How local will we become? – fuel costs and international sourcing

The cost of oil seems to be influencing everthing these days.  A recent report by CIBC World Markets, as reported in the NY Times, finds that the cost of shipping a container from China to the U.S. is now about $8000, up from $3000 earlier in the decade. In fact, the cost of transportation is now larger than the cost of tariffs.

What does this mean for supply chains – it is intuitive that higher transportation costs should lead to more localized production.  Instead of producing something in one location in a far off place, companies will start to choose to produce in multiple locations, closer to consumers.

Will this trend continue? One reason for international sourcing is wage rate differentials. If they continue to decrease (because wages in countries like India and China increase) and energy costs continue to decrease, then we may be looking at a long term trend to reverse globalization.

NY Times, Aug 3, 2008 – Shipping costs start to crimp globalization
http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html

Dabbawala and six sigma

Based in India, the Dabbawala organization is the buzz of the six sigma consulting world. To quote from the Economist’s article: 

“Using an elaborate system of colour-coded boxes to convey over 170,000 meals to their destinations each day, the 5,000-strong DABBAWALA collective has built up an extraordinary reputation for the speed and accuracy of its deliveries…

At 9am every morning, home-made meals are picked up in special boxes, which are loaded onto trolleys and pushed to a railway station. They then make their way by train to an unloading station. The boxes are rearranged so that those going to similar destinations, indicated by a system of coloured lettering, end up on the same trolley. The meals are then delivered–99.9999% of the time, to the right address.

Apparently there is now an HBR case on the organization.  This is probably worth checking out further if you need to discuss quality management.

The Economist, July 10, 2008
THE CULT OF THE DABBAWALA

High fashion improves the supply chain

Apparently even high fashion designers like Bulgari, Valentino and Gucci are paying attention to their supply chains and striving to improve performance.  They are making sizable investments in information technology to (1) cut lead times and (2) track sales data to better match the products in the store with what is selling.  In some cases they have learned the hard way – Gucci reported that a supply chain glitch lowered its quarterly sales growth by 2%.  Valentino hopes to reduce its lead time from Italy to the US by a couple of days.  These companies still rely on the novelty of their designs and the cache of their brands, but even they can appreciate the value of a smooth process.

WSJ June 27, 2008: Logistics are in Vogue with Designers

Improving the milk supply chain

Do you think the milk supply chain has been optimized? Think again! Deliverying milk is an old business, but apparently there is still room for some kaizen. WalMart has redesign the milk jug to be made of cardboard and with a rectangular shape. Rectangular means they stack on top of each other, thereby eliminating the cost of milk crates, the cost to clean them, the space they occupy and the weight they contain. They claim that these features allow them to reduce the number of deliveries to each store per week – from 5 to 2 – but I don’t think they fully explain why nor do I think such a reduction is due entirely to this redesign.

Milk is a dense item, so I suspect trucks “weigh out” before they “cube out”, i.e., the amount of milk a truck can carry is constrained by the weight of the load rather than the volume of the load. Hence, saving on volume doesn’t allow you to transport more milk. Therefore, the extra capacity per truck must be from the reduced weight of not having to carry milk crates. But to reduce the number of trips per week from 5 to 2 requires a 5/2 = 250% increase in carrying capacity per truck, which doesn’t seem realistic. Note, this assumes total demand at the store is assumed to remain constant and trucks make dedicated deliveries to stores. It is the latter assumption that may be the source of the discrepancy. Suppose before the change each truck delivered to 5 stores and each store sold the equivalent of one truckload per week. Because each store receives 1/5 of a truck per delivery, it needs 5 deliveries. Now change the routing so that each truck delivers to only 2 stores per trip, but keep the truck capacity constant. Now the store needs only 2 deliveries per week. Hence, a reduction from 5 deliveries to 2 probably only could happen if they change their routing given that a 250% increase in capacity is unlikely. Although the new milk containers increase capacity per truck, and this reduces costs, it does not reduce the total number of needed deliveries by 40%. If we could figure out how to do that, then we would really save a lot of fuel.

NY Times 6/30/2008 – Solution, or Mess? A Milk Jug for a Green Earth

http://www.nytimes.com/2008/06/30/business/30milk.html?ref=business