He's assisted with the logistics for airlines and shipping ports, but a chaired
professor in the School of Industrial and Systems Engineering is now responsible
for ensuring the Yankees play the Red Sox in September.
Schedule-makers
deal with conflicting requirements and preferences as a matter of course,
but as the financial and competitive stakes in athletics at the college
and professional level rise, so does the complexity of creating a balanced
schedule. George Nemhauser * a mathematician and a sports fan * noticed
it could benefit from specialization.
He's a partner
in a company called the Sports Scheduling Group, which has handled athletic
scheduling for several college conferences, including Tech's own
Atlantic Coast Conference for nearly a decade. The objective, he said,
is to balance the requirements of the television contract with competitive
fairness while accommodating the needs of fans, coaches, players, media,
sponsors and facility operators.
For some time,
Nemhauser and his partners have had their eye on Major League Baseball,
which lets companies submit proposed schedules and selects the best one.
After several attempts, the office announced last fall it was awarding
SSG the scheduling contract through 2006.
Compared with collegiate
scheduling, though, baseball is another order of magnitude. In fact, the
complexity of the task makes it too large to handle as a whole. Developing
a viable schedule, he noted, involved 12 high-performance computers running
virtually non-stop for five months.
"It's
a wildly constrained process and to come up with something feasible is
very difficult," he said. "Perhaps IBM's Blue Gene computer
could handle something as big and complicated as this, but I doubt it."
Age: 67
Occupation: Professor
Job description: Teaching, research with graduate students
on discrete optimization [both theoretical and applied] and faculty athletics
representative to the NCAA.
What I find most rewarding about my job: Working with students.
What I find most challenging about my job: Keeping up with
the graduate students.
Years at Tech: 19
Education: Bachelor's degree in chemical engineering
from City College of New York; master's degree in chemical engineering
from Northwestern University; doctoral degree in operations research from Northwestern
University.
Hobbies: Tennis, hiking, travel, wine collecting (and drinking)
The last book I read for pleasure: "Atonement," by
Ian McEwan.
The CD in my stereo: '60s-era Bob Dylan.
Another occupation I'd like to try: Centerfielder for
or owner of the New York Yankees. Unfortunately, they require ability and money
I don't have.
My first paid job: Camp counselor in the mid-1950s. We were
paid $250 for the summer.
One place I've always wanted to visit: I traveled a
lot both for business and pleasure and enjoy almost everywhere I've been.
One talent I would most like to have: Athletic ability
What I consider my greatest accomplishment: Being selected
as one of the eight best instructors in the Johns Hopkins University student
course guide three years in a row.
My pet peeve is: People who don't respect confidentiality.
My day would not be complete without: A glass of good wine.
What I most value in my friends: Humor and loyalty
My motto: Work and play hard.
]]>Professor
Nemirovski has made fundamental contributions in continuous optimization
in the last thirty years that have significantly shaped the field. He developed
(with D. Yudin) the theory of information-based complexity for convex optimization
underlying the majority of modern results on efficient solvability of well-structured
convex problems, which is described in their book "Problem complexity
and method efficiency in optimization" (1983). This work led to the development
of the ellipsoid algorithm (with Yudin) and the polynomial-time solvability
of linear programming (by L. Khachiyan), and Nemirovski was the co-recipient
(together with Yudin and Khachiyan) of the Fulkerson Prize from the Mathematical
Programming Society and the American Mathematical Society in 1982. In the 1980s
and 1990s Nemirovski did ground-breaking work in the theory and algorithmic
implementation of interior-point polynomial-time methods for convex optimization.
He developed (with Y. Nesterov) a general theory of polynomial-time interior-point
methods that is described in their book "Interior-point polynomial algorithms
in convex programming" (1994). In recognition of his contributions to
convex optimization, Nemirovski was awarded the Dantzig Prize from the Mathematical
Programming Society and the Society for Industrial and Applied Mathematics
in 1991. He introduced and developed (with A. Ben-Tal) the theory of robust
optimization as a way of dealing with data perturbations in convex optimization.
This, along with applications of convex optimization to quadratically constrained,
semidefinite, and geometric optimization problems, is described in their book "Lectures
on modern convex optimization: analysis, algorithms; engineering applications" (2001).
