Supply Chain Frontiers issue #48
How can freight transportation add value to modern supply chains when globally – and especially in Asia – the function tends to be only loosely linked to shippers’ supply chain strategies?
In Asia, companies are often divided into multiple business units, with each unit operating independently. This fragmentation makes it difficult to incorporate transportation into the company’s operations.
Companies in the west are starting to realize that transportation has a key role to play in the design of supply chains. They understand that including factors relating to the movement of goods in the initial design stages can significantly improve supply chain efficiency.
Here are three examples of how companies are integrating transportation into supply chain strategy.
Volvo Cars
Volvo Transport is the distribution subsidiary of the Gothenburg, Sweden-based car manufacturer, Volvo Group. The United States is a major market for Volvo cars. In the 1990s, the manufacturer shipped vehicles via direct ocean services to American ports and road/rail links to customer showrooms. Overall transit time was 30 days to the East Coast and 36 days to the West Coast.
At any given time, Volvo had some $500 million worth of vehicles in transit. The high value of this inventory, and other factors, such as the risk of cargo damage and late delivery, persuaded the company to look at other transportation options.
Two alternative configurations were considered and used. A high-speed feeder service between Gothenburg; Zeebrugge, Belgium; and US ports reduced door-to-door transit time from 8 to 10 days. The second alternative route was a high-speed direct service from Gothenburg to the United States that cut lead times to four days. Sea transportation is more expensive in both cases, but the extra cost is offset by inventory savings of 60% to 85%; shorter and more reliable delivery times; and less cargo loss or damage.
Motorola-UPS
In the late 1980s and early 1990s, semiconductor company Motorola set itself a target of 168 hours for delivery lead time. In other words, from the time an order was received by Motorola, it should be delivered to its customers within seven days. Motorola had factories in 7 locations in Asia (Japan, the Philippines, Malaysia, Hong Kong, Taiwan, South Korea, and China) and downstream plants in the United States, Canada, and Europe. Even though Motorola had managed to shrink the production cycle to four days, transportation to the United States was around 4.6 days.
At the time, Motorola was using a number of transportation companies based on their availability and price, and was incurring delivery delays and cargo damage. The company decided to partner with United Parcel Service (UPS) and integrate the logistics service provider into its supply chain design. The strategic partnership delivered a number of improvements, including almost $20 million in savings and a 98.4% on-time delivery rate.
HP-COSCO
Hewlett-Packard (HP) operated a European hub in the Dutch port of Rotterdam for distributing product to Central and Eastern Europe. Demand changes, coupled with the introduction of slow steaming by ocean carriers, resulted in longer transit times. Although freight rates declined, slow steaming also increased logistics and inventory costs.
In response, HP entered into an agreement with ocean carrier COSCO to relocate its European hub to Piraeus, Greece, in early 2013. The new hub will distribute product to Central Europe, the Middle East, North Africa, the Mediterranean region, and the former Soviet republics. An intermodal corridor will be created for shipping containers from Piraeus to the north. The new configuration is designed to take advantage of the slow-steaming era and will speed up product delivery.
Other carriers in the rail, maritime, truck, and air modes are engaged in similar efforts to involve transportation in the supply chain design process. There are ongoing challenges in the form of unexpected disruptions, such as the recent labor actions on the US East and West coasts. Also, the freight industry must continuously reinvent itself to remain competitive in the many markets it serves, and to stay ahead of new regulations and operational issues, such as rising fuel costs.
But these challenges are an intrinsic part of the logistics business. In the future, transportation players will create value and deliver innovations by marrying their services with customers’ business models and the many categories of products they move.
Demographic changes and political developments, particularly in Asia, and increases in transportation costs stemming from rising fuel prices, will require new supply chain designs. In addition, over the next 15 years, some 1.8 billion people are expected to enter the global consuming classes. Worldwide consumption is forecasted to nearly double to $64 trillion during that time, with half of the extra buying power residing in emerging markets.
Asia will require supply chains capable of supporting these markets efficiently and responsively, and transportation must be part of the region’s response. This is already happening. Alternative routes that connect Asia with Europe are being tested. An example is a new 11,000 km railway connection between China and Germany that crosses Kazakhstan, Russia, Belarus, and Poland in just 18 days. The Arctic route that links Asia with Europe and North America is another example.
As Asian companies continue to drive economic growth, both regionally and globally, they must not overlook transportation planning as a critical component of the supply chains that will facilitate that growth.
This article was written by Dr. Ioannis N. Lagoudis, Director of Applied Research, Malaysia Institute for Supply Chain Innovation. For more information, please contact Dr. Ioannis N. Lagoudis.