Supply Chain Disruptions Foster ‘Just-in-Case’ Strategy
This story appears in the June 3 print edition of Transport Topics.
Major supply chain disruptions from weather or other disasters can turn just-in-time inventory management into a liability rather than a solution, according to freight transportation experts.
The need to minimize supply chain disruptions coupled with a growing desire to bring goods to market quickly have shippers turning to a just-in-case distribution model that utilizes regional distribution centers, ensuring goods can be sourced both rapidly and in the event a supply chain disruption affects one region.
One outstanding example of the problem was Superstorm Sandy, which closed ports on the U.S. East Coast and affected supply chains for months.
“After Superstorm Sandy, there is more interest in mitigating risk. All companies are considering it, and it is part of their evaluation,” said Chris Merritt, vice president of retail supply chain solutions for Miami-based Ryder System.
Sandy “was a temporary pause, but it was a very expensive temporary pause,” said Gail Toth, executive director of the New Jersey Motor Truck Association. “You had customers that were down, carriers that were down and places you couldn’t get to.”
Thomas Connery, chief operating officer for Elizabeth, N.J.-based Shevell Group, which owns New England Motor Freight, Eastern Freight Ways and Carrier Industries, said the company’s drivers were prepared to deliver freight within a few days, but their customers weren’t ready.
“They had trees down, and the power was out. Two to three weeks were spent sitting on freight,” Connery said.
John Morris, industrial services lead for the New York real estate firm Cushman & Wakefield, said risk also can be tied to road closures, citing a May incident in which a tanker-truck accident closed a portion of Interstate 81 in Pennsylvania.
Those delays can mean empty store shelves and dissatisfied customers.
“If I’m a consumer packaged-goods company selling through a large merchandiser or mass retailer, and I don’t have product, I’ve disappointed my consumer, and they might substitute a brand and not come back to me. I’m also probably going to be penalized for stock out,” said Matt Menner, senior vice president of Transplace.
Shippers and retailers want to ensure that doesn’t happen.
“It absolutely lessens risks to have multiple distribution centers spread across multiple areas. It is a much more resilient supply chain if you can pull from two or three,” said Derek Leathers, president of Werner Enterprises, Omaha, Neb. Carriers said the desire to minimize risk is one of many factors driving toward a regional distribution model. Today’s consumers are demanding and have a wide variety of purchasing options, which adds pressure on shippers to have product available.
“I can’t remember the last customer I’ve had any level of strategic dialogue with that did not include their desire to have more regional distribution centers to get product to customers faster,” Leathers said.
A growing number of Werner’s customers are integrating rapid deployment centers for frequently purchased products versus just the mega-centers of the past, he said.
“It is an ‘and’ situation, where they keep some larger distribution centers [and] have these smaller rapid deployment centers,” Leathers said.
Companies are even more focused now on a perfect customer experience, which includes overnight if not same-day delivery.
“The only way to accomplish that is to have product put out in the field in a more regional basis,” Leathers said.
Richard Thompson, managing director with Chicago-based real estate firm Jones Lang LaSalle, said, “It is no longer sufficient to deliver a product to your customers within three to five business days . . . customers are expecting next-day or even same-day delivery.”
Thompson noted increased demand for distribution centers in major metropolitan areas and key distribution markets, such as Los Angeles, Chicago and New Jersey. As the economy improves, companies “will look to establish more facilities in their distribution networks to help reduce freight costs, mitigate risk and move closer to their end customers,” he said.
Ryder’s Merritt said retailers also are trying to figure out how to defer the channel decision of where they put product — either in the store or in a distribution center for e-commerce.
“The way you do that is to have your distribution centers more regionally located,” Merritt said. “You’re trying to predict what 325 million customers are going to do. That increases the amount of safety stock you carry.”
Atlanta-based UPS Inc. is seeing more retailers leverage their stores as mini-distribution centers in an effort to optimize their supply chain, said Melanie Alavi, a manager in UPS’ retail segment. Not only does that ensure inventory is close to consumers, but it also allows them to minimize markdowns by shipping an item to an online buyer instead of offering it on sale.
UPS aids the process by creating an interface with a visual display showing sales associates exactly what they need to pick.
“These store associates aren’t used to picking, packing and shipping. This creates a lot of pressure on the stores that they haven’t had to deal with in the past,” Alavi said.
Merritt said a challenge with shipping from stores is that retail space is generally more expensive than a warehouse or distribution center.
“If you try to use the store as the delivery point, you have to push more inventory there. Retail store shelf space isn’t cheap, and most stores have one to show and one to go,” he said.
Because of the cost of retail space, some companies are using regional DCs to minimize store inventory.
“You can carry less in the store as long as the inventory you do have is close enough that you can get to it quickly,” Leathers said.
Those rapid deployment centers replenish their stock weekly, sometimes daily, he said.
Not only do consumers want product quickly, they also demand a wide variety of colors, sizes and customization.
“I think while everyone aspires for there to be rationalization of SKUs [stock-keeping units], the reality is we become more and more demanding for assortment and size,” Menner said. “When there are these additional support facilities, they are smaller and specifically focused on the forecasted, high movers. You can’t afford to have 30 to 40 locations offering 8,000 products.”
Eric Hepburn, vice president of distribution center management for Penske Logistics in Reading, Pa., said companies have to look at all of their costs when opening new DCs.
“If the demand is enough to offset the transportation cost . . . they’ll generally pursue that opportunity,” he said.
However, with a move to regional distribution centers, shippers may not have the scale they once did.
“As people buy pairs of shoes and there aren’t pallets of shoes at the stores, there is a loss of scale. That is a significant issue for carriers,” Morris said. “This bodes well for [third-party logistics providers] that can generate scale by working with three to four shippers at the same time.”
Information technology advances provide greater visibility into the supply chain, allowing companies to move goods quickly.
“The ability to pick and pull a load and optimize a trailer can be done much more rapidly today than it could even just a few years ago,” Leathers said.
Rick Blasgen, president of the Council of Supply Chain Management Professionals, said technology allows carriers to opt for more, smaller distribution centers.
Rick Mathews, vice president of specialized services for Overland, Kan.-based YRC Freight, said YRC’s time-critical offering fits in well with a just-in-case distribution model.
“We are obviously coming off of a fairly unstable economy for the last year-plus, and customers and primarily retailers have let their inventories run to an all-time low,” Mathews said.
“What really falls nicely into our expedited service is the retailers’ must-arrive-by date,” he said.
Year-over-year, less-than-truckload carrier YRC is seeing double-digit increases in time-critical shipments.
CSCMP’s Blasgen said certain commodities can affect how quickly companies want to get it to consumers.
“If there is a desire to get fresh food to consumers quicker, that will drive regional activity. If you’re shipping steel or something without a shelf life, that may change,” he said.
The move to just-in-case inventory management has led to significant recovery in the industrial real estate market.
“That is both the absorption of empty rental space that is now being utilized and construction on new buildings being built. Almost nothing has been built since 2008, but now there is a significant amount in the industrial market,” Cushman & Wakefield’s Morris said.
Fortunately for shippers, real estate costs are dropping due to increased competition for tenants or buyers, Penske’s Hepburn said.
“There is an overall nervousness from a marketplace standpoint that if you don’t have somebody in your space today, you might not tomorrow. It is a very competitive environment,” he said.