In recognition of his seminal and profound contributions to continuous optimization,
Nemirovski was awarded the 2003 John von Neumann Theory Prize by the Institute
for Operations Research and the Management Sciences (along with Michael Todd).
He continues to make significant contributions in almost all aspects of continuous
optimization: complexity, numerical methods, stochastic optimization, and non-parametric
statistics.
Arkadi Nemirovski earned the Ph.D. in Mathematics (1974) from Moscow State
University and the Doctor of Sciences in Mathematics (1990) from the Institute
of Cybernetics of the Ukrainian Academy of Sciences, Kiev. He is the only individual
to have won all three of these prestigious prizes (Fulkerson, Dantzig, and
von Neumann).
The school is ranked No. 1 among industrial and systems engineering programs in the United States by U.S. News & World Report.
White, the Schneider National chair in Transportation and Logistics in ISyE, will assume his duties as chair July 1 from William Rouse, now director of the Tennenbaum Institute for Enterprise Transformation at Georgia Tech.
"I am very pleased that Chip White has accepted this responsibility," said College of Engineering Dean Don Giddens. "He is an outstanding scholar and academic administrator, and his vision for the future will help lead ISyE to even greater prominence."
White is also the director of Georgia Tech's Trucking Industry Program, a member of the Sloan Foundation's Industry Centers Network and executive director of The Logistics Institute.
His current research focuses on how real-time information can improve productivity and security in the transportation and logistics sector of the economy. He teaches courses on decision making under certainty and risk. His areas of research include optimization and artificial intelligence for problem solving in transportation, logistics and supply chain systems.
"I look forward to working with the ISyE faculty, our students, the administration, our alumni and our sponsors to continue the ISyE tradition of excellence and leadership in research, education and service," White said.
White is the past president of the Institute of Electrical and Electronics Engineers (IEEE) Systems, Man and Cybernetics Society and is former editor of several of the IEEE Transactions and a Fellow of IEEE. He is a member of the board of directors of several public and private organizations, including CNF Inc., a Fortune 500 transportation and logistics company.
]]>This fall Georgia Tech's renowned health systems faculty will launch a series of short courses designed for working professionals in the healthcare industry * from hospital administrators to consultants to mid-level managers and clinicians.
"The healthcare system in the United States is a very complex system, suffering in terms of costs, quality of care, efficiency and productivity * issues which engineers are good at solving," says Francois Sainfort, the William W. George professor of health systems and professor of industrial and systems engineering. "Now is a good time to start bringing engineering solutions to healthcare and to look at ways to re-engineer and redesign the system."
Founded in 1958, Georgia Tech's graduate program in health systems is top ranked in the field. Faculty members bring their extensive experience in consulting, research and teaching to the classroom.
Courses offered include
In addition, Sainfort will offer a free sneak preview of Georgia Tech's new health systems courses through a live webinar on August 2, 2005 from noon * 1PM. Sainfort will give a brief lecture on "Re-engineering Healthcare Systems" for interested students.
All courses will be taught at Georgia Tech's new state-of-the-art Global Learning & Conference Center located in midtown Atlanta and are organized by the Professional Education division at Georgia Tech.
"Through these short courses, Professional Education at Georgia Tech strives to share Georgia Tech's expertise in a variety of disciplines with leaders in business, government and other organizations. It is our mission to provide the best educational experience possible," said Nelson C. Baker, associate vice provost for Distance Learning and Professional Education.
Detailed information about these courses and the sneak preview is available online at http://www.emarket.gatech.edu/healthcare.
]]>Interesting and stimulating research presentations were delivered by Prof. Ellis Johnson, Prof. Yining Li, Prof.Sakis Meliopoulos, Prof. Qiwen Wang, Prof. Ted Russell, Prof. Ming Lei, and Prof. Eva Lee, among others at workshop.
For the detailed program schedule, please refer to the this linked PDF file.
]]>Dr. White leads the School of Industrial and Systems Engineering at Georgia Tech,
where he holds the H. Milton and Carolyn J. Stewart School Chair and the Schneider
National Chair in Transportation. He is also former executive director of The
Logistics Institute.
The Joseph G. Wohl Award is the Society’s highest award, given for career
service to the systems community, the IEEE, and/or the SMC Society. The award
is not given annually; it is only presented when there is a uniquely qualified
nominee, says Pierre Borne, Society Awards Chair and Professor "de classe
exceptionnelle" at the Ecole Centrale de Lille, France.
