or service, including ordering administration costs, ordering size costs, product costs, inbound shipping costs, assembling or conversion costs, quality costs and maintenance costs.  Unfortunately, many companies tend to focus on product costs and quality costs as their procurement success measurement, which are obvious and easy to measure and capture, but overlook other hidden costs in TAC.

In this article, I will use two examples to explain where we can identify some hidden costs from total acquisition cost.

Logistics costs as hidden cost

This is a very straight forward case of embedded cost analysis for the company using vendor managed inventory (VMI). The analysis is simple but requires significant trust, transparency, and collaboration between the company and their suppliers. The suppliers are asked to breakdown cost components for VMI raw materials as below:

  • Product costs
  • Shipping costs
  • Revolver hub costs (warehouse costs)

The embedded costs are hence broken down into different phases of the supply chain. In this case, the product cost is not the focus, but the logistics costs, which is hidden as part of the final pricing. After understanding the embedded logistics costs of raw materials, the Logistics team goes to its logistics providers for a quote, including shipping and warehousing, on the condition of meeting the same logistics service level used by suppliers. Once a lower logistics cost is identified, Procurement uses it as leverage to negotiate with suppliers. Suppliers need to either match the logistics costs or use the recommended 3PL by the company. This is a great example showing collaboration with suppliers for cost reduction. I believe many companies are conducting similar exercises to identify hidden logistics costs in their purchased materials.

Administration cost, order size costs as hidden costs

The costs of ordering administration, order size or assembling are difficult to capture and often not part of acquisition consideration. But those costs can become surprises some day and hurt the company bottom-line. It can potentially damage the relationship between suppliers and customers.

I’m using a case of pallet rentals in a logistics operation to illustrate those costs. A pallet is not a key material for many companies but it’s utilized in everyday operations to carry and ship important products. Pallet pooling is not a new concept. It allows companies to focus on their key supply chain activities and enjoy a lower logistics cost through renting pallets, instead of buying. The value proposition for this system is to decrease logistics costs, while supporting environmental sustainability.

It’s a great business model if there were no other hidden costs.

For any company using pallet pooling, the additional administration costs can come out of the blue. It’s not a simple activity of placing PO. It includes all other activities of “reporting, reconciling, correcting, and possibly conducting your own audit.” (Andrew Mosqueda, A Cost Analysis of Rental vs. White Wood Pallets). There is a lot of room for reporting errors or variables in a pooling system because pallets float from upstream 2nd or 3rd tiers of suppliers to downstream wholesales or retails. It can cause substantial effort for companies to maintain the program. If companies lose track of pallets because of shipping them to clients outside the rental network, the costs of “loss of equipment” will end up more than buying new pallets.

Ordering size requirement is another invisible cost in TAC. If there is a fuel surcharge for a full truck order or LTL surcharge, the inbound shipping cost per unit becomes higher for small batch orders. If companies choose to increase order sizes in order to lower surcharge costs per unit, inventory carrying costs will increase, such as storage, insurance, tax, and extra rental fee for this rental case.

It might be extreme to use a rental case to explain ordering related costs. The point is that intangible costs, such as ease of doing business, suppliers’ flexibility and services, are definitely part of total acquisition cost. In the long run, all of those hidden costs either pass along to consumers to decrease your competitiveness in the market, or hit bottom-line to reduce your profitability. Hence, for companies that would like to trim down total acquisition cost for their procurement, start with identifying hidden costs first before jumping into negotiate new pricing with suppliers.

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Key drivers of profitability and competitiveness in supply chain

Since the recession began, supply chain management has been back on the agenda of companies’ boardroom. There is no doubt that it’s the perfect time for company leaders to exam their supply chain model, supply chain network and identify the hidden costs in the chain. By reshaping the supply chain strategy of companies, the supply chain can become the “cash” chain.
The below chart represents key drivers of profitability and competitiveness in the supply chain. There are three aspects that supply chain can do to drive “cash”: reduce expense, increase revenue, and improve assets liquidity. Companies should look into all aspects, encourage innovation and risk taking. Companies can not only streamline the processes to achieve a lean and efficient organization, but also make their supply chain organization into a revenue stream.

