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Archive for October, 2010


Supply Chain superiority determines organizational competitiveness.  Some believe that supply chain superiority or excellence is achieved with the help of three elements; process, people and technology.  Another group would advocate continuous improvement, benchmarking and KPIs, and innovative thinking would lead to supply chain excellence.  Do you think these factors drive the excellence?  My answer would be, yes and no.  Yes because these are fundamental requirements of any supply chain but beyond these elements something else works behind the scene to improve your supply chain effectiveness.

In order to make all above mentioned factors to work effectively three factors are critical.  The first and foremost is Collaborative Relationships.  The other two factors are Trust and Commitment.  In my opinion supply chain is all about managing relationships, demonstrating trust in relationships and committing to the core objectives. Let me explain how my theory works.  The below given graphic would explain various supply chain relationships:

As you can see from the above graphic supply chain manages internal and external relationships with various agencies.  Supply Chain relationship with Sales and Marketing, Manufacturing, Logistics, and various Vendors will ensure that the right product is made available at the right time and place at the right cost.  Sales team relationships with agents, distributors, retailers and consumers will make organizations grow and become competitive.

People make things happen, technology give us the ability to establish supply chain visibility and the process drives the activities.  However, all these factors could function in a silo apporach and make supply chains fail.  What is required is an integrated approach and integration is possible by establishing trusting relationships.  Effective relationship management can provide a positive contribution to sustainable supply chain superiority and also help to satisfy stakeholder interests.

Many organizations end up with huge inventories and wrong product on shelf and mounting supply chain costs.  The main reason for this catastrophe is lack of trusting relationships among supply chain partners.  In my opinion all above are supply chain partners.  The partners could include internal members as well as external members.  What is evident is that supply chain fails if the partners working for individual benefits without a common goal.  Someone said, we all stumble, that’s why it’s a comfort to go hand in hand.

Mutual trust was defined as “a shared belief that you can depend on each other to achieve a common purpose”.  Trust plays a crucial role in strengthening relationships and organisational changes and it is a critical component in building a collaborative relationship among supply chain partners. Trust creates an increase in openness among partners involved and it is perceived as a result of effective collaborative relationships and leading to higher levels of partner/customer satisfaction.  Trust is not gained in a day or two; trust is built up over a series of interpersonal encounters, in which the parties establish reciprocal obligations.

“An ounce of performance is worth pounds of promises”. In order to turn your promises into performance you need commitment. The third ingredient for the supply chain success recipe is commitment; commitment means to show loyalty, duty or pledge to the core organizational values.  In a partnership commitment plays a vital role along with trust. Someone rightly said, “unless commitment is made, there are only promises and hopes; but no plans.” Unless the supply chain partners are committed to a common goal which could deliver mutual benefits, it would be a challenge to establish a trusting and successful relationship.

According to a recent report from Boston-based AMR Research Inc., “companies that excel in supply-chain operations perform better in almost every financial measure of success. Where supply chain excellence improves demand-forecast accuracy, companies have a 5% higher profit margin, 15% less inventory, up to 17% stronger “perfect order” ratings, and 35% shorter cash-to-cash cycle times than their peers. Companies with higher perfect-order performance have higher earnings per share, a better return on assets, and higher profit margins — roughly 1% higher for every three percentage-point improvement in perfect orders”.  In order to achieve these two key measures (i.e. demand forecast accuracy and perfect order performance), committed collaborative and trusting relationships are crucial.

Hachiko – A Dog’s Story motivated me to write this article. This story is based on a true incident from Japan. This story is about the relationships, trust and commitment shown by a dog and also explains how invincible bonds form instantaneously in the most unlikely situations. We do not realize the value of relationships until reality bites.

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Tom Peter once said, “Do what you do best and outsource the rest”. It is a common practice to outsource logistics and supply chain activities.  One would be surprised to know that some organizations strongly believe in insourcing logistics activities.  The recent study by CAPGEMINI (2010) revealed few interesting facts on insourcing.

  1. On an average of 24% of outsourcing companies indicated that they would be returning to insourcing some of their logistics activities, and 36% of 3PL respondents observe that some of their customers are insourcing certain logistics activities.
  2. “Transportation is most Outsourced”.
  3. The percentages of 3PL users outsourcing individual logistics activities (versus overall outsourcing) tend to be higher in Europe and Asia Pacific than in North America or Latin America.
  4. The gap between expectation and satisfaction with regard to 3PL IT capability is widening (54%).

