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Archive for the ‘Supply Chain’ Category

We have had several stories over the last couple years about retailers using inventories at their stores to fill web orders. At one time or another, there have been stories about Nordstrom, Wal-Mart and Macy’s all treating that big box at the mall as a warehouse. Now the Wall Street Journal reports that even more chains — including Sears and Office Deport  – are hopping on the bandwagon (Retailers Turn Store Clerks Into Web Shippers, Dec 9). You can here the reporter discussing her findings here:


It is not surprising that more retailers are going this way. They are all facing pressure from on-line competitors and finding some way to utilize their existing physical network is appealing. If nothing else, I suspect that everyone in the C-suite wants to be able to tell the board they are trying something.

But how can you set up this up quickly? You need to develop a system that updates inventories in real time while dispatching staff to fetch what has been ordered and scheduling the shipper to pick stuff up. Nordstrom is often identified as the first mover on this. The New York Times reports that it took them a couple of years to get it set up. How can a Johnny-come-lately ramp this up quickly? By working with UPS and FedEx.

UPS and FedEx Corp. which were critical to helping launch the e-commerce boom, are now eager to help traditional retailers deal with it. They have engineered new strategies for jockeying inventory across the country to avoid overstocks and markdowns and to keep customers from defecting to Amazon, a big problem last year. The strategy is also important this holiday season as clothing retailers are threatened with heavy inventories.

UPS says it is working with about 40 retailers on implementing these strategies—about double the number a year ago. FedEx said these partnerships helped boost revenue in its ground delivery business 11% in its fiscal first quarter. Both forecast record holiday-season deliveries: UPS with 34 million packages on Dec. 16 and FedEx with 22 million packages on Cyber Monday.

In the case of Sears, UPS provided software that shows shipment statuses of all orders across the entire system. It also sends tracking numbers.

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So how much does it cost to make a hamburger — in Nigeria? Turns out, it costs more than you might realize (Burgers Face a Tough Slog in Africa, Dec 10, Wall Street Journal).

MK-CI493_AFBURG_G_20131210160305

This is the breakdown for a Johnny Rockets burger and some of the numbers might seem out of whack — Why should iceberg (!) lettuce costly nearly five times as much in Africa as New Jersey? The answer is simple: It’s imported. Why import lettuce? Because the local supply chains are simply not sophisticated enough to support the quick service business.

But that quest is straining a supply chain that is short on the refrigerated trucks and warehouses needed to keep patties and vegetable toppings fresh. And in many places, Africans are consuming beef at a faster clip than cattle ranchers can deliver new cows, meaning beef prices keep climbing. That is testing the limits of what the continent’s young urbanites can afford.

And this is not just about Africa. (more…)

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“Where does that come from?” sounds like an easy question to answer and at a high level it is. Which car models are produced at which plants is public knowledge so whether your Toyota was built in Kentucky or Alabama is easiest enough to figure out. But if you want to take it to another level — to know where different components came from and where the stuff that goes into the components comes from — is a lot harder. That is the conclusion reached in a blog post on Nautilus (The Secret Life of Everything: Where Your Stuff Comes From, Oct 29). Modern, global supply chains are so far reaching and support so much complexity that transparency (at least to the outside world) is lost.

I’d thought of [supply chains] mostly in terms of delivering Amazon orders and keeping Staples stocked. Those are just endpoints, the final few steps of a waiter carrying a meal on a tray. And what I really didn’t get was that supply chains don’t just carry components and ingredients, but synchronize their movements. Shipping a box of pens to Staples is the obvious part. Coordinating the arrival of barrels, caps, boxes, ink cartridges, and nibs (through which ink flows) at the pen factory—and also metal to the nib factory, oil to the plastics-maker, and so on—is the bulk of what supply chains do, and in the most efficient manner possible, with algorithms optimizing everything from shipping networks to the path of pallets through warehouses, with an eye to what happens when one of these many moving parts goes invariably astray.

The problem then is that unless you pick a real simple product — like a T-shirt — it is pretty much impossible to know where all the components come from and where all the various production steps are executed. NPR’s Planet Money took on this challenge of tracking a T-shirt from cotton field through production and shipping to the disposition of used American clothes in Africa. It’s an eye-opening  picture of global supply chains.

