Recently my opinion of MIT’s Sloan Management Review, and the supposed gurus behind it, has improved. This week the bubble burst and they’re back in the tank with the rest of the out of touch with reality academes. On Monday there was an entire section of the WSJ penned in collaboration with Sloan, including one article discussing how "high oil prices are upending the way companies should manage their supply chains." Here are some tasty morsels from that article.
As transportation costs become more dominant, it becomes increasingly important to minimize the length of the journey from distribution center to retailer — the final leg of the supply chain — and to ship in large quantities to take advantage of economies of scale. To accomplish this, additional and larger warehouses become necessary, which implies more stock, hence higher inventory levels and costs.
Yowza! Sort of like a flashback to the 80’s for some of us, right? I don’t even know where to start. Yes, minimize the distance by locating close to the customer, but bigger inventories and bigger warehouses and bigger shipments? Perhaps it’s traditional accounting methods at work again, which don’t really count the cost of the cash tied up in all that inventory, the cost of a single quality incident putting a larger inventory at risk… you get the picture. "Economies of scale"…??? Maybe I’ve been immersed in lean a little too long, but I had hoped that traditional accounting terminology had died.
Some companies are trying to cut shipping times and costs by moving factories closer to the markets they serve. This generally makes sense when transportation expenses offset savings generated by making products in low-cost countries.
The problem is that "low [labor] cost" advantages are a myth. Just ask Dov Charney. If he can manufacture t-shirts and underwear in Los Angeles cheaper than at an Asian sweatshop, then anyone can. The real predominant cost in business is unnecessary complexity, not direct labor. Unnecessary complexity from overly convoluted supply chains, for example.
As a growing number of companies seek to serve markets from the closest factory, we predict another trend will emerge: a switch from dedicated to flexible manufacturing strategies. In flexible manufacturing, each factory is capable of making multiple products; in dedicated manufacturing, each plant specializes in making just a few. While dedicated manufacturing reduces production costs through economies of scale and fewer assembly-line set-ups, it can result in higher transportation costs because companies can’t always serve demand from the closest factories. The opposite is true with flexible manufacturing — production costs rise, but transportation costs fall.
The Sloan dudes are right on this, although wrong (again) in their analysis. Just as with supposed low cost labor, "economies of scale" is a myth in the lean world. Production costs do not have to rise with flexible manufacturing.
First, organizations will ship larger lot sizes less frequently or try to package products more efficiently to improve truckload utilization. As reported in CFO magazine, household and personal-care products maker S.C. Johnson & Son Inc. of Racine, Wis., last year saved about $1.6 million and cut fuel use by 168,000 gallons by combining multiple customer orders and products to load the fullest, best-configured trucks possible.
Second, companies will adopt cheaper and sometimes slower modes of transportation. Thus, we project more shipments will move from air to ground and from trucks to rail to cut fuel consumption.
Shipping "larger lot sizes less frequently" has nothing to do with their example of "combining multiple customer orders." Shipping larger lot sizes creates more cash tied up in in-transit inventories and more quality risk. Combining multiple customer orders makes sense. Slower modes of transportation? Once again, increasing the cash tied up in risky inventories.
You get the picture. Read the article for more amusing tidbits. Bring your lava lamp, wear a tie-dyed shirt, and you’ll feel right at home with the flashback. I’d invite anyone that tends to agree with these guys to visit any of the companies we often profile that are competing, globally, by reducing lot sizes at supposedly "high cost" North American factories. T-shirts, for example.