The outsourcing survey conducted by CILTUK revealed that logistics service providers (3PLs) are seen as:

  • “A necessary evil“
  • “They are only in it to make money these days”
  • “Deliver poorer service for disputed financial advantage”.

Further, the same report revealed that 52% of the respondents indicated that the length of the contract reduced.  Outsourcing community is aggressive and they do not mince words in sending out a strong message to 3PLs, “don’t sell me what YOU want, show me what I NEED”.  In 2009 UK’s largest retailer, Tesco, has decided to take some of its distribution operations in-house. The move follows a company review of supply chain strategy.

What prompts them to Insource?

The CAPGEMINI 2010 outsourcing review listed 12 different reasons for insourcing.  And they include:

  1. Logistics is a core competency at our firm – 19%;
  2. Cost reductions would not be experienced – 15%;
  3. Control over the outsourced function(s) would diminish – 14%;
  4. Logistics too important to consider outsourcing – 13%;
  5. Service level commitments would not be realized – 11%;
  6. We have more logistics expertise than most 3PL providers – 10%
  7. Corporate philosophy excludes the use of outsourced logistics providers – 9%
  8. Too difficult to integrate our IT systems with the 3PL’s systems – 8%
  9. Global capabilities of 3PLs need improvement – 6%
  10. Issues relating to security of shipments – 5%
  11. We previously outsourced logistics, and chose not to continue – 5%
  12. Inability of 3PL providers to form meaningful and trusting relationships – 3%

Now let us review top 5 reasons individually and understand whether they are true or system failure is causing outsourcing to fail.

1.Logistics is a core competency at our firm:  What is core competency? Core competencies are the key skills, characteristics and assets that any organisation brings to the marketplace. These competencies, on an organisational level, are a synergistic blending of the core competencies that people in the organisation individually bring to work every day.

If we go by the above definition, Logistics is the core competency of any 3PL company because managing logistics activities is their core business. Interestingly, one of the main objectives of outsourcing is to focus on core competency.  Modern globalized companies are described as “intellectual holding companies” because they focus so strongly on their core technologies while they purchase other services from companies that excel at delivering them. Thus, their entire operations function at a high level, yet they do not have to maintain high cost infrastructure. They get world-class capabilities without the risks involved in developing them.  With rapid globalization, it would be next to impossible to compete in a global platform without strategic alliances.  In my opinion, this reason is a myth.

2. Cost reductions would not be experienced: This could be true to some extent.  In my opinion shippers equally share the responsibility for this blame.  During the initial phase of data collection, 3PL seek the existing costs, business processes, business volume etc., in order to understand the size of the business and develop a cost sheet.  Often it was reported that the shippers are hesitant to provide this information citing confidentiality as a reason. Outsourcing should be considered as a strategic solution and the service provider should be considered as a strategic partner.  Unless transparency is established, relationships do not flourish and this is one of the fallout.  If the shipper could provide all required information to the 3PL and insist on the 3PL to provide the costing using ABB (activity based budget), this may not happen. If necessary go for an open book method which would establish transparency. Many shippers believe that they have very limited role to play in the outsourcing process.  Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest.  CAPGEMINI 2010 report reveals that outsourcing companies have reported 15% cost savings, 25% reduction in capital deployment, and 11% reduction in inventory.  In my opinion if the outsourcing process is managed well one can avoid this problem.

3. Control over the outsourced function(s) would diminish: In my opinion it is a myth.  It is true that the shipper may not have transactional control but the overall control will not diminish.  Again the responsibility lies with the shipper.  If the shipper is able to develop KPIs for all the outsourced activities and monitor the KPIs regularly, one may not lose control over operations.  In my recently published article, I have identified 32 different KPIs for warehousing function only.  An effective set of interlocking performance indicators provides operational feedback to the enterprise and helps them in directing the 3PL operator effectively.  Instead of describing an operation as appalling, if one can explain that 75% of transactions failed to meet the expectations, it would deliver a better message.  Controls will never be outsourced, what are outsourced is transactional operations.

4. Logistics too important to consider outsourcing: There is no doubt Logistics is important function.  Seamless flow of material information keeps the business moving forward. However, some of the activities within logistics function are mundane in nature.  These activities can be outsourced and allow logistics/supply chain manager to focus on the value addition instead of managing day-to-day routine functions. Hence, it is necessary to develop a strategy on outsourcing and identify non-core activities and also develop a SWOT analysis to understand threats and weaknesses of outsourcing.  Routine functions such as transportation and warehousing are non-core functions in my opinion.  One can outsource them and save costs.  In current economic conditions it would be next to impossible to develop infrastructure globally, it would be advisable to farm partnerships and strategic alliances to save costs and expand globally.

