Shocks to the supply chain: what happens when your carefully orchestrated logistics fall apart?

Chief Executive, The, April-May, 2008 by Steve Bergsman

Last summer, when The Boeing Co. announced it would delay the introduction of its 787 Dreamliner, CEO Jim McNerney blamed the problem on the company's supply chain. A large product like an airplane uses thousands of individual parts, but Boeing attempted to mitigate the smaller, individual supply chain quandary by using major suppliers to construct large pieces of the plane. Parts of the wings, for example, are being assembled as far away as Japan.

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McNerney reported to the press that the delays were attributed to a "slowing up in the supply chain rather than a fatal flaw in the supply chain."

Boeing's problem with its supply chain is emblematic of a challenge all U.S. companies now face: managing supply chains that are longer and more convoluted than ever before. For any given product, raw materials can be sourced in Africa, refined in India, produced in China, assembled in Mexico and finally distributed in the U.S.

Today, however, the biggest problem--faced not only by manufacturers but also by service companies like restaurants--is the rising cost of the supply chain. This is not necessarily because of the manufacturing piece of the chain, which can be performed in low-wage countries such as China, but because of the rapid rise in transport costs.

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Obviously, the price of oil hovering above $90 a barrel boosts cost of production. But it also means a huge increase in the expense of transporting parts and completed goods. And the issue goes beyond energy costs. Earlier this year The Wall Street Journal reported that due to a shortage of freighters the cost of shipping goods has reached an all-time high. The paper noted the cost to carry raw materials from Brazil to China had tripled from 2006 to 2007.

Interestingly, during the years 2000 to 2004, supply chain costs (from raw materials to production to final sales outlet) declined because there was no real rise in energy costs and deregulation had eased transportation expenses, notes Thomas Freese, a principal in Freese & Associates Inc., a Chagrin Falls, Ohio-based management and logistics consulting firm. "But that trend reversed itself in the last two to three years because the rise in energy costs is now impacting transportation costs."

In 2005, when the trend line for transportation expenses started to reverse, adds Freese, logistic costs amounted to 9.6 percent of GDP, up from 8.6 percent in 2003. Some of these costs are passed along to consumers, but in many cases the market is too competitive to raise prices, so companies have to look at the total supply chain, not just manufacturing but logistics as well.

"Businesses will continue to span supply chains across the globe," avers Dan Brutto, president of UPS International. "However, rising fuel costs are driving companies to move away from a 'one-size-fits all' approach to transportation management and toward implementing a multi-modal strategy that reflects product value, life cycle and handling characteristics at stock-keeping unit level. The side effect is that supply chains are becoming more agile and more closely matched to strategic business plans."

Emeryville, Calif.-based Jamba Inc., owner and franchiser of the 640 Jamba Juice stores across the U.S. and one store in the Bahamas, sources fruit, "boosters" (optional additives like ginseng and wheat grass used in its smoothies), and hard products like cups from suppliers across the globe. As an example, most fruit for its drinks comes from South America, but more of the exotic fruits are now grown in Asia. Meanwhile, its boosters are mostly shipped from Europe.

Jamba takes supply chain issues so seriously that in July it lured Greg Schwartz away from Wal-Mart, where he was vice president of global procurement, to the newly created post of vice president of supply chain management at Jamba. "People, process and technology are crucial to a healthy corporate supply chain," says Paul Clayton, Jamba's president and CEO. "Our success comes from having an experienced department."

In 2007, Jamba Juice expanded significantly, opening close to 130 stores. "As the volume continues, we become a bigger and bigger user of everything from cups to fruit," says Schwartz. "You can imagine the demand we have on suppliers in other parts of the world to fulfill our needs. Our No. 1 focus has been on insuring supply."

In expense terms, the most important factor for Jamba is the cost to the store. When those expenses rise, Schwartz does a reverse diagnosis of the supply chain, scrutinizing components to understand where the increase is coming from. At the same time, it will dissect the rest of the supply chain to look for opportunities to mitigate the problem, whether the cause is fuel or labor increases.

"We do not treat fuel costs on transportation any differently than we would the cost of product," Schwartz explains. "We try to look at the total value, the total landed costs to stores. So if a case of oranges costs $10 to deliver today and $11 tomorrow, it doesn't matter if it is transportation costs or labor costs, we plan for it and try to find other ways to mitigate the increase."