2011 marks the seventh year of our annual Supply Chain Top 25 report. At its highest level, the goal of this research has always been to raise awareness of the supply chain discipline and how it impacts business. By identifying the leaders — that is, companies that are pushing the envelope of supply chain innovation — we hope to consistently highlight the best practices from which others can learn, thereby raising the bar for the supply chain profession as a whole.
Each year, our analysts talk to and research the supply chains of hundreds of companies. What we see, hear and write about runs the gamut from specific to broad: from the specific functional issues in planning, sourcing, manufacturing, and distribution, to companies' broader, cross-value-chain strategies, visions, and missions. With seven years of data and discussion behind it, the 2011
Supply Chain Top 25 continues to offer lessons about staying power, change, and the never-ending challenge of defining and measuring excellence.
Rank Company Peer Opinion 1
(25%)
Gartner Opinion 1
(25%)
3-Year Weighted
ROA 2 (25%)
Inventory Turns 3
(15%)
3-Year Weighted
Rev Growth 4 (10%)
Composite
Score 5
1 Apple 2950 536 17.9% 49.3 40.9% 8.50
2 Dell
3 P&G
4 Research In Motion (RIM)
5 Amazon
6 Cisco Systems
7 Wal-Mart Stores
8 McDonald's
9 PepsiCo
10 Samsung
11 The Coca-Cola Company
12 Microsoft
13 Colgate-Palmolive
14 IBM
15 Unilever
1909
1726
550
2267
1501
1755
711
740
857
1305
566
560
994
449
457
660
215
402
550
449
161
445
361
265
128
239
238
459
6.6%
9.6%
25.1%
6.6%
10.2%
9.0%
15.3%
12.0%
9.8%
15.3%
21.4%
20.0%
12.5%
11.5%
38.9
5.6
17.7
11.2
11.8
8.5
141.8
7.8
16.9
5.3
16.6
5.1
21.1
5.3
4.1%
2.4%
43.9%
34.0%
5.5%
3.6%
2.6%
18.8%
22.5%
7.9%
6.1%
3.0%
0.8%
5.2%
16 Intel
17 HP
18 Nestle
19 Inditex
20 Nike
21 Johnson & Johnson
22 Starbucks
23 Tesco
871
949
389
376
781
548
544
524
247
331
62
180
144
121
127
190
13.6%
7.0%
22.6%
16.9%
13.0%
13.4%
10.6%
5.3%
4.5
14.3
5.5
4.4
4.7
3.6
8.6
18.3
9.7%
6.7%
0.8%
10.5%
3.3%
-0.3%
5.1%
8.0%
3.37
3.28
3.05
3.05
2.72
2.38
2.35
2.34
24 3M 760 7 13.2% 4.6 5.8% 2.25
25 Kraft Foods 471 192 4.4% 5.9 15.6% 2.03
Notes:
1. Gartner Opinion and Peer Opinion: Based on each panel's forced-rank ordering against the definition of "DDVN Orchestrator"
2. ROA: ((2010 net income/2010 total assets * 50%) + ((2009 net income/2009 total assets) * 30%) + ((2008 net income/2008 total assets) * 20%)
3. Inventory Turns: 2010 cost of goods sold / 2010 quarterly average inventory
4. Revenue Growth: ((change in revenue 2010-2009) * 50%) + ((change in revenue 2009-2008) * 30%) + ((change in revenue 2008-2007) * 20%)
5. Composite Score: (peer opinion * 25%) + (Gartner opinion*25%) + (ROA*25%) + (inventory turns * 15%) + (revenue growth * 10%)
2010 data used where available; where unavailable, latest available full-year data used.
4.11
3.98
3.96
3.72
3.62
3.60
3.53
5.14
5.13
5.10
5.07
4.82
4.40
4.35

Key Findings

The Top 5 include three mainstays — Apple, Dell and P&G — and two that joined the list for the first time last year—Research In
Motion (RIM) and Amazon.

Four new companies joined the list this year: Nestle, Starbucks, 3M and Kraft Foods.

Four key themes emerged this year among the leaders, including how they deal with volatility, their approaches to value chain network integration, their focus on sustainable execution and their abilities to orchestrate.
The Themes - Stepping back from the discussions we've had all year, four themes emerged.
1.
Resilience - First, of course, is the impact of the recovering economy. Companies are starting to invest again in resources and assets, and although we haven't fully recovered, the trend is certainly looking up. At the same time, leaders took some very clear lessons from the events of the past couple years, with one of them being the need for supply chain resilience: the ability to deliver predictable results, despite the volatility that many have pointed out is now here to stay. Speed, agility, efficiency, responsiveness and innovation — all remain critical, but equally important is a resilient supply chain. Companies like Cisco, Dow
Chemical, RIM, Unilever and others are actively designing in structures, processes and methodologies to create and expand this resiliency not only in their own supply chains, but in those of their trading partners as well.
2.
Value Chain Network Integration - Last year, we talked about the trend toward vertical integration. What we've seen since then is more about choosing the right set of value chain network integration strategies that allow better control of the end-to-end value chain. What this means is that there's no one answer that's always right. We see companies like Samsung, which have always been vertically integrated, weathering the ups and downs through ownership of supply, and others like The Coca-Cola
Company and PepsiCo becoming more vertically integrated with the acquisition of their largest bottlers. On the other hand, we see companies like Microsoft and Cisco managing an extensively outsourced network of trading partners. The key isn't whether a company owns all the pieces of its network — it's how well it controls the outcome of the activities that take place in the network that end in the delivery of a final product to a customer. As such, each company needs to figure out the right strategy for sustainable differentiation given its unique business goals, and design the tactics and processes that will best ensure the quality and efficiency of the end-to-end output and response to the end customer.
3.
Vision and Sustainable Execution - Leaders are setting their sights beyond the articulation of a clear vision to the need for sustainable execution against that vision. These companies understand that, although a long-term supply chain vision is critical to communicate future value, the ability to replicate, scale and continually build on best practices across the organization in a sustainable way — going beyond a one-time success or pockets of excellence — is just as critical. This is no small task given the size, complexity and sheer scale of many of the Top 25 leaders. It often requires fundamental shifts in organization and governance, as well as an unshakeable commitment to effective change management.
4.
Orchestration - Leaders have been moving steadily up the demand-driven maturity curve over the last several years. What differentiates the companies that are true "orchestrators" is that they go beyond simply borrowing and adapting others' best practices. They create new ones altogether, often defying "conventional wisdom" to rewrite the rules and increase the gap between themselves and others. We'll be writing more about this in the coming year throughout our supply chain research agenda.
Recommendations

Develop supply chain processes and methodologies throughout your trading partner network that will provide the resiliency to deliver predictable results in the face of ongoing volatility.

Supplement a clearly articulated, long-term value chain vision with strong, agile, and sustainable execution capabilities. Push your team to think differently and go beyond conventional wisdom to push the boundaries on performance levels.
 Measure your supply chain as your customers experience it. Develop the capability to internalize customer needs, and proactively build customer feedback into your supply chain design.

Step back and consider the basic supply chain capabilities you need, as well as the innovations that will differentiate your performance. Ensure the sustainability of your efforts and initiatives through a constant focus on governance, change management and culture.
Inside the Numbers
Within the small number of perennial leaders that have been on the list since it first published, we see retailers (Wal-Mart Stores and Tesco), consumer goods (P&G, PepsiCo and The Coca-Cola Company), high tech (IBM) and even pharmaceutical (Johnson &
Johnson) companies. There's Wal-Mart, a powerhouse and trendsetter in its industry; U.K.-based Tesco, which is constantly innovating with new formats; P&G, one of the most respected supply chain leaders in the world and an early pioneer of the consumer-driven supply chain concept; PepsiCo, with its advanced direct store delivery (DSD) capabilities; The Coca-Cola Company,