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There have been several things written over the last couple of years about working conditions in Amazon fulfillment centers. (See, for example, here, here, and here.) Now we have a BBC report complete with hidden-camera video of what it is like inside a fulfillment center.

If you prefer to read, you can also check out “Amazon workers face ‘increased risk of mental illness’” (Nov 25).

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Fancy, luxury handbags start off looking like this:

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Not exactly the image of exclusivity and sexiness that the likes of Hermes and Longchamp want to project when trying to convince customers to pony up for a bag but leather starts with hides and hides don’t start off in fancy colors.

The image comes from a Wall Street Journal article on Tanneries Haas, an old-school Alsatian tannery (French Tannery in Demand as Source of Top-Notch Leather, Nov 6). The article walks through the production process (quick: name a use for chromium!) but the interesting part of the story is how the industry of supplying high-end hides has changed. Tanneries Haas remains independent but luxury houses are buying up tanneries.

Until just a few years ago, the tanning business was the least glamorous cog in the designer-handbag industry. But recently Tanneries Haas and other French tanneries have found themselves the object of attention from famous luxury labels jockeying for secure sources of top-notch leather. “When they saw a certain number of tanneries disappear, they had to think about protecting their suppliers,” says Jean-Christophe Muller Haas, a sixth-generation French tanner. …

By acquiring suppliers, luxury goods purveyors hope to get more control over raw material costs. Prices of calf hides have soared in recent years due to Europe’s falling veal consumption. Calves are slaughtered primarily as a source of veal and skins are a byproduct. With fewer calves slaughtered to meet shrinking demand for veal, the supply of skins available for luxury leather goods is also diminished.

This move is not just limited to European calf leather. Businessweek reports that luxury firms are also buying up crocodile farms (A Crocodile’s Bumpy Road From Farm to Handbag, Oct 24).

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It is late October and on my to-do list is wading through Open Enrollment options. That inevitably brings up the question of how much money to put into our Flexible Spending Account (FSA). Given that a lot of people face that question at this time of year, I thought I would recycle a post (from Dec 2011) on how to think of funding an FSA as an inventory problem:

FSAs allow US tax payers to set aside pre-tax dollars to pay for authorized expenses. One can have separate accounts for healthcare related expenses (think office-visit co-pays or dental work beyond what your insurance covers) and dependent care. Let’s focus on the medical one. Here is how a Forbes blog explained the pros and cons of the program (A Tax Break For Driving To Wal-Mart!, Dec 2).

The way you save with an FSA is this: If you divert $5,000 from taxable salary to pay for braces and your combined federal/state income tax rate is 40%, you save $2,000. You can use the money you stash in the account for medical, dental and vision expenses for yourself, your spouse or your kids. …

If you don’t spend your FSA money within the plan year (or a 2.5 month grace period in some cases), you lose it. The fear of forfeiture leads folks to underfund these accounts. Not paying attention to how expansive the list of eligible expenses is leads folks into forfeiting money. The average amount employees set aside into a healthcare flexible spending account is $1,500, and about half of participants lose an average of $75 at year-end, according to WageWorks. But even these employees who forfeit $75 are still better off with the FSA, says Dietel. Since the average election is just under $1,500, the employee has saved 25% to 40% of that, or $375 to $600, so they are still $300 to $525 ahead of where they would have been without a healthcare FSA.

So here’s the question: Do people, in fact, underfund these accounts? (more…)

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A few months ago I had a post on stair-step incentives. These are incentive schemes that car manufacturers offer dealers that essentially pay rebates on cars that have been sold once sales cross a specified threshold. In that post, I noted that these schemes had the potential to skew competition in local markets:

 If you and I own competing dealerships across town, I have a serious leg up on you if I am the first to reach a threshold. I can price more competitively since I know that I am guaranteed to get a rebate while you are still striving to make the threshold. Note this makes everything all that more sensitive to how individual dealer thresholds are set. If mine were skewed low while yours were too high, it’s game over and I eat your lunch.

