Supply Chain Frontiers Issue #27. Read all articles in this issue
In these difficult economic times there is no shortage of issues to occupy supply chain managers, but two in particular, rising fuel costs and a dramatic decline in truck carrying capacity, figured largely in the MIT Center for Transportation & Logistics (MIT-CTL) FreightLab Roundtable this June. On the brighter side, attendees discussed a number of strategies that are helping companies to weather the storm.
FreightLab opened for business earlier this year with a mission to: “Investigate and develop better ways for the design, procurement, management, and analysis of freight transportation across all modes and regions.” Its research portfolio covers a number of key areas including optimal network flow strategies, the impact on inventory of transit time variability, how business policies influence pricing, and the selection of contracts in uncertain markets.
“MIT-CTL aims to drive supply chain innovation and accelerate its adoption into practice, and there is no better field of activity in which to meet these goals than freight transportation, particularly in the current economic climate,” said Dr. Chris Caplice, MIT-CTL Executive Director, who is also head of FreightLab. “Clearly the industry feels the same way given the extremely high level of interest FreightLab has already generated.”
FreightLab’s Innovations in Transportation Roundtable, which was open to MIT-CTL corporate partners only, focused on the issue of deciding how to flow product from the point of manufacturing/sourcing to the point of purchase by the end user. As Caplice explained, unlike distribution network design, flow strategy is essentially tactical, is adjusted monthly or even faster, considers the movement of individual SKUs, and shows how an established network can be used.
Within this framework one of the questions considered by roundtable attendees was how their companies are addressing rising fuel costs. Since the increasing cost burden of fuel is forcing many road carriers out of the market, the discussions also turned to the growing problem of cuts in carrying capacity. The 20 or so companies at the event are responding to these twin challenges in a number of ways. Here are some examples:
Network Optimization.
Taking ton-miles out of networks by moving operations closer to end customers is a strategy being looked at by most of the roundtable participants. As a result, networks are becoming more regionalized as the emphasis shifts from large, centralized distribution centers to smaller, regional facilities. A participant company has located redistribution centers adjacent to suppliers’ premises and is reducing its transportation needs by using conveyor belts to connect these facilities. Packaging is also being reconfigured; some companies are reversing decisions to switch US-based packaging operations to low-cost offshore locations.
New Inventory Realities
Keeping inventory to a minimum through strategies such as lean and just-in-time has become a guiding principle for supply chain managers. To an extent this is still the case, but the realities of lower demand and more volatile markets are forcing companies to tolerate higher inventory levels. To help counter this trend, some companies are looking at the elimination of slow-moving SKUs from their supply chains or canceling services to small, remote buyers that have become cost prohibitive.
Change the Product
There is a correlation between the physical nature of a product and freight costs. One roundtable company has altered its supply chain so that it can ship meat in frozen, processed form by rail rather than as livestock by less fuel-efficient road. Taking the water out of product and moving it as a concentrate increases the volume that can be carried per vehicle. A change in packaging can yield cost savings too; one company has switched from plastic shell packaging to shrink wraps, improving space utilization as well as eliminating the need to return the shells.
Flexible Contracts
Leasing rather than owning distribution facilities gives companies greater flexibility and makes it easier for them to adapt to changing market conditions such as see-sawing oil prices. Shorter leases of three to four years also give organizations more room to maneuver when markets change course.
Clearly, the soaring price of oil has triggered multiple supply chain challenges, but as roundtable attendees pointed out, it has also trained a spotlight on logistics. Companies have become more aware of the role of logistics as well as the need for more data on related activities. Now the onus is on logisticians to manage the data and turn it into meaningful decisions.
For more information on the work of FreightLab and the Innovations in Transportation Roundtable contact Chris Caplice.