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The physical internetA survey of logistics June 17th 2006

Like information on the internet, goods are moving around the worldwith ever greater e!ciency. But Paul Markillie spots dangers lurking inmodern supply chains

pany logo painted on its tail. Tractors tow-ing containers and cargo pallets dash ev-erywhere. Documents are automaticallysorted in a maze of machines. In one giantbuilding, known as the !matrix", packageszoom around on 300 miles of conveyorbelts. Before dawn, all these packages toowill have departed again.

As the night continues to travel west,similar scenes unfold at airports in Manila,Taipei, Hong Kong, Mumbai, Guangzhou,Dubai, Cologne, Paris and Anchorage. Thegoods moving through these air-cargohubs range from items bought on eBay tovehicle parts, fresh #owers, books, com-puters, transplant tissue$just about any-thing imaginable. Even live whales havebeen !FedExed". And when the nightreaches America again, the landing lightsonce more appear in the sky over Louis-ville and Memphis.

21st-century clippersFrederick Smith, FedEx’s chief executive,compares his company’s jets to clippers,the sailing ships that once carried cargoeson the trade winds. Mr Smith pioneeredthe air-express business in the early 1970sby delivering a few hundred parcels over-night to a handful of American cities usingFalcon aircraft the size of an executive jet.At Memphis airport, the parcels weresorted on a table. Many of his contempo-raries thought he was mad: who would

Shining examplesHow three large and successful companies areusing their supply chains to compete. Page 2

Manufacturing complexityAs distinctions between ownership and con-trol become blurred, supply chains aregetting more twisted. Page 4

Cargo cultsWith more and more stu" being movedaround the globe, e!ciency is at a premium.Page 6

Just-in-time lobstersWinging it to the pot. Page 8

Chain reactionsDelivery companies are consolidating. Page 9

Delivering the goodsA courier company goes online. Page 11

When the chain breaksBeing too lean and mean is a dangerousthing. Page 12

The Economist June 17th 2006 A survey of logistics 1

1

The physical internet

LOUISVILLE, Kentucky, 2am. Roaringthrust-reversers rapidly slow the giant

MD-11 jet as it touches down on the run-way before turning to taxi towards asprawling #oodlit building. Seconds afterit has pulled up at the ramp, large doors onthe fuselage swing open and people scurryaround with equipment. But they are notabout to unload hundreds of passengers:instead, the aircraft carries stacks of air-freight containers stu%ed with parcels anddocuments. Soon they will be emptied tojoin the 300,000 packages that are sortedevery hour at the UPS Worldport.

Every package is automatically photo-graphed, measured and weighed and hasthe information on its super-barcode ana-lysed by computers to determine its trajec-tory along some of the 17,000 conveyorbelts. This requires awesome computingpower: more data are processed here every30 minutes than in an entire day of tradingon the New York Stock Exchange. Eventu-ally the packages slide down a chute to beplaced into a bag or an air-freight con-tainer. And before dawn they are o% againto complete their journey in another air-craft or in one of a #eet of waiting trucks.

A few hundred miles to the south-west,in Memphis, Tennessee, more landinglights line up across the night sky. This isFedEx’s global hub, and for the next fewhours an aircraft will land here every 90seconds. Every one of them has the com-

Also in this section

www.economist.com/audioAn audio interview with the author is at

www.economist.com/surveysA list of further reading can be found online

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2 A survey of logistics The Economist June 17th 2006

2 pay to send packages by air? He almostwent bust. But now FedEx has ordered a#eet of double-deck Airbus A380s to helpcope with demand. Rival UPS has alsoplaced orders for the huge new Airbus.Neither company wants any seats inside,just space for lots of cargo. If they were pas-senger airlines, UPS and FedEx would nowrank among the world’s biggest carriers.

In an e%ort to rebrand itself, UPS ispainting the phrase !Synchronising theWorld of Commerce" on its 270-plus air-craft and 90,000-plus vehicles, includingits distinctive dark brown delivery trucks.It may not exactly trip o% the tongue, but itis an apt description of a business that hasgrown far beyond simply deliveringthings. Nowadays &rms ranging fromtrucking companies to freight forwarders,shipping lines, air-cargo carriers and posto'ces are more likely to use the word !lo-gistics" to describe what they do.

