SRFM? Yes, another ACRONYM!

The planning, execution and partner collaboration processes of nearly all companies today are driven by a “plan”, itself typically part forecast, part performance target. Together, the plan and these core processes are at the heart of almost everything a company does – from MRP output, to commitments to customers and suppliers, to internal performance targets and the bonuses that depend on them, to the financial projections delivered to Wall Street.

The day to day activities that absorb the majority of working hours, however, and through which things ultimately get done, often seem to occur in a reality almost separate from the plan and the core systems that support it. The reason? Actual supply and demand rarely match the plan. Uncertainty, whether about supplier performance, market conditions, a delayed product transition, or one of the many other drivers of supply and demand, leaves companies facing actual circumstances that differ from those planned for. Fire-fighting ensues – e-mails, voice mails, renegotiations, spreadsheet work-arounds. Stress is placed on relationships, and performance fails to live up to expectations.

What can be done? We can continue to hope for and to work toward better forecasts and plans. But forecasts will never be perfect as long as there are factors that impact our business which are outside our control. Which is to say forever, particularly as more key activities are outsourced, and business becomes increasingly global.

We can also invest in being able to better react to actual events as they occur - to the actual circumstances that differ from the plan – as soon as we learn about them. But response lead times aren’t zero, and flexibility isn’t free. Supply chains that win invest in responsiveness, but also acknowledge and work to minimize its costs and liabilities. And they choose to operate at a point where the incremental cost of further responsiveness rises to the level of the value it delivers. Which isn’t infinite flex at zero lead-time – in most cases, it is far from it.

There is a solution to the plan vs. reality gap – one supported by systems and processes that enable advance planning for the range of supply and demand outcomes that can occur – and which enables efficient execution and effective performance management in response to the outcomes that actually do occur. It is called supply risk and flexibility management, or SRFM.

SRFM begins by acknowledging that trying to run a business in an uncertain environment, using systems and processes design to execute a fixed plan, is like trying to manage a construction project in quicksand. If the one thing we are sure of is the forecast will be wrong, using it as the foundation of our core systems and processes makes consistent and efficient performance equally unlikely.

The appropriate foundation for planning and execution in an uncertain environment is the range of possible future supply and demand conditions. Using “range forecasts” allows us to capture and utilize all we know about prospective supply and demand conditions – whether from historical experience, or from the market information currently available to sales, marketing, and procurement. In contrast, “point” forecast systems are only able to capture a single “best guess”. Information about the range of potential outcomes – clearly critical and valuable – is excluded from core systems as a result, forcing “informal” manual processes to attempt to cover it.

Two processes form the core of SRFM, both of which are built on supply and demand range forecast foundations. The first process quantifies the impact of supply and demand uncertainty on prospective future operating and financial performance. The second enables supply chain strategies to be defined and executed – both internally and with key supply chain partners – to manage the range of future performance outcomes and risk factors identified to best meet business objectives. These two processes, and the transformation of supply chain planning, execution, and performance they enable, are best illustrated with this example:

Consider supply management. Under traditional processes, negotiations focus on price. Lead times, along with flex terms that outline performance responsibilities in the event of inevitable forecast changes, may also be discussed. Data about how these terms impact future cost, value and risk is rarely available, however, nor are commitments that quoted terms will be honored under the adverse supply and demand conditions when they matter most.

In contrast, under SRFM procurement, teams enter negotiations armed with data that quantifies how specific price, lead time, and flex terms for the product or material in question impact future cost, availability and liability across the range of potential supply and demand outcomes. The data covers both key operating variables, such as inventory and service levels, and key financial variables, such as liability, margin and revenue, and summarizes expected levels, risks, and trade-offs across potential outcomes.

Drawing on this information, procurement identifies the specific lead times and flex terms for the material or product that best meet the company’s objectives. Procurement requests that suppliers provide quotes on commitments to perform to these lead times and terms. Suppliers respond with terms that summarize – in advance – their ability (and, where relevant, the ability of their suppliers) to honor the requested performance commitments across the range of potential future supply and demand conditions, and the costs, lead time, and liabilities they must incur to do so. Potential capacity constraints are surfaced in time to be efficiently addressed, and information about other key supplier costs, objectives and constraints can be evaluated and balanced against buyer objectives and benefits from the supply capabilities they enable.