Profibility
Supply chain as cost drivers

This is the first thing that every company will jump into. “Cutting costs” becomes the slogan of the company. Many companies assign certain dollar amount to each individual as performance objectives. There is nothing wrong with that, except company leaders need to be aware of the existence of functional silos, and commit to transparency communication within the organization. As we all know, there are many tradeoff decisions to be made within supply chain, such as the traditional tradeoff between warehouse and transportation. Remember, pressure can increase the political level inside the organization and sometimes force people to make a decision based on making their numbers. High level leaders are responsible for the big picture of the whole supply chain and support the least total cost decisions for the organization. Unreasonable measurements or targets can discourage employee morale, damage organizational heath and sometimes lose supply chain talents for future growth.

Below is analysis for key drivers for supply chain as expenses and opportunities for cost reduction:
a. Transportation
There are many areas to be looked at in transportation to achieve cost savings. It has been discussed in detail in my article “Five Ways to Achieve Cost Savings in Transportation”.

b. Inventory carrying costs
It’s an area that many companies overlook and don’t even calculate and understand their inventory carrying costs. As standard rule of thumb, inventory carrying cost is 25% of inventory value on hand. When high inventory level is unavoidable during a recession, it’s a great opportunity for the company to look into their inventory carrying costs to identify opportunities. Below charts present all components for inventory carrying costs. I will discuss more into details in a separate article.

Inventory carrying cost

c. Variable production and warehousing cost
Variable costs are cost of labor, material or overhead that changes according to the change in the volume of production units. I believe many companies conduct ABC (Activity Based Costing) analysis to find out standard variable cost. Variable cost reduction can be done through process improvements to reduce wastes in production and warehouses, such as waiting time, movements, etc.

d. Raw materials
Raw material is considered as part of inventory. It includes direct and indirect raw materials. Collaboration and partnering with suppliers can lead to total inventory reduction in the chain to achieve a win-win situation, such as VMI or ERP. Scrutinizing suppliers in a difficult time will jeopardize companies in the long term.

Supply chain as revenue driver

Many companies recognize their supply chain as cost driver, but fail to see the prospect of supply chain as a critical role to drive revenue.
a. Supply chain service
Supply chain service level directly impacts customer satisfaction. Order fulfillment and on-time delivery are two major service metrics to measure company supply chain efficiency and effectiveness. Higher service levels bring higher customer satisfaction which prevents loss of revenue and leads to future sales. It’s worth noting that there is an exponential relationship between service level and cost. However, there is normally a predefined service level agreement between companies and their customers or trade partners.

b. Supply chain solutions
When business development is trying to break into a new sales channel, supply chain supporting capacity can often be brought up as a question. Example: A company wants to enter into a new market which can only order small LTL orders, but at much higher frequency. If the company has become accustomed to TL orders all the time, those LTL orders will become a market entry barrier due to increased logistics cost. Under this kind of circumstance, supply chain, as its supporting role to revenue increase, needs to be flexible and innovative to provide a solution as an enabler for market expansion without hurting the company’s bottom line. In this case, working with 3PL for LTL consolidation can often be the solution for the challenge.

c. Recycling or reverse logistics.
It’s one area that is easily neglected by many companies. Recycling, picking up disposed goods from the customers and reselling, can not only improve customer satisfaction and lead to new purchase, but also bring the company a new channel of revenue by reselling disposable goods to a safe recycling channel. It also helps companies to fulfill their social commitment for environment sustainability.

