Building a New Consensus on Infrastructure

As the US Congress struggles to find a long-term solution to funding the Highway Trust Fund, a new approach to prioritizing investments in transportation systems could greatly improve the infrastructure planning process.

The companies that rely on road, rail, and port networks to connect them to customers and suppliers worldwide, and the government planners responsible for building these trade arteries, exist in different universes.

They have different financial goals and work to very different timescales. While companies are tied to profit targets and product life cycles, planners develop infrastructure that can take a decade to complete and be in active service for many decades.

Another complication is that the public sector must deal with a diverse base of stakeholders, including public interests that often oppose new projects. There is political pressure too; pallets don’t vote, so consumer demands often trump commercial needs.

The way that new projects are planned also presents problems. Long-range planning is frequently driven by point forecasts based on macro factors to map future demands for infrastructure capacity. This approach is deeply flawed because it projects historic experience without paying due regard to future technological and economic changes.

In 2011 MIT CTL launched a research initiative sponsored by the National Cooperative Highway Research Program called Future Freight Flows (FFF), to develop a methodology that any transportation planning agency in the United States can use to allocate (scarce) funds to freight infrastructure projects. There were two main goals. First, expand the thinking of planners to consider multiple potential outcomes and futures. Second, enable better communication between the stakeholders.

Scenario planning, a decision-making process used for strategic and long-range planning, was at the heart of the initiative. In this method, users envision and prepare for different futures that are depicted in specially created scenarios. The method allows users to prepare for a range of plausible futures rather than trying to predict specific outcomes 20 or 30 years out. Scenario planning is also uniquely suited to bringing disparate parties together, and exposing them to the real-world consequences of planning decisions.

MIT CTL developed a scenario planning tool kit that includes four scenarios, guidebooks for facilitators and participants, and material such as brochures and videos that bring these futuristic worlds to life. In 2011 MIT CTL took the scenario planning program on the road in a series of one-day, interactive workshops in venues across the country.

Some two years later these efforts are yielding results.

For example, Delaware Valley Regional Planning Commission (DVRPC), an organization that took part in the interactive workshops, is using the internet to create greater awareness about the regional freight network. A web-based mapping application called PhillyFreightFinder enables users to gain a deeper understanding of how freight moves through the region’s airports, highways, railways and waterways, and the broader impact on transportation systems. Much of the inspiration for these tools came from the scenario planning workshop.

DVRPC is developing a working group of regional stakeholders, including businesses. The group will provide insights and perspectives on different projects, much like the user groups did in the MIT CTL workshops. And they will vote on their preferred options, and “game-changer” projects that could have a major impact on the region’s economy.

Another workshop participant, Washington State Department of Transportation, is using scenario planning to test the point forecasts it is mandated to use to predict freight growth in Washington’s new State Freight Plan. The scenarios provide a richer picture of the macro-level drivers that impact the volumes and types of traffic that WSDOT has to plan for.

While initiatives like these will not solve the nation’s infrastructure funding problems, they will help to bridge the divide between the public and private sectors.

The end result could be more responsive, cost-effective freight transportation systems that help US companies to sustain and improve their global competitiveness.

This article is based on the Harvard Business Review blog post A Better Approach to Infrastructure Planning by Dr. Chris Caplice, Executive Director, MIT CTL, and MIT CTL Researcher Dr. Shardul Phadis, published July 10, 2014.  

How to Cut Costs by Improving Product Punctuality

Products received from suppliers are not always available exactly when retail channels need them. Items that arrive way too early clog up warehouse space while latecomers often incur expediting costs and lost sales. By tailoring transportation methods and distribution center processes to match the delivery speed required of each product, companies can reduce the cost of transportation, prevent excess inventory, and eliminate lost sales.

Configuring supply chains in this way is often done through SKU segmentation, but this is difficult in complex operations where there are numerous products and an extremely diverse supplier base.

Researchers at MIT CTL have developed a model that uses purchase order (PO) information to help retailers determine when many different types of products need to be shipped to meet sales deadlines. The research was carried out by two students, Brad Gilligan and Huiping Jin, for their MIT Master of Supply Chain Management (SCM) thesis. The work was supervised by MIT CTL Research Director Dr. Edgar Blanco.

Lack of visibility

This retailer excels at capturing opportunistic business. For example, it might buy a product at low cost in the off season for sale during periods of peak demand.

This type of operation usually involves suppliers and stores in multiple countries. In order to make the project more manageable, the research focused on items purchased in China for sale in the United States. Even with this limitation the analysis covers more than 30,000 POs, 40,000 unique SKUs, and 1,000 suppliers.