"These awards are attributed after a call for nominations by a committee," says
Borne. "This year seven persons were nominated for the Award, and Chip
White was chosen with a strong majority," he added.
White was honored at the Society’s International Conference held in
Hawaii this October. In the past, he has received the Society’s prestigious
Norbert Wiener Award, given for technical contributions in the areas of Systems,
Humans, and/or Cybernetics. Former ISyE chair William Rouse, now executive
director of Georgia Tech’s Tennenbaum Institute for Enterprise Transformation,
is also recipient of both awards.
"I am delighted to receive the Wohl award and deeply appreciate having
the opportunity to contribute to the IEEE Systems, Man, and Cybernetics Society
throughout my professional career," says White. "The Society has
had significant impact on the Systems Engineering profession, and I am proud
to be part of this. Having known Joe Wohl, an outstanding systems engineering
leader and good friend, the award is particularly meaningful to me."
The School of Industrial and Systems Engineering
The School of Industrial and Systems Engineering at Georgia Tech is the largest
and most prestigious program in industrial engineering in the United States.
More than 10,000 graduates of the School can be found in consulting, engineering,
financial services, healthcare, transportation, nonprofit organizations,
entrepreneurial enterprises, law, retail, and major academic institutions
around the world. Nearly one in ten Georgia Tech ISyE graduates rise to the
top positions of their respective organizations, and distinguished faculty
members are internationally known for their research in virtually every subdiscipline
of industrial and systems engineering and operations research. For more information
about ISyE at Georgia Tech, visit www.isye.gatech.edu.
ISyE professors Roshan Joseph Vengazhiyil and Jeff Wu were awarded the Jack Youden Prize by the American Society of Quality and the American Statistical Association at the Fall Technical Conference in October. The two were honored for the Joseph-Wu paper, "Failure Amplification Method: An Information Maximization Approach to Categorical Response Optimization."
The prize was given by the American Society of Quality and American Statistical Association for best paper published in Technometrics in 2004.
]]>
Dr. Jeff Wu, Coca-Cola Chair in Engineering Statistics, is the recipient of the 2005 Jerome Sacks Award for Outstanding Cross-Disciplinary Research sponsored by the National Institute of Statistical Sciences. The award recognizes Wu's innovative work at the interface between statistics and engineering. It was presented at the Joint Statistical Meetings in Minneapolis in August. Wu also won the Jack Youden Prize for his joint paper with Roshan Joseph Vengazhiyil.
"As engineering encounters uncertainty in design, experimentation, and product usage, statistical methods and thinking should play an important, or even central, role in engineering curriculum and practice," said Wu. "Georgia Tech is a leader in this regard."
Wu's research is centered on statistical methodology and applications to engineering and life sciences, and quality and reliability engineering.
]]>The shift in activities is due in part to the strategy of postponement that spreads traditional manufacturing activities further down the supply chain. Cell phones are a prime example. According to Theresa Metty, chief procurement officer for Motorola, the cell phone maker had more than 100 hardware configurations, four housing colors and 30 different software versions. Add to that customization for different carriers, languages, power cords, batteries, etc., and the complexity becomes enormous.
To reduce the complexity and the risks of obsolescence that go with it, Motorola has rationalized its product offerings and delays product differentiation such as adding software or customizing for the language and carrier until the last minute. In fact, industry experts estimate that cell phone manufacturers today invest more time and money in localizing and customizing phones for the consumer market then they do in manufacturing the hardware. This postponement strategy has moved traditional manufacturing activities further down the supply chain and accelerated the blurring of the lines between electronic manufacturing service (EMS) and 3PL service.
The question of which type of service provider an original equipment manufacturers (OEMs) should use is now more confusing than ever.
Outsourcing in electronics manufacturing began in the 1980s, and made huge gains in the 1990s, when expensive new technologies like "chip shooters" and wave-soldering machines became standard equipment for circuit board assembly lines. Instead of making the capital investment themselves, electronics companies realized it was more cost-efficient to outsource the work to contract manufacturers who could spread the investment cost across several customers. While OEM companies like IBM, Hewlett-Packard, NCR and Ericsson redirected their focus from manufacturing to design and marketing, contract manufacturers like Solectron took off. Solectron's stock soared, appreciating by a factor of 280 times from 1989 until peaking in October 2000. And electronic contract manufacturing industry revenues grew overall to $106 billion in 2000 from $22 billion in 1993.
