If the one constant is change, that goes double for the supply chain. In the decades of the nineteen eighties and nineties, the example of the Japanese drove American companies to replicate their approach to manufacturing via just-in-time inventory. Keeping reserves on-site became…‘so yesterday!’ To accommodate this approach, supply chain processes correspondingly changed. 

At the same time that American business was re-inventing its supply chain, it was also relocating the geography of its sourcing. Globalization pushed vendors ever further off-shore. To operate in such a far-flung context, synchronizing transportation and logistics became an ever-challenging priority, all the more pressing with the internal production demands of just-in-time.

And now we’re entering yet another tectonic change in the business environment, accompanied by an imperative to develop a new supply chain paradigm.

In addition to distance and visibility, the global economic decline has placed a compelling premium on such considerations as cost controls and tighter credit, speed-to-market and an increased need for inventory buffers given distant sourcing-these new factors dramatically complicate the just-in-time supply chain model.

So where are we heading?

To find out, World Trade asked eight industry experts to describe innovative ideas, developments, and practices to address the often-conflicting goals of maintaining minimum inventory and maximizing supply chain resiliency and risk management.

What comes after just-in-time? Our roundtable offers compelling answers.

Steve Banker, Supply Chain Management Service Director, ARC Advisory Group

Just-in-time supply chain management was certainly a step in the right direction, but left much to be desired in real-world environments where things go wrong. For example, in several high-tech verticals, there are a small number of suppliers of certain key components. The destruction of the manufacturing or delivery capacity of one of these suppliers will greatly impact the industry. Here, a more realistic, risk-based approach to supply chain management is appropriate.

A good supply chain risk management (SCRM) program will not only reduce financial impact, it will also allow the company to gain market share if such an event occurs. In our view, no high-tech manufacturer does a better job of managing supply chain risks than Cisco Systems, the worldwide leader in networking solutions. Cisco has a Vision, a Strategy, and an Execution methodology surrounding SCRM. Vision involves a five-year horizon, Strategy reflects a three-year planning horizon, and Execution reflects their program for the next 12 to 18 months. Cisco’s Vision is to deliver the most resilient supply chains in their industry; their Strategy is to deliver best-in-class recovery times by incorporating resiliency requirements in the design of products and supply chains.

Their execution methodology is focused on four points: one, the use of a Resiliency index, the ability to bounce back quickly from a supply chain disruption, as standard risk metric; two, world-class crisis management capabilities; three, the ability to recover from catastrophic events for top products within a defined number of designated recovery time; four, world-class design for risk programs. From a strategic perspective, the time it takes to recover from a catastrophic event is a core focus. The metric that corresponds to this focus is “Time to Recover” (TTR). The business continuity planning must support this metric.

Mitigation is not free. A company needs to invest money today in measures that, in the long run, will save them more money and improve their competitive position. In the short term, these investments put downward pressure on quarterly earnings.

Companies also need to look closely at their corporate metrics to make sure the program can be supported. For example, lean manufacturing programs drive companies to reduce inventories. But a SCRM mitigation analysis will end up showing that particular raw material, semi-processed finished goods, and finished goods inventories will need to be positioned in advance at particular sites around the world. These inventories exceed what is needed to support customer demand.

Mike Bellardine, Senior Vice President, Global Trade and International Payments Services, KeyBank

The premise behind just-in-time inventory is avoiding non-earning assets. Having inventory sitting on the shelf not being sold is, obviously, a negative. But how to finance this strategy in a global liquidity crunch? Today, for many large firms, their suppliers are in fact their manufacturing arm. Without the suppliers there is no product to sell.

We have a customer who buys work gloves from China and then resells them to major retailers. This particular customer has been buying from three or four factories for several years, and their Chinese suppliers eventually got very comfortable with the risk of the buyer and felt that they would be paid on time based on the terms they agreed on. That process of an open account sale was really very easy between the buyer and seller.

Enter the credit crisis. Now the glove makers found that borrowing to fund that open account sale in China became much more expensive.

One solution is moving from open account financing to traditional trade credit financing-a letter of credit. A letter of credit provides financing comfort to the buyer’s or seller’s bank because another banks is actually the committed party, handling the documents for the transaction as well as effecting the payment. When our glove buyer issues an import letter of credit for its purchase, that Chinese suppliers can take that irrevocable commitment to pay to their bank in China and get preferred financing rates.

Traditional borrowing on working capital is a line of credit on your entire inventory or receivables. A letter of credit provides financing at the transactional level-in other words, as often as with each purchase order. It’s just-in-time financing, and it works for buyers and sellers alike.

Rick Blasgen, President and CEO, Council of Supply Chain Mangement Professionals

A supply chain is very much like a shock absorber. We in the supply chain manage the difference between what was planned to happen and what actually happened. Yet the traditional just-in-time model prepares only for pre-planned demand. What do we do about demand that wasn’t pre-planned? Beyond just-in-time, we need have accurate, actionable, timely information.