which is taking a more integrated value chain approach with the acquisition of its biggest bottler; IBM, a leader in supply chain organizational innovation; and Johnson & Johnson, which is retaining solid opinion scores, despite some bumps in the last year, and still leading the charge to improve the operational effectiveness of the challenged healthcare value chain. Each is unique, but what they all share is a dedication to customer value that drives them to constantly remake their supply chains in concert with the shifting needs of the markets they serve. They're also icons of their industries, drawing top talent to their organizations and facing heavy scrutiny from financial investors. Staying at or close to the top through "boom and bust" is no small feat, and it speaks to a commitment to supply chain as essential to success.
Another blue-chip group of companies with staying power continues to push the envelope of supply chain innovation. Dell, moving into the No. 2 slot on the basis of strong opinion scores and high inventory turns, has been radically redefining itself, diversifying beyond its traditional build-to-order PC base into business solutions, storage and services, with segmented supply chain response models. Cisco (No. 6) leads the way with its customer value chain management (CVCM) organization, sophisticated risk management capabilities and regionalized supply network architecture. Samsung (No. 10), on the list since 2005 and in the Top 10 ever since, is leading in its customer collaboration practices and leveraging its vertical integration to release more holistically designed products.
Intel continued its steady rise up the list, moving into the No. 16 slot this year on strong financials, which reflects its product expansion from chips and servers to complete solutions, and steady opinion scores, despite some product challenges that impacted customer shipments. With one of the world's largest and most complex high-tech supply chains, massive volumes and extensive global reach, HP's (No. 17) ongoing supply chain transformation has allowed it to consistently take costs out of its traditionally lowmargin businesses, even in the face of continuing price erosion. Nike, in the ranking since 2005, withstood the combination of falling demand in many of its markets and commodity price pressures to come in at No. 20.
The 2011 list also highlights the scale of change being driven through our discipline by emerging innovators. We welcome four new names to the list this year: Nestle, one of the world's largest food producers, with major expansions into emerging markets, at No.
18; Starbucks, which is transforming its supply chain into a strategic differentiator, at No. 22; 3M, an icon of innovation, at No. 24; and Kraft Foods, with its leading channel management strategy, at No. 25.
Two companies that qualified for the first time last year from industries that had previously been excluded have returned:
McDonald's, which is up a few notches to No. 8, and Microsoft, which holds steady at No. 12. Both come in on solid financials, but they also get a lot of respect from our voters.
In fact, looking back, we see an average of four new names each year, some of which surprised us at first, and some that have already come to be fixtures: high-flying Apple, ranking No. 1 overall for the fourth year in a row on the basis of continued killer financials and top-of-the-line voting scores; RIM, which was new to the list last year and rose to No. 4 this year, with enviable financials and solid votes; Amazon, another newcomer last year that rose five spots to No. 5 in the 2011 ranking; Colgate-Palmolive, rising steadily since 2009 to No. 13 this year; Inditex, with an aggressive expansion outside its traditional European base, moving up a few spots to No. 19 from its entry point last year; and Unilever, which came onto the list for the first time in 2009 and saw the biggest jump among our group this year, rising six spots to No. 15.
The ability to have a combination of repeat and new faces on the list each year — representing stable leadership supplemented by new challengers — was one of the goals in designing the methodology for the ranking, which has undergone substantial debate and refinement over the past seven years. Our joint use of financial metrics and opinion polling creates situations where organizations whose supply chain capabilities were less known to our research team can rise to prominence on one part of the score (for example,
RIM, with stellar financials, or Amazon, with huge peer voter totals). This balance ensures that new blood makes it into the discussion, forcing our analysts and the community as a whole to ask what these companies are doing right that might help others.
One of the trends we've seen over the last several years is a move from the notion of "supply chain" to "value chain" and a concomitant increase in the span of control of the supply chain organization (see "Stages of Value Chain Transformation, Revisited").
The old image of a supply chain organization limited to either inbound materials management or logistics, with procurement, planning, manufacturing, and customer service as totally separate functions, is fading. What's replacing it is a supply chain organization, often reporting at the board level, that includes the functions of plan, source, make and deliver. It also increasingly includes functions such as customer service and new product launch, and links them through the cross-functional processes and roles that are so critical to being demand-driven. The consumer-oriented companies, with their need to renew product lines constantly and their appetite for downstream data, have led the way in this change, which may at least partially explain the steady drift away from industrial companies making the list.
What else might explain the reason why there are more consumer and high-tech companies than traditional heavy industrials in the ranking? We've looked at this in detail over the years. Some have suggested that the financials used in the ranking favor the consumer and high-tech companies, but our analysis disproves this notion, showing that there is far more variation in financials between companies within an industry than there is between industries as a whole (see "The AMR Supply Chain Top 25 for 2010" and "Changes to the 2010 Supply Chain Top 25 Methodology: Our Ideas"). It's also not the composition of the voting population. The

industrial companies are well-represented in the peer panel each year, and our analysis has shown that they, too, tend to vote more for consumer and high-tech companies than for other industrials. Some have suggested it has to do with the impact of brand — that is, the notion that voters are more likely to vote for companies they've heard of. We agree that brand plays a part, and we continue to look for ways to mitigate that impact. But while brand has a role, it doesn't provide the full explanation.
There's something else that's even more important that should be noted: communication. Supply chain executives from consumer and high-tech companies are more likely to talk about what they're doing in supply chain and share it with others in all kinds of venues. External communication tends to be an accepted part of their organizational cultures. The Top 25 ranking is designed to recognize leadership, and a critical component of leadership is visibility. It's not just their product brand — these companies have a bigger supply chain brand.
Finally, with the peer vote making up one-quarter of a company's composite score, the makeup of the peer voting community is of vital importance. In past years, one challenge was that roughly 80% of peer voters hailed from North America. For 2011, we were able to significantly improve the global balance of our peer voters, with only 59% coming from the Americas, 29% from Europe or
Africa, and another 12% from Asia.
This better-balanced voter pool may have helped flag another trend this year: an increasingly two-way street in global supply chain strategies. Where emerging markets were once attractive primarily as low-cost manufacturing and sourcing locations, many companies today are finding that selling to as well as sourcing from these countries offers better results all around. Leading this charge are companies like HP, whose investments in China are decidedly oriented to selling there, or Unilever, whose global business strategy includes extensive emerging-market distribution.
What Is Demand-Driven Excellence?
The concept of being demand-driven is at the heart of the Top 25 ranking. We first started writing about demand-driven principles in
2003 and have published hundreds of articles on the topic since, including a maturity model to help companies move along the transformation curve. Because it's so critical to the Top 25 analysis, here's a brief synopsis of what it means to have a demand-driven value chain.
Figure 1 captures the organizational ideal of demand-driven principles as applied to the global supply chain. This model has three overlapping areas of responsibility:

Supply management — Manufacturing, logistics, supply planning and sourcing

Demand management — Marketing, sales, demand planning and service

Product management — R&D, engineering and product development
When these processes work together, the business can respond quickly and efficiently to opportunities arising from market or customer demand. The defining characteristics of supply chains built to this design include the ability to manage demand, rather than just respond to it; a networked, rather than linear, approach to global supply; and the ability to embed innovation in operations, rather than keep it isolated in the laboratory.
Operational Excellence and Innovation Excellence
Two basic dimensions of measurement capture the totality of the best-in-class, demand-driven, global supply chain: operational excellence and innovation excellence (see Figure 2). To measure operations, including delivering as promised to customers and keeping costs under control, we recommend a hierarchy of metrics, with perfect order performance and total supply chain costs at the top.

Of course, operational excellence has value only if customers want what's being made and shipped. To address this, we look at innovation excellence. Although far harder to measure reliably, this dimension can also be managed with a hierarchy of metrics, in this case, topped by time to value and return on new product development and launch (NPDL). The key is to find the right balance on both these dimensions. Too much emphasis on one at the expense of the other either squashes innovation or hampers growth.
Measuring Demand-Driven Excellence
For the Top 25 ranking, our ideal would be to have metrics that perfectly describe the two basic dimensions of performance: operational and innovation excellence. These are the dimensions that point meaningfully to the better value chain, identifying which business is faster, stronger and smarter. Betting on next year or next quarter is a matter of knowing who the better "athlete" is, not merely who won last time. Our premise is that the better athlete is more likely to win markets and profits in the future. Therefore, the companies that can demonstrate superior performance against these dimensions merit a higher share price multiple on a dollar of current earnings.
In our ongoing supply chain research, which includes detailed supply chain benchmarking studies of 70 companies, we've identified the metrics that map to these dimensions, which, if we had them, would clearly convey the organizations that have the healthiest value chains.
Metrics for Operational Excellence and Innovation Excellence
For each of these performance dimensions, we've published a full hierarchy of metrics that allows management to assess overall performance at the highest level, diagnose problems via process decomposition and make corrections at the tactical work level.
The Hierarchy of Supply Chain Metrics: Operational Excellence The Hierarchy of Product Metrics: Innovation Excellence

