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The New Supply Chain Frontier

The global economy and other forces have created unprecedented opportunities for companies, as well as enormous challenges that call for leadership in logistics and supply chain management. Here is an insightful look at why it is no longer possible to separate your supply chain strategy from your business strategy in today’s business environment.

By Kurt Kuehn

Few issues provoke such passionate debate as the future of globalization. If we examine why this is so, perhaps the best explanation would be the simplest: World trade has come a long way in a very short time.

Rewind to the early 1990s. Globalization and outsourcing were little more than vocabulary words. China and India were minor players on the economic field. Eastern Europe was shaking off the yoke of Communism. The USSR was still a nation-state, though clearly near collapse. The Internet had no commercial application and was the province of the military and academia. Cross-border trade was tightly regulated. And when we spoke of cargo security, it meant loss, damage or theft.

Fast forward to the present. globalization and outsourcing have become levers of corporate strategy and, in some instances, government policy. China, India and Eastern Europe have emerged as relentless economic forces. The Soviet Union has dissolved, replaced by individual countries bent on securing their share of the global economic pie. The Web now has 300 million regular users, and the number is growing. Foreign exchange transactions total US$10 billion a second. North America and Europe are free-trade zones, with Latin America eventually expected to follow suit. Cargo security has, unfortunately, taken on an entirely new meaning. All the while, global trading keeps chugging along; sea freight traffic has doubled over the last 30 years, while airfreight volumes doubled from 1996 to 2001 alone.

Dell became the de facto champion for logistics because it made it visible to the executive suite. Pioneers like Dell and Wal-Mart, to name just two, have elevated logistics to the CEO strata.

As commerce extends in geographic reach, there is a greater need for connectivity. This increasing complexity comes with a price – it is more difficult to connect the dots between suppliers, carriers and customers, as well as the intra-office disciplines of sales, marketing and production. The stresses are only intensified by the added weight of ever-changing security requirements.

Equally profound is the transformation of customer attitudes and buying behavior, and how it has reshaped the buying, selling and shipping of goods. A decade ago, and for many years before, commerce was a “supply-push” phenomenon. Sellers set their output according to order projections and shipped accordingly, pushing their products onto the marketplace. Today, the explosive growth of e-business, increasingly sophisticated forecasting tools and a proliferation of transportation options, have created a “demand-pull” environment with the buyer in firm control. The customer – whether a large retailer or an individual consumer -- has come to dominate commerce and shipping decisions, and will continue to do so.

The trends outlined above have moved swiftly, occurring over a brief period of time. They have brought remarkable change and great opportunity for business and consumer alike. They have also created enormous challenges and risks.

Today, each new step hits us faster and at more angles than ever. With each step come more options. More possibilities. And more challenges.

UPS transports the equivalent of two percent of world trade, so we have an enormous stake in the debate over its evolution. We have a bullish vision of the future, and it’s grounded in the work we do and the value it delivers. It is also grounded in our observations of the innovative companies that understand the role of supply chain management in moving their business models forward.

In one of the studies, just 17 percent said they were satisfied with their ability to accurately measure supply chain costs.

Our vision does not re-invent the wheel of trade. Instead, it seeks a more logical and thorough understanding of how it works, in an attempt to better “connect the dots” in an increasingly complex world.

We see we see commerce resting on three pillars: the flow of goods, information and funds. There is the physical movement of product from order through fulfillment to distribution; the information that informs all parties of the status of the goods either at rest or in motion; and the flow of funds required to consummate the transaction.

Our vision is to enable “synchronized commerce” where trading partners benefit from the seamless interconnection of goods, information and funds. To us, it is the “new frontier” for supply chain advancements.

To find solutions that reduce friction and simplify business processes, executives must look critically at their supply chain and ask how synchronized commerce can help:

Worldwide, total supply chain spend is a US$3 trillion industry. In China alone, logistics spend accounts for 20 percent of Chinese GDP. Behind the sheer magnitude of numbers is a growing need for business to either outsource non-core functions like logistics or engage a 3PL to support in-house operations as a cost-effective means of better managing the supply chain. In short, we see a robust marketplace for our synchronized solutions, which, of course, include shipping.

Synchronized commerce is not just the domain of large multinational corporations. It’s leveling the playing field for companies of all sizes. Take the case of a Canadian manufacturer named Malis-Henderson.