Not all information is actionable. Of any data, you have to ask yourself, does it allow me to make a better decision? Does it allow me to connect supply to demand in a more timely and accurate way? As an example, remember the last time you went to a grocery store. Did you buy only what you went in there to buy? If your answer is no, how was the manufacturer supposed to make sure that they had that inventory there for you, the consumer, when you had no intention of buying it when you came in?

Much of the answer comes down to common goals and objectives. In the supermarket example, the common goal for the retailer and the manufacturer is in-stock inventory. They both make money if they increase the percentage of inventory availability at the time the consumer makes the decision. Rather than anticipate inventory, you want the supply chain to be agile enough to deliver inventory beyond even forecasted demand. After all, you can’t create inventory out of the air.

Again in the example of the supermarket, the inventory you need might be a few hundred yards away or a continent away. How do you get it on the shelf on time? Maybe it’s RFID, maybe it’s a “smart shelf,” maybe it’s something that hasn’t even been invented. The point is, key supply chain participants, wherever they are, have to collaborate and share information, driven by common goals and objectives.

Karen Butner, Global Supply Chain Management Leader, IBM Institute for Business Value

Today’s supply chains face risks from many factors. These include increased economic uncertainty, increased globalization through outsourcing, additional regulatory compliance imposed by government entities, shorter product lifecycles and rapid rates of technology change, demanding customers, supply side capacity constraints, and natural disasters and external environmental events. Earlier concepts such as just-in- time, virtual inventory, supplier rationalization, and reductions in the number of distribution facilities were narrowly focused on reducing total supply chain costs. Now the complexities and volatility of our global marketplace force supply chain managers to take a more holistic approach.

The goal is to optimize supply chain product, process, information, and cash flows in the face of the “trade-offs”-cost, service, quality, and time. Modeling tools can help. Inventory optimization solutions, for example, address inefficiencies by determining the optimal levels of inventory and safety stock to have on-hand to meet service levels, supplier lead times, budgeting, and other constraints. Visibility and event management capabilities, meanwhile, provide end-to-end visibility of all functions and processes, integrating information and processes for rapid decision-making and, if necessary, corrective action.

The objective is to provide decision-makers timely, actionable information, as well as performance management scorecards and trend analysis. These capabilities allow supply chain personnel to manage even the most adverse business events, both internally and in collaboration with customers and partners. Managing the risks, of today’s complex global and economic environment through optimized and synchronized supply and demand visibility can help tame the volatility.

 

Tim Dumond, Principal, Corporate Advisory Services, Grant Thornton LLP

The whole concept of just-in-time was built around the idea of minimizing the amount of inventory in the value chain. The problem that’s developed over the years is that there are so many new risks involved with managing complex supply chains, particularly if they originate in distant, low-cost countries. Today, companies must balance trying to have minimal inventory and carrying more inventory to potentially mitigate those other risks.

The example we deal with the most at Grant Thornton is a supplier in financial distress. If you have a very lean and short value stream coming from that troubled supplier, the effect is almost immediate-so the need to react is immediate, too. The cost of maintaining product access can quickly offset the lean value stream’s savings.

We’ve seen that ripple effect for years in the Detroit automotive industry, for example, and now restructuring is spreading to other industries. Does your suppliers have enough cash on hand to weather the storm if sales soften?

We encourage our clients to have an effective supply base monitoring system in place, particularly one that encompasses their suppliers’ financials. Everybody monitors on-time delivery and quality levels, and has for many years. The key now is to also monitor the financial health of your suppliers through some kind of regular review program where you collect either publicly available information or private information directly from your suppliers. Use that information to identify those suppliers who are at higher risk and implement contingency plans, which may include carrying a little more inventory on hand.

The bottom line is you want to be able to segregate your supplier base into those with lower and higher risks. Consider geographical location and how easy it would be to find an alternate supplier. Obviously, in the case of a faltering supplier, it’s more expensive and difficult to fly the goods you need on a 747 from China than truck them from down the street. The whole emphasis is giving you more time to react if there is an issue.

Tom Kozenski, Vice President, Product Safety, RedPrairie

Today’s complex supply chains have to be responsive to factors beyond just-in-time. In the past you received information infrequently and in batches. You’d wait for an analysis to come out of the system, which took time to process, and then you’d respond, trying to predict where and when and in what quantity inventory should be.

Now you’ve got real-time data. You can respond instantly. As demand signaling replaces forecasting, buyers ‘pull’ as much as sellers ‘push.’ For example, in retailing, at each store’s point of sale, a real-time monitor can signal what’s selling and therefore needs replenishment. Getting such signals continuously throughout the day lets you be more responsive, more frequently. Respond fast enough and you make sure you have inventory on time, where it needs to be.