Through the negotiations and counterproposals, the two parties identify the price, lead time and flexibility terms that best prepare the supply chain for the material or product in question to meet the business objectives of both firms across the range of potential future supply and demand conditions. The requirements and commitments in the final agreement clearly define who has committed to do what and get what across possible future outcomes, and on what terms. Rather than fire-fighting, execution over time is an efficient process of optimally leveraging the assets and options put in place to best meet actual supply and demand conditions as they unfold, regardless of what they may be.

Parallel benefits accrue within the company. Procurement can now put clearly specified alternatives for performance across prospective supply and demand outcomes on the table, gain consensus with other functional leaders on the alternative that best meets the company’s objectives, and commit to deliver the quoted performance across potential supply and demand outcomes with confidence. The discussion at a cross-functional planning meeting for a new product introduction may go something like this:

Cross-functional management team asks procurement: “Should we secure the more flexible supply? Why or why not?”Procurement’s SRFM answer: “With the additional flex, our availability increases to a level that will enable us to hit peak demand, at locked-in pricing and lead times. Our liability if the product launch underperforms is also reduced by 50%. However, the incremental cost of the additional flexibility reduces margins by 2%. We can commit now to deliver either type of performance risk and return. Marketing and finance, the choice is yours – which alternative do you think best meets the company’s objectives.”

Companies implementing SRFM today are realizing 5-10% improvements in performance by managing and executing – both internally and externally – SRFM processes able to address the uncertain reality of their business environment.

Now, we all have informal versions of the above...but does your organization have a formal SRFM game plan in place? Should it? Will it? What of it?

Congestion? What Congestion?

Europe's brittle supply chain could snap anytime over the next two months as its ports struggle to cope with an armada of giant containerships laden with consumer goods from Asia. The danger of breakdown is greatest during the peak season across the Le Havre-Hamburg range of ports which handle the bulk of Europe's seaborne trade.

The north European waterfront suffered its first bout of congestion last summer when it was overwhelmed by a sudden, and totally unexpected surge in shipments from China that was largely responsible for the Europe-Asia trade growing by around 17 percent over the previous year.

And with China increasingly counting on exports to Europe and the U.S. as an outlet for surplus production churned out from factories built during a frantic two-year investment spree, a repeat of last year's glut this winter may be inevitable. Don't worry it will get even worse in the 2006 peak season.

Early reports of congestion are surfacing even as ports and shipping lines fine-tune their plans for the peak season. German inland barge operators claim vessels of up to 450 TEUs capacity are being forced to wait for up to 30 hours to unload their containers at Rotterdam and Antwerp as terminal operators are giving priority to ocean-going ships. Barge operators may have a low status compared to the giant ocean container carriers but they are major players in the transport chain, hauling around 2 million TEUs a year in Germany alone.

Extra container handling capacity should come on stream, begins but it is unlikely to keep pace with cargo growth. Antwerp opened a 1.5 million TEUs-a-year terminal in early July that may have restored its competitive edge and a reputation as Europe's most efficient port. The lack of spare capacity is still taking a toll with container traffic rising a miserly 3 percent in the first quarter from a year earlier to 1.5 million TEUs compared with double-digit growth across northern Europe.

Fears of a repeat of last year's chaos have also brought into a play a 1 million TEUs-a-year container terminal in Amsterdam that has worked only a handful of ships since it was opened in mid-2001. The Grand Alliance, a consortium of European and Asian carriers, wanted to shift a couple of Rotterdam services to the facility, which is half-owned by one of its members, Japan's NYK Line, but another member, P&O Nedlloyd, vetoed a move it regarded as a threat to a box hub it is building in Rotterdam which is not due to open for another three years. P&O Nedlloyd finally caved in (because after the APM acquisition, it simply didn't care) and two Grand Alliance services will call at the Ceres Paragon terminal generating annual traffic of between 175,000 TEUs and 225,000 TEUs.

But the extra capacity in Amsterdam and Antwerp, buoyed by more efficient operating procedures introduced after last year's jam, is unlikely to be sufficient to stave off congestion. The long forecast slowdown in China's foreign trade hasn't materialized -- its industrial production soared by 16.6 percent in May from a year earlier, driven by a year-on-year growth in exports exceeding 30 percent. And it's not just China: imports from other Asian nations are rising sharply, the traditionally lackluster North Atlantic trade is experiencing strong growth and the Europe-South America routes are enjoying an unlikely boom.