Based in Montreal, Malis-Henderson makes bridal veils and headpieces for shops in Canada and the United States. While the company may be small in size, it is large in stature; its handiwork has accompanied countless brides down the aisle for more than two generations.

Like all businesses, Malis-Henderson always has its eye on growth. However, it has long faced obstacles that confront many small companies. These include shipment delays, poor visibility into the supply chain, and the transfer of funds.

Because of burdensome customs clearance procedures and high-friction payment processes, Collect On Delivery (or C.O.D.) funds from Malis-Henderson’s U.S. customers didn’t post to its accounts for at least 30 days after the products were delivered. This slowed cash flow, meaning the company couldn’t expand as rapidly and efficiently as it would like. What’s more, tracking down C.O.D. checks absorbed time and manpower, resources that could have been deployed to grow the business.

The solution came in the form of optimizing Malis-Henderson’s supply chain. Today, an order, electronically transmitted to Malis-Henderson’s information system, triggers a host of synchronized actions. Goods are moved from its Montreal factory to a bonded warehouse in Champlain, New York, along the Canadian border. There, they are consolidated into one shipment for expedited clearance into the United States, and are delivered either by air or ground to bridal shops nationwide. Upon arrival at the stores, C.O.D. checks are handed to the delivery driver. Almost immediately, funds are transferred directly to Malis-Henderson’s bank account, and are available for use within 72 hours.

The benefits have been clear and striking: Malis-Henderson has cut 27 days from its cash-to-cash cycle, a near 90 percent reduction in Days Sales Outstanding. It spends less time chasing checks and more time on business development and customer service. Customers write checks to Malis-Henderson instead of to an unfamiliar third party. Costs are reduced and shipments move faster. And Malis-Henderson has a holistic logistics program in place to streamline its operations, free it to focus on its core competency and scale with its needs and markets.

Malis-Henderson understands that a synchronized supply chain strategy, besides harnessing the opportunities of global commerce and simplifying its complexities, is also a competitive differentiator. It fosters operational flexibility, and empowers smaller companies to gain market share by sharpening their responsiveness to dynamic customer needs. And it enables the market leaders to widen and deepen the moat that keeps their businesses virtually unassailable.

The example of Dell Inc. is often told because it remains a prototype of how to leverage the supply chain to fuse product and process. Dell didn’t invent computing, but it came to dominate it through a super-efficient build-to-order model that brought low-price, feature-rich PCs to the masses. It recognized that competitive advantage is obtained not only by the products it makes and sells, but also by effectively managing the product’s life cycle.

Dell perfected mass customization in the PC segment, and accomplished it through a no-slack supply chain infrastructure that drove down costs, improved time to market, and afforded his customers the ease, convenience and flexibility to design their own computing solutions.

Dell became the de facto champion for logistics because it made it visible to the executive suite. Pioneers like Dell and Wal-Mart, to name just two, have elevated logistics to the CEO strata. No longer is it just the domain of the shipping department. No longer is it perceived simply as a cost center. It has become a strategic imperative and a competitive weapon. As a result, it is gaining mind-share among the world’s business elite.

To be sure, the journey to the new frontier will not be without its speed bumps.

Recently our company participated in two studies that measured attitudes of U.S. executives to a variety of global business issues. In each study, less than half of respondents said their strategic and operational plans—which include supply chain management—were adequately integrated.

In one of the studies, just 17 percent said they were satisfied with their ability to accurately measure supply chain costs. Executives in the other study said their biggest obstacles to supply chain efficiency were inaccurate demand forecasting, incomplete inventory data and blurred lines of responsibility; 38 percent said the inability to tear down the internal silos that discourage collaboration was the primary cause of their difficulties.

Still, in both studies more than half of all respondents said they recognized the value of effective supply chain management and that it would play a key role in the success of their organizations.

Clearly, there is much work to do. Though the road ahead may be volatile, the possibilities for growth and prosperity are mind-boggling—and so is the opportunity for “synchronized commerce,” for the qualities it brings to the table are tailor-made to address many of the challenges confronting today’s businesses.

It has been said that people, their beliefs and their vision are defined by the times. Synchronized commerce is right for the times, because the times we live in demand visibility, connectivity and collaboration.

In today’s interconnected world, it is no longer possible to separate your supply chain strategy from your business strategy. And the supply chain is no longer an appendage to your business.

It is your business.