"The Evolution of the Last-mile Supply Chain"

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"Do you need a robust operational supply chain today? With Extron's modular approach we can have your supply chain solution up and operational in a fraction of the time required for you to develop or expand it yourself."
Source: Extron

Resources Related to The Evolution of the Last-mile Supply Chain:

• Supply Chain Management (SCM) (Wikipedia)

The Evolution of the Last-mile Supply Chain

A Brief History

Beginning in the 1980s, the United States led a massive globalization effort. Free Trade was the mantra of choice and ideas like Michael Porter's classic, "The Competitive Advantage of Nations" flourished. Global wages grew, poverty fell dramatically, and hunger was surely being eliminated. Mankind certainly had entered the golden age! Correct? Wrong!

Wrong - because globalization has had several unintended side effects and also because it has not resolved some of the most pressing supply chain issues. This is not to say that globalization is the wrong answer, on the contrary, globalized supply chains HAVE benefited the world and certain economies dramatically. The only problem is, as is often the case, one size does not fit all and a globalized supply chain is not the solution to all our manufacturing ills.

Why Are The Current Supply Chain Models Flawed?

Now that the globalization playing field is becoming more level, some of the true pitfalls of the model are becoming evident. Here are some problems:

1. Current globalized supply chain models do not take freight costs into account.
2. Globalized supply chains lead to increased inventory levels.
3. Globalized supply chain models assume cheap energy. However, the days of cheap, plentiful energy ended in the 1990s. Moreover, current energy supplies are causing significant environmental problems and are fueling "Petrodictators" (to borrow a word from Tom Friedman's latest book "Hot, Flat and Crowded")
4. Globalized solutions where "All Roads Lead to China" have eroded US preeminence in the world. In fact, we have actually fueled the rise of our biggest adversaries - Al Qaeda and China. Now, we have to spend more money defending ourselves from threats, real or perceived, from both sources.
5. Globalized supply chains have led to an unacceptable level of risk in the supply chains of most western countries. The flow of goods can simply be stopped due to a problem in one country - mostly China. Have this discussion with Supply Chain managers trying to plan around the annual February shutdowns in Asia during the Chinese New Year - I am sure you will get an earful.

What is astounding to me is that we are not simply discussing geopolitical issues here. Fundamentally, there are real economic issues with today's supply chains: freight costs, inventory costs, lack of IP protection for US-invented goods and much more. Why did we then outsource our entire supply chain to Asia? I think the answer can be summarized by "herd mentality" or, more kindly, groupthink.

Let me be clear, the solution is not to do a complete U turn to the days where we assembled every PCB or made every forging within our own borders. The globalized model has tremendous benefits, both to the US as well as to our trading partners. Both American and International companies benefit from globalization. The solution is to enter a paradigm that recognizes total cost and also manages risk to the overall supply chain.

I believe this is where the "Last Mile" architecture shines through. This is the architecture that balances supply chain risk, globalized sourcing and economics. This architecture allows for continuous refinement of the supply chain to balance costs.

A Brief History Of Globalization

In order to understand why we got into the position we are in, it would be useful to take a short history lesson on globalization. Fundamentally, civilizations have been trading in goods and services for centuries. Trading in rare spices, silks, animals and other goods is as old as man. However, when cheap transportation came into being (with steam ships, the internal combustion engine and air transport), and when communications revolutionized the ability of people to project their needs instantly, the real age of globalization was born.

Now, designs could be transferred, prices calculated and decisions made in days, not months. Goods could be cheaply transported in weeks, not years. If you were not globalizing, you were being left behind… You HAD TO globalize. You had to have an Asian strategy, because that was a cost reduction strategy.

In the rush to outsource and adopt less expensive globalized sources of materials, most companies did not address several key aspects of their supply chains. They then rushed into "point solutions" that solved each problem, but did not address efficiency of materials, labor or even address economies of scale (since each solution was a point solution).

Where We Are Today

Some key Supply Chain factors that were not effectively addressed in the massive outsourcing to Asia of the 80s and 90s included:

1. Inventory concerns caused by remote factories (high levels of configured inventory, inventory obsolescence, etc)
2. Management of Supply Chains that were naturally domestic
   1. Demo and Loaner programs
   2. Returns
3. High freight costs from overseas destination and heavy expedite fees for "mistakes"

However, the riches borne by cost reduction made possible by Asian outsourcing hid many of these problems. There were also significant first-mover advantages, since first movers stood to grab market share based on price reduction to end-customers.

