Developed-world supply-chain congestion needs innovative solutions
20 March 2015
Human Capital Alliance senior advisor, Somsak Jaitrong looks at supply-chain congestion solutions.
The recent US West Coast port strike highlighted continued US supply-chain congestion and the need for innovative solutions.
George Stalk, a Toronto-based Boston Consulting Group senior advisor said in a recent presentation that Asian freight to the West Coast of North America has been growing at a rapid rate but port and surface-transport capacities have not followed.
“North American ports and rail systems are beginning to choke, and delays and uncertainties are increasing.”
Freight demand on North America’s West Coast he said has been growing at a rate equivalent to one Port of Vancouver per year, and a rapid expansion of port and rail capacity would be difficult given political pressures and formidable environmental resistance.
“The supply chain bottleneck is beginning to affect the performance of manufacturing and retailing companies that rely on surface logistics to get their goods from Asia to the heartlands of North America.”
Stalk said few retail or durable-goods company executives understand the magnitude of the challenge and even fewer are investing against the phenomenon to reduce costs, improve profitability, and create competitive advantage.
Lack of new infrastructure
North America and Europe haven’t been able to keep pace with Asia’s infrastructure development.
China is completing eight sizeable new ports, while there is almost no action in North America outside of the major expansion at the port at Prince Rupert in Canada.
“These congestion issues add significant costs to logistics, of course, and it has always seemed to me at one level there is not much anyone can do about it.”
Rethinking supply-chain networks
Stalk said companies must look out over the horizon by rethinking supply-chain networks.
To remain competitive, they must aggressively manage China-based supply chains, looking for ways to squeeze time that competitors have not identified or exploited.
“They can explore alternatives that will minimize adverse effects on the supply chain. These alternatives may include options such as increased air freight use that may appear costly but may actually result in lower overall expenditures by reducing hidden costs.”
They may also invest in premiums and capabilities including extra payments for preferred treatment from ground, sea, and air shippers, port services, and other suppliers.
“Investments in capabilities enable companies to be better than competitors at managing their business in spite of the problems on the West Coast. These initiatives can include cross-docking, facilitated portside handling, and “track and trace” capabilities to keep boxes moving.”
Companies that make these creative investments will benefit enormously and open a competitive gap that will complement and enhance advantages founded on merchandising and store management.
Underestimating fast effective supply-chains
Many companies, Stalk said underestimate the importance of fast, effective supply-chains.
They understand supply-chain management’s importance but rarely think of supply-chain investments as an outright source of competitive advantage.
Moreover, they tend to underestimate the hidden costs of longer supply-chains, reduced flexibility, and lost gross margin from missed sales and write-downs and their ultimately profitability impact.
Innovative solutions – two-speed supply chains
To keep abreast, developed country companies hoping to expand into developed markets, Stalk said must consider using two-speed supply-chains.
They can continue using their slow-growth supply-chains in their developed economies but must now develop high-speed supply-chains suitable for high growth Asian economies.
Stalk said this exercise requires supply chain segmentation – and one that will be tricky to manage, especially as most Western supply chain managers have really only dealt with fairly slow growth in the past two decades.
He compared it to running a supply chain for a long established and now slow growth retailer, where the focus is on reducing costs as a percent of sales and perhaps catering to service needs for upmarket customers, versus the supply chain of a young, fast growing chain, where the challenge is just getting product.