Obviously, from a dealer’s perspective, this is an issue. Dealers don’t necessarily know how car makers set their targets. They, for example,  may be basing targets on national trends that may not apply locally. Further dealers may be facing challenges that the automakers don’t know (e.g., a top sales person just left). Even if a dealer knows how his target was set, he may not know what the target is for a neighboring dealer of the same brand or what is happening with a competing brand. Hence, he could be blind sided when a competing dealer reaches her threshold and starts pricing very aggressively.  Is there an easy answer to this dealer’s conundrum?

Enter the New Hampshire state legislature. (more…)

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This blog entry is a direct continuation of Marty’s post on Textiles in America and part of our ongoing posts on reshoring of work.  The New York Times Replica Edition is an exact electronic version of the in-print newspaper where I first saw these two nice pieces of data.  (I LOVE data.  Recall: “In God we trust, all others bring data”–according to quality guru Edward Demming.)

jobs evolution since 1990. (Source: Bureau of Labor Statistics, as reported in New York Times of Sep 20, 2013)

Jobs evolution since 1990.
(Source: Bureau of Labor Statistics, as reported in New York Times of Sep 20, 2013)

This chart provides hard data of the stories often told about job losses.  The huge transformation of textiles and apparel is striking–mind you, the data spans the relative recent 18 years!  I can only imagine the devastating impact to families working in that sector…  From an economic perspective, two key explanatory changes are: 1) offshoring to low cost countries after deregulation and 2) innovation leading to increased automation, and the substitution of capital for labor.  (I purposely use the “big” innovation word; later I shall also write about recent data linking innovation to offshoring.)

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About a year ago, we had a post on Amazon Lockers — the Seattle firm’s attempt to solve recurring last mile problems. Customers could have their purchases delivered to a secure, nearby location. No need to sign for a package; no need to worry about someone walking off with your box. You just need to enter a code to pop open the locker that has your stuff.

But there is an obvious complication here: Those lockers have to go somewhere. Amazon’s plan was not to buy real estate but to plant them in existing retail locations. But which stores would benefit from hosting Amazon lockers? That is the question that a recent Businessweek article examines (Do Amazon’s Lockers Help Retailers? Depends on What They Sell, Sep 20).

The incentive for any business hosting an Amazon locker isn’t the monthly stipend the online retailer pays—”not even worth it,” says the manager of a Manhattan copy shop—but the lure of higher store traffic given the online retailer’s enormous sales volume and the gazillions of brown boxes sent across the nation each day.

Amazon has the lockers in nine large metro areas and touts the delivery option as a customer convenience for the many people who can’t reliably get their online purchases at work or at home. For a bricks-and-mortar business, the idea is that people coming to collect their Amazon purchases will buy other stuff on their way out the door.

So do people buy other stuff? (more…)

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A Slate article asks a very simple question: “Ikea is so good at so many things. Why is it so bad at delivery?”

The author tells the story of an item that was purchased from Ikea and was supposed to be delivered by a third party. While Ikea claimed to ship the item, the third party claimed to never receive it. Since Ikea claimed the item was shipped, the order could not be cancelled without incurring a hefty cost. Apparently, this is not a unique experience:

The nightmare of Ikea delivery is a truth so universally acknowledged that even the company cops to it. Chief marketing officer Leontyne Green talked about her own “very frustrating” Ikea delivery experience in a December 2011 Ad Age profile, which stressed the firm’s ongoing efforts to improve delivery and overall customer service.

In trying to explain the above conundrum, the author recruits several of our colleagues from Dartmouth and Harvard:

“With sporadic orders over a wide geographic area, Ikea would need a fleet of trucks that might be idle one day and not able to handle the load the next,” says Robert Shumsky, a professor of operations management at the Tuck School of Business at Dartmouth.

We have discussed several times, albeit in the context of grocery delivery, the fact that one of the main cost drivers of delivery services is density. Since Ikea tends to be quite far from urban and dense areas, it is usually difficult to build density and thus difficult to offer a cost efficient services.  One may charge a high price for such a service, but given their target market, this may not be ideal. (more…)

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