By Mike Ramsey; Wall Street Journal; November 16, 2011
Ford Motor Co. this week lifts the veil on a new sport-utility vehicle that illustrates how much Chief Executive Alan Mulally has changed the way the auto maker now looks at developing and making cars. The new 2013 Escape, which is due to arrive in showrooms this spring, will be made from a common set of parts and components that Ford will also use to make its Focus compact car, two future minivans and at least six other models. Those same components, known in the industry as a "platform," will pop up in vehicles assembled and sold in North and South America, Europe and Asia.
By the middle of next year, Ford hopes to produce more than two million vehicles a year around the globe that are all made from the same basic parts and assembled in plants that use the same type of tooling. The goal: leverage design and manufacturing economies of scale to wring huge savings from its $50 billion annual budget for auto parts. "There are so many facets to the savings it's hard to put a number to it," said Eric Loeffler, the chief engineer on the new Escape. "You save money in literally every area of development, from engineering time, to parts and service, tooling and machinery."
The sharing goes far behind the new Escape. All told, Ford is betting on five common platforms to deliver sales of more than six million vehicles by the middle of the decade. Five years ago, Ford had 15 platforms that accounted for sales of 6.6 million vehicles.
By sharing parts, Ford expects to produce a raft of new, cost-competitive vehicles that Ford can sell in emerging markets including
China and India. The company is aiming to boost global sales to more than 8 million vehicles a year, from 5.5 million last year.
Ford reported third-quarter net income of $1.65 billion, driven by more favorable pricing for its vehicles in North America.
Of course, Ford isn't alone in its pursue of common platforms. Rival General Motors Co. is charging in the same direction. It now shares parts between the Chevrolet Cruze and most of the other compact cars it makes around the world. Chrysler Group LLC is farther behind, although it hopes to do this with its partner Fiat SpA.
Foreign car makers have been using common parts around the world for years. Volkswagen AG, for instance, shares parts among its
Golf, Jetta, Audi A3 and other small cars, vehicles whose global sales top 2.4 million, according to a study by consultant
PricewaterhouseCoopers. VW is preparing common components that are expected to account for 4 million vehicles a year by 2016, according to the study.
This is no small effort for the No. 2 U.S. auto maker. Before Mr. Mulally arrived in 2006, its operations in the U.S., Europe, Australia and other regions often developed their own vehicles, duplicating efforts at huge expense. Analysts estimate it costs auto makers between $800 million and $1 billion to develop a new model from scratch. Ford has said that it will cost about two-thirds less to engineer a new vehicle using shared platforms than developing a wholly new one.

Ford and GM have tried in the past to develop global platforms but their feuding regional operations almost always prevailed in breaking ranks. GM tried to develop common components for small cars a decade ago for its Chevrolet, Opel and Saab brands. But it ended up with cars so different they couldn't be made in the same plants.
Mr. Mulally, who joined Ford from aircraft maker Boeing Co., is determined to break the logjam. He has said he was surprised upon joining the company to learn it produced one Focus compact in Europe and a completely different one for the U.S. As a result, Ford was unable to buy common parts for the vehicles and couldn't even use its European Focus plants to make cars for the U.S., or vice versa.
"Can you imagine having one [Boeing] 737 for Europe and one 737 for the United States?" he said at the time.
Mr. Mulally has pushed hard to get the company's global operations to operate as one, and to create a handful of platforms that it can use everywhere in the world. Already, its Focus now serves as the underpinning for all of Ford's small cars. Another set of parts is used for all of its subcompacts and related models that it makes around the world. Subcompact production is supposed to exceed more than two million vehicles a year.
Next year, Ford will introduce a new Fusion mid-sized car also based on a global platform shared by an expected one million vehicles. The current version of the Fusion shares almost no parts with Ford's European mid-sized car, the Mondeo. Ford has finished or is working on platforms for small pickup trucks and commercial vans to be produced and sold globally.
While past global car strategies have failed, auto makers must make it work: markets like China, India and Brazil are buying low-cost cars that generate slim profits. The industry also has been forced to find new savings to offset rising cost of commodities like steel and plastics, and develop expensive new technologies to boost fuel economy and cut tailpipe emissions.
Ford posted a third-quarter loss as U.S. auto industry troubles continue. WSJ's Jeff Bennett and Matt Dolan discuss the auto maker's cash burn and the dismal outlook ahead. (Nov. 7) "Doing more with less is the new industry mantra," said Michael Robinet, managing director of IHS Automotive Consulting in Farmington Hills, Mich. "In the face of needed Asia expansion and the requirement to move more swiftly, shifting to fewer platforms within a global scope was the only viable answer."
The new Escape will be a key test of Ford's strategy. One selling point: It is more fuel-efficient than its predecessor. Ford says it will go 33 miles on a gallon of gas on the highway, five more than the current version.
And it has some features that will turn heads. One is a foot-activated tail gate. Approach the car with the key fob in your pocket and wave your foot below a sensor on the rear of the vehicle, and the tailgate opens — a neat trick for moms around the world carrying kids or groceries.
QUESTIONS: a.
Research which industry did Ford’s CEO Alan Mulally work before he came to Ford? Do you think that this experience would drive his focus on creating a supply chain characterized by global integration (vs. multi-domestic industry)? b.
What was CEO Mulally's reaction to Ford's global operations when he first saw them? How many different platforms were there at Ford five years ago? Why do you think he believed that this change was necessary? c.
What is Ford doing to address the problem? What are some of the advantages of having global platforms? In which areas do platforms create savings? d.
How obvious is such a global strategy? Would you say that Ford is a leader or a laggard in pursuing such a global platform strategy? e.
According to the article, what does it cost to develop a new car?
f.
From the following article (3. S/C Fragility),what are some of the issues faced when utilizing a global integration strategy?

December 12, 2011 By Bill Powell, editor-at-large, CNN Money
Manufacturers have spent years building low-cost global supply chains. Natural disasters are showing them just how delicate those networks really are.
The image above is almost surreal: It shows part of a Honda auto factory in central Thailand, one of the largest in Southeast Asia, swamped under 15 feet of water, brand-new cars floating in the currents. The devastating November flooding in Thailand, which killed more than 600 people, also knocked out some of Honda's key suppliers, including electronics component maker Rohm & Co., forcing production delays in plants as far away as Ohio.
The Thailand floods alone would test any company's operational prowess; now consider that much of the auto industry and many technology companies are still recovering from the earthquake and tsunami that tore through north-central Japan in March, shutting down dozens of contractors and subcontractors that supply everything from glass to test parts.
The twin tragedies in Asia have shone a spotlight on the often anonymous but incredibly important niche companies whose products and parts go into every MacBook or Prius. Invented by Toyota Motor Corp., (TM) and perfected in the era of globalization, the lean supply chain completely decentralized manufacturing: Big manufacturers developed a multinational network of specialists to supply them with parts and to make sure those components arrived at assembly plants at the moment they were needed. When things go as planned, the system benefits everyone in the chain: The assembly plant is more efficient (no pesky inventories to manage), suppliers keep the cost of parts down by locating in regions with cheap labor, and consumers enjoy lower prices.
But natural disasters such as the earthquake and tsunami reveal just how fragile this carefully crafted ecosystem can be. As Bob
Ferrari, a leading supply-chain consultant, puts it: "You never want to hear about the guys who run the supply chains for multinational companies. When you do, usually it means something really bad has happened."
Insurers and companies are still calculating the direct costs of the devastation. Munich Re, the big insurer, pegs the economic cost of the earthquake and tsunami in Japan at $210 billion for the first nine months of 2011 alone. Thailand's insurance commissioner estimates some $30 billion in losses from flooding in his country to date.
Scattered shipping containers in Sendai Shiogama Port in Japan on March 13

Because of the interconnected nature of supply chains, the economic impact of these disasters will be felt well beyond Asia -- and for many months to come. Computer hard-drive maker Seagate (STX), which operates two factories in Thailand, predicts disruptions to its customers (Seagate supplies hard drives to makers of PCs and servers) through 2012, and CEO Stephen J. Luczo says the industry won't "be back to normal" until 2013. iSuppli, a market research firm, says the computer industry is in need of 175 million hard drives but suppliers can deliver only 125 million units -- a shortfall of 29%. Apple (AAPL), Hewlett-Packard, (HPQ) and most recently Intel (INTC) are among the companies that have told investors that the flooding will have an impact on future earnings.
The effects of Mother Nature's wrath still are being felt in the U.S. Auto assembly workers in Ohio saw their hours cut in November because Honda (HMC) couldn't get parts from Thailand. (In late November, Honda returned those plants to normal production levels.) On the other hand, a factory in Decherd, Tenn., that normally makes engines for Nissan cars sold only in the U.S. suddenly had to ramp up production after the Japan earthquake; Nissan had the American plant ship engines to Asia for use in cars sold both in Japan and in Southeast Asia.
Not surprisingly, the events of 2011 have forced many manufacturers to rethink their global infrastructures. "These recent 'Black
Swan' or unprecedented natural disaster events have obviously exposed vulnerabilities among industry supply chains," says Ferrari, the supply-chain expert. "The question now is, has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?''
It is a big, knotty issue for CEOs: Are bottom-line-oriented executives prepared to pull back from a system of low-cost suppliers and
"just in time" manufacturing in favor of a more old-fashioned model that has plants squirreling away components for a rainy day, or, more dramatically, investing in backup facilities?
For some companies the answer is a resounding yes. Seagate CEO Luczo says sophisticated companies have started asking his company for longer contracts on supply arrangements.
Analysts say Nissan has bounced back better than other Japanese automakers because it was able to ramp up production at its other plants, including the Decherd facility. (One stroke of bad luck: Nissan also bolstered production at one of its operations in Thailand, which has been slowed by flooding.) FM Global, an insurance company based in Johnston, R.I., surveyed 600 chief financial officers in early 2011 and asked what they feared could derail their companies' revenue drivers. The most frequently cited answer? Supplychain disruptions. And that survey was taken before the Japan earthquake.
Carlos Ghosn, the CEO of Nissan, is philosophical. "There's going to be another crisis," he told an audience in New York in late
November. "We don't know what kind of crisis, where it is going to hit us, and when it is going to hit us, but every time there is a crisis we are going to learn from it." If he's right, and crisis mode is the new normal, then the real cost advantage may not go to the manufacturer with the nimblest supply chain but the company with the most robust one.