It isn't just the surge in cargoes that has overwhelmed Europe's top ports, it's the ever larger ships that are carrying them. The 8,000-TEU vessels, which account for around 30 percent of the bulging global container ship order book, are causing all the problems in the ports. A typical 5,000-TEU ship offloads around 2,000 TEUs at a main hub port, while an 8,000-TEU vessel will dump up to 6,000 TEUs. The problem is aggravated by the fact that on key routes such as Asia-Europe, these behemoths are calling at fewer ports and disgorging larger and larger loads. What's more, the biggest containership afloat can be built within a year, while a large container facility can take up to 10 years, much of its spent crawling through Europe's labyrinth planning procedures.

But the ports are the industry's whipping boys, particularly among their shipping line customers, less so with shippers and freight forwarders who take a balanced view of the problem. Shipowners have become less restrained since a top OOCL executive claimed Antwerp and Rotterdam were the only ports capable of handling the dozen 8,000-TEU ships it will be sailing into Europe in 2007 and questioned Le Havre's status as a global port. The latest salvo was fired by P&O Nedlloyd, which lambasted Hamburg for its lack of flexibility and warned the carrier would take its business elsewhere if service doesn't improve. This is what will happen after the APM acquisition is finalized.

Stung by the criticism, most ports have taken steps to avoid congestion, hiring more dockworkers, introducing added shifts and installing extra cranes. Some have gone further, like Southampton, which became the first British port to require trucks to book ahead before they arrive on the terminal and penalize those that miss their slot " by even a minute" with a 25-pound [$45] charge. The port has also boosted its annual capacity by some 400,000 TEUs since last year by acquiring more land and reorganizing its container yard.

These piecemeal measures aren't likely to make a major difference, however, and most industry analysts predict congestion will be an occupational hazard until the turn of the decade when a wave of new capacity comes on stream.

European terminals could, however, do more to attain Asian-level productivity. The fear chronic peak season congestion will persist for the remainder of the decade has focused attention on the role played by Europe's bureaucratic planning process that has delayed construction projects across the Le Havre-Hamburg range and beyond. Not to mention the continued glut of the European Intermodal network.

Many in the industry reckon ports are in a mess because governments don't think there is much political mileage in a less-than-glamorous sector. Railroads are worse...and nobody wants to support the trucking industry either. So, whats next?

If the industry, the politicians, and consumers continue to keep their head in the sand, its only going to get worse. Who is going to step up and take on the challenge? Your guess is as good as mine...but hey, just ring me up on my cell phone!

Have a great weekend!

Kuehne & Nagel Paying 590 Million Bagels, for an ACR Croissant!

Kuehne & Nagel International announced it is buying Paris-based ACR Logistics from Platinum Equity Group of Los Angeles in a deal worth $590 million and that will make it one of the top five contract logistics providers in the world.

The acquisition of ACR, formerly Hays Logistics, a UK-based company, is Kuehne & Nagel's largest acquisition and comes less than a month after Deutsche Post, the parent of DHL, paid $6.7 billion for Exel.

Platinum acquired Hays Logistics from the Hays business services group for $175 million in November, 2003. Kuehne & Nagel said it is paying $528 million in cash for ACR and also assuming debt of $60 million. It will finance the acquisition with existing cash and the sale of 1.7 million shares, equivalent to 7.1 percent of its share capital.

Kuehne & Nagel's acquisition will boost its contract logistics business in the UK and France retail and telecommunications sectors. This will also create growth from cross-selling activities, particularly in eastern Europe and Asia. At this point, nominal opportunity rests in the Americas.

ACR, which has close to 15,000 employees, generated revenues of $1.44 billion and made an operating profit of $72 million in 2004.

Once again, the deck is re-shuffling in response to the giant deals of DPost/Exel and Maersk/P&ONL. More to come...so if you have a bit of cash, try looking at the second tier 3pls and contract logistics providers as a good investment.

Back from Chicago and getting ready for Motown!

Sorry for such a delay in creating my next post...I am trying to get all of my follow-up work done from RILA's ALEx conference (it was an excellent venue for open discussions and it was a great place to meet a wide range of people from the Retail Industry) and my current project workload. Hey, remember, I still have a day job! I will get back in the groove starting next week.

Oh yeah, I will be heading back to Morgantown, WV at the end of the week to participate in the board meetings for West Virginia University's School of Business and Economics. I will also catch the Mountaineers playing the Lousville Cardinals in football on Saturday. Lets Go Moutaineers!