Some products were received well in advance of the sale date, while others arrived with very little time to make the final delivery to the store. Moreover, the company was unable to see which products fell into the early and late categories.

There was a huge opportunity to achieve savings by introducing slower, more cost-effective supply chains for early items and faster delivery times for tardy products. The model aimed to achieve this by adjusting lead times so that zero to seven days elapsed between a product’s arrival at the DC and its required availability at the store.

Performance improvements

The researchers were able to identify PO attributes that can be used to predict with more than 90% accuracy how much time the retailer needs to ship a product from suppliers. In test simulations on-time performance was improved by 36% to 60%. Additionally, no products arrived late and those that were received before the agreed delivery date were less than 10 days early.

Using this information, the retailer can cut transportation and holding costs, and potentially increase total sales volumes because more products will be available at the store when required. Also, the model can be updated automatically as new data comes in.

Although the model is geared to the needs of one US retailer, it is of interest to any retail operation that procures product opportunistically.

This post was authored by Brad Gilligan and Huiping Jin and originally published on July 16, 2014, by Supply Chain Management Review, as the first in a monthly series of articles on SCM thesis research. For more information on the SCM program and the latest theses contact SCM program Director Dr. Bruce Arntzen. 

World Cup Plays that Build Winning Supply Chain Teams

The 2014 FIFA World Cup is finally over. If you’re not a soccer fan maybe you’re still wondering what all the fuss was about. But followers of the game (including myself) now have to wait four long years before the next tournament.

Until then, we can revel in the memories of what was one of the most entertaining competitions in recent decades. And we can draw some important lessons from this wonderful spectacle – including ones that are particularly relevant to supply chain leaders.

Here are a few for your consideration.

Reinvent or perish. Spain was the world champion at the start of the tournament, but went crashing out after being beaten 1-5 by the Netherlands in the team’s opening game. The most fancied competitor, Brazil, was humiliated, in front of its home crowd, in a 1-7 defeat by Germany (more of that later).

Brazil and Spain had established reputations for inventive, free-flowing soccer, but their pedigrees counted for little on the ground. Other teams had figured out ways to compete with them and adopted some of the methods that made these two soccer powerhouses such formidable competitors.

In other words, these leaders had not moved with the times; they had failed to reinvent the strategies and processes that underpinned past successes.

And so it is in the supply chain world. A market-leading supply chain has a relatively short shelf life, and must continue to evolve and reinvent itself to maintain a competitive advantage. For example, Dell Corporation was the leading personal computer manufacturer in the world, earning accolades for its vaunted manufacturing postponement strategy. Yet the company failed to adjust to the maturation of the market – the shift to laptops, the maturing of the technology, and other changes – and declined to 3rd place behind Lenovo and HP. The need to adjust and reinvent is only growing stronger given the continued volatility of markets and the shortening of product life cycles.

Simple is often best. Some of the most memorable goals in this year’s tournament were also the simplest and most direct. They were uncluttered by complicated plays and their directness was devastating. Take, for example, one of the tournament’s best strikes, a goal scored by Australia’s Tim Cahill in the game against the Netherlands. Cahill met a cross from the right and volleyed a shot into the net. Simple, direct, and unstoppable. Most of the seven goals that Germany scored against Brazil had the same quality.

Keep it simple is a hard-won lesson in the supply chain profession. Packing a supply chain with too many product variants, for example, adds complexity, and the more complex a supply chain the higher the likelihood that something will go wrong. Direct routes to the customer and standardized processes with a minimum of touch points are usually the most efficient.

Don’t operate without a Plan B. Germany’s 7-1 thrashing of Brazil in the first semi-final match was a case study in how to clinically dismantle inferior opposition.

To a large extent Brazil played into the Germans’ hands. They dwelled on the absence of two key players – the soccer superstar Neymar and defense mastermind Silva – and appeared to be totally lost when Germany took the lead. Brazil had no emergency plan when the game started to slip away from them.

In the supply chain world we call the ability to adapt to disruptions resilience. A resilient supply chain is able to sense adversity and respond quickly with a back-up plan. As the number and types of disruptions has increased over recent years, resilience has become a key feature of winning supply chains. For example, many observers noted that Nissan bested Toyota and Honda in its faster response and speedier recovery from the Japanese earthquake and tsunami and the Thailand floods in 2011. Nissan was faster to assess these situations, communicate to all stakeholders, come up with action plan, and recover production.