By Bruce Tompkins, Principal, Tompkins Associates
Although lean thinking is typically applied to manufacturing, lean techniques and focus are applicable anywhere there are business processes to improve, including the entire supply chain. A lean supply chain is one that produces just what and how much is needed, when it is needed, and where it is needed. The underlying theme in lean thinking is to produce more or do more with fewer resources while giving the end customer exactly what it wants.
This means focusing on each product and its value stream. To do this, organizations must be ready to ask and understand which activities truly create value and which ones are wasteful. The most important thing to remember is that lean is not simply about eliminating waste — it is about eliminating waste and enhancing value.
The Concepts of Value and Waste: Value, in the context of lean, is defined as something that the customer is willing to pay for. Value-adding activities transform materials and information into something a customer wants. Non-valueadding activities consume resources and do not directly contribute to the end result desired by the customer. Waste, therefore, is defined as anything that does not add value from the customer's perspective. Examples of process wastes are defective products, overproduction, inventories, excess motion, processing steps, transportation, and waiting.
Consider the non-manufacturing example of a flight to the Bahamas. The value-adding part of that process is the actual flight itself. The non-value-added parts of that process are driving to the airport, parking at the airport, walking to the terminal and then to check-in, waiting in line at check-in, walking to the security check, and so on. Many times the nonvalue-added time far exceeds the value-added time in this type of process. Where should our improvement efforts be focused — on the non-value added steps or on making the plane fly faster?
Understanding the difference between value and waste and value-added and non-value-added processes is critical to understanding lean. Sometimes it is not easy to discern the difference when looking at an entire supply chain. The best way is to look at the components of the supply chain and apply lean thinking to each one and determine how to link the processes to reduce waste.
Creating Value: Lean principles focus on creating value by:

Specifying value from the perspective of end consumer

Determining a value system by Identifying all the steps required to create value

Mapping the value stream

Challenging every step by asking why 5 times

Lining up value, creating steps to occur in sequence


Creating flow with capable, available, and adequate processes

Pulling materials, parts, products, and information from customers
Continuously improving to reduce / eliminate waste
The value stream consists of the value-adding activities required to design, order, and provide a product from concept to launch, order to delivery, and raw materials to customers. To develop a value stream map for a product, you select a product family and collect process information. Then, you map the steps in sequence and by information flows; this is called a current-state map. The current-state map provides a clear picture of the processing steps and information flow for the process as it exists today. Next, you search the map for improvement opportunities using the concepts of lean, and create a future-state map. This will portray a vision of the future for the process or supply chain you are creating.
This future-state map helps you to visualize the roadmap to get from the current state to the future state.
Mapping the value stream for the supply chain is a similar process. However, the current-state map includes product flow, transportation links, defects and delivery time and steps, and information flow. After creating the current-state map for the supply chain's value stream, supply chain partners should scrutinize it for bottlenecks, waste, and process improvements. They should use what they discover to create future-state maps for the supply chain. An ideal-state map can also be created that provides a vision of how the supply chain could look if perfect integration of all components were to occur. This is in effect an entitlement map for the supply chain process.
Here's how it works – a current-state map indicates that flow within facilities is well defined, but that transportation methods between facilities is creating excess inventory and is not cost effective. The current state map may also show a

weakness in the information flow that is not adding value to the process. The future-state map should create flow between facilities, leveling pull within each facility, and eliminating waste. The method for leveling pull might be to install frequent transport runs or milk runs. Information flow could be improved by installing a web-based process to allow real-time flow of information between all supply chain partners as demand changes. The ideal-state map of this supply chain might have a greatly compressed value system with relocated operations and short transportation deliveries.
"Waste" Reduction: The "waste" reduction process begins with the question "What can we do to improve?" Some answers may include:
1.
Stop defective products at their source
2.
Flow processes together or change the physical relationship of components of the process
3.
Eliminate excess material handling or costly handling steps
4.
Eliminate or reduce pointless process steps
5.
Reduce the time spent waiting for parts, orders, other people, or information
In manufacturing environments, these waste reductions create the benefits of reduced manufacturing cycle time, reduced labor expenditures, improved product quality, space savings, reduced inventory, and quicker response to the customer. When waste is reduced or eliminated across the supply chain, overall cycle time is improved, labor and staff costs are reduced, product quality and delivery are improved, inventories are reduced, and customer lead-times are shortened. The net effect is the entire supply chain is more efficient and responsive to customer needs.
Components of the Lean Supply Chain

Lean Manufacturing: Lean manufacturing systems produce what the customer wants, in the quantity the customer wants, when the customer wants it, and with minimum resources. Lean efforts typically start in manufacturing because they free up resources for continuous improvement in other areas, and create a pull on the rest of the organization. Applying lean concepts to manufacturing typically presents the greatest opportunity for cost reduction and quality improvement; however, many organizations have received huge benefits from lean concepts in other functions.

Lean Suppliers: Lean suppliers are able to respond to changes. Their prices are generally lower due to the efficiencies of lean processes, and their quality has improved to the point that incoming inspection at the next link is not needed. Lean suppliers deliver on time and their culture is one of continuous improvement. To develop lean suppliers, organizations should include suppliers in their value stream. They should encourage suppliers to make the lean transformation and involve them in lean activities. This will help them fix problems and share savings. In turn, they can help their suppliers and set continually declining price targets and increasing quality goals.

Lean Warehousing: Lean warehousing means eliminating non-value added steps and waste in the product storage processes. Typical warehousing functions include receiving, put-away / storing, replenishment, picking, packing and shipping. Warehousing waste can be found throughout the storage process including:

Defective products which create returns

Overproduction/over-shipment of products

Excess inventories which require additional


Excess motions and handling steps
Inefficiencies, unnecessary process steps space and reduce warehousing efficiency
Transportation steps and distances

Waiting for parts, materials and information

Lean Procurement: Some lean procurement processes are e-procurement and automated procurement. Eprocurement conducts transactions, strategic sourcing, bidding, and reverse auctions using Web-based applications.
Automated procurement uses software that removes the human element from multiple procurement functions and integrates with financials. The key to lean procurement is visibility. Suppliers must be able to "see" into their customers' operations and customers must be able to "see" into their suppliers' operations. Organizations should map the current value stream, and together create a future value stream in the procurement process. They should create a flow of information while establishing a pull of information and products.