Montani Semper Liberi

The Secure Supply Chain: Just a Concept? Or is it an Eventual Reality?

So, off to Chicago, for the RILA Sponsored ALEx Conference. It will run from Sunday, October 9, until Tuesday, October 11, 2005. Exel was tasked with creating a supply chain related panel discussion. This is the abstract our panel will tackle, and listed below are the participants:

The Secure Supply Chain: Current Challenges and Best Practices
Monday, October 10, 2005 - 15:00 to 15:45

On the cusp of industry-changing supply chain regulations, this expert panel will analyze the security landscape through discussion and definition of best practices. Panelists will also examine the impact to revenue streams associated with current and pending regulations, such as an upgraded C-TPAT and 24-hour Rule. While many organizations grapple with the challenges associated with strategically securing their supply chain, those that attend this panel will gain access to a roadmap leading toward a distinct competitive advantage in the retail marketplace.

Phil Renaud
614-865-8731
phil.renaud@us.exel.com
www.exel.com

Jon Gold (Moderator)
703-600-2013
jon.gold@retail-leaders.org
www.retail-leaders.org

Kelby Woodard
952-556-5252
kelby.woodard@tradeinnovations.com
www.tradeinnovations.com


Curtis Spencer
281-554-9099
curtis.spencer@imsw.com
www.imsw.com

Don't look for a post from me on Monday, but I'll try to get one produced by Thursday, October 13. Until then, have a great weekend!

The Intelligent Trade Lane - Is this an Oxymoron or just Insane Logic?

IBM and Maersk Logistics have jointly launched Intelligent Trade Lane, a new wireless supply chain security platform that will serve as the first plank of the soon-to-be-announced Global Movement Management, a wider supply chain security initiative now under development at IBM.

IBM and Maersk, a division of the A.P. Moller-Maersk Group, have already started land-based testing of Intelligent Trade Lane, a platform aimed at providing security as well as supply chain efficiencies to customers shipping products beyond national borders.

The technology combines tamper-proof smart cards; wireless sensors for measuring such things as location and temperature; and satellite, cellular and mesh wireless networks for worldwide communications with customers over the Internet-based epcGlobal network.

Future plans call for starting a technology pilot in November, to be followed by a much larger test with retail, manufacturing and CPG (consumer packaged goods) distributors in March of next year. At this point, commercial availability is set for the second half of 2006 (to be honest, this sounds very optimistic).

In the pilot later this year, the non-RFID wireless tracking technology will move from land-based testing to deployment aboard ocean vessels, trains and trucks.

Specific technologies to be implemented include the Iridium satellite network (well, you knew sooner or later all those Iridium satellites were going to be used for something...you do remember that Iridium made the claim some years back that they would change the face of cell phone communication); Zigbee wireless mesh networks; smart-card encryption from IBM; and, on the epcGlobal network, RSA authentication and directory services from Verisign Inc. Damn, to date, that has to be the most difficult paragraph produced in this blog.

IBM will also work with national customs agencies throughout the world to seek standardization of the Intelligent Trade Lane technology (good luck on that).

Intelligent Trade Lane also represents the first implementation of GMM, an initiative IBM expects to unveil over the next few months.

Intelligent Trade Lane will revolve around cigar box-sized devices, dubbed TRECs (Tamper Resistant Embedded Controllers), which will attach to shipping containers.

Each TREC device will house a full-fledged computer, smart card and sensors. Identification and location environment will be stored in the smart card and secured with the use of IBM's encryption technology.

If this initiative becomes a reality, it will give Maersk Logistics (IBM Solutions?) a laser focused level of data collection (IE; the dreaded "visibility" word), while also allowing communications to customers in real time, or near real time, to become a true industry benchmark.

The skeptic in me wants to say that this just as much hype, as it is reality. However, the concept is solid. The creative use of existing technology lends itself to be a more realistic alternative to all of the RFID claims being throw over the wall the last few years. So, lets take a cold, hard look at this platform...and grade it on the results, not the hype.

Focus on the people, not the technology...

It is quite an honor to be asked to contribute some thoughts on the Logistics' market via a monthly submission to the Global Institute of Logistics.

In the first of the new series of opinion pieces, I reviewed the proceeding at the Supply Chain Directions Summit held in Philadelphia. When you scratch the surface of the technological issues facing the industry, you find what lies beneath is the importance of people and their ability to adapt and execute the process behind the technology.

Check out the Global Institute of Logistics at: http://www.globeinst.org/