Logistics is a military term. As generalsknow, wars can be won or lost by it evenbefore they are fought. Now companiesare having to become more involved inplanning their own logistics. Under relent-less pressure to reduce costs and increasesales around the world, &rms are outsourc-ing operations to subcontractors who cando them better and more cheaply, andmoving more of their production and ser-vices to lower-cost countries.

Globalisation requires greatly in-creased co-ordination of transport by road,rail, sea, air and now also by an entirely

new route to market: the internet. Thismakes logistics vastly more complex. Thejob of ensuring that all these things worktogether is known as supply-chain man-agement. Thomas Freese, an Americanconsultant in this business, explains: !Sup-ply-chain management is an evolution oflogistics. Logistics tends to be tactical, sup-ply-chain management is strategic."

Supply chains are becoming not onlylonger but also more enveloping. Supply-chain management these days can includeanything from buying raw materials tomanaging suppliers, warehousing, operat-ing transport #eets, taking orders, collect-ing payments, repairing products and evenanswering the telephone at call-centres.Companies are also outsourcing supply-chain services.

Yet supply-chain management is notjust about wringing costs out of a busi-ness. It can also be used to increase reve-nue and boost pro&ts without necessarilylowering costs. Indeed, some companieshave re-engineered their supply chains togain a huge competitive advantage. Whathas put Wal-Mart ahead of Sears in retail-ing, Dell in front of Hewlett-Packard in thepersonal-computer business and Zaraahead of Marks & Spencer in fashion? Themarket leaders all have supply chains thatare more responsive to customer demand,according to Yossi She', director of theMassachusetts Institute of Technology’sCentre for Transportation and Logistics.

Things like transport, purchasing and

warehousing used to be consideredmerely part of the cost of doing business,and were often managed as separate enti-ties. Now they are coming together as astrategic item on the chief executive’sagenda. There is a reason for this. !Supply-chain leaders are very aware of how acompany runs because they have to dealwith all the di%erent components of theoperation," says Rick Blasgen, who used towork for a big American food group andnow runs the Council of Supply ChainManagement Professionals.

But as this survey will show, supplychains harbour dangers too, and manag-ing risk is becoming a pressing issue. Anumber of alarm bells have started ring-ing. Most &rms have been organising theirlogistics to make themselves leaner. Manynow carry little or no inventory to savemoney. Indeed, sometimes their entire in-ventory consists of what is moving fromthe factory directly to the consumer in theback of a truck or an aeroplane. If some-thing goes wrong$and it often does$busi-ness will quickly grind to a halt.

Experts worry that some companies donot fully understand the risks of operatingvery lean international supply chains$orthat they choose to ignore them becausetheir rivals are forcing the pace, purchasingcritical components from a single supplierto increase their buying power. In fact,some &rms do not know who is supplyingtheir suppliers$or even where some oftheir lower-tier suppliers are based. 7

COMPANIES are now tweaking their lo-gistics to give themselves more #ex-

ibility should anything go wrong. For in-stance, instead of relying entirely onmanufacturing in low-cost regions, theymay put part of their operation$perhaps arapid-response warehouse or a second fac-tory$closer to, or even inside, the big con-sumer markets of America and Europe.This will increase costs, but could proveworthwhile by providing greater respon-siveness as well as an insurance againstrisk. Such moves might even put a modestbrake on globalisation, although trade#ows$especially to, from and withinAsia$are likely to continue to growstrongly (see chart 1 on the next page).

Most experts rate Dell’s supply chain asone of the best, even though the computercompany faces increasingly tough compe-tition. Instead of building computers ac-cording to a sales forecast and letting othercompanies sell them, Dell sells directlyfrom its own website and call-centres andthen builds to order. That way, it not onlycuts distributors and retailers out of itssupply chain but also gets paid up front. Itorders some of its components only whenit has received an order itself.

