For 21 years, Dr. John Vande Vate has been a professor at Georgia Institute of Technology. In 1999, he created the school's Executive Masters in International Logistics (EMIL) program to provide training and credentials to business executives in the logistics field. An initial advisory board that included the then-president of Wal-Mart Stores, the CEO of Schneider Logistics, and the vice president of Ford Motor Company recommended that Vande Vate and his colleagues make the EMIL program international in scope, award degrees, and keep the sessions short so companies don't lose their best employees for long stints. Vande Vate did just that, and since has welcomed students from Intel, HP, UPS, Motorola, and a long line of other global companies.
Q: What trends do you see in supply chain management these days?
A: One, visibility. Everybody's been selling visibility tools. Manufacturers think, 'If only I could tell my suppliers with more detail what I need from them, they could provide it better.' And then, 'If only I could have better track and trace and know where everything was at every minute.'
My own sense of that is it's a bit misguided. On the visibility side for track and trace, what that can potentially save you is the difference between, 'If I get in trouble and I have to send it expedited, do I find out that I have to use second-day air or do I have to use flash?' That's what track and trace can do for you. So you can just look at what you're spending on flash -- that's what that stuff is worth for you. And I think people have overblown that.
Then they sort of followed that trend with, 'What I need to do is give my supplier more detail so that I know what I need on a given day [and] he's making it for that day and sending it.'
We call it ship to forecast: 'This is what I forecast I need, I order it from you, it should arrive right on time, and I use it.' In a global world, with an increased number of SKUs, it's hard for me to forecast; my forecast is bad. And so I'm sending you these numbers every day telling you to make it, but it's changing wildly and it's wrong. And you're running around trying to make it and it's not what I needed anyway.
We've been working with a European auto manufacturer to try to turn that around. We've done lots of studies and simulations to show that it would work and there's a lot of theoretical work behind it that says just shipping to the average, and then controlling inventory, costs no more in terms of inventory and transportation, and your supplier will love you, because he knows what to make every day, and it's the right thing.
Q: So what's wrong with today's forecasting? Are manufacturers using the wrong tools?
A: No, I don't think it's the wrong tool, I think it's that the problem has changed in three different ways. One is that I force myself, maybe incorrectly, to forecast farther in advance because my market may still be here in North America or Europe, but my manufacturing, at least one stage of it, is in Asia. It might also be crossing the pond several times, and so I've stretched out the supply chain, which mean I've got to forecast farther in advance and that makes it harder to do. Second, I'm getting into narrower and narrower market segments; in order to win more market share I have more and more products that I offer. And that means it's harder for me to forecast what I'm making. And then, finally, even now that I've got lots of basic platforms that I'm making, I'm offering the customer more options, and that makes it harder.
So forecasting tools are probably pretty good, but there's a limit to what you can do with the problem we're asking you to address.
Q: The push-pull model of demand has tended lately toward the pull side. Do you not place as much importance on the pull-based model as most seem to these days?
A: I would raise the question one level higher and what I would say is that the real decision is where to put the push-pull interface. Every system is a mixture. I can't think of a pure pull system. Dell's is a push-pull system. The suppliers are forced to push to the vendor hub and then we pull from there. Instead of simply thinking, 'I manufacture in Asia and I sell in North America,' it's really, 'I'm going to have manufacturing from Asia to the customer, and where do I put the push-pull interface between Asia and the customer to get the best economy?' Some companies are really trying to pull some of the manufacturing out of the plant in Asia and move it closer to the company and the customer -- for instance, pushing in Asia and pulling in North America. But you'll typically want to pull closer to the customer.
Q: Considering that transportation costs are on the rise and supply chains are getting longer, has the dispersed operation outstripped its value?
A: You hear stories of people who move their manufacturing to China for $2 million in savings, and that's not wise -- unless you're only making $4 million.
You've bought a lot of complexity when you move globally like that. You've opened yourself up to transportation from Asia to the U.S.; those rates have been at record highs. Ocean shipping will probably stabilize or come down, air probably will not. You hear of people that built a business plan on 80% of inventory going on the water and 20% going on the air, and the reality is it was the other way around. And the peak season pricing is only getting worse.
Then there's the level of trust -- there are suppliers that will play games with the contract manufacturer: 'I sent 1,000.' 'I only got 900.' And you end up eating the 100. So you have to protect yourself. Then there's also the customs people. You've bitten off a lot.
Q: How do manufacturers ensure quality assurance when their operations are so dispersed?
A: That's a real issue. China is a great story on the quality side. I hear of people who outsourced manufacturing to the same contract manufacturer in Mexico for years, and they'd get the quality up and then it would fall back down. Then they moved to China and within six months blew by the best they'd ever seen in Mexico and sustained it. The challenge now is that people want to get both the quality and the lower labor costs, so they're having to go into western China. Whether they can match that quality level there, we'll see. Quality managers will have to go there and certify manufacturers. And you certainly want to do it at the factory. You don't want to do it after the product gets here.
Q: What about this end of the supply chain? What's the forecast for the logistics infrastructure in the U.S.?
A: It just sounds like we're headed downward. I think that's a drum we all need to beat on harder.
Our logistics infrastructure is going to be a real challenge for us in the future. Asian ports are growing at 25% a year. Our ports are liable to be over 100% capacity in a few years, and I don't see the opportunities to expand them because typically they're in larger cities and congested.
Our railroad system is, frankly, not keeping up, and it's something of a tragedy. We have a real opportunity in that, unlike Europe, for example, we don't have a legacy of national railroads that are politically connected and hard to integrate, that move only in one direction because of politics that are heavily dedicated to passenger rail. And yet we just are not delivering the goods the way we should be. And there are reasons: It's hard for the railroads to get a reasonable return on invested capital -- it's a capital-intensive business. And so it's hard for them to justify making the investments that need to be made unless they can get that return. So, part of it is the externalities -- the things that other modes of transportation don't have to pay for -- that make them relatively less expensive than rail.
We're heading for a crisis in trucking, I think, because of fuel rates, insurance rates, the age and number of drivers. In that environment the financial stability of some of the carriers wavers -- their assets and trucks become less valuable and it's hard for them to keep going. I think it's a real issue.
And then on the 'software' side, too, it involves training the people who think about these issues.