Describe the Company
Company X is an Agro commodity leader in continent-wide footprint covering densely populated and remote areas of the USA. The company had suffered from high road transport costs as gas prices are touching the skies which in turn reduced the profit figures. The company is looking to strengthen its supply chain by boosting its security. With thin margins and increasing risk of supplier mistakes, the company decided to explore international markets in Europe, the Middle East, and Asia. The company has to maintain price quality and will choose the suppliers who maximise those characteristics.
Why did they call you? What was the stated problem?
Currently, Company X is procuring goods from high-volume producers located in the center of the continent (North America). One of the primary problems associated with having a north American supplier is that nearly all the goods have to be transported via land. The United States Of America have extensive interstate highway connecting all 50 states (Alaska and Hawaii are states but they are not in the mainland USA). Although the goods can reach anywhere in these 50 states within 3-4 days from order, the goods are moved using large cargo trucks, and consequently the land transportation cost at source are high (driver cost, diesel for trucks, maintenance, insurance, theft, etc ).
Describe the situation and the context
The basic supply chain planning was adequate yet the company was facing trouble with the higher cost of transporting. The profitability continued to be low year on end. Agri commodity doesn’t have high margins so any cost to the supplier is transferred to the parties involved. Agro commodities, in spite of being in a sheltered industry with a secure market share, these businesses were fairly profitable. There were several indications that the basic supply chain planning was inadequately embedded in the business. As a consequence, the low margin and high volume sales became the nature of the business. Large fluctuations in gas prices and politics along with the supplier’s unreliability led to loss-making business.
Currently, Company X is purchasing goods from high-volume producers located in the center of the continent. Company X is exploring options in international markets, mainly Asia and Europe. This move may make the supply chain a lot more complex than it had ever been in the past. Dealing with customs, Quality checks, spoilage, and theft on a much more significant scale than before.
What are the industry trends ?
The foundation of the Agro-industry is, based on low margins and a high volume of sales. Even a tiny increase in overhead cost will reflect deeply on the revenue and profitability of the company. Seasonal changes affect the availability, storage, and prices of Agro commodities. To reduce running costs, the companies look to buy the Agro commodity at international markets. As a result, the company can maintain a healthy price-quality relationship.
Due to several reasons, gas prices are shooting upward with no sign of going down. This has put additional strain on road logistics as their overheads are increasing. This has led to the commodities being more expensive which reduces the profit earned. An industrial push to adopt rail transport is to be expected if the prices of gas won’t fall anytime soon.
How were the customers changing?
The prices of Agro commodities increased which results in low customer satisfaction. A permanent lowering of the cost base was necessary and expected.
What was the stated problem?
The problem stated is the high cost of land transportation, cost-quality trade-off, supply chain security, exploring international suppliers, and the complex supply chain reconfigurations associated with intercontinental suppliers.
How were the suppliers changing?
With the added strain on the supply chain, many suppliers have started to miss their delivery dates. All instances of any mismanagement or lack of coordination were always on account of the Company. This has resulted in the Company making huge losses. The suppliers are at the mercy of their logistic partners who are charging exorbitantly for goods transport via road networks. The suppliers expected something to change.
What was the stated problem?
The stated problem was general discontent with the profits and was looking to cover it by exploring international suppliers. The senior executives wanted to reduce the overhead cost associated with road transport or find any alternative.
What was the perceived, but unstated problem? What was the elephant in the room?
It was assumed that the suppliers were paying too much for a road logistics service. If Company X decides to go with an international supplier, company X will have to build a new relationship with this supplier. Company X may not get privileges like borrowing on credit, cannot verify quality in a person, and biggest of all, in case of fraud company X, will have a hard time getting remunerations as the case crosses international jurisdiction. A proper risk assessment needs to be done.
What was the unrealised problem?
While all this was partly true, there were two unrealized problems:
1.) the supply chain model was outdated as it relied on one mode of transport even after technological development in air and sea transport.
2.) With only regional suppliers to work with, the price-to-quality relationship was not at its best.
3.) A fully vertically integrated supply chain will require heavy upfront capital.
What was the big problem? What were the Real problems?
The big problem was the increasing cost of road transportation from the supplier to Company X. Company X will have to develop a fast, efficient, and custom-configured supply chain for international suppliers. Company x will have to take into account the customs check and how long it sometimes takes. Which requires heavy upfront investment and will take a few years to break even. Depending on international vendors for sudden demand hikes is not advisable.
What were the complicating factors that made solving these problems so difficult?
A combination of domestic and international supply chains opened doors for a more complicated supply chain. Co-ordination between International suppliers, 3rd party quality control, FOREX banks, and customers was a must. Each combination of domestic and international suppliers had its pros and cons.
How long would it take to solve the problem themselves?
