It's a Small World After All

Aug. 1, 2004
For many U.S. businesses, the best practice from an international perspective is to outsource manufacturing and production to Europe and Asia. Outsourcing, though, is not as simple as it seems, and it could cost you more than you think.

Picking Out Costs

One cost-cutting target for many managers is picking. Several European companies have automated as much picking as they can, and some U.S. companies are following their example. Kroger Company recently awarded a contract to Witron to implement an automated piece -picking operation at its Peyton Southeastern U.S. distribution center. The system will feature AS/RS tote cranes and an integrated conveyor network operating under a Witron WMS and PLC control system.

By Air or by Sea

Some products can handle a 21-day delivery time. Others, such as computer and communication products, have such a short life cycle that it's worth the extra cost to fly them into U.S. ports. Carriers such as FedEx Express will help you here. With so much manufacturing moving to China, FedEx will begin offering regular flights into and out of the Central Japan International Airport when the airport opens in February 2005. It will operate in the International Airline Warehouse No. 2, with a total floor space of 5,600 square meters (warehouse: 3,500 square meters; canopy: 2,100 square meters) built by the Central Japan International Airport Co. Ltd. for handling and customs clearance of both import and export shipments. FedEx Express already offers flights into and out of New Tokyo International Airport in Narita (NRT) and Kansai International Airport (KIX).

European and Asian companies face many of the same issues you do: the need to reduce total operating costs, shipment sizes changing from pallets to cases, and creating more flexible systems. Many U.S. companies, though, are letting European and Asian companies solve these problems and taking advantage of the situation by outsourcing manufacturing and production overseas.

Despite the political debate about outsourcing here in the U.S., it's a business fact of life and won't go away. For many U.S. businesses, outsourcing is not an option. It can cut your manufacturing and labor costs. But it can raise your total operating costs if you're not careful. Outsourcing also affects aspects of your total supply chain beyond the issue of costs.

"One of the larger complexities for material handlers to deal with when outsourcing is the issue of time," says Rick Moradian, vice president, international logistics, APL Logistics. "Can you plan, can you forecast, can you predict demand for one, two, three, even five months from now? Can you 'bet' that what you've ordered is exactly what will be needed in a certain period of time?"

For example, you save some by manufacturing overseas, but when those products arrive in the U.S., will they just sit in a warehouse for a month or more? In such a scenario, how have you really benefited from lower manufacturing costs? "Outsourcing often means an internal shift with a company's business practices must take place, too," continues Moradian.

As soon as you shift sourcing and move to somewhere far away, your notion of supply chain takes on a different perspective in terms of how to manage it. In addition to determining whether you have the kind of visibility to manage product flow from these far points, you need to know whether you can alter your supply chain to handle changes in demand. And, in today's "wacky" world, you must consider changes imposed because of political instability.

"It becomes a question of how do I take time and become more flexible as opposed to letting it hamper me," says Moradian.

You may end up adding inventory carrying costs to your bottom line. "Lots of companies are not necessarily factoring in the supply chain costs when they look into outsourcing," continues Moradian. "If companies are outsourcing due to core competency reasons, that has one value proposition. We're dealing with clients who source from 14 countries. There are tremendously complex rules and regulations on a per-country basis, from customs to quota requirements, to production principles to credit terms to banking practices to shipping and transportation, documentation management and information flow. The notion of global outsourcing is exponentially making their supply chain network more complex in terms of how they can manage it."

"A lot of managers tend to just look at a location study," agrees Steve Simmerman, senior vice president, marketing and business development, Swisslog. "But when you look at a logistics network study, you're talking about lead times, stocking levels, total transport costs, allocation of product and so on.

"For example, one company here in the states had a number of plants and DCs. It decided to outsource the majority of its manufacturing to China, closing some manufacturing plants in the U.S. It chose one of its West Coast facilities to handle the bulk of its receiving. It was initially looking for a WMS to support all of this, but we found out that what it was really struggling with was its total logistics network," says Simmerman.