To succeed against its low-cost rivals,Dell must have a supply chain capable ofgetting computers to its customers withina few days. The company outsources someoperations, such as component produc-

tion and express shipping, but runs its ownassembly lines in America, Ireland, Malay-sia, China and Brazil. Last year the com-pany opened its third assembly plant inAmerica, in Winston-Salem, North Caro-lina. This can make a desktop computer ev-ery &ve seconds. Dell decided to expand inAmerica in order to be close to its custom-ers, but it is still growing in Asia too.

In terms of speed to market, Dell hasmuch in common with Zara, a fast-fashioncompany that is part of Spain’s Inditexgroup. Fashion is highly perishable,quickly in#uenced by the latest thing seenon the catwalk or on the back of a celeb-rity. Zara’s designers follow such fashiontrends closely. But whereas a typical cloth-

Shining examplesHow three large and successful companies are using their supply chains to compete

1


2 ing company manufacturing in Asia couldtake six to nine months to get a new designinto the shops, Zara completes the processin around &ve weeks. It buys some gar-ments and material from Asia, often partly&nished or undyed, but around half itsclothing is manufactured in-house at itsbase in La Coruña in north-west Spain, orby a cluster of small contractors in thesame area. The clothing is delivered bytruck to Europe and by air to the stores Zarais now opening in other parts of the world.

Zara avoids mass production. Althoughsome stock is replenished, its clothing, forboth men and women, is deliberatelymade in small batches. This helps create ascarcity value: better buy now in case it isgone tomorrow. It also keeps shops look-ing fresh and reduces markdowns. At Zara,the number of items that end up in a sale isabout half the industry average.

Behind many successful companieslies a successful supply chain. Indeed,someone who knows about logistics maybe running the company. Lee Scott, thechief executive of Wal-Mart, rose throughthe ranks of the company’s transport andlogistics divisions. And at Toyota, the pio-neers of lean manufacturing, Katsuaki Wa-tanabe, who took over as president of theJapanese car company last year, made hisname cutting some $10 billion of costs outof Toyota’s supply chain.

But buying things more cheaply fromsuppliers is not the only way of achievingcost savings. Another tempting economyis to cut down on stocks. The chief reasonfor holding stocks is to smooth out bumpsin the supply chain. Hau Lee, a professor ofoperations, information and technology atStanford University, points to one of thebiggest sources of ine'ciency in logistics.He calls it the !bull-whip e%ect", after theway the amplitude of a whiplash in-

creases down the length of the whip whenit is cracked.

Procter & Gamble (P&G), a giant con-sumer-goods company, discovered this ef-fect more than a decade ago. The companynoticed an odd thing about Pampers, itswell-known brand of disposable nappies:although the number of babies and the de-mand for nappies remained relatively sta-ble, orders for Pampers #uctuated dramati-cally. This was because information aboutconsumer demand can become increas-ingly distorted as it moves along the sup-ply chain. For instance, a retailer may see aslight increase in demand for nappies, sohe orders more from a wholesaler. Thewholesaler then boosts his own sales fore-cast, causing the manufacturer to scale upproduction. But when the increase in de-

mand turns out to have been only a blip,the supply chain is left with too muchstock and orders are cut back.

A more reliable #ow of informationcan smooth out these #uctuations. Oneway of achieving this is to integrate supplychains, as P&G has now done with Wal-Mart and other big retailers. The idea is toorganise things so that sales informationfrom a store will automatically prompt thelevel of deliveries needed to keep theshelves stocked.

For a company such as Wal-Mart, withmore than 60,000 suppliers in Americaalone, keeping everyone informed is criti-cal. The company does this through its Re-tail Link system, which suppliers can tapinto over a secure internet connection.They can check stock levels and salesdown to the level of individual stores. Wal-Mart may have a brutal reputation for driv-ing down costs, but its investment in in-formation systems has played a large partin building one of the world’s most e'-cient supply chains, capable of handlingmore than $300 billion of annual sales.

