As consumers as well as drivers, we have constant reminders of the current high price of gasoline and diesel throughout the world.  Of late, every time we fill-up our automobile with fuel, receive a delivery of heating oil (it’s been a cold winter here in the Boston area), or purchase food items at the grocery store, they each provide us top-of-mind reminders about how dependent our economic security remains tied to the price of fuel.   As a sidelight, as an industry analyst at IDC, I came to discover that the price of oil was one factor utilized to even gauge overall IT spending in the economy.Catching-up on the news this week provided a more sober reality to the global supply chain impact of increased fuel prices, and what may come with continued business and government uncertainty in certain economies.

On Monday, press and industry reports out of China indicated renewed fuel shortages of gasoline and diesel were leading to growing lines at filling stations across major cities in China.  Shortages first reported in southern and inland China appeared to be spreading to the wealthier areas of the north and coastal regions, including Shanghai and Beijing.  While Chinese government officials called for calm among drivers, a policy of regulated fuel pricing is obviously clashing with the realities of market supply and demand.  With inflation hovering at 8.7 percent, the Chinese government is resisting pressure to pass along market-driven price hikes, and the government-owned oil companies had no choice but to cut-off supplies to independent stations, in order maintain cheaper domestic fuel supplies to support current farming and public transport needs.

In the U.S, reports of average prices of a gallon of diesel approaching $4, have motivated independent truckers in Pittsburgh and other U.S. cities toward declaring “enough”, by parking their rigs in daily protests.  The American Trucking Association is projecting a 2008 industry fuel bill of $135 billion in 2008, a 20% increase from 2007.  Truckers, paralleling developments in the airline industry, are indicating the need for cutting back on equipment and available capacity, in order to save on fuel costs.

And on the oceans, a report this week form the San Pedro port complex of Los Angeles-Long Beach, the gateway for 70% of entering west coast port traffic reported that import volumes have fallen 8.8% in both January and February, with three of the largest global carriers deciding to share space on the same ships, instead of operating regularly scheduled vessels for weekly services.

As these fuel trends continue, supply chain professionals can anticipate more cutbacks in available capacity, and thus flexibility or last-minute expediting of shipments may come at a very costly price.  More importantly from a historic perspective is that the occurrence of groundbreaking price points relative to the overall cost of fuel leads to inflection points for supply chain strategy and decision making.  I had the opportunity to view some very insightful research from highly noted Professor David Simchi-Levi of MIT that quantifies this phenomenon, and its long-term implications on supply chain strategy.

The bottom-line here is that the need for analytical based decision support tools and predictable planning in fulfilling demand and insuring supply has never been more important.  We are reaching that point where the needs for trading off supplier sourcing, production, and inventory vs. transportation will be the key competency tools required in a competitive supply chain.

How many of you are utilizing these tools?

My final post highlighting the recently completed Supply Chain North America Conference relates to an important milestone in the ability for supply chain professionals to measure supply chain risk.  In the presentation Managing Risk in Your Organization with the SCOR Methodology, Dave Morrow, Managing Consultant at IBM, delivered an exciting overview for the initial introduction of supply chain risk management measures within the newly released SCOR Release 9.0 framework.This new supply chain risk management framework was the product of a global project team chaired by the Connecticut Center for Advanced Technology, Inc, and IBM, and a project team spanning 22 different organizations.  The objective was to enhance the SCOR framework model to begin to incorporate a process to identify potential risk measures throughout the supply chain.  By this writer’s view, this is a great start. Copies of the presentation and overview of this framework will be available to SCOR members shortly. (company membership in SCOR required)

This presentation provided what I believe to be one of the clearest definitions of what is supply chain risk management:

“Supply chain risk management is the systemic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk, or reduce its negative impact on supply chain performance”

The framework of measures includes a new Level 2 measure, Supply Chain Value at Risk, a category of risk metrics derived as an offshoot from the financial services industry value-at-risk, used to track market or portfolio risk.  Twelve best practices are identified to identify formal risk management, provide quantification of risk, and categorize a supply chain designed for risk. Metrics utilize historical volatility as a risk metric, and will measure risk metrics for the Plan, Source, Make, and Deliver aspects of the SCOR framework.

Supply chain managers continue to seek more meaningful ways to communicate supply chain strategy needs with “C” level executives, and this new framework has the potential to allow these professionals to quantify to a CFO the value of supply chain factors of risk, as well as its impacts to demand and supply risks.  I encourage readers to evaluate this new framework for potential use in measuring risk in your supply chain.

One interesting presentation that I attended was delivered by The Performance Measurement Group (PMG), the benchmarking consulting arm of consulting firm PRTM.  The session was titled Global Supply Chain Trends: Operational Practices and Performance Metrics, and the key takeaway for me, as well as the audience, was the fact that recent benchmarking data indicates that companies are feeling the impacts of elongated global supply chain processes, specifically in customer-facing performance.

Readers may recall that PMG  benchmarking is defined across four stages of supply chain maturity, Stages 1 and 2 being less mature, and Stages 3 and 4 being more advanced.  It was again interesting to observe that data continues to reinforce that less mature ratings continue to dominate the population, with more than 60% of the PMG population rated in either Stage 1 or 2 maturities. 