Information Processes: Each step in the warehousing process should be examined critically to see where unnecessary, repetitive, and non-value-added activities might be so that they may be eliminated. Lean Transportation: Lean concepts in transportation include:

Core carrier programs

Improved transportation administrative process and automated functions


Optimized mode selection and pooling of orders
Combined multi-stop truckloads


Cross-docking operations
Right sizing transportation equipment

Import / export transportation processes

Inbound transportation / backhauls
The keys to accomplishing the concepts above include mapping the value stream, creating flow, reducing waste in processes, eliminating non-value-added activities and using pull processes.
Lean Customers: Lean customers understand their business needs and therefore can specify meaningful requirements.
They value speed and flexibility and expect high levels of delivery performance and quality. Lean customers are interested in establishing effective partnerships — they are always seeking methods of continuous improvement in the total supply chain to reduce costs. Lean customers expect value from the products they purchase and provide value to the consumers who they interact with.
Benefits of Lean Systems
1.
Speed and Responsiveness to Customers: Lean systems allow a supply chain to not only to be more efficient, but also faster. As the culture of lean takes over the entire supply chain, all links increase their velocity. A culture of rapid response and faster decisions becomes the expectation and the norm. This does not mean that decisions are made without careful thought. It simply means that a "bias for action" becomes the new corporate culture and anything less will not be tolerated. Slow response or no response becomes the exception, rather than the rule.
2.
Reduced Inventories: In the lean paradigm, inventory is considered waste. Many would argue this point, but manufacturing can take place efficiently with little or no raw material, work in process (WIP), or finished goods inventory. Many companies today produce directly into trailers and maintain no other finished goods inventory. All quality inspections and checks are performed within the process, rather than after production is complete. In this true make-to-order scenario, all goods are shipped directly to the next link in the supply chain when the trailer is full, and overproduction is not possible and cannot be tolerated. No space is designated to store finished goods. The system is not designed to carry them.
Applying one-piece flow and pull systems can reduce WIP dramatically. A Kanban or visual signal for more goods to be moved forward to the next process can accomplish this procedure. Although the ultimate goal is to eliminate
WIP, minimal WIP is normally the result. The elimination of bottlenecks is one goal of a lean supply chain, but a bottleneck will always exist to some degree. As a result, WIP must always exist in front of a bottleneck or the bottleneck operation will be starved and will stop.
Raw material inventory is a different matter. Although the leanest organizations have arranged just in time deliveries to support manufacturing, this approach requires the absolute highest degree of competency and coordination within the supply chain.
3.
Reduced Cost: Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product. High development costs are the result of this model. To recover the enormous development and initial capital costs sunk into the product before it was produced, mass producers forecast and run long production cycles for each SKU. Consumer preferences and variety suffer in this scenario. Costs still need to be minimized, but not at the expense of what more sophisticated consumers now demand.
4.
Improved Customer Satisfaction: Lean promotes minimizing new product development time and expense. This delivers the product to market faster, making it easier to incorporate current requirements into the product. Lean also promotes the use of less capital-intensive machines, tools, and fixtures, which results in more flexibility and less initial cost to recover. As a result, product life cycles may be shorter and product developments incorporated in newer versions of the product more frequently. Profitability does not suffer and brand loyalty is increased, as customers prefer to buy products and services from a perceived innovator.

Supply Chain as a Competitive Weapon: A strong supply chain enables the member companies to align themselves with each other and to coordinate their continuous improvement efforts. This synthesis enables even small firms to participate in the results of lean efforts. Competitive advantage and leadership in the global marketplace can only be gained by applying lean principles to the supply chain. Thought, commitment, planning, collaboration, and a path forward are required.
Path Forward to a Lean Supply Chain: Lean is a cooperative process for survival and for success. Supply chains that want to grow and continue to improve must adopt lean. Lean concepts require an attitude of continuous improvement with a bias for action. The concepts of lean apply to all elements of the supply chain, including support departments such as product development, quality, human resources, marketing, finance, purchasing, and distribution. The challenge is to bring all of these areas out of their traditional silos and make them work together to reduce waste and create flow.
Duplication and a lack of appropriate and timely communication run rampant in these traditional organizations. A lean supply chain is proactive and plans for the unexpected by positioning all resources for effectiveness. Downturns in demand can be addressed without layoffs or significant productivity losses.
Leaning "other" areas presents a larger challenge than it does in manufacturing. Supervisors and factory workers embrace change that results in making their lives less complicated and more successful. In the hierarchy of support areas, it is more challenging for the people to understand how lean can benefit them. The answer is simple: What benefits the organization as a whole benefits the supply chain.
Because the Internet provides us with unprecedented opportunities for sharing information and conducting transactions across the supply chain, companies should have a sense of urgency about adopting lean concepts. But all chain partners have to be on the same playing field, and the lean concept is intended to let everyone reach new levels of efficiency and effectiveness. Supply chain leaders should not delay — it's urgent to act now to implement lean concepts in the supply chain.
TRANSPORTATION STRATEGY STUDENT QUESTIONS
1.
What is the primary focus of a lean supply chain? What are the primary enablers to do this?
2.
In the context of a lean supply chain, what adds value and what is considered waste?
3.
How does transportation add value? How can it be perceived as being “wasteful”?
4.
How do lean supply chain improvement programs / processes affect transportation with regards to emerging information technology applications?
5.
The benefits of a lean supply chain are well-defined. How does transportation management and execution contribute to these benefit areas?
6.
Can transportation be a competitive weapon? How so?

By Supply Chain Digest; May 25 , 2 010
WalMart has created quite a stir in its supplier community as it moves forwards with plans to take over inbound transportation management for most supplier shipments to its distribution centers and stores.
Currently, nearly all supplier shipments to WalMart are managed by the supplier, in some cases as part of a
“total delivered price”. In other cases under a “Collect” arrangement where WalMart selects the carrier and pays for the freight, but the supplier works with the designated carrier to execute the shipment. In other cases, Wal-Mart does arrange backhaul pick-ups at suppliers after one of its trucks makes a delivery to its DCs or stores, but these are thought to represent a small portion of the total inbound moves.
A growing number of retailers manage inbound freight dynamically, requiring suppliers to submit planned shipments receiving routing instructions back from the retailer – but usually using common carriers for the freight movements to the retail DC. Under its program, WalMart will largely use its fleet of some 6,500 trucks to plan and execute the inbound supplier moves.
While details are not completely clear, it is assumed many current Collect freight suppliers will increasingly have their pick-ups scheduled by WalMart, and many Prepaid customers will now have WalMart completely control their outbound transportation.
Of course, this brings up the question of how the transition will be made for those customers currently selling to WalMart on a total delivered price that includes transportation to WalMart distribution centers. In that case, WalMart will ask for “allowances,” as it does currently when it arranges a backhaul, to offset the transportation cost of the total delivered price. Those allowances become deductions against the invoice for that particular shipment.
According to BusinessWeek, in some cases WalMart has been asking for allowances in the range of 6% of the invoice – as much as twice as large as the actual cost for transportation, meaning the supplier’s current profit margin would be reduced by 3 percentage points – quite a financial beating. “There may be a disconnect when we walk into the room on what that cost might be,” Kelly Abney, WalMart’s vice president of corporate transportation, recently told BusinessWeek magazine. “But we work collaboratively. As soon as a supplier shares the data, almost always those differences are quickly resolved.”
A former logistics executive at a major food company said that for large companies, transportation costs for
WalMart shipments were under its overall average of 3%. “The truckload costs for the larger accounts, certainly including WalMart, was more effective than our average,” he said. “6% cost allowance requests, if this is accurate, is dreaming.”
For WalMart suppliers that use total delivered pricing, one potential impact will be that they will lose some current transportation advantages. With WalMart representing 20-30% of many vendors’ total sales volumes, losing the ability to leverage those volumes if they move from prepaid and add to WalMart pick-up could result in higher rates on its other shipments due to a loss in total freight they can offer to truckers.
In other cases, suppliers may lose the some optimization capability, such as multi-stop truckload optimization, or continuous moves, that are no longer viable with Wal-Mart controlling those shipments. “It’s the large consumer packaged goods manufacturers that tend to ship Walmart Prepaid and who are the ones at risk to

lose leverage with this change,” one vice president of logistics for a WalMart supplier told SCDigest. He, like virtually everyone we spoke with for this article, spoke only on the condition of anonymity.
In the end, WalMart is saying it is simply better in logistics than its suppliers – which may be true given its huge number of trucks and total network density, providing opportunities to reduce empty miles that are simply not available to most companies. The new program has “allowed our suppliers to focus on what they do best, manufacturing products for us,” Abney said last week. “With lower costs usually comes increased sales.” Abney said Wal-Mart has had such discussions with more than 100 of its thousands of vendors thus far, and some few dozen have already had their shipment approaches change to WalMart control.
Another factor of concern to suppliers is the potential for greater distribution center costs. “Customer pickups [CPUs] are the no good for our DC because they are frequently late, not willing to drop trailers, which causes live loading, cause OS&D issues, etc.,” one logistics executive told us. “Remember that most of the customer pick-ups will be carriers they secure to do the pick-up rather than their own fleet. We do everything possible to limit CPUs and live loading as it added significant cost to our supply chain.”
Do fuel surcharges play a role in WalMart’s new transportation strategy? According to the direct director of transportation for another WalMart supplier, WalMart’s challenges with fuel surcharges under the current program are key to this change in transportation strategy.
“What is interesting – and distressing at the same time- is that WalMart is considering changing our terms to
Prepaid but force us to use only their fleet. Why would they do that? A Collect item has no transportation cost in the price of the goods,” our source said. “What they want us to do is to agree upon a transportation cost and add it to the cost of the goods but provide a freight allowance at the same amount for freight. You would think this would have a net effect of zero.”
But it doesn’t, he said. “What they are truly trying to get at is to recover fuel surcharges more accurately. The problem WalMart was having is that Collect pricing is very slow to change, maybe once a year, and so often they were left holding the bag on increased fuel prices with no mechanism to recover,” the executive said.
“But with this approach, they can simply enact a fuel surcharge program with their freight allowance and now they are whole – closing a loophole of the benefits of Collect freight terms.”
1.
Who benefits most from the change in transportation strategy, WalMart or the suppliers?
2.
Will the consumer, the “puller” in the supply chain, be benefited or hurt from the change? How?
3.
How will Wall Street analysts view this change in supply chain / transportation straegy?