In the best-case alternate scenario, the fuel prices and transport security increase thus company x decides to not go with international suppliers. This will gradually restore the profits to the original level or may even increase them in the long run. After acquiring the necessary capital, company X may establish international suppliers who may offer competitive rates and quality, especially from Asia
Who benefited from not solving the problem? What benefit did they derive?
The current domestic suppliers and 3rd party transporters benefited from the high fuel prices and inefficient supply chain. 3rd party transporters are charging exorbitantly , while offering to changed to their services.
ACTIONS
What actions did you take?
An alternate model of the supply chain was built by identifying 15 international suppliers spanning Europe, the Middle – East and Asia.
In case of domestic suppliers, the suppliers where narrowed down to who can supply goods via railroads as to reduce transport cost.
Establishing an End to End supply chain will take huge upfront cost for procurement of raw materials then scheduling, and then final delivery of product to the customer. It is further extended to after-sales service and reverse logistics depending on the nature of the business
Maintained better relationships with suppliers situated in Canada as they can fulfil unaccounted demand spike better because they transport via roadways. Yes the road logistics is expensive in contrast to railways but road transport hardly take 3-4 days from order dispatch.
Setting up of banking facility such as Escrow accounts for multiple vendors and FOREX options should be explored.
Quality verification of international suppliers will be tricky at first, as we cannot always travel to supplier country to inspect. This risk will be mitigated after a close relationship with international supplier is established.
Securing an international insurance for the commodity is highly advanced as it minimises the loss in case of theft, damage or outright no delivery of goods.
A reputed 3rd party quality control firm should be hired to mitigate risk of spoilage and damaged goods.
Proper storage facility has to be maintained as the imported Agro products may spoil due to change in climate, humidity and transport. Location 7 and 6 have more colder weather compared to USA. Location 4,5,9,10,11&19 have more drier climate and the agro commodity may get spoiled to relatively humid USA.
Location 6,12 and 8 are the best possible locations for international suppliers. As they are situated at biggest port of Europe and United Kingdom. With the treaty of The Transatlantic Trade and Investment Partnership (T-TIP), it’s convenient to trade with these locations.
For the best outcomes, the location 1,2 and 3 should be high priority suppliers. the location 16, 17 must be selected for close proximation to USA.
Try to avoid Location 13,14 and 15 as they are on heavy snow region . During severe winter the supplier may not be able to deliver their goods of agreed date.
location 18 should be avoided as they are land locked. The supply from there will take at minimum few weeks to months. Only rely on this supplier if the commodity cannot be procured by other location.
What data was collected? How?
Each customer/B2B data and stock transfer for a period of 60 months before the year of modelling was collected via the ERP system for accurate forecasting and demand planning. The collected data had to be sorted and cleaned for better analysis. Data from 3rd party transport were also added to the mix.
What analysis was done? How?
Analysis for finding 15 potential Agro-suppliers on a global scale including the added complexity of supply chain, customs, storage, and rail transport. Identifying strategic supply chain combinations with domestic and international suppliers was on the priority list of objectives. Increasing the resilience of the supply chain by diversifying the supplier contact was analysed. Rail transport is an interesting option to explore with selected domestic suppliers.
How long did it take to conduct the analysis?
It took 1 day to conduct the preliminary analysis, and 5 weeks to conduct the additional analysis for extra 15 scenarios asked by the board.
Why was the analysis necessary?
The cost-effective scenarios were not evident without the analysis, nor it was obvious that the international supplier was necessarily better than the current domestic supplier. To prove the effectiveness of the new model and to select the best alternative model with the minimal cost, least possible level of risk, and maintain a reasonable price-quality at all levels, all the analysis was necessary.
What were the results of the analysis?
The results of the analysis clearly showed an overall cost reduction of 18% and better supply chain security and options. The sustainability and reliability part of the supply chain is not possible to quantify at this level, further analysis is to be performed which was beyond the primary scope of this project.
What were the recommendations?
- Switch to rail-road transport for domestic vendors.
- In case of international supplier , it is advanced to hire a 3rd party quality Inspection control firm to mitigate risk of spoilage ,foul play, and damaged goods.
- For international suppliers, locations 1,2,3,4,5,6,7,8,9,10,11,12,13,16,17 are optimum according to our analysis. Location 14,15,18,19,20 should be avoided
- At this moment End to End supply chain should not be implemented due to high cost and break of period is uncertain.
- Maintain better strategic relationships with suppliers situated in Canada as they can fulfil unaccounted demand spike, as they transport via roadways.
RESULTS
What benefits were derived from the project?
Results of analysis clearly showed an overall cost reduction of 18% and better supply chain security and options. A mix of domestic and international supplier strengthen the security and options of the supply chain.
How else did the project sponsors benefit?
A number of additional supply chain remodels were initiated for domestic as well as international suppliers. With the mix of rail-roads transportation, the net carbon footprint is reduced drastically. With reduced operations expenses and stable transportation the Company X ‘s supply chain is better than ever.