Benchmarking data continues to indicate that the more mature companies invest significantly in operational innovation, with much of the data reinforcing better performance in operational improvements such as overall cost, return on working capital, on-time delivery to customer request date, as well as other metrics.

Of greater and timelier interest is the finding that companies with extended global supply chains performed significantly worse than companies with a regional supply chain footprint, on customer-facing metrics such as perfect order performance, but slightly better on internal metrics such as cost-of-goods sold as a percentage of revenue, or total SCM costs.  As an example, globally based supply chains experienced 20% worse than their counterpart regional supply chains in on-time delivery, 28% worse in perfect order fulfillment. In my view, this points to the tradeoff of seeking lower costs in a low-cost region, vs. increased transportation and coordination exposures. PMG also made a statement that the gap is widening in working capital improvement.

From a specific industry perspective, it was interesting to note that the consumer packaged goods industry has the more mature practices in customer service performance, while the high-tech industry demonstrates the lowest supply chain management costs. Again, by my observation, the high tech crowd has had far more experience in lower-cost sourcing, as well as servicing global customers, but continues to tradeoff overall service performance for cost.

I would be interested in comments from industry practioners on this post.

I had the opportunity to participate in the Supply Chain World North America conference this week, the annual conference of the Supply-Chain Operations Council (SCOR), an independent member-supported organization with over 300 corporate and other members.  The theme of this year’s conference was Enabling Game Changing Strategies for Supply Chain Management, and there were a number of vary interesting presentations which I will highlight in some future posts.

This Part 1 post highlights a panel discussion that I had the opportunity to co-moderate, which was an opportunity for our audience to hear first hand accounts from supply chain executives regarding what’s actually happening day-to-day across various industry environments.  The three panelists were:

• Mary Long, Director of Customer Services and Collaborative Supply Chain Strategies for Campbell Soup
• Michael Hadley, Senior Manager for Material Management for The Boeing Company
• Simon Ellis, Practice Director for Supply chain Strategies at IDC Manufacturing Insights, and former Supply Chain Strategy Director at Unilever USA

Five common themes were articulated from our panelists, themes which I believe many supply chain managers will relate to:

• Increasingly uncertain business conditions and supply chain events have placed even more emphasis on overall supply chain cost reduction, as well as a renewed focus on back to basics in supply chain service and order fulfillment execution. Mary Long also spoke to recent recall and product safety issues which have resulted in heightened consumer awareness around insuring freshness and food safety.
• Longer and more complex global supply chains have added new challenges for insuring flawless customer service, as well as meeting cost goals. Certain commodities are either in short supply, or have experienced unprecedented cost increase. This particular theme was also brought out in a separate session outlining benchmarking data captured by the Performance Management Group arm of benchmarking firm PRTM.
• Data proliferation- our panelists spoke to a current “blizzard of data” and not enough quality information. Simon Ellis expressed this as a struggle for what should managers really look at, what should be prioritized for meaningful information, and what really is the best strategy for management analytics.
• Emerging needs for sustainability and green supply chain initiatives are becoming more important for businesses, and these initiatives have the potential to bring value, and overall make good business sense.
• A final theme was concern around the shrinking labor pool for talented supply chain professionals, both in the U.S. and other geographic regions. As a sidelight, SCOR has been sponsoring a multi-company initiative to address key supply chain skills areas, and how to attract more graduates to this profession.

I thank the panelists as well as our session attendees for an interesting hour of discussion.

In a mid-February post (Product Quality Issues Tied to China- More Deepening Concerns), I commented on the disturbing incident of contamination in certain supplies of the critical blood thinner drug Heparin, which were sourced within China.Since that post, there have been new press stories that the contaminated Heparin is now been linked to 19 deaths, (vs. previously indicated 4 deaths) and all imports of the drug, as well as its raw ingredients have been suspended by the U.S. government.  The U.S. Food and Drug Administration found contaminant in 20 of 28 samples of raw Heparin sourced from a Chinese factory of Scientific Protein Laboratories, a primary supplier to Baxter International.  Also revealed is that a different brand of Heparin has been recalled in Germany, after 80 patients were taken ill from doses.  The German manufacturer is narrowing down the source of that contamination to another Chinese supplier. 

Press reports will continue to hype the deepening concerns around drug safety from drug supplies manufactured in China, and no doubt, the lawyers of victims will be citing many of the past quality defect stories of Chinese goods to bolster damage claims.  But there are lessons here related to supply chain strategy and risk mitigation. 

It’s fairly obvious to me, and other supply chain professionals I presume, that government inspections cannot be relied upon to be the sole quality control point for drugs and medical materials imported from China.  There are a reported 700 Chinese drug makers registered with the U.S. FDA, with just 14 inspections completed by the FDA last year.  Quality and safety will have to come from highly controlled and monitored process, managed by brand owners themselves. 

A recent Boston Globe story ( Drug makers stick by China- subscription required) indicates that U.S. manufacturers such as Iverness Medical, Covidien, as well as Genzyme are ramping-up their own manufacturing sites located in China, utilizing highly controlled processes developed, controlled and proven for all worldwide facilities.  Sourcing materials solely for pure cost savings, is penny wise and pound foolish in the drug manufacturing value chain.  The point here is that the sourcing or procurement group does not hold the bag for product quality, the complete value-chain, and all groups involved, collectively own that responsibility.  Safety should never be compromised for the sake of singular material cost savings.