Seeking security in the supply chain

by Gary S. Ciuba

The continuing threat of terrorist attacks could ultimately result in five years of strong growth in the adoption of supply chain management (SCM) software and services. The SCM landscape has been altered significantly, as companies seek to implement new solutions that can effectively combat supply chain execution roadblocks: lack of visibility and burdensome trade and homeland security compliance.

In an era of virtual integration and globalization, visibility (in support of event management) and homeland security compliance (in support of efficient border crossings) will be essential to mitigate the terrorist drag on the global supply chain. A strong likelihood exists that all of these solutions will be web-based.

Visibility: Shippers, government entities and customers want to know where the goods are — still in the plant, on the road or water, in the air, in a warehouse, in the store, or at the consumer's home? In order to track shipment status, the shipper requires access to real-time information about an item's location during manufacturing, warehousing and transport to customers. This information may reside with any number of materials/components suppliers, third-party logistics providers (3PLs), freight forwarders and carriers.

Visibility is important in determining whether a company's plans and forecasts (often developed during the first wave of SCM solutions in the 1990s) are accurate or require amendments. Appropriate plan adjustments using real-time information about the state of affairs up and down the supply chain may help prevent product flow problems like those that occurred a few years ago at Cisco Systems Inc. and Ford Motor Co. Recall that Cisco announced a $2.25 billion inventory write-off in 2001 due to lack of visibility in its supply chain. Ford closed five assembly plants when parts delivery was disrupted due to a temporary border shutdown post- September 11.

Addressing the visibility problem can be achieved by following the paper (information) trail, and by tracking the actual movement of “atoms” (materials). The paper flow method provides real-time access to information about the processing of customer orders, materials requisitions, packing slips, bills of lading or airbills, shipment manifests, customs declarations, etc., as well as documents supporting the transfer of funds.

The “atoms” tracking method provides real-time information about movement — ideally at the SKU level — as goods ride in an ocean container, railcar, truck, airliner, etc. Item track and trace is achieved using technologies such as bar code scanners, radio frequency identification (RFID), GPS, phone and fax, as well as physical observation.

In order to streamline and automate the production of this visibility information, shippers have turned to supply chain execution “point solutions” — typically, transportation management systems (TMS) and warehouse management systems (WMS). The much publicized mandate from retail giant Wal-Mart Stores Inc. for its top suppliers to use RFID tags by the beginning of 2005 is the most prominent example of the drive toward real-time visibility. Other retailers — notably, Target Corp. and Albertsons in the U.S., Tesco and Selfridges in the U.K. and Metro Group in Germany — also have major RFID mandates in process.

In addition, other software/hardware vendors have focused on the tracking of assets carrying the goods rather than the goods themselves. These companies have developed wireless products and services to track intermodal containers, truck power units and trailers.

International Trade Compliance: A process as paper-intensive and bureaucratic as that surrounding the cross-border movement of goods is ripe for digitization if not standardization, although both would be ideal. The process of standardization is inherently political and diplomatic, yet a number of software and services companies have embarked on the journey.

A government's natural desire to secure its borders against unauthorized incoming shipments like chemicals, explosives and biological weapons has been heightened by the recent terrorist attacks across the globe. A number of governments have also instituted mandates to regulate the flow of outgoing goods that may aide and abet terrorists, like computers, chemicals and weapons. These objectives now accompany the desire to reap revenue from duties and tariffs, and to encourage trade by lowering barriers through agreements like NAFTA.

Yet the prospect of more delays, more rules and more bureaucracy likely will burden the flow of over $6 trillion in world trade. Supply chains likely will invest in technological/software initiatives to ease this burden and to ensure efficient business practices. The international trade compliance solutions focus on workflow and forms surrounding customs declaration, denied party screening, calculation and payment of tariffs, duties and duty drawbacks, and could also be used to facilitate the U.S. Bureau of Customs and Border Protection's new rules for advance filing of shipment manifests.

Solution providers addressing trade compliance specifically are taking various marketing approaches, ranging from a managed services model to a traditional software license model. Companies plying the managed services model explain that trade compliance is cumbersome, complex and errors can be catastrophic, so why not turn over the process to the vendor's experts and best-of-breed technology. Software licensing companies employ a different tactic, suggesting that supply chains streamline and increase the accuracy of the compliance process by using software technology.

Shippers using or evaluating solutions that address visibility and trade compliance problems are still seeking “real” implementation. Implementation implies that: 1) the supply chain participant has paid for the solution, 2) the solution has been running long enough to show effectiveness, and 3) the supply chain has realized targeted return on investment. Few, if any, extended supply chains have achieved total visibility, and few have optimized the use of existing technology to streamline trade compliance.

Two questions remain:

  • Will an extended supply chain be able to obtain a software/services solution to enable total visibility and regulatory compliance?
  • How will the benefits from these solutions be conferred to the participants?

When this ideal becomes reality, the supply chain will have a significant competitive edge, resulting in better asset utilization, working capital management, fatter margins and greater customer satisfaction. LT

Gary S. Ciuba is a managing director at investment banking firm Stephens Inc. (www.stephens.com), where he specializes in transportation, logistics and logistics technology investment banking. He can be contacted at: [email protected] .

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