Reconnecting With Your Network

As the lead time between ordering for replenishment and receiving increases, the required safety stock increases. Likewise, as the variability in the lead time increases, the required safety stock increases.
A thorough examination of these items should result in a good estimate of the TDC when everything goes according to plan. However, it is also important to include the costs that are incurred when things don’t follow the plan.

Unplanned Costs

When it comes to offshore manufacturing, variability is the name of the game – making profitability a moving target. Political, socioeconomic and demographic upheavals, changing marketplaces and the multitude of factors that affect transit time all raise risks and costs and reduce a manufacturer’s flexibility in terms of inventory tracking and control, warehousing, distribution and customer service.

Every risk that comes with the increased time and variability of an extended supply chain has an associated cost. Examining these costs in greater detail is the second step in the process to make a good decision.

The current US transportation-related infrastructure often causes bottlenecks leading to delays and hence lost or delayed sales and/or premium costs to expedite. Even now, US port and rail systems are overburdened with imported cargo. Staging spaces and crane capacity are inadequate, and rail and truck traffic out of ports often approaches gridlock. Further, since container ships are getting bigger, some take five or more days to unload. Those are just everyday delays and do not take into consideration the possibility of labor actions at US West Coast ports that could cause disruptions similar to the lock-out that closed ports a few years ago.

A continued focus on security has brought with it an increasing likelihood of more thorough cargo inspections at the port of entry, delaying shipments by a week or more.

The current gridlock at US West Coast ports is worsening as US export traffic increases with the weak dollar. Traditionally, ports have dealt with a ratio of about three import containers to one export container, but now that ratio is approaching 2:1 as more and more export containers take up scarce staging space, potentially holding up incoming shipments.

Stuck in all this port congestion, trucks are idling longer, triggering concerns over air quality and leading to an increase in environmental regulations. The Ports of Los Angeles, Long Beach and Oakland, for example, will levy a $35 per twenty-foot-container equivalent environmental fee to mitigate pollution.

A number of ports are developing regulations on the type of fuel ships can use while they are in port. While container ships are at sea, they burn bunker fuel. The regulations would require that they burn a low sulfur fuel when they come into ports in Europe and on the US West Coast. We can expect to see higher fuel costs as the price of bunker fuel is soars and low sulfur fuel prices are even higher with increased demand.

Weather is an uncontrollable variable that can cause substantial delays, again increasing expediting costs and revenue shortfalls. A typhoon in the Pacific Ocean could mean, at best, delays as a ship detours around the affected area. Or, in the worst case, it may cause losses as shipping containers are jettisoned or lost due to the storm.

Clearly, over the course of time some fraction of the replenishment shipments will be expedited due to unexpected surges in demand or delays in replenishment resulting from these and other causes. The costs to expedite an overseas shipment can easily be three to four times the cost of the planned mode of transport. Even a small percentage of expedites can have a material effect on the TDC. Therefore, an estimate of the number of expedites should be built into the TDC of the imported material during the initial analysis.

Out of Room in the Warehouse?

The foreseeable and unforeseeable delays of long supply chains not only increase expediting costs and revenue shortfalls, they also complicate supply chain management. One of the highest hidden costs associated with offshore manufacturing is inventory. Although logistics professionals recognize the need to add extra days of inventory to cover the “pipeline” while the material is in transit from an overseas location, they sometimes overlook the need for additional safety stock to account for the longer lead time for replenishment.

There are additional factors that also negatively affect warehousing costs. Ocean transport of containers can be extremely variable, requiring importers to plan for delays in receipt and also require them to be able to accommodate larger quantities of material in a single shipment. It is not uncommon, for example, to have two, three or even five containers arrive at the same time, even though they were all ordered one week apart. This multiplies the need for warehousing and staging space and the labor costs for marshaling and sorting the products. If extra warehousing space is not readily available, it may mean paying a premium for third-party space or last-minute arrangements.

As one manufacturer learned, equipment rentals, such as special chassis for ISO-containers, may further increase these costs. The manufacturer offshored production of a key intermediate from the US Gulf Coast to Europe and found itself in a “feast or famine” situation for months while its ISO-containers were stacking up in Europe as they got rolled from one ship to the next.