Supply chain innovation: Flowers by sea

So how much innovation can there be in supply chain design for cut flowers? Once the industry globalizes (as it has), it would seem that airfreight is the only option. Customers value freshness and cut flowers are the essence of a perishable flower. However, there may be more room for process changes than you would think as there is a trend of shipping flowers by sea (Fresh-Cut Flowers, Shipped by Sea?, Wall Street Journal, May 11).

The delicate business of transporting fresh-cut flowers from field to vase is being quietly rearranged, with more and more blooms taking a slow steam by sea from South America and Africa instead of being whisked by air.

Global cut-flower sales approached $14 billion last year and most move by cargo plane, but high jet-fuel costs and improvements in chilling technology are prompting a shift to more ocean shipping, particularly for imports to Europe.

Ocean transport costs can be half those of airfreight, an important consideration for price-conscious supermarkets and florists. Mom is unlikely to notice the difference in her Mother’s Day bouquet. Proponents say certain roses, carnations and other hearty varieties show no ill effects from the sea voyages spent in refrigerated containers a degree or two above freezing.

According to the article, some industry participants say that ocean shipping could account for a significant chunk of the market in coming years. Currently, airfreight accounts for 99% of shipments.

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Tale of Two E-grocers: AmazonFresh and Why grocery delivery service is greener than driving to the store

In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod.  Two interesting e-grocer articles appeared this week:

The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area.  Why?  In class we show the difficulty of this business and I praise the operational focus of Amazon.  If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household.  It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.

In his article, Tom proposes a second raison d’etre of AmazonFresh:

AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.

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Will the Bangladeshi factory collapse change global apparel supply chains?

I’ve been thinking over the last several days about the tragic factory collapse in Bangladesh. One question that comes up is why global apparel firms would choose to source their products from Bangladesh. CNN has a spiffy graphic that clearly shows that cost is one reason (Bangladesh vs. the U.S.: How much does it cost to make a denim shirt?, May 3).

Of course, the US ain’t exactly the right benchmark here. The real alternative is China and  the Wall Street Journal reports that wages there are four times higher than those in Bangladesh (The Global Garment Trail: From Bangladesh to a Mall Near You, May 3). That kind of cost advantage together with a tariff advantage with the EU gets you growth like this.

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I’ll gladly pay you Tuesday…

A dollar today is worth more than a dollar tomorrow so it is not surprising that firms would prefer to defer paying suppliers for as long as possible. As the Wall Street Journal tells it, many large firms like Procter & Gamble and DuPont are working to redefine “as long as possible” when it comes accounts payable (P&G, Big Companies Pinch Suppliers on Payments, Apr 16).

What began as a way to preserve cash when markets dried up a few years ago has become a means of freeing up money to fund expansions, buy back stock and support dividend payouts at a time of lackluster sales growth and shrinking profit margins.

P&G is actually late to this game. It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts. The company is looking to move its payment terms to 75 days and recently started negotiations with suppliers, people familiar with the matter said.

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Trains and Trucks: Evolving American logistics

The Wall Street Journal had a pair of recent article that touch on how the business of schlepping goods from Point A to Point B has been evolving in the US market. The first deals with the booming business of railroads. The major US railroads have been on a spending boom (Boom Times on the Tracks: Rail Capacity, Spending Soar, Mar 26).  See the graph at right.

Just where has that money been going? To expanding track, enlarging tunnels, replacing bridges, and adding locomotives and cars. The emphasis has, in part, been on increasing the speed and reliability of trains in serving customers such as UPS.

In the past decade, though, under pressure from customers like UPS, trains have become more dependable. UPS “trained us in what it means to perform to their very high standards,” says Mr. Rose at BNSF. “I’m sure there were many times they were very frustrated.”

“I don’t know if we’re the largest customer [of the railroads] but I would tell you we’re certainly the most demanding,” says Ken Buenker, a vice president in UPS’s Corporate Transportation Group. UPS’s goal is an on-time arrival rate of 99.5%, he says. “So think about how much you risk with a train.” One breakdown could delay many deliveries.

Railroads used technology and strategy to tackle such problems. They used sensors to detect mechanical issues before they caused delays. They developed their own version of the airline “hub and spoke system” and organized shipments in trains all bound for the same destination. The latter move eliminated the time- and labor-wasting stops to break trains apart and reset them. It also paved the way for longer and speedier itineraries. Railroads “are always talking about efficiency and speed,” says Mr. Buenker. “The velocity of the network is really key for them.”

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Would you deliver packages for Wal-Mart?

Right now, same day delivery is one of the hottest topics in e-commerce with multiple firms experimenting with different ways of fulfilling on-line orders tout suite. See this Wired graphic-fest for a summary of what different firms are trying.

Then there is this.

Wal-Mart Stores Inc is considering a radical plan to have store customers deliver packages to online buyers, a new twist on speedier delivery services that the company hopes will enable it to better compete with Amazon.com Inc. …

“I see a path to where this is crowd-sourced,” Joel Anderson, chief executive of Walmart.com in the United States, said in a recent interview with Reuters.

Wal-Mart has millions of customers visiting its stores each week. Some of these shoppers could tell the retailer where they live and sign up to drop off packages for online customers who live on their route back home, Anderson explained.

