Profitable Fulfillment: Part Two--Strategies: Segmentation, Orchestration, Postponement, Pooling
on Aug 25, 2016
There are proven strategies for achieving profitable fulfillment, including segmentation and orchestration of fulfillment service providers, optimizing postponement with outsourced partners, and multi-party inventory pooling.
In part one of this series, we looked at the challenges of economically and profitably providing rapid fulfillment, with unique personalized requirements by sector, channel, and customer. We looked at automation of mass customization as part of the answer. Here in part two, we look at several other strategies for profitable fulfillment in various scenarios.
Fulfillment Segmentation and Orchestration
Complex Orchestration Challenge
With over 300 vehicle/equipment platforms (compared to 12-15 typically for an automotive manufacturer) Caterpillar’s equipment comes in hundreds of thousands of possible configurations. There can be over 10 legs in the end-to-end delivery from the factory to the dealer. Many of these, such as mining trucks, are very large complex pieces of equipment that may not be shipped as an entire finished vehicle, but rather shipped in various pieces from various locations that arrive at a yard, often colocated with the destination port, where they do the assembly. These can include many different third party accessories and subsystems that CAT doesn’t provide directly.
Dealers have the flexibility to mix and match those add-ons at the dealer location or at the actual job site, which could be a mine, construction site, agricultural, military, or other site. In the past this in-chain, multi-stage assembly process was difficult for CAT, since it tracked shipments but did not have clear visibility into the relationship of those various piece parts. Dealers often had long lead times of 15-25 weeks from the time they placed an order until receiving it. Yet, depending on sector, some equipment can’t be forecasted until 2-3 weeks out because the customer doesn’t know the exact requirements yet. This forces dealers to make their own forecast and hold a lot of parts inventory. And if they can’t put together the right configuration, they may be forced to sell an alternate brand to meet the needs on time, even if the customer preferred CAT equipment.
GT Nexus network platform is being used to increase the transparency, reliability, and coordination of shipments to dealers. Dealers can now see where all the various pieces of the product are and get more accurate estimated arrival times. CAT is also providing mechanisms for the dealers to better pool their inventory (see Inventory Pooling in a Heavy Equipment Dealer Network below). CAT is continually working on better optimizing product movements to reduce costs, reduce lead times and variability (see CAT Tackles Variability below), reduce detention and demurrage charges, and speed up processing at the port. They have used the network data to analyze port efficiencies and thereby changed origin/destination pairs for better speed (reduced wait time for unloading or delays in custom clearance). Detention has been reduced by better documentation and better visibility of the receiving capabilities and locations in the yard.
A common strategy to control complexity and cost is consolidating spend to fewer suppliers and service providers (e.g. carriers, 3PLs, installers, and repair services), thereby gaining economies of scale and volume discounts with more business per supplier. However, supplier consolidation can make it harder to meet the increasingly diverse fulfillment requirements that companies are facing across the globe, such as a much broader mix of order sizes, product diversity, needs for specialized processing, handling, and installation skills and equipment, and expanding globalization with significant differences by regions (even within a country). The diversity of requirements drives the need to segment fulfillment, with capabilities to handle the unique requirements of each segment differently. It can be hard or impossible to find a supplier that can do it all. Often specialized or regional service providers are much better able to fulfill these diverse unique requirements… sometimes at a lower cost.
Unfortunately, using many specialized suppliers introduces complexities. Different products are handled by different partners, e.g. temperature sensitive carriers or storage facilities, heavy equipment haulers and riggers, extremely fragile instruments, and so forth. Advanced companies are using technology to provide the coordination and orchestration that lets them ‘have their cake and eat it too’—that is to take advantage of the abilities of a diverse and scattered set of suppliers and service provider partners, while controlling costs and performance.
One example of fulfillment segmentation and orchestration is a major automotive OEM that has an online ‘Upfit Configurator’ that allows general contractors, plumbers, caterers, people transporters, electricians, and HVAC contractors to configure customized vans and wagons.1 The customizations are typically not done by the OEM, but rather by its network of upfit or port processing partners, at an ‘upfit center,’ often located near the origin or destination port. This is just one specialized step in a multi-step logistics process from the factory to the dealer (see Figure 2 below) that can include the OEM, their Origin Service Provider, rail carriers, the trading company, upfit centers and port processors, ocean carriers, car haulers, and more. By using a common networked platform across this network of fulfillment partners, the OEM is able to give the upfit centers much more precise estimated times of arrival, allowing the centers to better plan their labor and capacity. The upfit center receives a complete set of instructions for the operation.
The same system gives the OEM precise visibility into progress at the upfit center, for early alerts when things are falling behind with the potential to miss the sailing. The system provides a set of KPIs and dashboards to measure and continually improve the performance of the upfit centers. This is one example of how fulfillment can be highly segmented, performed by many parties, yet tightly coordinated, with the activities of all of the parties being monitored and orchestrated by a common end-to-end platform.