There is a direct relationship betweeninventory and information, says MartinChristopher, director of the Centre for Lo-gistics and Supply Chain Management atBritain’s Cran&eld School of Management.The more information a company hasabout its suppliers and its customers, thebetter it is able to plan. A greater under-standing of each link in the supply chaincan also improve e'ciency and reducerisk. This is leading to a much higher level

From catwalk to checkout in !ve weeks

PACIFIC

OCEAN

S O U T H E R N O C E A N

ATLANTIC

OCEAN

INDIAN

OCEAN

Global merry-go-roundTrade (exports) between main regions, growth forecasts 2005-08

Note: North America includes Canada, U.S. and Mexico; Asia excludes Indian subcontinent

1

24

17

2005250

2008311

2005375

2008439

2005242

2008311

2005427 2008

58827

27

2005628

2008799

2005263

2008336

INTRA-ASIA

20081,888

20051,395

1712

200575

200888

200557

20086418

14

200555

2008642005

1052008

120

35

38

28

2005 2008Value, $bn: 000 000

% increase:00

00

Source: Global Insight

1


2

IT COULD happen anywhere in theworld, on any production line, but if one

of its products or components fails a test,Cisco Systems knows about it. This is be-cause the world’s largest maker of the net-working equipment that powers the in-ternet has linked up all the test machineryin the factories that make its products, andresults are immediately relayed to Cisco’sheadquarters in San Jose, California. If thecompany’s engineers do not like what theysee, they can remotely shut down a pro-duction line or distribution centre until theproblem is &xed.

This degree of transparency in a globalmanufacturing operation is quite remark-able$even more so when you considerthat Cisco, which may achieve sales ofsome $28 billion this year, does not ownthe vast majority of factories that make itsproducts. The company believes that out-sourcing has allowed it to grow far morerapidly than if it operated its own assem-bly plants. But it has had a few problemsalong the way.

In 2000, Cisco brie#y became theworld’s most valuable company as tech-nology &rms’ share prices soared to aston-ishing levels. Some customers were order-ing technology products on a hunch thatshortages were on the way. But the bubblesuddenly burst, and despite its clevermanufacturing system Cisco was leftheavily overcommitted as some of its cus-tomers slashed their spending. In 2001,Cisco reported its &rst quarterly loss sinceit went public in 1990 and wrote o% $2.2billion-worth of unsold networkingequipment. That was a powerful incentiveto improve its supply chain.

This is becoming more complex asCisco expands into new areas. The big rou-ters and network-switching equipmentthat make up its core business are custom-built to order. But that does not apply tothe consumer products into which Cisco isnow venturing. In 2003 the companybought Linksys, which provides wirelessnetworking equipment, much of it forhome use. And last year it splashed out$6.9 billion on Scienti&c-Atlanta, whichmakes television set-top boxes for video,cable and satellite. As technologies merge,Cisco may make the equipment to broad-cast television programmes taken from theinternet around people’s homes.

Building big internet routers involvessome forecasting of future demand, pre-manufacturing certain common parts andrapidly customising the equipment whenan order comes in. By contrast, makingconsumer electronics involves manufac-turing lots of standard products that willbe sold mostly through retailers.

To keep on top of demand, Cisco hashad to do the sort of things that P&G doesin supplying supermarkets, avoidingshortages on one hand and too much stockon the other. This means that on the con-sumer side of its business Cisco is in dailycontact with retailers. !What happens inOhio at Best Buy is going to be quite di%er-ent at Dixons in Manchester," says AngelMendez, head of Cisco’s worldwidemanufacturing.

Plenty of consumer-electronics compa-nies outsource their production, but Ciscois now having to re-examine whether thatis really the best option for its consumer di-vision, because Scienti&c-Atlanta has

done rather well building its own productsin its own factories. Mr Mendez is con-vinced that outsourcing, albeit with strongcentralised controls, has given Cisco ahuge competitive advantage in its corebusiness, but he is open-minded aboutwhat will work best on the consumer side.!The one-size-&ts-all solution may or maynot be right," he says. !What does matter ishaving an agile, adaptable and speedysupply chain." For Cisco, that means it willhave to &nd a system that can cope with aspectrum of products ranging from $99consumer items to $1m-plus purpose-builtrouter systems. The answer may be to setup completely di%erent supply chainswith some common features, such as com-bined component-purchasing.