5. Service level commitments would not be realized: It is true to some extent.  Again the shippers shares 50% responsibility for this blame.  As long as the shipper is able to define the measurable service levels and monitor the same periodically and works with the 3PL proactively, this could be avoided.  Operational efficiency should be measured on a daily basis.  Some of the Fortune 500 Companies recruit specialists or appoint lead logistics service providers to monitor their operations. Nicholas and Amrik of Monash University indicated that formulating and quantifying the requirements was an obstacle to outsourcing in Australia.  If you are not sure what to expect out of outsourcing, you have no right to complain about the service levels. Effective operational control will ensure high level of service levels.  CAPGEMINI 2010 review reveals that 29% improvement in average order cycle length, order fill rate improved by 11% and whereas order accuracy improved by 7% through outsourcing.

Other reasons include; organizational logistics expertise.  3PL service providers globally consolidated their positions and are able to provide cutting edge solutions which individual organizations cannot afford.  IT integration is very simple now days.  Without penetrating firewalls one can exchange information through EDI and integration may not be necessary.  3PL capability improvement is an on-going issue; shippers may have work with the 3PLs to get what they want.

However, in my opinion there are two genuine reasons and they are security risks and relationships failure.  I have discussed in length about the supply chain security risks in an outsourced environment earlier.  It is a genuine reason and 3PLs are expected improve their performance on this subject.  As mentioned earlier outsourcing is like a marriage.  As long as it is not a marriage of convenience and both the partners are willing to invest time and effort to make the relationships work, the pact should be successful.  The outsourcing goes through three phases before it firms up as a relationship.  The initial phase is known as courtship where everyone is happy.  The second phase would be hardship where the shipper notices inefficiencies and the 3PL struggles with resources and cost overruns.  The third phase is battleship, in this phase both the parties involved are in a mood to terminate the relationship because of mounting issues.  If both parties proactively work and sort out issues through well-defined escalation process, the outsourcing moves into a relationship mode.

Many organizations get caught up in the hype of the outsourcing craze and forget that it is a complex business strategy and lack of strategy, lack of top level management commitment and not dedicating best and brightest internal resources could lead to outsourcing disasters.  If organizations embark on outsourcing with one dimensional approach of saving costs, it would be a big business risk and will have long lasting implications on the business.  Ideally develop an organizational strategy, create an outsourcing frame work, and seek professional help (if necessary) to handle the process and select the right match (3PL) and this should work as mantra for outsourcing success.

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Significant staff members are deployed in supply chain area and the respective managers are responsible for Occupational safety and health related issues.  According to SAFEWORK Australia there were 131,110 workers compensations claims received during the financial year 2007-08.  Out of which 68% were from male workers and rest from female workers.  According to European Agency for Safety and Health at work, 5,720 people die in the European Union as a consequence of work-related accidents. Besides that, the International Labour Organisation estimates that an additional 159,500 workers in the EU die every year from occupational diseases. Taking both figures into consideration, it is estimated that every three-and-a-half minutes somebody in the EU dies from work-related causes.  The incidents are expected to be high in manufacturing, transportation and storage area.  Based on the compensation claims in Australia, 19% claims were received from manufacturing area and further 8% from transportation and storage area during 2007-08.  If we look at the frequency rate (is the number of cases expressed as a rate per million hours worked by employees) the manufacturing and transportation and storage recorded 12.4.

We are seeing steady improvements in the last five years, manufacturing area recorded 13% and Transportation and Storage industries have reported 22% improvement.  However, lot to be achieved in order to make workplace safe.  Someone said prevention is better than cure.  How appropriate in the present context.

Risk assessment is the first step to make your organization a safe place to work.  Managers should take whatever steps necessary to ensure the safety and health of employees. To prevent accidents, you should establish a health and safety management system that incorporates risk assessment, risk management and monitoring procedures. The risk assessment can be undertaken in five steps.

Step 1: Identify Hazards

Looking for those things at work that have the potential to cause harm, and identifying workers who may be exposed to the hazards.  Particularly in the warehouse area where fork lifts are moving at brisk pace carrying huge loads and also during loading and unloading areas.

Step 2: Evaluate and prioritize the risk

Based on the past incidents establish a list of existing risks, their severity and their probability.  Once this information is established prioritize the risks based on frequency and severity.  The objective of this exercise is to find ways to avoid the risks in future.  The risk need not be due to an accident, it could be due to health hazard also.

