Overdue cargo has become the new normal at HVAC and refrigeration distributor ACR Supply Co. because of the West Coast port slowdown. Cargo ships stacked with the Raleigh, NC, company’s air conditioning and refrigerating supplies, alongside countless other goods manufactured in Asia for U.S. wholesalers and retailers, have been idling outside Long Beach, CA, unable to dock due to congestion caused by a months-long labor dispute between shippers and longshoremen.
That means much of the company’s air conditioning equipment is languishing at sea on a trans-Pacific container vessel when it should be barreling toward ACR’s North Carolina distribution center on an eastbound freight train.
While the slowdown has kept goods from reaching their destinations on time, it also has kept distribution executives like ACR Supply Chain Director Mark Bray awake at night. When Bray called his supplier earlier this year and was told that the company’s cargo was “all on the water right now,” he knew ACR couldn’t let its inventory dwindle. So he began devising ways to manage this supply chain kink that showed no signs of straightening out.
“We said, ‘OK, let’s stock up; we’ve got to buy a little bit more than maybe what we normally would buy to prepare for that,’” Bray says. “Hopefully they won’t be out, but if they are, if we plan ahead and buy up some inventory now, we’ll be the ones who have it in stock and maybe our competition won’t have it.”
Though the West Coast port slowdown was resolved in February, congestion won’t clear for months because of a severe backlog. What is clear is that the labor dispute and subsequent shipping delivery interruption became a pain point for companies – an “absolute disaster,” as one plastics distribution executive described it – and shed light on the need for distributors to prepare for supply chain disruptions that can occur in a number of forms and strike at any time.
“Companies have to develop their own strategies for some of these things and often they don’t,” says Cliff Lynch, a logistics and supply chain consultant and the owner of C.F. Lynch & Associates. He says the last five or six years have been the “most volatile” he has seen with regard to disruptions.
“They assume it’s going to be a perfect world,” Lynch says. “I think companies need to develop a contingency plan. What if your carrier goes out of business? What if there’s a natural disaster?”
A Disruptive World
Natural disasters provide the least predictable and most disruptive hit to a business. In 2011, a tsunami that devastated Japan also disconnected a major link in the global supply chain, shuttering factories, interrupting shipments and causing U.S. companies to scramble for new suppliers. The same year, a volcano erupted in Iceland, grounding flights across Europe and forcing companies to reconfigure transportation networks.
But supply chain disruptions go beyond labor discord and natural disasters. Factory fires decimate inventories, suppliers go bankrupt, manufacturers recall products. An estimated 50 containers simply fall off cargo ships into the ocean each week, according to Paul Dittmann, executive director of the Global Supply Chain Institute at the University of Tennessee-Knoxville. Government regulations can render one product obsolete and drive up demand for another. And a sudden raw material shortage can sink even the most ambitious product, something Apple could face if the company can’t secure the gold needed for its new watch.
The list of disruptions could stretch from Shanghai to Seattle, which is why mitigating the risks to your company’s supply chain is imperative, says Dittmann, co-author of the book “The New Supply Chain Agenda.” With so many disruptions lurking, it’s only a matter of time before one of them hits home, he says.
“Even though any one event might be highly unlikely and have low probability, like the volcano in Iceland or tsunami in Japan, there are so many
things that can happen,” he says. “If nothing bad has happened to you in a long time, the probability is pretty high that something major will happen.”
The cost is also high. A broken supply chain can lead to increased overhead, added shipping expense, overtime pay, inefficient distribution centers and a loss of customers looking for a distributor that can deliver.
“A company’s overall financial health, their shareholder value, is highly dependent on an efficient supply chain,” Dittmann says.
Companies responded to the West Coast port slowdown with a variety of solutions, from finding alternate ports on the East or Gulf coasts or in Canada or Mexico to importing goods via air to finding new suppliers locally or abroad.
“You can probably find another supplier in a nanosecond, unless it’s one spec supplier from one of the OEMs and special products – then they’re up the creek,” says Bill Childers, vice president and managing director of the newly formed power transmission division at Affiliated Distributors, Wayne, PA. “But if you’re dealing with a supplier in the U.S. and the plant burns down, what do you do?”
Childers is former president of bearing manufacturer C&U Americas, Plymouth, MI, where the slowdown caused much “heartache,” he said last fall as the port situation worsened. But he says most distributors have beefed up their supplier “bench strength” in recent years, and those who haven’t should do so now.
