Can JIT and Global Sourcing Strategies Coexist? How Cloud-Driven Supply Chain Visibility Reconciles Lean Manufacturing With Globalization

Transcription

1 Can JIT and Global Sourcing Strategies Coexist? How Cloud-Driven Supply Chain Visibility Reconciles Lean Manufacturing With Globalization A GT Nexus White Paper

2 Just-In-Time Is at Odds With Globalization Lean, just-in-time (JIT) inventory strategies are colliding with global sourcing strategies as the complexity of supply chains cuts into the very benefits JIT aims to provide. On one hand, minimizing inventory costs by shortening supply lines, reducing order quantities, depending on pull-based replenishment, and developing close customer-supplier relationships capable of responding quickly to demand changes can greatly benefit a company s bottom line. On the other hand, the overwhelming labor and material cost advantages of overseas sourcing come at the price of slow bulk shipments, pushbased orders, and an inflexible, committed in-transit inventory pipeline. Companies are now trying to reconcile these critical initiatives, keeping inventory lean while managing a complex network of suppliers, customers, and trading partners all over the world. Because the environment in which JIT evolved has been fundamentally altered by increasing globalization, many manufacturing companies have turned to global sourcing of materials and components in order to cut costs. However, extending a supply chain by thousands of miles introduced a level of risk to which lean manufacturers can be very susceptible. These companies can choose to increase inventory, abandoning their JIT strategies to counter the risk and increase costs, or they can find an alternative a system that allows greater agility to tackle global supply chain challenges. The Major Threats to Profit Margins Manufacturers that improved their margins for years with lean production are facing two major threats to the effectiveness of this approach. Costs savings that used to be realized from JIT are much lower in the face of increased landed costs, lead times, and fragmented global operations. At the same time, complexity is leading to a greater level of risk and disruption. Companies are finding ways to overcome these challenges with new technology and strategies that make them more agile, like segmenting their supply chains and increasing visibility. Dell, a poster child for JIT, is an excellent example of a company that has recognized the threats and acted to counteract them. The company has successfully made the transition to having four major supply chain segments with a highly configurable system. They ve used a cloud-based network to reduce lead times, improve product availability, and lower freight costs Dell successfully segmented its all in the face of longer, more risky supply chains. Because the company supply chain to combat margin took stock of the challenges in global manufacturing today, they were able to erosion and complexity. improve their lean strategy to fit the current environment. 2

3 THREAT #1 Margin Erosion in the Global Supply Chain Global sourcing can offer both tremendous opportunities and invitations to disaster. Careful management helps companies avoid being surprised by hidden costs, which can lead to a serious erosion of the expected benefits of sourcing from low-cost developing regions. As goods move from origin to destination, unexpected costs can fall under handling, insurance, customs duties, inventory cost of capital, and trade finance fees. In addition, unexpected modal changes and poor freight allocation can significantly increase transportation costs. Discrepancies among time zones, languages, units, and regulatory requirements can make operations more difficult, and most companies must have a way to standardize data in order to keep these costs from ruining their projected savings from JIT practices. FIGURE 1: Traditional approaches to determining landed cost often uncover surprise costs after the product is delivered too late to make corrective adjustments. Margin Loss "Overhead" Agent Fees Deconsolidation Fees Consolidation Fees Drayage Duties Duties Freight Freight First Cost First Cost Typical Cost Recap Actual Costs Auto Suppliers React to Global Complexity When it comes to complexity, the stakes are particularly high for companies like top-tier automotive suppliers. Original equipment suppliers need visibility into the end-to-end supply chain to make sure they meet supply commitments to their customers who are in turn simplifying their supply chain architectures. Suppliers are taking on a more strategic role in execution and risk management, and need a way to streamline operations and lower costs. They can t afford to cost their buyers millions in just-in-case airfreight when inventory levels are not sufficient to support JIT levels of service. 3