The playing field is leveling. One of the most pleasing features of the 2014 World Cup is how “small” teams such as Algeria and Costa Rica gave bigger teams a run for their money. Costa Rica reached the quarter-finals where they took soccer behemoth, the Netherlands, to a penalty shoot out. The smaller teams were not intimidated by more storied opposition.

An innovative, well-run supply chain can empower small, relatively unknown companies to compete successfully against much bigger opposition, and even redefine markets. Twenty years ago who would have thought that a company called Amazon.com that sold books online would grow into one of the world’s top retailers? Amazon’s supply chain is key to the company’s success. Similarly, it was difficult to imagine that the small store that Sam Walton opened in Rogers, Arkansas, in 1962, would grow to be the largest company in the world by revenue. Again, Wal-Mart’s supply chain processes are key to its success. Today, rapid technology innovations are bringing more opportunities for small, innovative players to compete successfully against larger incumbents.

The winners of the 2014 World Cup, Germany, had already learned lessons like these before they got to Brazil. The country reinvented its national soccer development program after performing miserably in a European championship. The goal scored by Germany in the final against Argentina to win the trophy exemplifies the simple-and-direct philosophy. And Germany demonstrated its resilience in the final match against an Argentine team known for grinding opponents down with its seemingly impenetrable defense.

Supply chain leaders should watch the next World Cup in 2018, and not just for the soccer!

 

This article was orignally published as a Yossi Sheffi Linkedin Influencer blog post. See the original post here.

Why Innovation Has to be More Than a Good Idea

Supply chain strategies often include some sort of commitment to innovation, but if the organization is not set up to be truly innovative it’s an empty promise. And the consequences can be severe if your competitors are doing more than paying lip service to innovation.

Here is an example of a company that paid a high price for this shortcoming. The names of the players and products involved have been changed.

In early 2011, Lamynix, a leading manufacturer of specialty laminates, was approached by VideoFlat, one of its major customers, with an enticing contract to buy, at a premium price, a protective film twice as wide as the usual size. The new laminate had to be in production within 12 months.

Fulfilling the contract required a significant innovation effort. But the venture also offered an opportunity for Lamynix to capture a share of a promising new market. The multi-million dollar contract was signed.

Twelve months later, Lamynix had failed to deliver the new product and VideoFlat found another supplier to work with.

What went wrong?

Lamynix’s supply chain enjoyed an enviable reputation for excellence. Underlying this performance was the company’s supply chain strategy: a set of strategic principles and objectives that served as a bridge between Lamynix’s competitive strategy and its supply chain decisions. The three principles were: (1) achieving the lowest product cost, (2) maintaining the best product quality, and (3) operating with the lowest working capital.

In order to support these principles, the manufacture operated high-volume plants that exploited economies of scale to the fullest. In fact, Lamynix had built the largest laminate extrusion plant in the world.

However, although the supply chain strategy had served Lamynix well in the past, it masked a three-way conflict between cost, service and inventory.

Because of high switch-over costs, high-volume plants can reduce product costs only if production runs are long enough. Long runs, in turn, diminish the plant’s ability to make as varied an assortment of products as needed in real time. With an inflexible plant, matching supply and demand required the company to keep sufficient inventory of the finished products at hand. But inventory costs money, and higher inventory levels, in turn, increase the final cost for the customer.

The manufacturer was juggling these competing goals when it was approached by VideoFlat.

Part of the challenge posed by this juggling act was the lack of a clear pecking order among the three strategic principles. Should cost reduction be pursued even if it meant sacrifices in service level, or should service level be fixed and costs adjusted accordingly? Likewise, should inventory levels be kept low to keep costs low, even if it meant sacrifices in service level, or should customer service goals dictate the inventory levels, even at the expense of higher costs?

These conflicts were the source of much tension within Lamynix’s supply chain function, and distracted it from meeting the terms of the contract with VideoFlat.

It transpired that the manufacturer created the wider laminate, but only in a small pilot plant maintained for R&D. The trials had uncovered some production issues with the new product, and it would have been expensive to equip the high-volume plants to deal with these problems. Moreover, at the time, Lamynix was under intense pressure from stakeholders to maintain high margins and, as a consequence, had little appetite for spending money.

The company’s unwillingness to solve the production issues deterred decision-makers from taking ownership of the project. Nobody wanted to be responsible for the high costs associated with stopping a profitable, humongous plant so that technicians could figure out how to solve an innovation problem.

However, the deeper reason for Lamynix’s failure to deliver was that innovation was not one of the organization’s top three priorities.