By Pradheep Sampath, Director of Product Management at GXS, the global leader in enabling B2B e-commerce
Wal-Mart continues to find ways to seek and destroy sources of supply chain risk. In a recent development, they want to take the driver’s seat, gain greater control over exogenous factors and achieve further cost reductions by controlling all transportation activities.
In February 2010, Wal-Mart announced a new “Supply Chain Reliability Program” . This initiative was designed to ensure that goods did not arrive too early or too late into over 100 of their US Distribution Centers (DCs), as defined by a fourday window leading up to a “Must Arrive By Date (MABD)”. You may recall from this earlier announcement that suppliers who fall below a 90% monthly threshold for compliance with this program would incur invoice deductions that equal 3% of cost of goods sold (COGS) for shipments arriving before or after this 4-day MABD window. Wal-Mart has now gone one step further to achieve timely and cost-effective deliveries.
This past week, Wal-Mart initiated the process to take over responsibilities for all US transportation activities from their suppliers. Suppliers currently make deliveries using their own transportation providers to over 100 Wal-Mart DCs.
WalMart then leverages its fleet of 6,500 trucks and 55,000 trailers to ship goods between these DCs and 4,000 stores nationwide. With this move, Wal-Mart wants to own and operate all transportation – all the way from the supplier’s factories to the retailer’s DCs and stores. Wal-Mart has started reaching out to the first set of its suppliers to take over transportation routes that it believes it can handle more efficiently than they can. Wal-Mart will require price cuts from suppliers for taking transportation costs off their hands, resulting in lower prices for consumers as well as increased margin and sales. They expect to gain efficiencies by better truck utilization while further improving on-time deliveries.
Wal-Mart’s current transportation strategy focuses almost exclusively on their DC-to-Store network and presumably results in significant empty miles on return trips. This new move to own the entire transportation network can help create back-haul strategies out of empty miles. This is but one example of how securing control over logistics and transportation can reap significant rewards for Wal-Mart.
Five Points for Suppliers
While this is clearly an advantageous move for Wal-Mart, I can think of at least five ways in which this development could impact suppliers.
1.
Suppliers that were concerned about penalties and financial impacts of not complying with Wal-Mart’s MABD stipulations can take comfort in passing this burden on to the retailer. They will however have to continue evolving their transportation acumen and fully expect Wal-Mart to hand this responsibility back to them at short notice down the pike.
2.
Wal-Mart is said to be demanding significant price cuts – reportedly as much as 6% from suppliers in exchange for taking over transportation. Initial reaction from suppliers is that this may be up to twice as high as what it costs them on average. It becomes imperative now for suppliers to be able to demonstrate accurate transportation costs, as a component of current total costs to accurately negotiate this price cut with Wal-Mart.
3.
Suppliers will lose flexibility and will likely have to accede to Wal-Mart’s schedule to pick up goods from their factories. Collaborative transportation planning and actionable supply chain visibility between suppliers and Wal-
Mart would significantly help alleviate some of these challenges. Having access to an automated, timely, cost effective and error free platform to exchange critical business transactions with Wal-Mart is a critical imperative for success.
4.
Shipments to Wal-Mart frequently take up the lion’s share of many a supplier’s transportation needs, helping them secure attractive volume-based rates from carriers. Without the bulk discounts they accrue from shipments to Wal-
Mart, suppliers will be burdened with higher transportation costs for their other retail customers.
5.
This would result in higher prices that suppliers will likely be forced charge their non Wal-Mart retail customer base.
The possibility of higher shelf prices for consumers shopping at these retailers is real. Lower sales, margin and revenue for these other retailers and for suppliers is also something that will need to be reckoned with.
STUDENTS: Read and prepare for classroom discussion on the 5 points of importance to Tier 1 suppliers to WalMart.

By Bruce Tompkins, Principal, Tompkins Associates
Although lean thinking is typically applied to manufacturing, lean techniques and focus are applicable anywhere there are business processes to improve, including the entire supply chain. A lean supply chain is one that produces just what and how much is needed, when it is needed, and where it is needed. The underlying theme in lean thinking is to produce more or do more with fewer resources while giving the end customer exactly what it wants.
This means focusing on each product and its value stream. To do this, organizations must be ready to ask and understand which activities truly create value and which ones are wasteful. The most important thing to remember is that lean is not simply about eliminating waste — it is about eliminating waste and enhancing value.
The Concepts of Value and Waste: Value, in the context of lean, is defined as something that the customer is willing to pay for. Value-adding activities transform materials and information into something a customer wants. Non-valueadding activities consume resources and do not directly contribute to the end result desired by the customer. Waste, therefore, is defined as anything that does not add value from the customer's perspective. Examples of process wastes are defective products, overproduction, inventories, excess motion, processing steps, transportation, and waiting.
Consider the non-manufacturing example of a flight to the Bahamas. The value-adding part of that process is the actual flight itself. The non-value-added parts of that process are driving to the airport, parking at the airport, walking to the terminal and then to check-in, waiting in line at check-in, walking to the security check, and so on. Many times the nonvalue-added time far exceeds the value-added time in this type of process. Where should our improvement efforts be focused — on the non-value added steps or on making the plane fly faster?
Understanding the difference between value and waste and value-added and non-value-added processes is critical to understanding lean. Sometimes it is not easy to discern the difference when looking at an entire supply chain. The best way is to look at the components of the supply chain and apply lean thinking to each one and determine how to link the processes to reduce waste.
Creating Value: Lean principles focus on creating value by:

Specifying value from the perspective of end consumer

Determining a value system by Identifying all the steps required to create value

Mapping the value stream

Challenging every step by asking why 5 times

Lining up value, creating steps to occur in sequence


Creating flow with capable, available, and adequate processes

Pulling materials, parts, products, and information from customers
Continuously improving to reduce / eliminate waste
The value stream consists of the value-adding activities required to design, order, and provide a product from concept to launch, order to delivery, and raw materials to customers. To develop a value stream map for a product, you select a product family and collect process information. Then, you map the steps in sequence and by information flows; this is called a current-state map. The current-state map provides a clear picture of the processing steps and information flow for the process as it exists today. Next, you search the map for improvement opportunities using the concepts of lean, and create a future-state map. This will portray a vision of the future for the process or supply chain you are creating.
This future-state map helps you to visualize the roadmap to get from the current state to the future state.
Mapping the value stream for the supply chain is a similar process. However, the current-state map includes product flow, transportation links, defects and delivery time and steps, and information flow. After creating the current-state map for the supply chain's value stream, supply chain partners should scrutinize it for bottlenecks, waste, and process improvements. They should use what they discover to create future-state maps for the supply chain. An ideal-state map can also be created that provides a vision of how the supply chain could look if perfect integration of all components were to occur. This is in effect an entitlement map for the supply chain process.
Here's how it works – a current-state map indicates that flow within facilities is well defined, but that transportation methods between facilities is creating excess inventory and is not cost effective. The current state map may also show a

weakness in the information flow that is not adding value to the process. The future-state map should create flow between facilities, leveling pull within each facility, and eliminating waste. The method for leveling pull might be to install frequent transport runs or milk runs. Information flow could be improved by installing a web-based process to allow real-time flow of information between all supply chain partners as demand changes. The ideal-state map of this supply chain might have a greatly compressed value system with relocated operations and short transportation deliveries.
"Waste" Reduction: The "waste" reduction process begins with the question "What can we do to improve?" Some answers may include:
1.
Stop defective products at their source
2.
Flow processes together or change the physical relationship of components of the process
3.
Eliminate excess material handling or costly handling steps
4.
Eliminate or reduce pointless process steps
5.
Reduce the time spent waiting for parts, orders, other people, or information
In manufacturing environments, these waste reductions create the benefits of reduced manufacturing cycle time, reduced labor expenditures, improved product quality, space savings, reduced inventory, and quicker response to the customer. When waste is reduced or eliminated across the supply chain, overall cycle time is improved, labor and staff costs are reduced, product quality and delivery are improved, inventories are reduced, and customer lead-times are shortened. The net effect is the entire supply chain is more efficient and responsive to customer needs.
Components of the Lean Supply Chain

Lean Manufacturing: Lean manufacturing systems produce what the customer wants, in the quantity the customer wants, when the customer wants it, and with minimum resources. Lean efforts typically start in manufacturing because they free up resources for continuous improvement in other areas, and create a pull on the rest of the organization. Applying lean concepts to manufacturing typically presents the greatest opportunity for cost reduction and quality improvement; however, many organizations have received huge benefits from lean concepts in other functions.