How could it distribute product once it arrived into that one facility without incurring a lot of extra costs? "Its plans really forced it to take a hard look at the business decision to outsource," continues Simmerman. "We took a look at its logistics network and all the associated costs of inventory, transportation, supply points, etc., and analyzed the distribution network demand side today as well as what is anticipated in the future. By revamping parts of its inbound logistics from overseas, we took out close to 20 percent of its total supply chain costs. For that company, the decision was to not funnel all of its products from one DC. It opened another in Los Angeles and routed inventory appropriately to regional DCs throughout the U.S.

"There were expensive hidden transportation costs behind the scenes that would have killed the savings it was gaining from offshore manufacturing," continues Simmerman. "The president of the company asked how would the WMS help manage the flow of inventory from China to the U.S.? That was a key question because the problem was not the WMS. The real problem was the supply chain network and cost model. The bottom line is that companies need to evaluate their total logistics network."

The issues material handlers need to consider include:

  • Lead time. How long will it take for a placed order to be made and delivered?
  • Capacity. Overseas ship carriers often have limited capacity.-Air freight can be expensive. Can your supply chain "flex" with need and demand and still make a profit?
  • Quality. Can you obtain good products, and do you have a quality supply chain?
  • Reliability. Your supply chain must be reliable to make demand forecasting work.
  • Flexibility. Where are the flex points in your supply chain? Can you reroute cargo, goods and shipments as demand changes?
  • Visibility. What product is in what container and where is it going?

In addition, material handlers need to re-evaluate the role of their DCs. "Managers need to look at where their DCs are today, and where they should be with an outsourced model," says Simmerman. "Depending on where your customers are located, you may have one DC in Los Angeles and a smaller one nearby, or several in Europe if that's where your customers are. Managers also should consider whether they need to execute processes differently within the four walls of the DC that they're not doing today."

Control systems for supply chain management, whether software or hardware, must meet certain requirements. "Scalability is a crucial feature," adds Simmerman. "Software must support a few large facilities as well as several smaller ones, all linked together in a real-time, Web-based network. And the software should be event driven."

One other issue material handlers will have to deal with for international material handling is that of clean data. "Forecasts and logistics network studies are just two of the major pieces that demand clean data," says Simmerman. For many companies, clean data is still a work in progress, but it's crucial to successful material handling in the international arena.

Delivering News on Time

In Northern Europe, newspaper and book publishers usually turn to Audax to see that their product ships to airlines, bookstores and retailers' news shelves on time, daily. The Gilze, Netherlands-based company also delivers stationery and other paper products to various business customers.

Audax faced the enviable problem of increasing customer volume and product diversity. To accommodate the new volume levels, management knew they needed to upgrade their product picking and distribution systems from manual to automatic. "We chose Inther Logistics Engineering because of their knowledge of logistics," says Leo Nolen, managing director, Media Logistics. "Our logistics processes have a nearly 30 million turnover. Thus, it's an important part of our operations." Inther is a turnkey material handling and logistics supplier in the Netherlands, with consulting offices throughout Europe and the U.S.

Retailers place orders daily, usually before noon, although a few push the order deadline as late as possible. One result is that orders are usually small case loads. Customers prefer to order smaller amounts to reduce overstock issues. However, the size demand means that Audax needs a flexible system.

Inther set up two types of picking systems to handle about 12,000 slowmoving and 1,500 fast-moving items. Radio frequency helps collect all slow movers from shelving into bins. A dropto-light workstation distributes these articles, which are put into customers' order bin or carton box. The bin or box then continues its way to the flow rack locations and the pick-to-light workstations where the fast movers are picked and placed in the customers' cartons.

The Inther transport system ensures that the bins are transported to the right workstations, then on to the packing tables for shipment. Trucks come late in the evening and are loaded. By midnight, the carriers are rolling to deliver the product to 8,000 customers throughout the Netherlands for the next day's business.

This dynamic batch-picking system can handle 800 picks per person per hour. It took about four months to make the system stable, mainly because of the technical challenges in integrating an ERP system with a WMS system. Once those issues were solved, the Inther LC software controls every process in the distribution center, whether it's manual, radio frequency or automated, and guarantees 99.99 percent accuracy in inventory and goods tracking.

"This system has enabled us to meet our customers' needs for flexible ordering and delivery," says Nolen, "at a profit."

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