In 2001, the bubble burst. Solectron stock dropped 77% from its 2000 high point. The industry shrank 13% to $92 billion by 2002, and has been challenged ever since.
The main reason for this downturn is the collapse of the high-tech sector, specifically semiconductors and telecommunications - the two largest customers of electronic manufacturing services - which created overcapacity among contract manufacturers. Add to this the decrease in profit margins for key sectors of high-tech manufacturing. When margins began to plummet, OEMs put the squeeze on their contractors to lower prices and contractors were forced into price competition with one another rather than simply competing against OEM in-house costs. The earnings before interest and taxes (EBIT) over the years for Sanmina-SCI, a leading contract manufacturer of electronics, tells the whole story.
To counteract margin erosion, contract manufacturers are exploring new territory using two distinct strategies. One approach is an effort to broaden the customer base by reaching out beyond the traditional mainstays of computer and peripherals manufacturing. The other strategy is expansion into such higher margin services as product design and logistics.
Automotive and medical manufacturing are two industries high on the list of targets for contract manufacturers. According to Joe Minville, senior director for business development for global automotive markets, Flextronics has been doing business in the automotive industry for about eight years and is now making a push for more. Solectron is expanding its business in both automotive and medical manufacturing. The company currently produces airbag control modules, car audio and navigation systems, engine and ignition control modules, X-ray equipment, ultrasound monitors, MRI scanners, surgical robotic systems, and other products. Such contract manufacturers as Sanmina-SCI and Jabil are following suit.
The other direction for contract manufacturers - one that is truly reshaping their business - is expansion into non-manufacturing services that yield higher profit margins. Many contract manufacturers have already expanded their service offerings to include product design. Operating as original design manufacturers (ODMs), they work generally in one of two ways. The ODM designs a product and offers it "off-the-shelf" to an OEM for sale under its own brand name. Or, at the other end of the spectrum, the OEM takes specifications to an ODM and negotiates for the ODM to design and manufacture the product. Between these two extremes lies a range of ODM/OEM collaboration.
Contract manufacturers are also expanding into the realm of logistics, offering sourcing, component purchasing, and such traditional logistics services as warehousing and distribution. Flextronics chief executive Michael Marks says, "Design and logistics are where the value proposition is - not manufacturing." Flextronics maintains logistics operations centers in which basic products get the finishing touches of firmware, memory, and peripherals based on customer orders. The company is banking on the vertical integration of services from production to warehousing and shipping as the wave of the future. As part of that strategy, Flextronics purchased Irish Cargo Express for $50 million in 2000, and has already grown it into a billion dollar business.
This strategy brings contract manufacturers into direct competition with 3PLs, which have a long history with electronics companies (especially those involved with computers and peripherals). To counter contractor inroads into this key market segment, 3PLs are expanding their services as well. A recent survey by the International Warehouse Logistics Association found that 11% of the organization's members offer manufacturing services, up from 2% in 1994; 74% provide assembly services, up from 69% in 1994; and 74% provide packaging services, compared to only 17% in 1994.
Many 3PLs are providing product completion activities including light assembly and packaging along with logistics. Menlo Logistics has moved into light assembly, packaging and other value-added services that support postponement. It performs these postponement duties for Hewlett-Packard inkjet and laser jet printers in North America. 3PL providers Kuehne & Nagle and FM Logistics have set up a joint venture company, Cologic, to provide product completion, product planning, purchasing, and other logistics activities to the high-tech industry in Europe. Cologic now handles final manufacturing services for HP printers in Europe, adding the software, firmware, country-specific cords, and packaging to basic printers manufactured in Asia.
One-stop-shopping has natural appeal to OEMs, but it also has its drawbacks. The biggest concern is that an all-purpose provider can easily transform into a direct competitor. Consider the case of Motorola and BenQ. BenQ is an ODM that specializes in consumer electronics and mobile phones, and Motorola is one of its largest customers. Faced with pressure from OEMs to lower prices, BenQ launched its own brand of mobile phone handsets to increase its profits. BenQ's brand has captured the second largest share of the market in Taiwan - second only to Motorola.