As a result, companies rapidly outsourced, shut down local supply and did not analyze costs fully. And it was so easy! When your costs are a fraction of what they were, you can hide all kinds of mistakes, stock all kinds of inventory and not do all the rigorous analysis you should because your costs are dropping 80% and besides, waiting is just not our way, is it?

Moreover, as operations groups were gutted, and contract manufacturers (CMs) emerged as global powerhouses, there were fewer people to manage operations. In effect there was no one to watch over the supply chain except the CM. Little wonder, then, that the CMs encouraged their customers to outsource everything. The message was simplicity, a globalized hub and freight costs were just part of doing business. No one discussed inventory because the CM would hold inventory and charge a small markup for holding it.

This model has worked fine until today. However, two major disruptive factors have come into play as well, with the gradual erosion of the "Asian Supply Advantage".

Major Disruptions

In the early 21st century two major disruptions, vis-à-vis supply chains:

• "Oil shock II" or the first major oil price disruption since the 1970s
• Sept 11, 2001

With these two disruptions, freight lead times and freight costs began to enter the equation in a significant way. Recently, an executive charged with a turnaround at a Silicon Valley icon was surprised to discover that in his retail business, which was being run out of a global logistics hub in Singapore, near his CMs factories in Malaysia, freight costs actually totaled 13% of revenue! Additionally, lead times had increased by a day due to security requirements.

He was paying more and waiting longer to fulfill products from a logistics hub far away from his local markets.

So We Have A China Strategy, Now What?

As discussed earlier, an Asia/China strategy was a requirement after the ‘90s. If you did not manufacture in China, then your competition was going to eat your lunch because they could, and would, lower their costs.

As part of the natural evolution of capitalist markets, however, competitive advantage rewards early movers, but only for a time. That time is now up. Everyone is manufacturing in Asia or China and now organizations are looking for new sources of advantage.

Two immediate opportunities stand out:

1. Inventory: Although global inventories have continued to shrink, it is clear that inventory pipelines have lengthened as product life cycles have shortened. This is not a desirable condition.
2. Freight: As mentioned in an earlier example, freight costs are now becoming a factor on the income statement and it is clear that freight does not add any value  to the product being shipped. Freight is simply an addition to cost - it adds no value.

The Logical Next Step - Postponement

As a result, supply chains reconfigured to minimize inventory and freight. The way this is being handled is by implementing Postponement.

Postponement, a topic for another white paper, is, simply put, the act of committing inventory to a configuration at the last possible point (typically after receipt of the customer order) and doing so (from my perspective) in a location that minimizes non value- add freight costs - which means that postponement is typically implemented in the market where the product is going to be used.

Let me be clear, postponement only applies to products that merit it. These are typically high value products, generally costing more that $1 per cubic inch. Also, the more configurable a product is, the more "postponeable" it is.

The Last Mile

The "Last Mile" Supply Chain architecture implements Postponement in a logical and cost effective manner by putting all aspects of the "Last Mile" under one roof. Extron's business model addresses these issues. Extron handles all Last Mile (or some might say domestic) supply chain activities for its customers.

Extron is a "Last Mile Supply Chain Services" company. This is an evolving segment of the supply chain industry, but a cutting edge segment that has evolved as supply chain managers nationwide struggle to cope with the inadequacies of the current globalized supply chain model. Our clients include Dell, Sun, Motorola and a significant number of technology companies.

We address the following major problems:

1. Increased inventory turns using postponement and final configuration as enablers
2. Custom supply chain programs for unique needs
3. Freight cost reduction using appropriate transportation chains for different component streams
4. Eliminating rework
5. Reassert control of your Supply Chain
6. Control your IP when using offshore sources

Extron's "Last Mile" business model addresses the above issues through the following comprehensive service offerings:

Forward Supply Chain Programs

1. Inventory Management and Warehousing
2. Forward Distribution and Fulfillment
3. Packaging Configuration (retail, PoP, country kits, disposable kits, etc)
4. System Integration (box and rack build) Reverse Supply

Reverse Supply Chains Programs

1. Demo/Loaner program management
2. Reverse logistics and RMA management (including remanufacturing)
3. Custom SC programs

Our engagements are tailored to each customer's needs and include services ranging from simple inventory management to accommodate temporary spikes in inventory, to complex engagements that involve transfer of product knowledge, reconfiguration of products, and so on.

Why West Coast?

From my perspective, it would be good to keep some supply chain activity in the Silicon Valley - help the local economy among other things.

It is also a solid customer advantage to be located on the west coast, since goods (many of which come from Asia) can be processed quickly and without expending further (non-value- add) freight costs to move them elsewhere in the country. This improves the cash-to-cash cycle and inventory position for most of our customers, besides keeping costs low and totally variable.