With all its interdependent links, the supply chain remains exceptionally vulnerable to the law of unintended consequences. So why are people surprised when cost cutting in one area has unanticipated effects somewhere else?
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
It was hardly a surprise that when the grocery chain Albertson's announced plans to shut down a DC in Northern California, executives declined to comment on how much money they expected to save. Asked what the grocer hoped to accomplish, spokesmen neatly sidestepped any mention of dollars and cents. "We're doing this to improve our efficiencies and to make sure we remain competitive in an increasingly competitive marketplace," said Quyen Ha, spokeswoman for Albertson's. "There are a lot of opportunities for streamlining and cost reduction."
It's possible that publicly traded Albertson's is leery of releasing too much financial information to its competitors. But industry analysts offer a different explanation: They maintain that many times, executives simply have no idea how much money their supply chain cost-cutting measures will really save.
It's not that billion dollar conglomerates neglect the due diligence. Most spend months, if not years, conducting research and poring over models. It's far more likely, say supply chain consultants and analysts, that they're simply unable to gauge the effect that any given distribution-related decision will have on operations elsewhere along the supply chain. "The assumption is that Albertson's is a pretty sophisticated company and that they understand what they're doing," says Neil Stern, a partner in the Chicago retail strategy firm McMillan-Doolittle. However, "it's really difficult to get to the heart of some of the costs in this area."
George Bishop agrees. "The main issue we see is that people are trying to reduce costs but they don't understand what their cost structure is to begin with," says Bishop, who is senior vice president at LxLi, an industrial engineering consulting firm that specializes in distribution center operations. "If you don't understand your specific costs, you can't make a good decision."
Take Albertson's decision to shutter its San Leandro, Calif., DC in 2006. Once it closes the 439,703-square-foot facility, the grocer will serve 172 stores in Northern California from warehouses in Vacaville and Roseville, northeast of Sacramento. But that's not just a matter of rerouting deliveries and sitting back to watch the savings roll in. The company will need to hire more drivers to cover the expanded territory. And with drivers in short supply, that could prove both difficult and expensive.
Albertson's will also have to expand its 440,000-square-foot Roseville DC by 120,000 square feet to accommodate the added volume. And although Roseville is a full-line warehouse, storing dry goods, produce, deli foods and meat, its refrigeration capacity is limited, so Albertson's will have to add expensive refrigeration equipment at the site.
Then there's the likelihood of labor complications. The San Leandro shutdown isn't scheduled until 2006. But odds are the operation will find itself short-handed in the intervening months as workers decamp for more secure situations.
Penny wise, pound foolish
When it comes to cutting supply chain costs,U.S. industry's track record is a spotty one. Although they're not eager to talk about it, a surprising number of major companies have been burned by ill-conceived supply chain decisions.
Some have fallen victim to poorly thought-out warehouse management system installations. Others have watched the "savings" achieved by installing used equipment evaporate due to high retrofitting costs. "If you're talking about consolidating DCs, it's tempting to use the equipment you already have at another DC," says Bob Babel, vice president of engineering at systems integrator Forte."You need to proceed very cautiously with that. The equipment was bought for one application at a particular DC, and trying to force it into the new DC requires some expertise."
Another common pitfall is failure to plan for the future. Today, for example, many DCs are starting to perform more "value-added" tasks—putting shirts on hangers or adding store-specific labels—before shipping items to retail customers. Because it's not a big part of the business right now, says Babel, DC managers might be tempted to consign these jobs to some dusty corner of the warehouse. But that could prove to be a big mistake. "Providing value-added services might only be 10 percent of your business today," says Babel, "but it could grow to 60 percent in two years. You need to step back and think through the process, and figure out how to perform value-added services within your current workflow. In the end, you'll be able to perform those services better, and service more clients."
Living in a silo
Then there's the very real danger of underestimating the impact a decision made in one part of the company will have on another part of the supply chain."Many companies have created silos where one manager controls a budget for distribution, another guy manages the transportation budget, and somebody else oversees manufacturing," says Bishop. "At the end of the day, the goal is to make budget, and therefore a lot of options aren't looked at very seriously."
Bishop outlines the following scenarios as examples of ways in which silo decisions can have unintended consequences:
The procurement department cuts a deal with a vendor to change packaging from corrugated cardboard to a cheaper alternative, plastic. But it fails to consult with the logistics team about the move. Only when the items arrive does the company discover that the DC's highly automated conveyor system can't transport the plastic-encased product. The company is forced to remove the fast-moving item from the conveyor system and assign workers to pick it manually, incurring logistics costs that may well offset any savings from the packaging changes.
In an attempt to cut inventory costs, a buyer decides to place more frequent orders for smaller quantities. Within weeks, the central stock operations report that efficiency in the receiving and putaway process has plummeted as a result.
Executives at the retail level decide to order split-case quantities in order to hold down store-level inventories. They're dumfounded when complaints start pouring in about soaring replenishment and pick costs at the DC.
In a crusade to end stockouts, a retailer decides to maintain central stock at each of its five distribution centers. What it doesn't stop to consider is whether the improvement in service levels will justify the resulting increase in holding and operational costs.
"Even if you're just looking for a short-term fix, you need to look several years down the road so that the changes you make now won't mess you up later," warns Babel. "You don't want to do something in manufacturing that adversely impacts distribution. You don't want to discover in the end that all you've done is push work from one place to another. The manufacturing side may look better, but the DC can't do the work so you end up losing."
build a model
So you've determined that retrofitting your existing distribution center will be cheaper than building a new one. Fair enough, but your work's only half done. Before updating a DC, you need to model the revamped process, analyzing the new workflow and layout. That means you'll need to classify all of the products that move through the site as either fast movers or slow movers, and determine exactly how each type will be stored. You'll also need to find out how many of each kind of product you have in inventory, and calculate their volume and weight.
Many experts say that modeling and slotting should be done at least once a year. But Tom Flock, senior project manager at distribution/logistics systems integrator Fortna, argues that an annual checkup is not enough. He urges managers to perform these exercises every six months or even more frequently if the business experiences seasonal peaks and valleys in demand.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.