There is no doubt that the economic downturn has taken a toll on manufacturers. But if recent production reports hold steady, 2010 may bring muchneeded optimism to the entire industry.
The May Institute for Supply Management’s (ISM) monthly Report on Business showed that activity in the manufacturing sector expanded for the tenth consecutive month. What’s more, 75% of manufacturers believe they will see positive growth by the second half of 2010, according to the PricewaterhouseCoopers Manufacturing Barometer.
These “green shoots” raise many questions; perhaps the most immediate is, what can industrial manufacturers do now to prepare for a potential uptick? One clear and immediate step is to make sure their supply chains are more flexible and efficient.
Manufacturers typically have highly complex, global supply chains that span from supplier to facility to customer and many spaces in between. Creating a flexible network between these points gives manufacturers the ability to respond quickly to economic or market changes so they can handle spikes or dips in customer demand, better manage costs and ultimately, gain a competitive edge. In fact, a key step to manufacturers’ business recovery, according to the PricewaterhouseCoopers survey, is managing global supply chains efficiently.
Backlogs Bring Immediate Concerns
Flexible supply chains keep the right amount of inventory moving on time, all the time. But there are early signs that manufacturers may not be keeping up with demand.
According to the ISM, manufacturers believe their customers’ inventories are too low, and backlogs are on the rise. Of the companies who reported order backlogs in May, 30% reported that they had increased. If inventories remain low, the potential for delayed or cancelled orders is immense.
If backlogs are a problem, third-party logistics (3PL) experts can put in place a just-in-time (JIT) shipping model, which uses overnight air freight services to get goods to customers as soon as they’re ready. The beauty of a JIT model is that it can be a solution that is implemented in relatively short order.
Although air freight is more expensive than ocean freight, making the short-term switch can provide a big payoff, as it did for costume apparel maker Leg Avenue. The company used JIT shipping to handle its 2008 peak season, which precedes Halloween. The company’s story offers lessons—and results—that manufacturers can apply.
Due to the slow economy, Leg Avenue’s peak retail orders (made between May and July) were down. But as Halloween approached, consumer demand increased more than anticipated, so retailers low on inventory ordered a second wave of merchandise in the fall, worth $35 million in revenue for Leg Avenue.
Streamlining Shipping Options
Just-in-time shipping can be a short-term solution in some cases, but there are also long-term strategies manufacturers should consider to create a more agile supply chain. One good place to start is to rethink how to ship goods across borders. There are new options that can move goods to customers more quickly and cost effectively.
In the past, manufacturers that needed to ship products across the globe traditionally relied on one of two options: ocean freight or air freight. Ocean freight proved to be the most cost-effective and efficient option, especially considering the sheer volume of goods that a freight vessel can carry. The downside was that goods could spend weeks in transit. Conversely, shipping goods via air freight saves time, but for goods that have longer cycle times, air freight may not be worth the cost.
With today’s transitioning global economy, some 3PLs are developing hybrid services that combine both air and ocean freight for a single movement. This model involves using an ocean freight vessel to transport goods to a city that has a sophisticated port authority and airport. There, products are transferred from vessel to aircraft to reach their final destinations. The combination of services provides faster transit times than an ocean service, but it also consumes substantially less fuel and costs less than a pure air service.
Efficiency in Returns
Every manufacturer knows that the supply chain doesn’t end when a product or good reaches its customer. So, an efficient and nimble reverse logistics model is essential. Automating the returns process is a key way to add efficiency to the supply chain. A logistics provider can make it possible for a percentage of returns to go directly from the customer back to the manufacturer instead of a distribution center. Fewer touch points mean faster transit times, fewer chances for errors, and more rapid turnaround and credit processing.
Most important, an automated returns process ensures greater inbound visibility, which means a return never gets lost in the system. The latest technology puts tracking tools in place to give reverse supply chains the same end-to-end visibility as outbound operations. Complete returns visibility reduces inventory redundancy and customer calls for status updates. It also helps companies allocate staff based on inbound volumes and automate the receiving and credit processes.
The Visibility Advantage
Visibility is important not only in the returns process, but also throughout all points of the supply chain. In fact, making sure that customers know the exact status of their orders improves the customer experience, giving manufacturers an added differentiator.
Wisconsin-based Monroe Trucks knows this well. The company outfits stock commercial vehicles for specific purposes, including armored vehicles, fire trucks and snow/ice trucks. It used to take Monroe Trucks between six weeks and three months to deliver its finished vehicles. In addition, Monroe’s former shipping provider couldn’t ensure visibility into its supply chain, so when customers asked where their orders were, Monroe couldn’t tell them.
To improve visibility and service, Monroe overhauled its logistics model. Today, the company delivers trucks in just 10 days, and customers can track their orders any time. The change gave Monroe Trucks peace of mind and improved its customer service. At the same time, the company saved a total of 22% in transportation costs.
Although there are signs of an upturn, managing costs remains paramount for manufacturers and their customers. One way that companies can drive home cost savings is by taking a close look at where their products stop along the supply chain. Stopping can be costly, whereas a continuously moving supply chain saves time, fuel and money.
Modern supply chain management has reduced the amount of inventory companies need to stock. Using a directto- customer business model, which minimizes distribution center stops, allows inventory to remain in motion. With the help of a global 3PL, companies can better synchronize their production and distribution with customer demand.
In addition to reducing the number of shipments, bypassing distribution centers when possible reduces shipment touch points, resulting in lower administrative and handling costs. The reduction eases the strain on a company’s budget, allowing it to use faster transportation options such as air delivery. Most notably, faster delivery means faster payment by the customer, which is always a good thing.
While signs are pointing to an upturn, the industry is not yet out of the woods. So, the best way to prepare for any market condition is to create a nimble supply chain that can be adjusted based on real-time insights. Building supply chain flexibility today will ensure that manufacturers can handle whatever this year brings.
George Post is the supply chain solutions global marketing director for package delivery company UPS. He oversees key UPS services that help automotive and manufacturing sectors move freight and packages across borders.