Wal-Mart would offer a discount on the customers’ shopping bill, effectively covering the cost of their gas in return for the delivery of packages, he added.

(Wal-Mart may get customers to deliver packages to online buyers, Reuters, Mar 28)

The article describes this as being at the “brain-storming stage” and I must admit that I don’t know where that lands on Woody Allen’s notion-concept-idea spectrum. Indeed, it strikes me as being something of an elaborate April Fools’ joke.

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Apparel in America

Last week I posted on making toys in the US; this week it’s apparel — specifically, T-shirts and sweatshirts. Let starts with sweatshirts and a firm called American Giant. The story starts back in December with an article in Slate describing the company’s business model and extolling the wonders of its product (This Is the Greatest Hoodie Ever Made, Dec 4, 2012). In effect, American Giant uses technology to cut its distribution cost and rolls a good chunk of the savings into offering a superior product.

In the 1970s, when the fashion industry morphed into a mass-market business dominated by mall stores, its marketing and distribution costs began to skyrocket. To keep retail prices down, companies began to shrink the price of producing clothes. Today, when you buy a hooded sweatshirt, most of your money is going to the retailer, the brand, and the various buyers that shuttle the garment between the two. The item itself costs very little to make—a $50 hoodie at the Gap likely costs about $6 or $7 to produce at an Asian manufacturing facility.

American Giant has found a loophole in the process. The loophole allows Winthrop to spend a lot more time and money producing his clothes than his competitors do. …

American Giant doesn’t maintain a storefront, and it doesn’t deal with middlemen. By selling garments directly from its factory via the Web, American Giant can avoid the distribution costs baked into most other clothes. …

But there is really no comparison between American Giant’s hoodie and the competition. It looks better and feels substantially more durable—Winthrop says it will last a lifetime. When you wear this hoodie, you’ll wonder why all other clothes aren’t made this well. And when you hear about how American Giant produced it, it’s hard not to conclude that one day, they all may be.

OK, so what do you think happens when such glowing press hits the web a few weeks before Christmas? Right, they sell out of everything. Here is a BBC report how they got hit by a tsunami of orders (American Giant: The problems of being an overnight success, Mar 10).

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The Unbearable Lightness of Lululemon Yoga Pants

So Lululemon has a problem with its yoga pants. It is of the I-see-England-I-see-France variety (Lululemon Yoga Pants Pulled From Stores for ‘Sheerness’, Wall Street Journal, March 19).

The yoga-apparel retailer’s shares tumbled late Monday after saying it has pulled some of its popular pants from stores, after a mistake by a supplier left the pants too see-through. …

“The ingredients, weight and longevity qualities of the pants remain the same but the coverage does not, resulting in a level of sheerness in some of our women’s black Luon bottoms that falls short of our very high standards,” Lululemon said in a release.

Lululemon said Monday it has used the same manufacturing supplier on key fabrics since 2004 and is working to understand what happened.

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Supply Chain Coordination and Anti-Trust: The Japanese Car-Parts Keiretsu

One cannot discuss the Japanese automotive industry without mentioning the Car-Part Keiretsu.  The Wal Street Journal has an interesting article on the anti-trust investigations and lawsuits regarding these arrangements (“Japan Probe Pops Car-Part Keiretsu“)

 First: what’s a keiretsu? A keiretsu is a cluster of interlinked Japanese firms, usually centered on a large corporation that holds equity in the smaller firms.

Japanese auto makers have long seen keiretsu as a way to ensure quality over the long term by building trusted relationships with suppliers. The brand-name companies often own significant stakes in keiretsu parts makers and often enjoy the right of first refusal for newly developed technology. Typically, they work closely from the design stage onward, sharing proprietary technology.

By combining forces and coordinating their actions, these companies are able to reduce costs and risk, better facilitate communication, while building trust and reliability. The Toyota Group is considered to be the largest of the “vertically-integrated” keiretsu groups.  There were always discussions that the practice of such a scheme may lead to cartel-like behavior. Recently, due to changes in the Japanese automotive market, several investigations and law suits regarding illegal practices of these Keiretsus:

But there was a lot going on behind the scenes and some of it wasn’t legal. In fact, some areas of the Japanese auto-parts business were rife with bid rigging and collusion, according to confessions by companies and executives to antitrust officials around the globe that have produced multimillion-dollar fines and a dozen prison sentences.

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Evolving supply chains

As the New York Times tells it, supply chains are changing (New Hubs Arise to Serve ‘Just in Case’ Distribution, Feb 12).

Major storms like Hurricane Sandy and other unexpected events have prompted some companies to modify the popular just-in-time style of doing business, in which only small amounts of inventory are kept on hand, to fashion what is known as just-in-case management. …

Just-in-case is a response to the vulnerability of just-in-time supply chains, said Rene Circ, CoStar’s director of industrial research. Since the 1990s, just-in-time has made sense for many companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production.

This model also reduced transportation costs, because goods would be shipped only as necessary. By combining the just-in-case with just-in-time strategy, Mr. Circ said, companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things, because inventory equals cost.”

I’ve been trying to think what I should say about this article for several weeks. I have felt conflicted because, on the one hand, it hits on some interesting points. On the other hand, it also leads with one of my pet peeves of business reporting. Specifically, it links any change in inventory management to some failure of just-in-time management. However, I am not convinced that is actually a good description of what is going on here.

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