Doing it their wayIt is not unusual to &nd di%erent outsourc-ing strategies among successful companiesin the same industry. Apple, for instance,designs its hugely popular iPod but out-sources the supply of the components andthe assembly to other companies, many ofthem in Taiwan and China. By contrast,South Korea’s Samsung Electronics ishighly integrated, even making its ownchips and liquid-crystal displays.

In the electronics business, there aretwo sorts of contract manufacturer build-ing products to be sold under the brandname of an !original-equipment manufac-turer" (OEM), the industry’s odd name fora company that outsources its production.The &rst kind are !original-design manu-facturers", who use their own designs andintellectual property to produce for OEMs.These companies tend to be specialised

Manufacturing complexityAs distinctions between ownership and control become blurred, supply chains are getting more twisted

of co-operation, says Patrick Ducasse,global head of the consumer practice atBoston Consulting Group. According to MrChristopher, in future it will be supplychains that compete with each other, notindividual companies.

Members of supply chains invariablydo business with one another over the in-ternet. You may not know how to ship aproduct from, say, Bangladesh to Barba-dos, but there will be a freight forwarder orexpress-delivery &rm that does. Increas-ingly services of this kind are available on-

line. Some companies, such as INTTRAand GT Nexus, two American &rms, nowprovide specialist web-based platformscapable of doing much of the work for lo-gistics managers using ocean freight. Theinternet is ideal for this purpose, says GregJohnsen, of GT Nexus: !It is global, it is al-ways on and you can get to it from almostanywhere." His service, which provideson-demand logistics software that linksinto widely used o'ce applications, nowhas around 40,000 regular users.

Logistics managers ship their goods

through hub-and-spoke systems that re-semble those used by the internet, exceptthat they are visible. If you could look in-side the big internet exchange points scat-tered around the world, you would see im-mense numbers of packets of information,each with an address attached, all beingread, redirected and sped on their way, justlike their physical equivalents in the cargohubs at Louisville and Memphis. And justas computer networks are getting fasterand more e'cient, so too are those formoving goods in the physical world. 7

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2 and design things from the ground up.Most began by making circuit boards buthave progressed to designing and produc-ing complete products, such as laptopcomputers, digital music players and print-ers. Many are based in Taiwan.

The second kind are providers of elec-tronic manufacturing services (EMS),which make products to the design andspeci&cation of an OEM. Increasinglythese companies o%er a broader range ofservices, such as helping with the designso that products are easier to make. Such&rms include Flextronics, based in Singa-pore, Solectron and Sanmina-SCI, bothwith headquarters in Silicon Valley, andCelestica, based in Canada. They all oper-ate factories around the world. Contractmanufacturers do not like to disclosewhom they are working for, but their cli-ents include IBM, Microsoft, Dell, Nortel,Xerox, Sony-Ericsson, Cisco, Sun Microsys-tems and Hewlett-Packard.

!It’s much more of a supply-chain playnow," says Tom Wright, who is in charge ofworldwide logistics for Flextronics. The&rm has factories in more than 30 coun-tries around the world, most of them inlow-cost regions such as Asia, eastern Eu-rope and Latin America. Companies areconstantly asking their suppliers to be-come !quicker, cheaper and more respon-sive", says Mr Wright. !Where it gets mas-sively complicated is the physicalmovement of all these materials." Thatcomplexity has increased enormously inthe past &ve years, with so much manufac-turing moving to China, India and otherAsian countries.

Which companies come out on top willdepend crucially on the integration of sup-ply-chain information systems, Mr Wrightbelieves. He, too, doubts that there will bea single solution. Flextronics has organiseditself into di%erent divisions to handle its$15 billion-plus sales of mobile phones,computers, networking equipment, digitalcameras, printers, medical devices, carcomponents and many other products.