Step 3: Develop strategy for prevention

Understand the operational processes to identify areas of improvement and also identify appropriate measure to control and ultimately eliminate the risks.  Smoking is injurious to health, we all know.  However, we find designated space allocated in work place for smoking.  Instead of grouping all smokers in a small place where smoke inhalation would be much more than normal smoking, employees should be encouraged to adopt healthy life style by avoiding smoking.

Step 4: Taking action

Develop action plan for each risk and develop a prevention plan.  It is very much necessary to understand the roles of each player in this area. By specifying who does what and when, we are developing a collaborative approach involving everyone in the plan.  It is not plan that is important but it is the commitment to implement the plan is vital.  One more area that needs attention is education.  Continuously educate all concerned about the importance of safety at work place.  The best example is the safety drill conducted by the airhostesses prior to take-off.

Step 5: Measure and Monitor

“What You Measure Is What You Get”, the safety performance should be reviewed regularly in order to achieve sustainable and competitive advantage through continuous improvements.  This review should critically view “near miss” in order to avoid an accident in future.  Continuous reviews lead towards risk prevention.

What causes accidents and develops into a risk in Supply Chain Area?

The first and foremost factor that could lead to an incident is uneducated/untrained workforce and followed by Equipment, Workplace, Footwear, Material Handling, Transportation, Working at a height, Handling hazardous material, and last but not least is psychosocial factors.  Lack of information, instruction, training, supervision and education could lead to haphazard work flows and which could lead to accidents.

As we all know, the material handling equipment handlers in warehouse race against the time in order to keep their productivity levels high.  This is a welcome sign but not at the risk of safety.  The safety of the equipment handler and other staff working in the warehouse is paramount.  Poor housekeeping and poor visibility inside the warehouse could lead to accidents.  Generally people tend to ignore cleanliness in warehouses and that is not a good practice in making workplace a safe.  One should ensure that warehouse is illuminated well preferably by natural light if not by electricity. Workers and the warehouse visitors need suitable footwear. The footwear should take into account the type of job, floor surface, typical floor conditions and the slip-resistant properties of the soles. Movement of vehicles in the busy yard is always dangerous place unless managed well.  People being struck or run over by moving vehicles, falling from vehicles, being struck by objects falling from vehicles or vehicles overturning are some of the common incidents noticed in the yard.  In some of the modern warehouses people work at great heights and there is the risk of objects being dropped on people working below or people could fall from the height and injure themselves.  Some of the material handled in the warehouse could be dangerous in nature, it could be fatal when inhaled.

The last and the very important factor that could cause accidents in work place is psychosocial factor (“Psychosocial refers to one’s psychological development in and interaction with a social environment”), in simple stress.  The work related stress could have long lasting impact on the health and safety of the employee.  The supervisor should play a vital role by interacting with his/her staff on a regular basis in an informal atmosphere to address any issues that are could lead to work related stress.  Sometimes demanding work conditions also could lead to a risk.

Risk Prevention Guidelines:

  • Establish clarity with regard to procedures and responsibilities for health and safety and everyone know their own and others’ responsibilities?
  • If the manager is not competent on these issues, should not hesitate to seek outside help.  Avoiding the issue will not solve the problem, it would magnify the impact.
  • Identify and prioritize the risks and develop a strategy and plan to minimize and eventually eliminate.
  • Like people equipment will also fall sick and could cause the accidents.  Make sure that the equipment is regularly serviced.  This would also help to increase the life span of the equipment.
  • Organize periodical health check-ups, this is a preventive measure.
  • Continuous training is the key element.  The training need not be a class room based.  An informal discussions, charts, posters and incentives could help.
  • Supervisors should interact regularly with their staff and educate the ever changing regulations, safety procedures, and also discuss organizational changes in an informal way.
  • Develop the procedure to capture an incident.  As mentioned earlier, past records act as guide to avoid future incidents.
  • Incidents should be investigated promptly and outcomes should be recorded.
  • Celebrate the success and review the failure.
  • Workplace inspections play a big role in avoiding incidents.
  • Periodically review the Health and Safety policies and procedures and update the same in order to handle any eventuality.

Safety doesn’t happen by accident, at the end of the day, the responsibility to keep the work place safe rests with employer and employee both.  A collaborative approach would always produce the best possible results.  It is human tendency to hide the incident due to fear of defeat.  Unless we understand the incident and what caused the incident, we cannot avoid it in future.  “Prepare and prevent, don’t repair and repent”.  An unknown author said, “Your safety gears are between your ears”, it is true.  A vigilant and well trained workforce ensures safe work place and finally safety isn’t   just a slogan, the reality is that it is the way of life.

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