Commentary: Aligning corporate and warehousing strategies

Tom Nightingale, a longtime freight transportation and logistics specialist, noted that in fast changing times such as these, it is critical that strategic leaders consider their end-to-end supply chain system as a whole in order to best succeed.

   Recently, as I was having my morning cup of coffee and scanning my daily news briefing headlines, I was struck by a glaring error that many of us seem to make. Every day, we are deluged with headlines about the fast changing world of ocean shipping—carrier alliance changes, the Hanjin bankruptcy, and most recently, Japan’s three largest ocean carriers (MOL, NYK Line and “K” Line) agreeing to merge their container divisions.
   Most of us have an immediate and tactical response to situations like these: try to define what immediate effects will occur within our supply chains. We assess what cargo is in-transit at the time of the bankruptcy, for example, and how to keep it moving. We examine our ocean rates and attempt to determine how much a new alliance might increase them, and how we can offset those potential increases. We look at our suppliers and consider how a merged container company’s new service network will impact time in transit, and then increase our safety stock accordingly.
   However, few of us stop to ponder how these kinds of changes might impact our warehouse strategy. When we think about warehouse strategy, it is generally in terms of the inland distribution costs and key metrics inside those four walls. In fact, the Warehouse Education and Research Council’s (WERC) 13th annual DC Measures Study released in 2016 cites the top metrics as on-time shipments, average warehouse capacity used, order picking accuracy, dock-to-stock cycle time, internal order cycle time, percent of supplier orders received damage free, peak warehouse capacity used, lines picked and shipped per person hour, total order cycle time, order fill rate, lines received and put away per hour, and on-time ready to ship. Few, if any, of these metrics link back to the exogenous variability currently being driven into our warehouses by unexpected changes in the ocean shipping industry.
   As vessel service strings shift as result of the changing ocean landscape, are supply chain leaders considering the impact on inventory carrying costs, inventory available to promise, and inland transportation costs as a function of total landed costs? If your ocean carrier no longer calls Prince Rupert and now calls Los Angeles/Long Beach instead, what does that mean for your warehouse strategy? Are your warehouses still in the right location? As truckload and intermodal capacity re-tighten, how will your total landed costs and inventory availability change?
   WERC’s 2016 DC Measures Study theorized, “[If] senior management is directly involved with decisions of which metrics DCs should use to evaluate performance, then those distribution centers (DCs) would be more aligned with the corporate strategy.” It found that 85 percent of senior executives are directly involved in choosing the metrics utilized to demonstrate DC performance. And yet, those metrics rarely seem to stretch outside the four walls of the warehouse. The study noted that 62 percent of senior executives monitor distribution costs as a percent of cost of goods sold. However, when metrics begin reaching beyond those walls—such as distribution costs as a percent of cost of goods sold—there are so many variables that enter into the equation, the metrics become muddy at best.
   As supply chain leaders, we must look across silos and understand the multiple and varied impacts of all the different forces at work so we can devise strategies to deal with changes, while also bearing in mind our corporation’s strategic objectives. If the company has set forth goals to reduce inventory carrying costs, we will (of course) look inside the four walls of the warehouse and benchmark ourselves against best-in-class DC operations. But we cannot stop there. We must look outward and factor in both the rapidly changing ocean ecosystem and the ground transportation network that forms the interstitial bonds between the ocean freight leg and our warehouses.
   Throughout my career, I have seen the best companies prepare and respond to changes in market conditions with a combination of tools. We should all be armed with comparable metrics such as WERC’s DC Measures Study and the research American Shipper delivers on a regular basis. However, the best-in-class supply chain practitioners further augment those key benchmarking metrics with actionable studies, as well as entrusting a stable of solutions providers that help them through targeted analysis, recommendations garnered from similar experiences, and cutting edge tools such as network modeling and scenario simulation software.
   In fast changing times such as these, it is critical that strategic leaders consider their end-to-end supply chain system as a whole in order to remain nimble, cost effective, and in alignment with corporate strategies, all while delivering optimal customer service.