Lean Suppliers: Lean suppliers are able to respond to changes. Their prices are generally lower due to the efficiencies of lean processes, and their quality has improved to the point that incoming inspection at the next link is not needed. Lean suppliers deliver on time and their culture is one of continuous improvement. To develop lean suppliers, organizations should include suppliers in their value stream. They should encourage suppliers to make the lean transformation and involve them in lean activities. This will help them fix problems and share savings. In turn, they can help their suppliers and set continually declining price targets and increasing quality goals.

Lean Warehousing: Lean warehousing means eliminating non-value added steps and waste in the product storage processes. Typical warehousing functions include receiving, put-away / storing, replenishment, picking, packing and shipping. Warehousing waste can be found throughout the storage process including:

Defective products which create returns

Overproduction/over-shipment of products

Excess inventories which require additional


Excess motions and handling steps
Inefficiencies, unnecessary process steps space and reduce warehousing efficiency
Transportation steps and distances

Waiting for parts, materials and information

Lean Procurement: Some lean procurement processes are e-procurement and automated procurement. Eprocurement conducts transactions, strategic sourcing, bidding, and reverse auctions using Web-based applications.
Automated procurement uses software that removes the human element from multiple procurement functions and integrates with financials. The key to lean procurement is visibility. Suppliers must be able to "see" into their customers' operations and customers must be able to "see" into their suppliers' operations. Organizations should map the current value stream, and together create a future value stream in the procurement process. They should create a flow of information while establishing a pull of information and products.

Information Processes: Each step in the warehousing process should be examined critically to see where unnecessary, repetitive, and non-value-added activities might be so that they may be eliminated. Lean Transportation: Lean concepts in transportation include:

Core carrier programs

Improved transportation administrative process and automated functions


Optimized mode selection and pooling of orders
Combined multi-stop truckloads


Cross-docking operations
Right sizing transportation equipment

Import / export transportation processes

Inbound transportation / backhauls
The keys to accomplishing the concepts above include mapping the value stream, creating flow, reducing waste in processes, eliminating non-value-added activities and using pull processes.
Lean Customers: Lean customers understand their business needs and therefore can specify meaningful requirements.
They value speed and flexibility and expect high levels of delivery performance and quality. Lean customers are interested in establishing effective partnerships — they are always seeking methods of continuous improvement in the total supply chain to reduce costs. Lean customers expect value from the products they purchase and provide value to the consumers who they interact with.
Benefits of Lean Systems
1.
Speed and Responsiveness to Customers: Lean systems allow a supply chain to not only to be more efficient, but also faster. As the culture of lean takes over the entire supply chain, all links increase their velocity. A culture of rapid response and faster decisions becomes the expectation and the norm. This does not mean that decisions are made without careful thought. It simply means that a "bias for action" becomes the new corporate culture and anything less will not be tolerated. Slow response or no response becomes the exception, rather than the rule.
2.
Reduced Inventories: In the lean paradigm, inventory is considered waste. Many would argue this point, but manufacturing can take place efficiently with little or no raw material, work in process (WIP), or finished goods inventory. Many companies today produce directly into trailers and maintain no other finished goods inventory. All quality inspections and checks are performed within the process, rather than after production is complete. In this true make-to-order scenario, all goods are shipped directly to the next link in the supply chain when the trailer is full, and overproduction is not possible and cannot be tolerated. No space is designated to store finished goods. The system is not designed to carry them.
Applying one-piece flow and pull systems can reduce WIP dramatically. A Kanban or visual signal for more goods to be moved forward to the next process can accomplish this procedure. Although the ultimate goal is to eliminate
WIP, minimal WIP is normally the result. The elimination of bottlenecks is one goal of a lean supply chain, but a bottleneck will always exist to some degree. As a result, WIP must always exist in front of a bottleneck or the bottleneck operation will be starved and will stop.
Raw material inventory is a different matter. Although the leanest organizations have arranged just in time deliveries to support manufacturing, this approach requires the absolute highest degree of competency and coordination within the supply chain.
3.
Reduced Cost: Traditional mass production tries to minimize unit costs by increasing total production over the life cycle of the product. High development costs are the result of this model. To recover the enormous development and initial capital costs sunk into the product before it was produced, mass producers forecast and run long production cycles for each SKU. Consumer preferences and variety suffer in this scenario. Costs still need to be minimized, but not at the expense of what more sophisticated consumers now demand.
4.
Improved Customer Satisfaction: Lean promotes minimizing new product development time and expense. This delivers the product to market faster, making it easier to incorporate current requirements into the product. Lean also promotes the use of less capital-intensive machines, tools, and fixtures, which results in more flexibility and less initial cost to recover. As a result, product life cycles may be shorter and product developments incorporated in newer versions of the product more frequently. Profitability does not suffer and brand loyalty is increased, as customers prefer to buy products and services from a perceived innovator.

Supply Chain as a Competitive Weapon: A strong supply chain enables the member companies to align themselves with each other and to coordinate their continuous improvement efforts. This synthesis enables even small firms to participate in the results of lean efforts. Competitive advantage and leadership in the global marketplace can only be gained by applying lean principles to the supply chain. Thought, commitment, planning, collaboration, and a path forward are required.
Path Forward to a Lean Supply Chain: Lean is a cooperative process for survival and for success. Supply chains that want to grow and continue to improve must adopt lean. Lean concepts require an attitude of continuous improvement with a bias for action. The concepts of lean apply to all elements of the supply chain, including support departments such as product development, quality, human resources, marketing, finance, purchasing, and distribution. The challenge is to bring all of these areas out of their traditional silos and make them work together to reduce waste and create flow.
Duplication and a lack of appropriate and timely communication run rampant in these traditional organizations. A lean supply chain is proactive and plans for the unexpected by positioning all resources for effectiveness. Downturns in demand can be addressed without layoffs or significant productivity losses.
Leaning "other" areas presents a larger challenge than it does in manufacturing. Supervisors and factory workers embrace change that results in making their lives less complicated and more successful. In the hierarchy of support areas, it is more challenging for the people to understand how lean can benefit them. The answer is simple: What benefits the organization as a whole benefits the supply chain.
Because the Internet provides us with unprecedented opportunities for sharing information and conducting transactions across the supply chain, companies should have a sense of urgency about adopting lean concepts. But all chain partners have to be on the same playing field, and the lean concept is intended to let everyone reach new levels of efficiency and effectiveness. Supply chain leaders should not delay — it's urgent to act now to implement lean concepts in the supply chain.
TRANSPORTATION STRATEGY STUDENT QUESTIONS
1.
What is the primary focus of a lean supply chain? What are the primary enablers to do this?
2.
In the context of a lean supply chain, what adds value and what is considered waste?
3.
How does transportation add value? How can it be perceived as being “wasteful”?
4.
How do lean supply chain improvement programs / processes affect transportation with regards to emerging information technology applications?
5.
The benefits of a lean supply chain are well-defined. How does transportation management and execution contribute to these benefit areas?
6.
Can transportation be a competitive weapon? How so?