Subsequently, the business went to one of Lamynix’s competitors whose supply chain strategy called for flexible production through mid-size plants. These facilities were able to solve the production issues that Lamynix had encountered. In other words, the rival’s supply chain strategy was more welcoming to innovation.

The episode forced Lamynix to rethink its competitive strategy, and encompass a strong commitment to innovation in profitable market segments. The supply chain strategy was reformulated, to include among its three key principles real, meaningful support to innovation efforts.

As this example underlines, a company’s verbal commitment to innovation is not enough if its supply chain strategy frustrates innovation and key personnel are unwilling to commit the resources that innovation requires.

This post is based on the article Is Your Supply Chain Strategy Holding back Innovation? published in the July/August 2014 issue of the magazine Supply Chain Management Review, and written by Dr. Roberto Perez-Franco, Director, SC2020 Project, MIT CTL, roberto@mit.edu.

Driving Value Over the Last Mile

Truck drivers drive trucks, unless they happen to be in the last-mile delivery business where they can also function as merchandisers, salespersons, route managers, or even customers.

A recent MIT CTL roundtable highlighted the multifaceted role of drivers in last-mile deliveries, and how companies need to consider these roles when developing last-mile supply chain strategies.

In this context the “last mile” can involve the final delivery of a shipment to a retail outlet, be it a mom-and-pop store or a supermarket, or to a consumer’s home address.

This relatively small segment of global supply chains is gaining in importance. The world’s megacities are growing in both size and number, posing major distribution challenges for companies. Also, the dramatic growth in online sales volumes means that companies must figure out how to make more home deliveries within 24 hours of receiving customer orders.

The last-mile driver is a key player in this changing retail universe.

At a beverage and snack products company, delivery drivers for some product lines have three jobs: deliver the order to the retailer, replenish store shelves, and take orders. This “one person does all” model is great for building relationships with store owners, but it also means that the driver can only serve 10 stores a day, which is expensive.

The amount of contact that the last-mile person has with customers changes with the nature of their job.

A company that delivers frozen foods and ice creams to homes calls drivers “route business developers” because in addition to making 100 deliveries a day, they are tasked with bringing in new business along their routes. In another company drivers are known as sales assistants because they develop close relationships with customers over time. The company educates drivers to deal with many kinds of problems, such as billing issues or claims about products.

Some organizations require driversto follow strict appearance standards because they deal directly with customers and represent the company’s brand. This is particularly the case when dealing with consumers, where trust-building is also critically important.

With these added roles comes the need for added training, such as customer interaction scripts, delivery completion checklists, and follow-ups with customers. In one company drivers are given cultural sensitivity training.

Drivers also receive technological support. For instance a logistics company provides as much information as it can to drivers via phone apps that convey special delivery instructions about time, location, and gate codes. A food and beverage company equips each of its retail delivery drivers with an iPad and all the technology needed to see what is in stock, what the competition is doing, how to deliver the order, and how to take an order and secure payment.

Some drivers are even treated as customers. At a third-party logistics company drivers can call a central dispatch team if they have questions or issues. If a truck breaks down, for example, the company might send another driver or swap the cargo out of one truck onto another.

Perhaps companies need to think about the last mile in terms of value creation – not just cost reduction. Instead of rewarding drivers for reducing time per delivery they could earn bonuses for generating new business by spending more time with customers.

At issue is whether the last mile is a cost to be minimized or an opportunity to be maximized.

The Last-Mile Delivery Roundtable took place on May 21, 2014, on the MIT campus. For more information on the event and the proceedings contact Dr. Edgar Blanco, Principal Research Associate, MIT CTL, at eblanco@mit.edu.

The ROI of Persistence

Supply chain innovation (SCI) is attracting a lot of attention, and given the pace of technological change, it’s understandable that companies are on the lookout for the Next Big Thing.

However, MIT CTL research suggests that big-step, Eureka! moments are rare; most meaningful innovations are the result of incremental change and continuous improvement. The vital spark is not provided by “light bulb” moments but patience, hard work, creativity, and trial-and-error-learning.

The good news is that the slog may not be sexy, but it is effective. Take, for example, how Niagara Bottling LLC has progressed along the innovation path.

The Ontario, CA-based private label bottled water company has been innovating since it started operating in 1963. It was one of the first enterprises in this sector to vertically integrate by bringing bottle and cap manufacturing in-house.

Niagara recently introduced cases of bottled water without a corrugated cardboard tray. The change might not appear significant, but it has achieved a 17% increase in case density per pallet, reduced greenhouse gas emissions, and a reduction of nearly 1 million gallons in annual fuel consumption.