In fact, contract manufacturers lower the barriers to entry and make it relatively simple for new competitors to emerge. For example, Ingram Micro, a large IT product distributor, recently tapped Solectron to manufacture both branded and non-branded built-to-order PCs. So OEMs may face a whole new breed of competitors emerging out of their own supply networks.
The risk of nurturing a future competitor is not the only downside of relying on a single supplier. It is much harder to maintain competitive pricing and performance with a single supplier -- putting all your eggs in one basket has always been risky. Compare the fates of Nokia and Ericsson when in March 2000, fire destroyed a Philips plant in Albuquerque that made RF chips for mobile phones. Nokia quickly shifted orders to other suppliers while Ericsson, which had eliminated backup suppliers to cut costs, was forced to cut back production and cede market share.
In spite of these concerns, many OEMs - especially those with strong brand names and little fear of upstart competitors - continue to push for the single-source model.
A strategy that alleviates the competitive concerns associated with relying on one provider, but also provides the convenience of one-stop shopping, is for 3PLs and contract manufacturers to form partnerships to win an OEM's business. For example, Sanmina-SCI Corp. joined forces with the UPS Supply Chain Solutions division to provide services as part of a $3.6 million deal with IBM. Toronto-based contract manufacturer Celestica Inc. now partners with four 3PLs: FedEx, Exel Logistics, Kuehne & Nagel, and Panalpina. According to Paul Blom, Celestica senior vice president for worldwide supply chain management, the move was spurred by the need to provide OEMs with a fuller range of services - in other words, to deliver one-stop shopping.
As the services of 3PLs and contract manufacturers continue overlap, how do OEMs decide which suppliers to use for which tasks? Beyond the simple strategy of one-stop shopping, one place to start is with the traditional competencies. Electronics contract manufacturers have established skills at managing automation and mastering volume, while 3PLs excel at managing labor and mastering flexibility. These legacies favor a division of responsibility in which the contract manufacturer mass produces the common platform and the 3PL customizes and delivers it in or near the local market. This also has the advantage of keeping any single player from holding all the cards.
This is the first of several columns highlighting investigations from Georgia Tech's Executive Master's in International Logistics (EMIL) program. Co-author Dr. Amy Ward, together with her colleague, Prof. Anton Kleywegt and their PhD student, Jinpyo Lee, have been exploring the evolving relationships among contract manufacturers, logistics service providers and original equipment manufacturers.
]]>During the holiday season that just past, millions of Americans stood on
line to return something they received or purchased. Whether it was an ugly
tie, a waffle iron that didn't work, or a digital camera that was just
too extravagant, product returns represent an important part of the total supply
chain. How important? In the US, companies spend roughly $950 billion annually
on logistics and 4.5 percent of this, or $43 billion, is for returns. At the
retail level alone, returns add up to $16 billion a year. And retailer return
policies have made headlines lately with stories about services that track "frequent
returnees" as part of an effort to prevent return fraud.
Depending on the industry, return rates range from around 3 percent to as high
as 50 percent of total shipments. The average retail store has about a 6 percent
return rate. In the consumer electronics industry, the rate is about 8.5 percent,
in the apparel
industry it's 19.4 percent, and online apparel purchases are returned
at a rate of 35 to 40 percent. Yet in spite of the magnitude of these numbers,
returns management gets little attention from most companies. When they develop
their logistics strategies, the focus is usually on outbound supply chain efficiency.
The dollars involved aren't the only reason to pay attention to returns
management. Consumers care about how their returns are handled, and may make
future shopping decisions based on their returns experience. They are extremely
sensitive to the returns process and it plays a big part in customer satisfaction.
Manufacturers also have cause to be concerned about the disposition of returned
products: if off-quality items are allowed to re-enter the retail channel they
can have a negative impact on brand image.