Supply chain as assets management

Asset management can be the most challenging task for supply chain because it would take a much longer time to make changes in company assets, such as leasing contracts for warehouses. Better asset management in supply chain will require will require organization transparency and a communication from upstream to downstream to minimize functional silo.

a. Fixed cost of DCs and docks
For a company with excess inventory, it’s costly to acquire more space for storage. For companies with extra space due to less demand, it won’t be easy to close DC in the short term and there is also a risk for a higher acquiring cost when the market is back. So companies can seek partner opportunities with each other to overcome the difficult time together. A project I worked on in the past is to provide a customer storage solution. With certain incentives, the customers purchase several months of inventory shipped directly from the manufacturer. They utilize their empty spaces to make storage revenue and the products are used for their future demand. While the company with excess can avoid the cost of new warehouse space and one leg of transportation from storage to the customers. Certainly this kind of process needs to be carefully managed to avoid skewing demand and other possible negative impact.

b. Fixed cost of plant
This is the most difficult part of all costs reduction opportunities because it may lead to the close of a factory or downsizing the workforce. It’s the last thing I like to see and propose because I’m also one of the millions who lost their job during the recession. The company should try their best to use other methods such as work sharing or payroll reduction to work with employees to overcome the difficult time together. However, as a business person, I can also understand “competitive advantage”. If closing a plant is the best thing for long term growth and efficiency, we just need to face the reality and move on.

c. Cost of private fleet
It’s very similar to the fixed cost of DCs and docks. When it’s not possible to reduce the size of the private fleet in the short term, partner with suppliers or customers to share the capacity to reduce costs.

d. Inventory management
Inventory is the biggest issue to any company during a recession when consumption drops dramatically. It’s a big topic and there are many things that can be done in inventory management. It not only requires day-to-day tactical inventory management to minimize inventory DOS and maintain a targeted customer service level, but also requires some strategic decisions from higher levels to achieve inventory goals.
I. Use demand driven forecast, instead of sales & marketing driven. Many companies include their marketing goal in their demand forecast which produces an inflated the demand forecast. Inventory overflow is unavoidable when the market is down. Face the reality, and forecast based on customer demand.
II. Centralize inventory management, instead of decentralize. A decentralized ordering or inventory management can normally cause higher inventory in the entire supply chain. Centralized inventory management will lead to better forecasting at an aggregate level and hence result in a lower inventory.
III. Inventory optimization and classification. ABC classification can improve inventory turn while maintaining fulfillment service levels. Optimization will lead to SKU reduction so companies can focus on their critical products for better service and lower cost.

Established metrics leads to total supply chain excellence

Besides all of these actions and factors to enable supply chain to become the “cash” chain, leaders should not forget to establish well-designed metrics for the entire organization to achieve total supply chain profitability and competiveness. Company leaders need to be aware that high costs in some areas are normally the symptoms of root causes, and many times, those problems are caused by the wrong metrics in the organization. Requesting cost savings without removing the root causes and establishing accurate performance metrics, the cost savings initiatives can be a failure. For example, production cost per unit is a great measurement of manufacturing efficiency, but it can result in high inventory when manufacturing ignores other cost components in supply chain and over produces in order to reduce cost per unit to meet their metric. This kind of story actually happens every day, and it’s a daily battle for many supply chain professionals. The right metrics convey the right positive incentives and drive the right decisions. When overhauls in supply chain need to be done at a strategic level to achieve day-to-day tactical operational efficiency, company leaders have the obligation and responsibility to face reality and to make the right strategic decisions for the organization.

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From Coffee to Business Process Improvement: A Story of Office Coffee

Employees on the third floor were not happy, especially in the early morning. The coffee kettles, two for regular and one for decaf, in the breakroom were always empty! It’s almost unacceptable for an anxious coffee drinker to wait even five minutes for a freshly brewed cup in the morning. Even worse was that there are others waiting in line in front of you so you might even need to wait for the next kettle to brew. So, people are cranky, unhappy, and even cursing because coffee was not available when people needed it. Time is money, but without coffee in the morning, work won’t be efficient!

It’s totally a supply chain breakdown issue, so a few Six Sigma Black Belts set out on a mission to fix it. The new process is focused on regular coffee because there is much less demand for decaf. Many sigma tools can be applied in this analysis, such as normality analysis of waiting time per person, fishbone analysis, Pareto, regression and correlation analysis between waiting time vs. office hours. A typical six formula can be developed such as Y(coffee waiting time)=Xs of (number of kettles, office hours, number of  coffee addicts, coffee grounds and filter availability, etc. )

According to the rumor, there were quite a lot of hours involved with group brainstorm and heated discussion among Black Belts. A rather complicated new coffee making process, which is like the two-bin system of supply chain management, was produced. The company generously paid for a big desktop mat with nicely printed color coded flow and process. Below is my simplified version to illustrate the idea.

