Black & Decker, the big international toolmaker, has cut millions of dollars from its finished-goods safety stocks, even with a supply chain that stretches around much of the world. The fashion retailer Liz Claiborne has pruned seven to 10 days of inventory from its supply chain, although much of its merchandise arrives from across the Pacific by ship. Williams-Sonoma, the purveyor of high-end cooking equipment, has reduced its ocean freight bill by millions of dollars.
All these international logistics success stories, drawn from a new study by the consulting firm Aberdeen Group, demonstrate that international logistics doesn't have to be a nightmare. That's welcome news at a time when U.S. trade with China and other Pacific Rim nations is exploding. But the story doesn't end there. That study also shows that success in international logistics does not come easily and that even large enterprises cannot go solo when sailing in international waters. Every one of those achievements relied on sophisticated computer systems developed and applied by third parties.
The longer the chain, the greater the risk
That companies need help reining in their sprawling international supply chains should come as no surprise. Unlike its domestic counterpart, the typical global supply chain stretches across thousands of miles, multiple borders and unmanageable oceans. It presents almost limitless opportunities for disruptions from various and ever-changing regulatory and legal requirements. And the potential for delays at any of its numerous touch points makes it subject to enormous variability and unpredictability, which can quickly erode any savings achieved by moving manufacturing abroad.
These problems haven't gone unnoticed. In the Aberdeen Group's study, which was based in part on a survey of 400 international logistics and trade managers, 62 percent of the respondents cited long lead times that hampered their efforts to respond to market demands as one of the major reasons for their companies' push to improve international logistics. A slight majority also noted that unanticipated costs had eroded product cost savings.
The rush to offshored manufacturing in recent years has only magnified the problem. Long lead times and a few added costs that had little effect on the bottom line when a small portion of a company's supply chain was international become increasingly significant as offshore sourcing grows. "What once might have been a rounding error is suddenly seen as a critical part of the core business," says Beth Enslow, vice president of Enterprise Research for Aberdeen Group and author of the new report, Best Practices in International Logistics.
Greg Johnsen of GT Nexus, a company that supplies global logistics and transportation software, notes that international supply chain costs can grow quickly, gobbling up as much as 15 percent of corporate revenues. The problem isn't just the longer order cycle time for international shipments, he says, but also the large range of variability that seems inevitable with the long lead times and multiple touch points in international logistics. For a domestic shipping operation with a week-long order cycle, the worst case might be the potential for three or four days' variability. For its international counterpart with what's nominally a 65-day order cycle, it could be 25 or more days.
That variability far exceeds what anyone might expect to experience in domestic operations. A single shipment can have as many as 20 physical and document touch points, compared to a handful at home. Governments are much more heavily involved in international shipping than in domestic. International shipments may move on several modes, not just, say, by truck. Plus there are the potential complications presented by time zones, currencies, and language barriers and document requirements.
And the list doesn't end there. "You have to allow for storms, port congestion, customs clearance," says Joe Dagnese, a vice president of Menlo Logistics. "Those are just some of the things that can lose days at a time."
Those delays cost companies more than time; they also cost money. Managers typically compensate for variability and delays by stockpiling inventory, using costly expedited transportation, and adding staff or partners, says Johnsen. Those are all expensive solutions. Over time, the added logistics and inventory costs can significantly erode—and in some cases, eliminate—the savings derived from buying the goods from less expensive offshore sources.
Management by guesswork
Managing costs is already a significant challenge in international supply chains. "We don't have nearly the amount of control, from a management perspective, in how to maximize a capital investment as we do in the domestic supply chain," says Enslow. She says the head of international transportation for one large company told her that he knows to the penny what impact domestic fuel surcharges have on his shipments, but that on the international side, he has a tough time figuring out what he spent in a month on shipments going from Shanghai to Long Beach.
That's hardly an isolated case, says Enslow. Few companies have a good handle on their international shipping costs. "The systems are not established," she notes. "A lot of the expected savings are eroded by transportation costs, brokers' fees, and fines." In fact, Enslow compares the state of international transportation to what domestic transportation in North America was like in the 1970s, unautomated and largely fragmented.
This situation is now coming to a head, Enslow warns. In her report, she writes, "Logistics staffs keep their supply chains moving through hard work, experience-based problem solving, and insistent phoning and faxing of logistics partners. At nearly two-thirds of companies, spreadsheets, department-built Access database applications, and e-mails round out the technology portfolio. Many international logistics groups have reached the breaking point, however. As global sourcing and selling increases, so do transactions, partners, and problems to be managed. But budgets don't allow logistics departments to continue throwing people at these issues. The current manual-intensive process of global logistics is becoming unsustainable."
Can you see it now?
The alternative to manual global logistics management, of course, is automation. And that's exactly what Enslow is urging. She notes that as part of the research, Aberdeen identified eight "best-practice" companies and analyzed their operations to determine what made them stand out. "Analysis of the eight best-practice winners found that greater process automation, improved technologies, and increased reliance on logistics partners were instrumental in driving their successes," she writes.
Johnsen is of the same mind. He adds that the key to managing global supply chain costs and improving logistics performance is to focus on reducing variability—that is, actively managing the supply chain to improve reliability and predictability, and to create systematic ways to signal potential disruptions before they occur.
He says that the systems have to create visibility into not just the flow of goods, but also into the flow of information and costs, and that those systems ought to provide connections between all the participants in a network. That is, of course, what GT Nexus offers. But few would deny that the sort of integration he's urging is crucial to managing a complex international supply chain. The Aberdeen study highlights, for example, Williams-Sonoma's selection of GT Nexus' on-demand transportation management software to manage international transportation spending with a closed loop integrating procurement, execution, auditing and freight payment.
Over the last few years, a number of specialists in international software—companies like GT Nexus, Optiant, TradeBeam and SmartOps—have developed sophisticated global trade optimization tools. In addition, third-party logistics service providers with broad international experience—Menlo Logistics, TNT Logistics, and APL Logistics come to mind—have developed a mix of homegrown and partner platforms. As Menlo Logistics' Dagnese says, "One of the most important things you can do is ensure that your partners have visibility into the information that they need. That allows them to plan their operations. The better we can see, the better we plan."
But few companies have that visibility right now. Enslow writes in the Aberdeen report, "The greatest handicap to logistics performance, according to two-thirds of firms, is the lack of visibility and metrics for managing overseas vendors and logistics service providers."
Though they may have a long way to go, Enslow is optimistic that the laggards will take the necessary steps to turn things around. Companies are generally aware that if they don't take charge of improving their global logistics operations, they risk falling behind, she says. In fact, Enslow expects to see many companies make major strides before the end of the decade. "There will be huge improvements over the next five years," she predicts.