Given its volume and importance in the overall supply chain, returns management
offers sizable business opportunities for 3PLs, and many of them are now targeting
this sector with reverse logistics services and programs for customers. UPS,
for example, works with companies to facilitate product returns and repairs
through its network of UPS Stores, its package delivery services, and its Supply
Chain Solutions services. Toshiba America Information Systems and UPS have
joined forces to provide a convenient, fast "return and repair" program for Toshiba
laptop computers. Consumers who need service start by getting a repair consent
from Toshiba, then they take their laptop to the nearest UPS Store where it is
packaged and shipped to a specially designed repair
center at UPS Supply Chain Solutions' campus in Louisville, Kentucky,
adjacent to the UPS Worldport global air hub. With this system in place, it
is possible to receive, repair and return a laptop to its owner – all
in the same day! This system underscores one of the most important features
of an effective returns management network: speed. Fast, responsive returns
management increases customer satisfaction. Another major concern for manufacturers
is the high cost of improper returns. These include products misused by consumers,
products returned after warranties have expired, and products from other
manufacturers. While these returns occasionally involve fraud or stolen goods,
most often they are the result of errors or improper training on the retail
level. Whatever the causes, last year Philips Consumer Electronics billed
back $45 million to retailers for unauthorized shipments of returned goods.
Such post-shipment rejections are expensive for both the manufacturer and
the retailer. To ease the problem, Philips now works with third-party vendors
GENCO Distribution System and Ozark Electronics Repairs Inc. to ensure that
only eligible products make it back to the manufacturer. The 3PLs place employees
in retailers' return centers to verify that items are eligible for return
before they are shipped. They also evaluate defects and determine if components
are missing. The Philips returns management program has identified between
5 and 10 percent of all retail returns as being ineligible for return to
the company. It also speeds refunds and reconciliation because retailers
know what to expect before the product leaves their return centers.
Some retailers including Target, Best Buy, Sears and Wal-Mart are preventing
improper returns by beginning the screening process at the customer service
desk of their stores. Using software developed by SiRAS.com, UPC codes and
serial numbers of Nintendo, Sega and Philips/Magnavox products are scanned
at the time of purchase. That data includes warranty and product exchange
information. Should the consumer want to return the item, the retail clerk
can simply go to a website to find out when and where the product was purchased,
what the warranty states about returns, and whether or not it is eligible.
In this way, improper returns are caught at the store's customer service
counter, avoiding the expense of shipping back to the manufacturer.
The value of an effective returns network is magnified when product returns
involve international shipments. ADTRAN, a telecommunications equipment manufacturer
located in Huntsville, Alabama, entered the China market in 1999 through a
network of distributors in major Chinese cities. The company met with great
initial sales success. ADTRAN had neglected to establish clear reverse logistics
procedures, however, and as a result soon suffered the usual fallout in terms
of customer dissatisfaction, duplicate product replacements and reduced revenues.
International trade issues, including double payment of VAT, duties, taxes
and fees – once for the original product and then again for the replacement – further complicated
the picture, adding expenses and delays.
To counteract these problems, ADTRAN has developed a comprehensive reverse
logistics strategy that addresses warranty repair, non-warranty repair and
advanced replacements. The strategy is designed to tap opportunities for
savings by cutting VAT costs, eliminating China Customs penalties and quarantines,
and saving on labor and transportation costs by performing tests and repairs
in China. To facilitate the program, ADTRAN hired a 3PL reverse logistics
partner with expertise in China Customs procedures, and a post sales service
partner with the facilities, staff and resources to handle testing and repair
of failed products locally, as well as to destroy obsolete products within
China. By setting up clear reverse logistics flow procedures that integrate
the services of these 3PL partners, ADTRAN is now seeing immediate savings
and a more fluid flow of products to the world's second largest telecommunications
market.
These examples, as well as other successful returns management systems, help
us define the characteristics of an effective reverse logistics strategy. First,
a returns management process must have clear guidelines regarding what can
be returned, replaced or repaired, and these must be implemented consistently.
Speed is also critical in returns management so that returned products don't
lose their potential value while awaiting disposition. In addition, the returns
procedures must address the issue of disposition, not only in terms of what
to do with each returned item, but also when and where to do it in order to
get the most value out of the returned goods without compromising the supply
chain. ADTRAN, for example, realized significant savings both in time and money
by moving the disposition decision to China and Philips realized savings and
improved relations with its customers by moving the initial disposition decision
to its customers' returns centers.
If forward logistics is all about getting the right product in the right
place, reverse logistics is all about making the right decision in the
right place, and a key part of making the right decision is having the
right information. An effective returns management process serves as an
invaluable information resource, providing a stream of data that can enhance
the returns process as well as improve product design and manufacturing
quality, indicate packaging problems, and draw attention to marketing issues.