4 THREAT #2 Increased Risk in the Global Supply Chain The potential for supply chain disruptions is much greater in a lengthy, global supply chain. Natural or manmade disasters can completely shut down supply chain activity, while more subtle inefficiencies can slowly eat away at profit margins. Companies without an effective in-transit visibility system can only count inventory already on hand. This means that anything even a few days away will not be considered available to the customer. With longer lead times and cargo crossing several time zones and continents, companies can t always rely on ETAs and often hold buffer stock to fill orders when inventory isn t visible. This approach directly contradicts JIT; the two can t coexist. The company can choose to expedite orders by using expensive airfreight instead of ocean to ensure the order will arrive, but this drastically drives up transportation costs. Lean Manufacturer Reacts to Japan Earthquake A large manufacturing company got the news in the middle of the night: a 9.03 magnitude earthquake off the coast of Japan had caused a 128 foot wave to flood the streets and wreak havoc on industry and infrastructure along the way. The company sprang into action. Within a few hours of the tsunami, the logistics team had run global materials management reports to tell their facilities exactly which products originating from Japan had made it out and which were still stuck at the ports. They were able to launch their contingency plan with alternative suppliers already vetted and on their network, avoiding what would have been much greater losses. When no excess inventory is held to account for events like this, a contingency plan is crucial. Using cloud technology, the company handled the disaster with poise and effectiveness. Technology Designed for the Networked Supply Chain Manufacturers with complicated global supply chains have hundreds of trading partners they must interact with to ensure operational excellence and on-time delivery. However, many of the systems companies rely on today to manage their supply chain data were designed for the recording and control of internal business functions. They weren t built to connect to external partner systems, or to enable active collaboration with external partners, or to automate the dozens of mission critical supply chain processes that take place between companies across companies working together as business networks. Next-generation visibility and control systems were designed for today s networked supply chains. They leverage the cloud-based information sharing models that make collaboration across networks finally possible. By providing a clear picture of supply chain data, manufacturers can uncover hidden costs and combat risk while keeping their lean inventory strategies. How can just-in-time, lean production methods work in a world where suppliers are 40 days and thousands of miles away? With supply chain visibility. 4

5 Having accurate, timely data from each link in the supply chain allows companies to correctly monitor costs as they accrue, both ensuring better management and control of the sourcing process and providing superior data for subsequent forecasts. A networked system in the cloud provides the visibility to prevent any surprises when it comes to cost, and sufficient warning of inventory issues in order to be proactive. FIGURE 2: The technology behind supply chain visibility (SCV) Collaborative applications for visibility and control across the community network Cloud platform with unified network-wide information base, community management tools, customization frameworks On-demand integration infrastructure to partner systems, for all to leverage Cloud Multi-tenant Platform Global Utility-scale Cloud not only enables the breakthrough information sharing models that supply chain networks require (these models resemble the sharing models we see now in social networks, which put everyone in the network on the same page ), but they also enable breakthrough economics to make the information asset suddenly available to thousands of companies at once. Manufacturers can adopt the technology without a major outlay of capital and bring on partners to connect their supply chain activity. With a cloud-based visibility system in place, companies can face the challenges to their lean manufacturing strategies, finding cost savings and greater agility throughout the supply chain. Challenges, Overcome: How Visibility Puts JIT Back in the Game The only solution that allows JIT to work in the modern global supply chain is a system that provides the visibility needed to see the inventory, to mitigate risk, and to lower the costs of globalization. The right technology standardizes information from a company s entire network of supply chain partners, protecting the JIT strategy with greater agility while laying out the details As visibility increases, service levels FIGURE 3: of and lowering the true costs of moving goods across the globe. go up and cost, air freight, and safety stock levels drop. With cloud technology, companies have insight into the true landed costs of Service globally-sourced products. As visibility increases, there s less need for expedited airfreight to account for risk in the lean supply chain. Companies use visibility Visibility Total Cost to maintain their profit margins by lowering costs and keeping customer service Air Freight levels high. Safety Stock 5

6 Manage Risk With Alternatives in the Supply Chain Supply chain risk mitigation calls for a clear picture of supplier and logistics partner options in the network. A company looking to strengthen its planning process should be able to accurately assess the current environment as well as be able to easily communicate with partners that may be needed to execute a contingency plan. A good visibility system will be able to: Analyze the current sourcing environment and compare to best-case scenario contingency plans. Are the right rates and suppliers available in case of disruptions? Run transportation scenarios to identify the best options for rerouting goods Build production scenarios: what are alternative sources to facilitate sampling, replace production, perform product testing or site inspections, or create back up plans for other activities? Identify exceptions: set up rules and alerts that will identify possible disruptions Understand where financial hits will happen: will late shipments lead to lost sales? Will longer lead times from suppliers slow production? How can the losses be offset? Companies that can perform these functions won t have to fall back on holding large amounts of extra inventory to account for possible disruptions or deploy last minute airfreight to reach the customer on time. They can avoid massive losses by executing well-planned contingency efforts on a cloud-based control system. Making JIT Work in a Global Marketplace Global sourcing has been widely adopted because it holds the promise of dramatically lower costs. However, inadequate visibility across the entire supply chain can conceal the real risks an increasingly complex global trade environment can produce. Because this dilemma directly undermines the usefulness of JIT and lean inventory strategies, a company must address these challenges before it can gain a competitive advantage through cost reduction. Fortunately, new cloud supply chain platforms provide the intelligence and control needed to make JIT work in a global sourcing world. In particular, a sophisticated visibility tool, supplied with high-quality data from all of the participants in the extended supply network, can solve many of the problems caused by the collision of JIT with the longer lead-times inherent in global sourcing. 6