One of the problems companies face isthat di%erent products may need to movealong their supply chains at di%erentspeeds. A supermarket, for instance, needsregular supplies of perishable productssuch as bread, eggs and milk, although cus-tomers coming in to buy them will also oc-casionally buy slower-moving items suchas shoe polish or light bulbs. A suppliercannot a%ord to ignore either. If peoplecannot &nd what they are looking for, theymay go elsewhere. !Being in stock is one ofthe most important measures supermar-

kets look at," says Sam Israelit, an expert inretail logistics for Bain & Company, a &rmof management consultants.

Companies need to o%er di%erent ser-vice levels for di%erent products, says MrIsraelit. The idea is never to be out of stockof high-velocity items, which tend to bethe most pro&table. On lower-velocityitems, there is slightly more room for error.But demand will also vary by location andseason. One supermarket may sell lots ofethnic food because of local demograph-ics, whereas another may get runs onthings like barbecue sauce and charcoalwhen the sun comes out. According to MrIsraelit, !it adds enormous complexity tothe planning process." Few &rms will havethe clout to build an organisation capableof handling all of these things, so they willoutsource their logistics to specialists.

Even P&G, which is one of the world’slargest consumer-goods companies, out-sources parts of its supply chain, such astrucking operations. The company talksabout two !moments of truth" in retailing.First, is your product on the shelf? Second,when you have persuaded a customer topick your product, does it deliver what itpromised? The &rst requirement can bemet through a collaborative e%ort be-tween supplier and retailer; the secondwill depend on a combination of thingssuch as product innovation, marketing,packaging, presentation and pricing.

Collaboration in the supply chain im-proves visibility, says Chris Poole, P&G’sdirector of outbound logistics in westernEurope. He calls it !joint value creation". At

a practical level it means that by sharingmore sales information, a supermarketplanning a special promotion, for instance,can be reasonably sure that a supplier willbe able to deliver the necessary goods. Atthe same time the supplier will be betterplaced to increase production. With betterinformation, both the retailer and the sup-plier can a%ord to carry less stock. !Supplychains are becoming leaner, but paradoxi-cally they can also become more agile,"adds Mr Poole.

There are various ways to streamlinethe process, he says. One way of reducingcostly handling is to put items into !shelf-ready packaging" so they do not need to beunpacked from a box and placed on a shelfindividually. In Europe, P&G uses a three-tier logistics system to schedule deliveriesof fast- and slow-selling goods, bulky andsmall items in the most e'cient way. Theidea is that every shop gets what it wantswhen it needs it and lorries travel as full aspossible. When the load is too small to jus-tify a truck, it is sometimes sent by courier.And thanks to satellite-tracking gear on ve-hicles, supermarkets can be alerted whena truck is about to arrive so they can pre-pare for unloading.

Individually these are small things, buttaken together they can make a huge di%er-ence. In Europe, P&G uses some 2,000trucks a day just for outbound deliveries.Excluding small items like cosmetics andfragrances, those trucks between themcarry more than 1,800 di%erent products.Ensuring that the supply chain runs likeclockwork$and to do it every day, sevendays a week$takes an enormous amountof e%ort.

Jumbo taskYet some companies’ supply chains haveto cope with things that are a magnitudebigger still$such as building a jumbo jet. ABoeing 747 contains some 6m parts, all ofwhich have to be ordered, tracked, assem-bled and often carefully monitoredthroughout their service life. That adds upto a huge information load even for a sin-gle aircraft$and this year Boeing expectsto deliver almost 400 new jets.

At Everett, just north of Seattle in Wash-ington state, Boeing manufactures its 767,777 and giant 747 airliners in the largest fac-tory in the world. The parts that go intoeach aircraft arrive by road, rail and airfrom all over the globe. Now Boeing isgearing up to produce a new airliner on thesite, and at the same time fundamentallyreform its own supply chain.

The company has been steeped in the

Our daily bread

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2 traditions of engineering, yet members ofthe team developing the new 787 Dream-liner, due to make its &rst #ight next year,now talk like people working on new con-sumer products. That is largely because thedesign of the 787 is heavily in#uenced byBoeing’s customers.