A carefully planned reverse logistics network provides a wealth of information
to help fine-tune forward logistics processes and keep you from returning
to the same mistakes again and again.
Globalization is, without question, the single biggest influence on supply chains today. The effect of this trend on the transportation industry and supply chain management is shaping the way businesses address inventory and manufacturing processes.
International trade volumes are growing at an accelerating rate, roughly doubling every ten years from about $2 trillion in 1983, to $4 trillion in 1993, to nearly $8 trillion today. And international trade has grown faster than the global economy in all but one year (2001) over the past decade. Not only are we involved in more global trade, global trade is more of what we do. It constitutes a large and growing piece of the global economic pie. This growth has been overwhelmingly in the area of industrial goods. While trade in agricultural products has increased less than five-fold in the past 50 years, trade in industrial goods is up nearly 50-fold over the same period. Not surprisingly, one driving force behind this growth is industrial expansion in Asia - specifically in China.
What may be surprising is that although international trade is up, much of the movement of goods is intra-corporate. Roughly 40% of all U.S. imports are goods that companies bring in from their own overseas subsidiaries. One reason for this trend is that retail giants such as Home Depot and Wal-Mart are sourcing goods directly from international markets rather than relying on middlemen. From 2002 to 2003, Wal-Mart doubled the percentage of goods that it sources directly, from about 8% to 16% - an increase of between $15 and $16 billion in a single year! In addition, companies continue to move labor-intensive manufacturing to lower-wage markets, adding to the rise in intra-company imports.
Ocean container traffic is carrying the bulk of this trade increase. TEUs have increased from about 157 million in 1996 to nearly 200 million in 2002. But ocean borne trade is not the only place feeling the strain. Air cargo trade volumes are doubling nearly every ten years. And it's clear that some big players believe this trend in air transport will accelerate. UPS has agreed to purchase ten Airbus A-380 freighters - each with a capacity of 150 tons of freight - for delivery in 2009, with an option to purchase ten more.
The consequences of this growth are far-reaching, starting with the transportation industry and the infrastructure that supports it, with fallout all the way through the supply chain.
The first to feel the pain have been the cargo ports and airports that deal with increased traffic. Congestion, delays and strained capacity are commonplace today, and they are exacerbated by three imbalances. The most obvious disparity is between the high volume of goods moving from Asia to the West, versus goods moving in the other direction. This trade imbalance causes a serious backup in North American and European points of entry. At LA and Long Beach, for example, approximately three container loads are imported for every one load exported, leaving two containers to store or ship back empty. Since most U.S. and European ports are in heavily developed areas, storage space is limited - and expensive. So is the capacity consumed repositioning empties. It's estimated that industry spends $11 billion annually just moving empty containers.
The other two imbalances contributing to port congestion relate to investments (or lack of investments) in the transportation infrastructure. The transport industry in Asia is investing in cargo port and airport expansion at a much greater rate than in Europe and North America. This allows more goods to move out of Asia with greater efficiency. But the ports of entry in Europe and North America are not equipped to handle this increased traffic, so they are more clogged than ever.
Why the U.S. and Europe have not kept pace is due, in part, to the location of these ports. Because they are surrounded by development, expansion is extremely costly. Still, the same can be said of Hong Kong. Subtler reasons may include a greater concern about the environmental impact of expansion and recognition of the importance of global trade to economic growth and competitiveness.
Another factor contributing to port backups is the increasingly large size of transport vessels. To take advantage of growth in trade, steamships lines have been investing in larger vessels that can transport more goods in each crossing. Not only do these larger vessels take longer to load and unload, because of their size they can call on just a limited number of large, deepwater ports - the same ports that are already groaning under the strain.
The time vessels spend waiting at port is time not spent moving goods. According to a DHL-sponsored survey in the December 3, 2004 issue of Logistics Management, nearly half of all shippers say their goods experience delays of eight days or more at West Coast ports on transits that can be as short as eleven days. This increases a roundtrip Pacific crossing from between 25 and 30 days to between 30 and 40 days. And that reduces the number of roundtrips that a vessel can make each year by 25 - 30%.
