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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Innovation and quicksourcing

Chris Anderson, the former editor of Wired and current 3D printing cheerleader, has an intriguing piece in the New York Times (Mexico: The New China, Jan 27). it deals with his experience running 3D Robotics, a maker of civilian drone aircraft. 3D Robotics competes with firms that sourcing their production in China and hence they have had to find a way to take on competitors with low labor costs. Their answer? Tiajuna, Mexico. 3D is based in San Diego so engineering is done on the north side of the border but assembly is done on the south. Labor costs may higher than in China (but, as the article notes, the gap is closing as Chinese wages rise) but Anderson sees many advantages in his firm’s “quicksourcing” model that depends as much on speed as cheap hands.

First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. Strange as it may seem, many small manufacturers don’t have that option. When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods — money we wouldn’t see again until all those products sold, sometimes a year or more later. Now that we carry out our production locally, we’re able to make only what we need that week.

This point obviously depends on owning one’s own facility in Mexico or having a very tight relationship with the Mexican supplier. If a small buyer doesn’t have much negotiating power with a supplier it will still likely face large minimum purchase quantities when buying from Mexico. Still it is an interesting observation and suggests that some start ups may be making ill-advised trade offs between cost savings and flexibility.

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How do supply chain choices impact California gasoline prices?

California is famous for its car culture but that lifestyle has been expensive in recent months as the price of gas in the Golden State has climbed and climbed. California gas prices are almost always above the national average but in recent weeks the gap has grown more significant than usual.

So what gives? According to the Wall Street Journal, it’s all about supply chain issues (California’s Gas Price: Is There a Villain?, Oct 18).

What’s the lesson learned from California’s recent spike in gasoline prices, which is costing consumers millions of dollars and prompting calls for an investigation?

Probably nothing more villainous than this: In the world of tight supply-chain management, if you live by “just in time,” you on occasion will get hosed by “just in time.” And that’s the price Californians opted to pay, in part because they have goals beyond just access to cheap gas.

As the article goes onto explain, there are two issue here. The first has to do with the features of the market that have operational implications.

The state is an isolated market. Ships deliver oil to California’s refineries, which then make gasoline and pipe it throughout the state and to neighboring Nevada, Arizona and Oregon. There is no major pipeline or rail infrastructure that can quickly deliver large amounts of gasoline or oil from other locales in the U.S. to California—supplies that could mitigate shortages.

How isolated is California? While the rest of the U.S. is consuming less imported oil and more domestic shale oil from fields like the burgeoning Bakken in North Dakota and Eagle Ford in Texas, California is importing more oil from countries such as Ecuador and Iraq—now up to roughly half of what it consumes.

The state also mandates a special blend of cleaner gasoline—with the strictest specifications in the nation—especially in the extended summer months. The cleaner and pricier gasoline, in a driving market that’s larger than many countries, has been a plus for the state’s air quality, a goal Californians sought. But the trade-off is that during emergencies, California stands alone.

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Local Food Online Grocer Relay Foods is Expanding

Online retail is exploding with Amazon leading the charge in the long tail, items consumers buy irregularly.  Online shopping and delivery of fast movers like groceries, however, is available to few areas in the US: FreshDirect in NYC and Peapod in Chicago and some east coast cities are the big exception.

An Operations Audit gives the explanation: the costs of covering the last mile are strongly influenced by delivery density which makes large sprawl areas prohibitively costly to serve (as dotcom busts like Webvan quickly learned).   In our operations strategy class, we study Peapod by linking its financial performance to its operational structure and execution.  Such analysis highlights the importance of operational metrics such as stops per hour and pick&pack per hour and revenue metrics such as basket size ($ per order).  Students always suggest to replace the expensive delivery process by a pick-up model.  For companies with a large investment in delivery assets and processes such as FreshDirect and Peapod, however, embracing pickup (which Peapod is experimenting with) then necessitates a hybrid model.  In contrast, pure-play pick-up models such as the French ChronoDrive never invested in delivery assets.

This brings us to Relay Foods which seems to differentiate itself on 3 dimensions:

1. Emphasize local suppliers, and hence satisfy the “local food movement”.
2. Local supply allows daily deliveries which minimizes inventory risk.
3. Focus on pickup approach. (They also offer home delivery at a premium of $10/order.)

Relay foods is based in Charlottesville, Virginia, and also serves Richmond.  It can show nice growth trajectories (see video below) in those two markets and earlier this month announced it raised $1.2 million to expand in to the greater Washington, Baltimore, and Philadelphia areas.

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Reserving toys

Every now and then I see a popular press article that I feel is all but certain to generate academic papers. I can just instantly picture a conference six months in the future at which some grad student will cite this story as justifying his or her model. Today, I saw one of those stories. It has to do with a service Toys R Us is offering this holiday season. Here is how the AP (via the Huffington Post) explains it (Toys R Us ‘Hot Toy’ List Allows Customers To Reserve Items In Advance Of Holiday Rush, Sep 12).