Coffee Making Process

The mat was placed in front of the coffee kettles so it’s very eye catching for everyone serving coffee. The kettles were also relabeled with clear signs of “regular” vs. “decaf”. People were laughing at the change. Many felt it’s a waste of resources in designing the process and printing the mat, but people started to follow the process flow. You know what? The fresh coffee availability was much more improved! The chances of being out of coffee in the early morning were decreased dramatically. Whoever craved coffee in the early morning could now be blissfully caffeinated. Yes, there were still times of process breakdown when a few were not following the process to make a new kettle when the first one was empty, or coffee availability tends to be lower in the afternoon. But overall, the situation is getting better and employees on the third floor were happier. The company was happier too, by investing a little bit of printing cost, the total office productivity improved!

It’s a coffee making process implementation in the office breakroom, but it reflects some supply chain, LEAN and business process improvement disciplines and practices:

  1. When a two-bin replenish system is implemented, the re-ordering process, when and how, is the key to maintaining high stock availability.
  2. Obvious signs, colors or labels are always useful in LEAN implementation.
  3. When a change is implemented, it’s not always welcomed at the beginning. Change management may be necessary in many cases.
  4. Any process improvement opportunity should be encouraged. It might be a small improvement but result in a huge increase of customer satisfaction.
  5. I think the Human Factor is the most import learning from the office coffee making process. Human factor is the most critical X in Y, no matter if the Y is fresh coffee waiting-time in the office, or products availability for our consumers. A well-designed process can be easily broken because of human manipulation and interruption. The coffee making process relies on many individual coffee drinkers to brew coffee when the first one is empty. Like any processes in the real business world, the expected outcome of a well-designed process relies on many individual employees consistently following instructions. For many manual processes, training and retraining are always required for process enforcement in order to achieve the same standard outcome. Cross-functional communications are always critical to make sure information flows properly and that following the steps can be executed in a timely manner. On the other hand, employees are those who will develop continuous improvement opportunities to streamline processes to achieve better result with a shorter lead-time.

OK, enough learning from this office coffee process. Now it’s time for me to make a coffee for myself at home. Waiting time: 2 minutes.

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When “Green” encounters “Efficiency”- What supply chain executives can do to achieve both

I enjoy reading the article Can You Have a Lean-Green-Global Supply Chain by Mollenkopf, Tate and Ecklund. It explains the possible conflict and synergy between lean and green supply chain. At least it gives me a very clear definition of “sustainability”, which I often misused as well.

Like the authors say, “green” or “sustainability” are buzz words for today’s business environment. To be green means to avoid negative impact to the environment, including air, land and water, and sometime even creating positive impact. But when “green” encounters “efficiency”, companies often choose “efficiency” over “green”. In the end, executives need to be responsible to the stockholders for company bottom line. Going “green” becomes something nice to have as part of a company’s social commitment. I had personal experience that a famous warehouse club resists to optimize truck in order to keep their dock loading efficiency. But actually, many components in supply chain can provide companies with “green” opportunities and at the same time help companies achieve cost and efficiency objectives. Below are some of my thoughts:

  1. Use “green” material for product design and packaging. Companies can choose to use green materials which can be recycled and reused, which will not impact the environment negatively. Using recycled pallets is a good example in packaging. It’s more challenging to substitute direct materials of the products. However with the green initiatives from governments, there is more and more R&D invested in developing “green” materials. That is true that green substitutes can be more expensive today. However, working with suppliers closely in product development and increasing the economic scale of the material can optimally reduce the material cost and achieve “green” prospective.
  2. Reduce unnecessary movements in operation and logistics. It’s back to Lean concept to reduce waste of movements. In a factory or warehouse, layout improvement can eliminate unnecessary travel of the workers and forklift trucks, and improve efficiency. Postponing inventory deployment can ship the products to the right locations to meet customers demand, thus avoiding possible stock transfer movements among different regions. For unavoidable small batch or LTL orders from the customers, the efficiency can be achieved through LTL consolidations. All of those reduced movements will not only save significant transportation cost, but also resulting CO2 omission reduction and contribute to a greener environment.
  3. Improve reverse logistics. Reverse logistics hasn’t been paid too much attention by many companies. But how to reuse, return or dispose of the defective products will have a huge impact on both “green” and logistics costs savings. Companies need to re-examine their reverse chain for more value creation. For examples, instead of shipping the consumers returned products directly to the overseas or local suppliers for inspection and repair, the company can source local service providers to sort the returned products, resell the nondirective ones and then send the defective ones to repair, locally if possible. There is additional service fee incurred, but the savings from unnecessary shipping is tremendous. Just thinking about it, most of returned products from the consumers are actually not defective products. When disposal or scrape is avoidable for end-of-life products, the company should be socially responsible to make sure the wastes are properly handled by the recycling service provider. The goal is to create zero landfill. And keep in mind, any hazardous disposal will damage the company’s reputation and cost more for damage recovery.

Going green is not just a slogan. Going green in supply chain can help a company achieve cost savings or cost avoidance. Executives need to commit to support green initiatives and engage their employees to identify any green opportunities inside and outside the company. As the article says, companies embracing green, lean and global supply chain strategies may in fact continue to gain momentum and find themselves poised on the leading edge of competitiveness.

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Five Ways to Reduce Transportation Costs

I’m reading the article “Corporations Review Transport Operations as Pressure Grows to Reduce Expenses” by Daniel P. Bearth. The article discussed the pressure that executives are facing today to reduce transportation costs.  There are a few fundamental ways that companies in any industry can do to reduce their transportation costs.

1. Truck Load Optimization. It sounds like a non-brainer to optimize the empty truck space to reduce the average cost per unit. TL optimization not only reduces the overall transportation costs per unit but also removes the trucks required over the road, which contribute to CO2 omission reduction. So, when the transportation cost savings weight more than inventory holding cost, ordering at a full truck load will be the proper action to take.

2. Milk-run. When LTL order is necessary to reduce inventory holding cost or due to warehouse space limitation, milk-run will be the best option to reduce transportation cost. Milk-run is to consolidate multiple LTL orders in one truck and stop to deliver for multiple customers. It’s the best solution to resolve the LTL challenge. It also provides customer satisfaction at the same time because it gives customers flexibility to order small batches. The challenge of executing milk-run is to plan the delivery route. Unless it’s a repetitive route at the same schedule, it can involve a lot of manual planning and coordination between logistics personnel, carriers and the customers in order to optimize the truck space. But the savings from LTL consolidation can be significant.

3. Fleet utilization. Improving fleet utilization is another way to save transportation costs. Fleet, no matter private or public, is more cost efficient to serve within a distance of average 150 miles. For distances greater than 150 miles, line haul will have a lower cost per mile. So, by utilizing fleets for transportation movements within that distance will lower the fleet fix cost significantly. On the other hand, the fleet planning is necessary to make sure a correct fleet capacity. Unused fleet capacity or idle trucks are wastes to transportation.

4. Stock transfer reduction. The cheapest way for transportation is not to move it. When companies have a lot of internal stock transfer movements within their supply chain network, it’s time to review their regional supply and demand planning. For traditional FDC/RDC distribution network, the regional deployment should be postponed to the last minute to meet just in time requirement. During this economic downturn, there are many excess inventories existing in the supply chain network.  Transportation can be avoided by an effort of selling the inventory locally, instead of moving them to a different location for storage.

5. Backhaul for reverse logistics. The last but not the least, the transportation costs saving opportunity can be identified through evaluating reverse logistics network. Companies should collaborate and partner with their carriers, suppliers or customers for any backhaul opportunities. The carrier’s cost can be reduced because of equipment utilization from this close looped network. This cost savings benefits should be shared among supply chain partners.

As a conclusion, above are five ways to reduce transportation costs – nothing out of the box but basic logistics management theories. But as always, getting back to fundamentals is often the best solution to tackle supply chain challenges.

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