Port congestion is just the starting point for delays. The roads and railways that carry goods to and from the ports are choked with traffic, and in the densely populated areas around many European ports, L.A., Chicago, and the Northeastern seaboard, there simply is no room to build more roads.
In short, the transportation infrastructure in the West has not kept up with the demands created by the growth of international trade. This has not only made transportation more costly, it's also made lead times longer and - even more problematic - less reliable.
In response, some shippers choose to bypass the traditional "land bridge" across the U.S. to reach East Coast customers (i.e., unloading at West Coast ports and using rail or truck connections to cross the continent) and move their goods to the East Coast via the all-water route through the Panama Canal to New York, Savannah and Charleston. Others are opting to unload in smaller, less frequented ports. But these two approaches fly in the face of the trend among shipping lines to invest in large vessels that cannot pass through the Panama Canal, and can only unload in deepwater ports. Switching to airfreight is another possibility. But that's an expensive proposition, and airfreight facilities in the West are becoming just as congested as coastal ports. Still another option is to shift sourcing closer to home.
Whatever the strategy, many shippers have realized that longer, less reliable lead times mean more inventory and more premium freight for expedited shipments. Following the 2002 West Coast lockout in the ports of Los Angeles and Long Beach, Wal-Mart, for example, reversed a long trend of decreasing its days of inventory. While the increase may seem small - less than two additional days of inventory, it represents a significant $850 million investment in protection against unreliable lead times. And if Wal-Mart is forced to take such measures, imagine the impacts on shippers with less clout.
Using alternative ports and increasing inventories are two examples of operational responses to the challenges created by port congestion. Since the problem shows little sign of abating, shippers must focus their efforts, and their investments, to reduce the impact of this problem over the longer term. The two areas where most shippers are focusing their efforts are forecasting and supply chain visibility.
Experience has shown that companies engaged in ocean borne shipping of goods with any appreciable demand volatility face forecasting errors in the range of 70 to 80%. And those poor forecasts are the scapegoat for all the excess inventories, stock outs and premium freight charges. But they simply don't deserve the blame.
We had the unusually good fortune to work with one company's history of orders and rolling forecasts. Using this information, we were able to artificially improve the forecast accuracy and evaluate its impact on inventory and premium freight. Our simulations showed that even significant improvements in forecast accuracy yielded only small improvements in inventory and expediting costs. In fact, our studies indicated that cutting the forecast errors in half from over 70% to about 35% reduced inventory and expediting costs by only 10%. The reason? Inaccurate forecasting is just one factor contributing to the problem. The other culprit is lead-time variability. Accurate demand forecasts can tell you how much you'll need, but if lead times are unreliable you are still left with the question of when to ship it so that it will arrive when you need it.
If improving forecast accuracy and supply chain visibility won't produce the kinds of improvements we're looking for, what will? The first answer is to increase the frequency of shipments. It's a tactic that has served Toyota well. They bring parts into their plants more than once an hour. Because of this frequency, shipments are smaller so plant inventory is lower. Perhaps even more important is that frequent shipments reduce the risk associated with unreliable lead times. Every truck carries lots of different part numbers, but only a small number of each part. If one shipment is delayed, they know that next is not far behind - and that all the different parts they may need will be there. Using this strategy, Toyota is able to maintain a high degree of protection against unreliable lead times with a lower level of inventory and fewer expedited shipments. Toyota is already recognized for launching several revolutions in quality and manufacturing and it may not be long until other companies follow their supply strategy as well.
One final trend bears watching: As a result of the tight capacity and congestion in ports today carriers are in a strong negotiating position. They are able to charge customers higher rates, but how they choose to invest the profits they are generating can make or break these companies in the future. The temptation is to invest in more and larger ships in order to cash in on the high demand. But that is a dangerous strategy. When global trade slows - as it inevitably will - even a small drop in traffic at the big ports will translate into a big reduction in congestion and wait times. And that will lead to an equally big increase in vessel capacity at the very moment that demand is shrinking. When demand and profits are high, the smart money should go to investments that increase reliability over those that simply increase capacity - especially if that capacity is not the bottleneck.
The transportation industry is feeling the greatest impact from the growth and imbalances in international trade today. But the fallout of the problem is felt at every level of international business. Developing effective strategies to address this growth - from shipping investments to inventory management - can make the difference between riding the wave of globalization and feeling it crashing down on top of you.
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