“One of the common traits of these new Tier 2, Tier 3 suppliers is inconsistency. Product quality, product delivery, service, all of that,” Childers says. “You move from one to the other over time until you find one that really does perform and you stick with them. Then all of a sudden maybe you have a port stoppage, which is not of their doing, and then you have the others as backup.”
In addition to additional suppliers, distributors should have alternate shipping options for their products. The Icelandic volcano disrupted Sigma-Aldrich, a life sciences distributor, when it grounded flights in Europe and prevented the company’s critical, time-sensitive products from moving along the supply chain.
Within 24 hours of the eruption, the company was able to reorganize its distribution network chain to serve customers in Europe and Asia via ground transportation, says Karin Bursa, vice president of marketing for Logility, a supply chain management company that works with companies on their supply chain strategies.
“That is lightning fast in their business,” Bursa says. “Their customers had virtually zero impact from a service level perspective, whereas their competition wasn’t as quick to respond and they had delays and backups. And it was an opportunity for Sigma-Aldrich to service some new customers. It was all from a network planning and distribution planning perspective. They were able to deliver when their competition wasn’t able to deliver.”
Proactive, Not Reactive
ACR, Sigma-Aldrich and many other distributors have taken steps to ensure deliveries despite disruptions.
“When it comes to the basic fundamentals of supply chain, companies are doing better and better at that,” Dittmann says. “Some are getting extremely sophisticated. The problem that we found is that when it comes to one-off special events like risk events, people simply aren’t prepared for that. They’re too busy to worry about the things that aren’t necessarily going to happen.”
Dittmann outlines a three-step process to manage and mitigate risk in their supply chains. First, he says, identify the possible risks that could affect your supply chain; create a long list of everything that could cut supply. Next, prioritize the risks that are most impactful, narrowing it down to three to five that could potentially happen and would certainly disrupt your supply chain. The last step is
mitigating or managing risk, which occurs by creating a contingency plan that would keep the supply chain moving or at least return it to operation quickly should one of these risks occur.
“It takes time and effort and money to mitigate against risk, and the risk may not happen,” Dittmann says. “And sometimes people think it’s another part of the company that’s going to see the loss. But it has to be given priority and attention in companies which, in general, is not being done in companies today.”
George Muha, a supply chain consultant with Keystone Dedicated Logistics, a non-asset based third-party logistics service provider, sums up the need to create a contingency plan if one isn’t already in place with a personal story.
Muha lives in New Jersey, and when Superstorm Sandy tore through his hometown in 2012, it knocked out power to his home. He and his family were without electricity, heat and water for two weeks. As the temperature plummeted, he kicked himself for not having a generator as he watched neighbors who did stay in their homes and avoid the disruption of checking into a hotel. But buying a generator after the storm hit meant paying a premium, and he quickly saw how a contingency plan could prevent a host of hardships.
“It’s just like your supply chain,” he says. “With that analogy, you can see that companies need to have some kind of alternate plan in case something goes out, some kind of insurance. When something does happen, like if they’re relying on a port they can have a plan in case the port shuts down for a week. Having an alternative plan in place – even if you never dust it off – could be a life saver.”
Bursa, whose company works with wholesale distributors, says executives in the industry don’t always consider supply chain risk because they are focused on other aspects of the business.
“They’re very good at sales, they’re very good at promotion, they’re very service-oriented, but they’re not necessarily all good at managing their supply chains,” she says. “The nature of wholesale distribution is you carry a big honking product portfolio. In that, you’ve got some fast movers, but a big piece of that inventory base is usually a boatload of slow movers.”
With a diverse inventory and range of suppliers in an increasingly volatile world, distributors must properly manage the movement of goods because the B2B marketplace is growing more competitive and less tolerant of service interruptions.
“Even if you’re a regional wholesale distributor, someone in your supply base is global,” she says. “Somebody who is serving you, one of your trading partners, is going to be global in nature. And you need to understand the importance of that supplier on your ability to serve customers and you need to look at lead times within your network on that service and what the inventory levels are. All business is global these days.”
Bray’s company is a regional distributor whose reliance on a global supply chain has caused disruption, but when summer hits its peak and ACR has enough air conditioners in stock, he can credit the company’s success to one simple adage.
“He who has the best supply chain wins,” he says. “It’s become such a big thing. It used to be the necessary evil of business, and the warehousing, transportation and procurement was back-office stuff while everybody focused on sales and marketing. But now it’s become a core competency and the thing that’s driving business. There’s a lot that goes to it, and it’s something you’ve got to be good at if you want to be in it for the long haul.”
Click here to read the case study associated with this article, The Disruptive Holiday.
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