Bill Luttrell, Senior Locations Strategist, Werner Global Logistics, Werner Enterprises
The United States is at a crossroads. It is still the largest economic power in the world. The International Monetary
Fund’s 2011 report estimates that we are living in a $70 trillion global economy, in which the United States is by far the single largest economy at approximately $15 trillion. To put that nation’s economic strength into perspective, the next three largest economies combined (China, Japan, and Germany) barely surpass the U.S. total.
The United States is also a nation blessed with abundant natural resources, a growing population, a highly educated work force, efficient manufacturing, and an aging, but still excellent infrastructure. It is still the world’s only superpower.
But its biggest and immediate challenge is to maintain and strengthen that position into the future. One way for the
United States to maintain this position is to continue to improve its leadership position in logistics and to improve its infrastructure.
“Lean and Mean”
During the past couple of years, the significant downturn in the U.S. economy has forced corporations that want to survive to look long and hard at their internal operations. For manufacturers, this meant dissecting their entire supply chain to capture savings by cutting costs and increasing productivity. This process included re-evaluating suppliers, looking at transportation options, improving inventory controls, reassessing location and facility requirements, finetuning work forces, and improving material-handling and packaging methods.
Likewise, logistics service providers — trucking companies, railroads, shipping lines, air cargo firms, brokers, expeditors, software vendors, etc. — have all had to improve their own cost and performance structures to meet their clients’ needs. In fact, those that could not compete were forced out of the market. From 2007 to 2010, 8,000 trucking firms went bankrupt, according to a report published by Avondale Partners. It certainly was not business as usual. It has been a major retooling for all.
As a result, most U.S. manufacturers have literally become “lean and mean,” with debt-to-cash ratios the lowest in five years at 3.06 percent. Despite industrial production only being up 5.3 percent in 2010, and the fact that only half the production volume lost during the recession has returned, manufacturers are experiencing all time high profits and an abundance of cash. But profits still are not enough to overcome risk. It should be noted that transportation no longer is a sound barometer for gauging the overall economy, as the growing service sector and the Google and Facebook type companies that do not produce goods are having a much greater effect.
U.S. manufacturers are more than ready as they are reacting to the protracted slow economic growth, which is being fueled by political and policy uncertainties (risk). They are not adding employees as their productivity gains and the slowed economy have negated their need to hire, which in turn has contributed to the high unemployment rate and has helped keep consumer demand in check. In addition, as the restocking of inventory ends, production is beginning to taper off a bit. Companies are cautiously waiting for the spring-loaded economy to trigger.
Ready for Retooling
This is not the first time for a major retooling of the U.S. manufacturing economy. American manufacturing underwent a major overhaul and upgrade during WWII and during the postwar years of the 1950s and 1960s. The United States felt it was its duty to rebuild the world economy and we went about it with gusto.
The U.S. economy was going strong and the world was its market. But by the late 1970s and early 1980s, other nations started to compete with America on a more serious basis. In particular, Japan was developing into a global economic power, second only to the United States. The Japanese were building new manufacturing facilities globally that were extremely modern and efficient. For the first time ever, robotics were being introduced and the term “supply chain” was born.
The 20- to 30-year-old American facilities simply could not compete. After a period of some hysteria, America was forced to retool. And while the Japanese had made great advances on the manufacturing floor, they had failed to do so across the entire spectrum of their business.

Timing also played a part. By the 1990s, when U.S. manufacturing really started to retool, advances in computer technology and other IT-related industries allowed the United States to leap-frog to a much higher level, implementing state-of-the-art solutions not only on the manufacturing floor, but also at the desktop-level in U.S. company headquarters, back offices, warehouses/distribution centers, and even back into their suppliers and forward to their retail outlets — indeed, across the entire supply chain. In addition, the U.S. began making investments in third-party expertise, from visibility software, to creative financing and assistance in strategic planning, to third-party logistics.
Retooling Is Not Complete
Logistics means movement, and when things physically move, you have to have the proper infrastructure. Moving product efficiently and cost competitively is essential to supply chain success. One area attracting tremendous attention is the call for extended investment in transportation infrastructure.
America’s highway system is the most important nationwide infrastructure it has. Although the U.S. highway system is world-class and extensive, it is typically more than 30 years old and in need of some significant repair/upgrade to meet the needs of a growing economy. More than 70 percent of the freight tonnage in the United States moves over its highways by truck. U.S. trucking accounts for 5 percent of the U.S. GDP, and trucks are the only mode of delivering goods to more than 80 percent of the communities in the country. Trucks also account for more than 80 percent of the value of cross-border trade with Mexico and more than 60 percent of the value of trade with Canada.
Bottlenecks and congestion are of major concern, as it is estimated such lost time costs more than $20 billion annually.
Funding for highway repairs and expansion is at a crossroads. The federal fuel tax, which has historically been used to fund highway infrastructure, does not produce enough needed revenue. Revenues are declining as more vehicles are becoming more fuel-efficient. The U.S. Congress must address this need on a more long-term basis. In the meantime, some $23 billion has been approved for the Highway Trust Fund and Surface Transportation Program, extending their funding to March 2012.
Mega transportation corridors are developing rapidly, connecting large metropolitan areas and regions throughout the
United States. These include:
 Boston – New York – Philadelphia – Washington, D.C.
 Chicago – Pittsburgh
 Charlotte – Atlanta
 Southern and Northern California
 Denver – Omaha – Kansas City – St. Louis
 Indianapolis – Columbus
 San Antonio – Austin – Dallas – Oklahoma City
 Louisville – Cincinnati – Lexington
 Orlando – Tampa – Miami
 Seattle – Tacoma – Vancouver
 Cleveland – Youngstown – Akron – Canton
 New Orleans – Baton Rouge – Memphis
 Tucson – Phoenix – Las Vegas – Salt Lake City
 Idaho Falls – Great Falls – Calgary
As the United States grows by an additional 30 million people by 2050, keeping its transportation infrastructure in top condition and meeting these future growth needs are vital and will require long-term planning.
Sector Challenges
Trucking companies are experiencing several issues, including new Compliance, Safety, and Accountability (CSA) safety requirements; Hours of Safety (HOS) guidelines; and very tight capacity conditions. The CSA has already begun sending warnings out to carriers regarding deficient safety numbers. These CSA reports on carriers will force them to keep on top of their data if they want to be competitive. HOS rules calling for shorter-hour limits and restart timelines for drivers are currently being debated in Congress, and a decision should be forthcoming soon.
Capacity constraints, the sudden high cost of new trucks with 2010 Environmental Protection Agency (EPA) compliant engines, and the unknown economy have most carriers holding off on buying new trucks until the economy picks up.

This means we will see more aging trucks on the road. Today the average age of the U.S. fleet of Class 8 trucks is seven years, an increase of 17 percent since 2005. An aging fleet, along with a surging shortage of drivers due to tougher hiring requirements and higher fuel prices, has led to higher pricing.
U.S. rails are in a better position. Railroads, along with government entities, have poured millions into upgrading U.S. rail network infrastructure. The Association of American Railroads is requesting that $150 billion be spent on upgrades and expansion by the year 2040 to meet network future needs. Overpasses and tunnels have been upgraded to accommodate double stacking. The Class I railroads were recently the major recipients of $7.7 million from the government to upgrade security. Railcar leasing companies are now pulling several thousand idle railcars out of storage to meet increasing demand.
Weather and cost-cutting has caused some constraints, but intermodal rail continues to grow at a very rapid rate. New high-tech intermodal facilities are being built. Volume-wise, more than 4 percent of total U.S. tonnage has shifted from trucks to rail due to higher fuel prices and new double-stacking routes. Basically, if a product is moving more than 750 miles, rail transport can be an economical option.
The U.S. port infrastructure has also been going through major upgrades. While the West Coast ports have already made significant upgrades, the East Coast ports are currently spending millions on upgrades directly related to the $5.25 billion
Panama Canal expansion, which is expected to be completed in August 2014. New post-Panamax ships will be twice the size of current vessels and require a 50-foot draft, and U.S. ports — especially those on the East Coast, including New
York/New Jersey, Norfolk (Virginia), and Charleston (South Carolina) and Savannah (Georgia) — are competing for expanded traffic.
All U.S. ports are modern, state-of-the-art facilities with trucking and rail links, warehouse/terminal development, and foreign-trade zone (FTZ) status. U.S. ports recently received $235 million in security grants from the government. The
United States also has a series of inland ports that have been making significant upgrades. These include inland ports located in Dallas/Ft. Worth, Chicago, Kansas City, St. Louis, Atlanta, Memphis, the Inland Empire of California, Columbus
(Ohio), Charlotte (North Carolina), and Florida’s Inland Port.
Air service, including global air cargo service is widespread across the United States. The International Air Transport
Association (IATA) states that the air cargo industry continues to experience some extensive capacity oversupply and flat volume well into next year. However, the volume to/from the United States and Latin America is gaining. With inspections on all domestic and “high-risk” international flights, the Transportation Security Administration (TSA) states that air cargo is more secure than ever.
The bottom line is the United States has the world’s largest, most efficient, world-class logistics infrastructure in place, and it is currently undergoing upgrades to handle the growing capacity of the future. From the West Coast ports of Los
Angeles/Long Beach, to the inland transportation hubs of Omaha and Memphis, to the border crossing at Laredo
(Texas), to Chicago’s O’Hare Airport, the United States is truly a mega hub to the Americas — and beyond.
STUDENT QUESTIONS:
1.
As a consequence of the recent economic down turn, major corporations have been forced to do what / why?
2.
What has been the impact of these strategic decisions on the transportation strategy and carriers?
3.
What are the author’s major points with reference to re-tooling the US logistics system?
4.
What is meant by the phrase “lean and mean”?
5.
What are the key challenges in the future for each modal category?