Figure 1 - Example Multiple Milestones and Partners in Vehicle Logistics Processes from Factory to Dealer
Optimized Postponement with Outsourced Partners
While supply chain postponement strategies2 have been implemented by manufacturers for years, they can be a lot harder to accomplish, due to the loss of visibility and control resulting from the tremendous growth in outsourced manufacturing and fulfillment partners. The challenges are compounded when multiple tiers and multiple enterprises are involved. To enable well-managed postponement execution with outsourced manufacturers, one of the world’s largest sporting footwear brand owners has implemented the ability to monitor the progress, step-by-step, at each of its suppliers’ factories. This granular, near-real-time visibility into factory progress against milestones is foundational to the OEM’s postponement strategy. Another large apparel manufacturer/OEM has taken a similar approach.
Precise factory milestone visibility enables these OEMs to have multiple points of postponement and maintain an accurate estimate of the time they have before they need to make each of the key postponement decisions. For example, the apparel OEM sends an order which specifies the number of shirts to make, but not yet the colors or sizes. The outsourced factory buys the undyed gray fabric. The OEM knows exactly when the material is ordered, arrives, and is scheduled to be dyed. It knows exactly when it has to make the color decisions, based on what is actually happening on the ground at the outsourced factory, not some average estimated schedule. Later in the process, it knows when the size decisions must be made, based on when the cutting and sewing will start. At the end, it knows by when they must tell the contract manufacturer how many of each size, color, and style to ship and where. In fact, the decision on final destination can be postponed further until the shipment arrives at the deconsolidator at the destination port. This allows key decisions to be postponed until location-specific demand is much better understood.
Postponement is also used for duty and tariff engineering, where an item’s components are assembled at the point in the supply chain that creates the lowest total cost. One large equipment manufacturer makes enormous mining trucks, which are assembled at different stages and points in the supply chain, both to optimize duties and tariffs as well as due to logistical constraints of moving very large machinery across roads, on or under bridges, and by rail. In many cases, the final assembly is at the mine.
The flexibility to design a global fulfillment and delivery process with postponement done at the optimal stage by various outsourced partners is made feasible by using a shared network platform that orchestrates the activities of the various partners. The network platform must provide highly granular, near-real-time visibility into what is happening on the ground at all of the various manufacturing and fulfillment partners, and provide a single shared system that drives the execution, with precise instructions for each activity at each partner at each step. With a single networked platform, there are no delays in these instructions or status information getting from one system to another or mistakes introduced by manual data re-entry or translation errors between different systems.
Multi-Party Inventory Pooling
Inventory Pooling in a Heavy Equipment Dealer Network
Heavy equipment dealers can benefit greatly from network-wide visibility of equipment, options, and service parts. One of Caterpillar’s largest dealers has about 20 locations spread throughout the region. CAT started giving that dealer better visibility into their own inventory. Now the same platform is being used to help with inter-dealer transfers. These were already being done, but largely on a manual basis, with dealers calling around when there was a need. Now the platform can quickly identify and orchestrate inter-dealer transfers. This includes full visibility into equipment and components that are at CAT’s own locations and in transit as well.
The demands of omni-channel fulfillment have given rise to Distributed Order Management, whereby a retailer (or wholesaler or manufacturer) has a system that can see inventory across all locations and make optimal decisions about where to fulfill each order from. However, these systems are often constrained in their visibility to see inventory outside of the company. It is not uncommon to have inventory spread across multiple tiers of fulfillment, not only a company’s own inventory locations (DCs, stores, plants) but also at out-sourced manufacturers’ plants and DCs, and at other supply chain participants, such as wholesalers, distributors, installation and repair partners, accessory suppliers, and other players in the channel. In addition, there is often a lot of inventory in transit between these various locations, especially when shipped across an ocean. Network-wide visibility to available inventory, both at rest and in motion, provides major advantages of wider inventory pooling, often allowing much quicker and/or lower cost of servicing customer needs as they arise. In some percentage of cases, pooling consumes inventory that is not in demand in the location it is currently at and therefore might not be consumed for months or at all.
In addition to finished goods inventory, multi-party pooling can add a lot of value in spare parts inventory management, where it can be quite challenging to achieve desired service levels with the optimal mix of inventory at each location, in large part due to the long tail3 of slow movers that is common in spare parts. A frequently used approach, particularly where fulfillment response time is critical (e.g. auto parts, where a car is up on the lift waiting for a part), is to simply throw a lot of inventory at the problem, especially at or near the end nodes. This adds a lot of inventory and cost to the system. This can be further complicated when parts distribution centers (PDC) hold a mix of parts built by the OEM and by suppliers. In addition, there is inventory at dealers that becomes invisible to other dealers. Providing unified visibility across dealers’ inventory, suppliers’ inventory, parts retail store inventory, and PDC inventory creates opportunities for higher service levels at less cost across the network.
1 Customizations include adding various interior racks, shelving, workbenches, seating, wire spool holders, partitions to separate and secure the cargo, protective window mesh, exterior ladder racks, strapping systems, and so forth. -- Return to article text above 2Postponement of differentiation is where certain decisions or steps in production (or fulfillment decisions such as where to ship to) are postponed until a clearer picture of demand emerges (such as having received firm orders or measured actual demand). A classic example is designing a platform with interchangeable components, building the components based on the forecast, but postponing assembly until each order arrives and then doing assemble-to-order. -- Return to article text above 3 Complex machinery has a long tail of parts, many of which may see only a couple of turns per year at a given location. -- Return to article text above
To view other articles from this issue of the brief, click here.