These are a varied bunch. For airlinesstruggling with high fuel prices, the 787will o%er around 300 seats, but with itssleek, lightweight construction it will givea 20% fuel saving over other aircraft of asimilar size. To please passengers, the fuse-lage is designed to give them more room,the windows will dim electronically, and anew pressurisation system will providethem with healthier cabin air. The ownersof the aircraft (who nowadays are mostlygroups of investors who lease them to car-riers) will want the 787 to have a long and#exible service life. It needs to be easily re-con&gured to suit di%erent airlines, thusimproving their return on investment.

Boeing began development of the 787by seeking its suppliers’ advice, which isalso done by other manufacturers, such asToyota. !We asked them, how would youdo it?" says Steven Scha%er, vice-presidentof Boeing’s !global partners"$a title thatre#ects the new, more collaborative ap-proach. Boeing has already begun to buildaircraft more like cars, with a moving as-sembly line and a larger proportion ofparts being completed as sub-assembliesbefore &nal &tting. As a result, the numberof individual items that have to come to-gether for &nal assembly has shrunk to a&fth of what it was a decade ago.

The 787 takes that process further. Asmuch as half of its primary structure, in-cluding the fuselage and wings, will be

made out of light but enormously strongcarbon-&bre composite materials. Much ofthis will be prefabricated, rather than be-ing riveted together from thousands of alu-minium sheets and ribs. Two specially con-verted 747s with huge bulbous fuselageswill be used to #y the composite structuresdirectly to Everett.

Suppliers at more than 130 sites aroundthe world are linked together with Boe-ing’s development teams through regularface-to-face meetings, known as !partnercouncils". Urgent items are dealt with byvideo conferencing. These video links, of-ten over secure internet connections, arebecoming a common feature in the o'cesof suppliers and the companies they work

for. They are the modern-day version ofengineers gathering around a drawingboard to scratch their heads and work outhow to make something.

Mr Scha%er says that more sharing ofinformation between Boeing and its sup-pliers allows everyone in the supply chainto take a longer-term view of how the mar-ket for the new aircraft will develop. Thisshould allow suppliers to prepare more ef-fectively for future demand, and Boeing tobe ready for possible problems. The aim isto smooth out any potential lumps in thesupply chain before they materialise. Witha price tag of around $130m for each 787,both Boeing and its partners are under-standably keen to get the logistics right. 7

Where the aerospace giants come together

THERE are few customers more de-manding than Toyota. The challenge

that Transport Corporation of India (TCI)has been set is to deliver the parts the Japa-nese company needs to build cars at a fac-tory near Bangalore. TCI operates some6,000 trucks, which is a good start. But theobstacles are formidable.

For a start, Toyota wants just-in-time de-livery. In the car business that usually in-volves suppliers delivering to a stagingarea near the factory, often run by a logis-

tics partner, from where components aretaken directly to the production line wherethey are needed, when they are needed. InBangalore, Toyota wants those deliveriesto take place every two hours$and with alevel of reliability in excess of 99%.

But how do you do that when roads areoften in poor condition and sometimeschoked with tra'c, and when crossingfrom one state to another can involvehours of border queues and miles of redtape? Trucks are lucky to manage an aver-

age speed of 30-40km (19-25 miles) anhour. With the most distant supplier morethan 2,000km away, some componentscould take a week to reach the factory, al-ways assuming the drivers and the lorriesprove reliable and there are no accidents.

!Toyota taught us how to do it," says Vi-neet Agarwal, executive director of TCI.His company set up a joint venture withMitsui, a Japanese trading group, whichacts as Toyota’s logistics partner in India.They began with training to ensure that

Cargo cultsWith more and more stu" being moved around the globe, e!ciency is at a premium

1


2 drivers would take care of their loads,moderate their aggressive driving habitsand wear seat belts. Sometimes trucks arefollowed to make sure standards are main-tained. This has helped to build a reliableservice that meets Toyota’s service levels,says Mr Agarwal. It has also cut stocks, sav-ing $100m a year in &nancing costs.

With more overseas companies invest-ing in India, companies like TCI can expectto be kept busy. It is not just India’s busi-ness-processing sector that is attracting for-eign investment. The country is also enjoy-ing a$less noticed$manufacturing boom,and merchandise exports are growing at arate of about 25% a year.