Steady flow. Enterprises such as bottled water water company Niagara Bottling LLC take stepped approach to supply chain innovation.

Steady flow. Enterprises such as bottled water water company Niagara Bottling LLC take a stepped approach to supply chain innovation.

The new packaging configuration required the company to work with multiple trading partners. It cooperated with OEMs to engineer case packing and palletizing equipment, elicited the support of raw materials suppliers to reconfigure flexible packaging, and engaged with customers to adjust the way product is shelved.

Importantly, Niagara worked across the supply chain and used trial-and-error tests to achieve small improvements in materials, packing and bottle design. In doing so, it turned a series of relatively modest advances into a much larger one. The project took about 10 months to roll out.

The company’s vertically integrated internal operations helped as well, by giving it close control over the supply of bottles and caps. Also, instead of depending on external parties, Niagara’s own production engineers made critical decisions affecting materials planning and manufacturing processes.

More innovations are in the pipeline. The company aims to minimize the need for human operators in its plant and warehouse facilities by introducing more automation over the next three to five years. Laser-guided vehicles and automated storage and retrieval systems will be part of these changes.

Niagara’s stepped approach to SCI shows that supply chain teams can build innovation into their DNA. There will be failures along the way, but by advancing incrementally organizations can minimize the risks involved and avoid the problem of becoming overly committed to a single new idea.

This post is based on the Innovation Strategies column “Perseverance Pays in the Innovation Game” by Ashley Dorna, Executive Vice President, Supply Chain and IT, Niagara Bottling LLC, and Jim Rice, Deputy Director, MIT CTL, published in the May/June 2014 issue of Supply Chain Management Review

Put Port Resilience on the Risk Management Map

Ports in a storm. The econonic damage wrought by Hurricane Katrina underscores the vulnerability of US ports.

Ports in a storm. The economic damage wrought by Hurricane Katrina underscores the vulnerability of US ports.

Port security is in the news thanks to the debate over a mandate to scan all containers flowing into the US and ongoing contract talks between the International Longshoremen and Warehouse Union and US West Coast waterfront employers.

Yet the issue of how to make the nation’s ports more resilient is still being largely overlooked.

Research carried out by MIT CTL shows that port stoppages have become more frequent, and the structure of the national ports system makes it more likely that a disruption will inflict serious economic damage.

Increases in global trade volumes as well as the size of vessels are two factors that have raised the threat level. In addition, the way cargo handling facilities are owned and governed, and port-related investment policies, add to the complexity of a system that is inherently fragmented.

Also compounding the risk of economically damaging stoppages is the fact that while supply chain resilience has attracted much interest over recent years, port resilience has not garnered much attention.

But perhaps one of the most surprising reasons for the vulnerability of the US maritime transportation system is the way port facilities are distributed. For example, the MIT CTL research shows that imports of food/farm products and chemicals are concentrated in a small group of ports in the US Gulf region. If these facilities are disabled, the economic consequences could be substantial.

A disaster that underlines the threat is Hurricane Katrina, which hit the US Gulf Coast in 2005 and caused an estimated $882 million worth of agricultural trade to be lost. The following year national food prices rose by 2.5% to 3.5%.

The MIT CTL research has identified ways to steel the US ports system against unexpected disruptions like these. For example, the researchers have mapped the system’s weaknesses and suggested back-up resources that might be put in place to buffer the system against disruption. The research team has developed a prototype web-based app called Port Mapper that identifies alternative cargo handling options when port facilities are disabled.

However, there is still a need for more active industry engagement. Each component of the port system needs to be reinforced against disruptions both internally and in terms of the extended supply chain.

A lack of both understanding and motivation prevents this from happening. It’s time that the industry devoted more effort to developing and implementing risk management strategies designed to make these vital gateways more resilient.

This post is based on a commentary article titled “Time to toughen up US ports” by James B. Rice Jnr., Deputy Director, MIT CTL, and Kai Trepte, Research Affiliate, MIT CTL, published by the Journal of Commerce, June, 2014. For more information on the port resilience research currently underway at MIT CTL contact James B. Rice  Jnr at jrice@mit.edu.

A more detailed account of the MIT CTL research is published in the article “Failure modes in the maritime transportation system – a functional approach to throughput vulnerability,” Maritime Policy and Management, Volume 38, Issue 6, by BERLE, Ø., RICE JR, J.B., and ASBJØRNSLETT, B.E. The article can be accessed on the MIT CTL web site here.

Photo courtesy NASA.

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