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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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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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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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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How the New Year in China affects supply chain reliability

An interesting story from today’s Wall Street Journal (Companies Seek to Avoid China New Year Hangover, Feb 21). Basically, the Chinese New Year is complicating supply chain management.

For toymaker The Bridge Direct, Easter now begins in August.

That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.

The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.

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What’s it like to work in an Amazon fulfillment center?

If a major firm opened a new facility in an otherwise depressed area, that would be good news, right? An article in the Financial Times suggests that there may be some caveats on that conclusion in the modern economy (Amazon unpacked, Feb 8). The firm in question is Amazon and the location is Rugeley, Staffordshire, in the West Midlands region of England. As the article tells it, the town was once a booming coal mining center but has steadily been on the skids since the mine closed in 1990. Hence, there was much excitement when Amazon announced it was opening a fulfillment center in 2011. Amazon also brought modern management techniques to Rugeley with kaizen events and gemba walks.

How has all that played out for the workforce?

What did the people of Rugeley make of all this? For many, it has been a culture shock. “The feedback we’re getting is it’s like being in a slave camp,” said Brian Garner, the dapper chairman of the Lea Hall Miners Welfare Centre and Social Club, still a popular drinking spot. …

Others found the pressure intense. Several former workers said the handheld computers, which look like clunky scientific calculators with handles and big screens, gave them a real-time indication of whether they were running behind or ahead of their target and by how much. Managers could also send text messages to these devices to tell workers to speed up, they said. “People were constantly warned about talking to one another by the management, who were keen to eliminate any form of time-wasting,” one former worker added.

The former shop-floor manager and another worker described a strict “three strikes and release” discipline system – “release” being a euphemism for getting sacked. In the early days, people were “released” frequently and with little warning or explanation, workers said. A very large number were laid off after the first busy Christmas period, some of whom had assumed their jobs would be permanent. Chris Martin says his job lasted less than a week after he took a day off for blisters and returned to find the night shift he was on had been abruptly cancelled.

It is this job insecurity that has most disappointed Glenn Watson at the district council. “Our definition of a good employer is someone who takes on people and provides them with sustainable employment week in week out, not somebody who takes on workers one week and gets rid of them the next,” he said. The council had understood Amazon would use the first 12 months to gradually build up its own workforce, transferring agency staff on to its payroll, but by last autumn Watson thought there were still only about 200 Amazon employees, with the rest of the workers supplied by Randstad and two smaller agencies. One young man strolling out of the warehouse last September said he was still an agency worker, even though he had been there since the site opened.

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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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What explains the price of a flu vaccine?

It’s been a bad flu season with hospitals in many cities overwhelmed with patients. This is largely a preventable problem. The annual flu vaccine is not perfect but a wider use of the vaccine would provide some amelioration. So why don’t more people get a flu shot? Some reporter at the LA Times seemed to think that cost might be a factor (Why does a flu shot cost so much?, Jan 21). After all, getting the shot at your local pharmacy will set you back $30 or so. However, as the reporter found out, given the supply chain challenges of producing and distributing influenza vaccines, the real question is why flu shots cost so little.

That’s because the process of manufacturing the flu shot and distributing it is a huge headache for pharmaceutical companies. The influenza vaccine must be made anew each year, beginning in February. Researchers determine what strains to put in the vaccine after looking closely at what types of flu are most prevalent in the Southern Hemisphere throughout its winter, which is our summer. …

Vaccines for other illnesses, such as measles, mumps and rubella, can be used until their expiration date, which is often years after they’re made. Influenza vaccines are really only used September through January and then go in the trash. And there are no regulations saying people have to get flu vaccines, meaning it’s very difficult for companies to estimate how many they should make. …

This year, companies have produced about 145 million doses, he said. Only about 129 million have been distributed. Last year, companies lost even more on the flu vaccine because it was such a light flu season and fewer people decided to get the shot. Only about 42% of the U.S. population got an influenza vaccine last year, which meant that about 30 million doses were never used and had to be destroyed.

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