In the biggest change, Toys R Us, based in Wayne, N.J., will offer a “hot toy” reservation system starting over the next few days – when the company announces its 50 products on its annual ‘hot toy’ list. The reservation system will run through the end of October.

Toys must be reserved in stores – in order to avoid online scammers, Storch said – and customers have to put down 20 percent to reserve the toy.

Once reserved, customers will receive an e-mail notification when the order is available and have until Dec. 16 to pick it up in store. The idea is to help customers avoid a frantic last-minute search for hot toys – such as 2009′s Zhu Zhu Pets stuffed hamsters and last year’s Leapfrog LeapPad tablet – which often run out of stock later on in the season.

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Flow Times and Months of Supply in the Housing Market

This is a short post: In class we introduce Little’s law to show how flow time is a physical metric of inventory, adjusted for scale:

Flow Time = Inventory / Throughput

Here is a beauty of a graph from Gary Lucido:

Flow times (Months of Supply) of the City of Chicago Housing Inventory

This picture dramatically captures a seasonal effect, representing the fairly predictable pattern of a “slow” real estate market in winter to an “almost double as fast” summer. (The “Great Recession” slow down in 2009 is very visible as is the signal that times are changing again in summer of 2012.)

Flow time is the rigorous concept to measure a “slow” or “fast” market.  Little’s law gives two explanatory hypotheses for a change in speed in the market: either inventory is decreasing recently or sales (throughput) are increasing [or both].

Isn’t it amazing how useful our three basic operational metrics (Inventory, Flow Time, and Throughput) are to explain and quantify market changes?

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Don’t Have Enough Maple Syrup for Your Pancakes? Blame Canada

I never thought I would use the terms “maple syrup”, “strategic”, and “reserve” in the same sentence. But then someone broke into the Global Strategic Maple Syrup Reserve in Quebec and made off with $30 million worth of Canada’s Maple export.

Probably you ask yourself: Why does Canada have a Strategic Maple Syrup Reserve? Why does it have to be pooled (in other words, why does it have to be global), and how many pancakes does one have to eat in order to consume such an amount of syrup?

Since the 1940s Canada is the global leader in production of maple syrup, churning out somewhere in the neighborhood of three quarters of the world’s supply, so why do they need to keep a global reserve? In this industry both demand and supply (i.e. the harvested quantities) are uncertain:

 The trees need cold nights and mildly warm days to yield sap, meaning production can vary greatly year to year based on the weather. That’s a potential problem for the big syrup buyers, whether they’re bottlers or large food companies that make cookies or cereal. Quaker can’t pour a bunch of time and money into developing a maple-and-brown-sugar-flavored version of Life, only to find out it won’t be able to get enough of its ingredients, or that they’ll have to pay through the nose for each liter of syrup.  (“Why Does Canada Have a Strategic Maple Syrup Reserve?“, The Atlantic)

One cannot manage maple syrup inventory the same way you manage inventory of consumer goods.

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How fast does Apple turn over its inventory?

We have posted in the past about Apple’s impressive operational expertise  (see here) but now there is a report that puts are hard number to that. Business Insider reports that Apple’s turns are frankly absurd (Wow! Apple Turns Over Its Entire Inventory Once Every 5 *Days*, May 31, see also here)

Apple turns over its inventory once every five days. …

The only company on Gartner’s list of 25 companies that turns over its product faster is McDonald’s, which is not exactly in the electronics business. Dell and Samsung rank two and three in Apple’s category, turning over their inventory roughly once every 10 and 21 days respectively.

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Reducing flow times in supply chains

Here’s an interesting supply chain story in one graphic:

This comes courtesy of a Wall Street Journal story on how 3M has worked to simplify their supply chains (3M Begins Untangling Its ‘Hairballs’, May 17). The product in question here is a simple plastic hook that once logged over a thousand miles crisscrossing the Midwest in the process of being made.

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Macy’s warehouse at the mall

If you order something on-line, where do you think it ships from? If you’re ordering from Macy’s, the answer may be the local mall. The Wall Street Journal reports that Macy’s is planning to dedicate space in over 200 stores to picking and packing orders to ship to customers’ homes (Macy’s Regroups in Warehouse Wars, May 14).

The retailer plans to convert 292 of its 800-plus stores for the task, with expanded storerooms and new technology that dynamically updates the status of every item in every store. The goal is to better manage inventory.

For instance, if stores have too much of an item, the excess can be shifted to the website, where it might be selling better and at full price. Likewise, out-of-stock items won’t disappear from Macy’s website if they can be found in a physical store. Online orders will be filled by stores closest to consumers, saving time and money on shipping.

Before it started shipping from stores, Macys.com removed thousands of sold-out items from its website each week, Mr. Sachse said. When the chain carried a limited-time line from Chanel creative director Karl Lagerfeld last year, half the online inventory sold out in the first day, yet Macy’s stores had to discount the collection to get it sold, he said. If Macy’s had been able at the time to meet online demand with Lagerfeld items shipped from its stores, he said, sales would have been much better.

In the video below, the reporter gives more details.

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