You want to create the opportunity for customers to signal demand at the plant and warehouse level as well as the retail floor. Then, given minimum stock levels at each level in the supply chain, you react not to forecasting but to the realities at the points of sale. If Store A is selling items like hot cakes and Store B isn’t, A needs to be replenished more frequently, in greater quantity. Pulling inventory toward demands is just-in-time on steroids.

The objective is to minimize the amount of inventory in your supply chain, but always have it when somebody wants it. If I had to predict the future, it might be a much more collaborative environment where the demand signals are shared across corporate enterprises. If corporations fully collaborated to satisfy marketplace demand, they might be able to operate without costly distribution center buffers. Nirvana is I need something and you make it to order, shipping directly from the factory to the retail floor.

Keith Lovetro, President and CEO, YRC Regional Transportation

In the purest sense of the just-in-time model, if you need a widget for manufacturing, you’re never waiting for that widget, but it’s also never sitting in inventory. It always walks in the door “just-in-time” to fulfill inventory. But what if there are disruptions in the supply chain? If a product is late, it hurts manufacturing. If it’s early, it increases your carrying costs. Which side are you going to err on? Most people will accept some level of inventory rather than be stocked out on something that they want to sell. Just-in-time still matters. But predictability and reliability may matter even more.

My expertise is transportation, and you can carry less inventory if your transportation model is highly reliable and predictable. I’ve had customers tell me they don’t need merchandise as fast as long as they know it’s 100 percent reliable. Compare this to another underlying premise of just-in-time-that we’re moving goods just as quickly as we can, not just off our shelves, but in the transportation pipeline. Speed-to-market, however, may not maximize profits.

Controlling costs comes back to better information: product stocking level, consumption rate, delivery rate, who your customers are, where you’re positioned in the market. If I know that it takes three days to get my product from warehouse to store, I have to ship at that rate to keep supply on the shelves in time for purchase. Better data lets you balance inventory carrying costs against product availability requirements. If you don’t need it overnight, put it on a three-day run. Information gives you the ability to be more precise and more predictable. The goal is not simply speed of response -it’s speed of response to consumer need.

Simon Constantinides, Head of Sales Trade and Supply Chain, HSBC Bank USA

Many companies running just-in-time models to control inventory carrying costs may overlook the impact such models create through a transfer of financial risk to suppliers. In today’s economic situation, “vertical awareness”-the need for buyers to have visibility, understanding, and influence over their downstream supply chain as if they were vertically integrated-is imperative.

At HSBC, we suggest that a company exercise vertical awareness by considering four key, interrelated factors when working with their suppliers:

1) Supplier Financial Collaboration. The difference between JIT and vendor managed inventory is more than just providing suppliers with increased visibility to upstream activities. This approach includes a downstream focus with an emphasis on collaboration between buyers and suppliers. Buyers need to identify and understand their suppliers’ financial cycles and proactively support those needs. The buyer’s responsibility is not to assume new financial supply chain risks outside their expertise. Instead buyers should be close to their suppliers, identify their financial condition, and collaborate to enable financing without assuming direct financial risk.

2) Financial Structure. In the current market, trade continues to be financed under sensible and appropriate terms. Buyers need to understand how suppliers access working capital finance and consider structures that facilitate financing. This could be a return to more traditional and conservative terms of trade-letters of credit-or modifying a traditional term of trade-time vs. sight letters of credit. Vertical awareness requires a solid understanding of the downstream supply chain’s liquidity and risk.

3) Manage Terms and Impact to the Supplier’s Financial Future. Structured open account terms have been great for buyers but challenging for suppliers who struggle to retain historical levels of working capital support. Don’t resist considering a partial, temporary return to more structured and supportive terms of trade. Traditional tools such as letters of credit offer suppliers and their bankers the enhanced comfort that comes with evidence of the buyer’s commitment to the transaction. They also provide discipline, visibility and, risk mitigation tactics. Effective terms management benefits all parties. 

4) Know Your Supplier’s Financial Health. Evaluate your suppliers’ financial health by considering the following: Is access to finance dependent on posting letters of credit? Are they using letters of credit terms to secure/collateralize their sales book to improve cash predictability? How is the supplier’s customer base performing? Are orders being reduced or cancelled leaving the supplier with unsold inventory? Are other buyers stretching out terms and potentially compromising a supplier’s cash cycle? Does the supplier have a solid and stable banking relationship with a reputable bank?

These four elements can be key to implementing a win-win business strategy that helps buyers effectively navigate today’s global marketplace, confident that their suppliers are also strong partners for the long haul.



Contributing Editor Jeremy N. Smith writes “Great Moments in World Trade” each month on the back page of the magazine.