TCI reckons that India’s third-party lo-gistics market will be worth more than $16billion this year, and that it will grow at acompound annual rate of 6.5%. As Indiadevelops, inevitably its low-cost advan-tage will diminish. On the other hand, thedemands of foreign companies will makelocal supply chains more e'cient, in Indiaas well as in other developing countriessuch as China. And there is still a lot ofscope for increased e'ciency.

Mr Agarwal says the cost of logistics inIndia represents some 13% of GDP. ForChina, the Council of Supply Chain Man-agement Professionals puts the &gure ataround 21% of GDP$a big improvementon 1991, when it was around a quarter.America shows just how much cost can bewrung out of the system: back in 1982, lo-gistics represented 14.5% of America’sGDP, but now the share is down to justover 8%. Between then and now, estimatesthe CSCMP, inventory costs in Americahave fallen by 60%. Europe is lagging be-hind America, with logistics costs of 11% ofGDP or more.

Supply-chain e'ciencies can be im-proved in various ways. One of the most

dramatic was discovered 50 years agowhen Malcom McLean, a American truck-ing magnate, reinforced the decks of theIdeal-X, an oil tanker left over from the sec-ond world war, and loaded it with 58 largemetal boxes containing goods that wouldnormally have travelled as loose cargo. Itwas this event, says Marc Levinson (a for-mer &nance editor of The Economist) in hisrecent book !The Box", which marked thebirth of the shipping container.

Boxing cleverThe Ideal-X sailed from Newark, New Jer-sey, to Houston, where after a &ve-day tripthe boxes were unloaded directly ontotrucks and hauled to their &nal destina-tions. In 1956 the back-breaking businessof loading cargo onto a ship cost $5.83 perton, says Mr Levinson. McLean calculatedthat loading the Ideal-X cost less than 16cents a ton. Containerisation dramaticallyreduced the cost of shipping products fromone place to another.

Today most goods and raw materialsspend some time in a container as theymove around. The container-shipping in-dustry is booming (see chart 2), especiallywith exports from Asia. Giant containerports such as Hong Kong, Singapore andLos Angeles have #ourished thanks torapid-loading equipment. And containerships are getting bigger. Some now carryaround 9,000 containers, and there areplans for giant vessels with double thatnumber, which would require a line of lor-ries more than 50 miles long to haul away

all the containers they could carry.So why is Kuehne+Nagel (K+N), the

world’s leader in arranging seabornecargo, so keen to expand its ground-trans-port side? The Swiss company developedas a freight forwarder, which means it ar-ranges for other companies’ goods to becarried by other companies’ ships. It hasalready become a big air-freight forwarderand also operates road and rail services.Last year it paid (440m ($532m) for Paris-based ACR Logistics in order to increase itspresence in contract logistics.

Klaus Herms, K+N’s chief executive,says he believes the time is right to develophis company’s overland business. Thatdoes not mean he wants to own trucks, butrather to buy European companies that doon land what his company already does atsea and in the air. In the next three to &veyears, Mr Herms hopes to have the wholeof Europe covered with a network oftrucks working for him.

Trucking has been a highly fragmentedand cut-throat business, says Mr Herms.But now the industry is consolidating,thanks to globalisation and the demandfor more integrated and specialised ser-vices. Increasingly, customers need to useseveral di%erent modes of transport,which are often handled by the same ITsystems. As a freight forwarder, K+N seesits future as o%ering a broad range of sup-ply-chain services.

Others have the same ambition, includ-ing many of the express operators. Thatdoes not seem to bother Mr Herms. !They

The way to go

Source: Drewry Shipping Consultants

*Including transhipment and empty container throughput†Twenty-foot equivalent units

World container-port throughput*, TEU† m

1982 85 90 95 2000 05 080

100

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400

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2

F’CAST

A well-contained revolution

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2

FOR someone who enjoys maintaininga saltwater aquarium, Mike Middleton

has an interesting job. The former marinelooks after two 25,000-gallon saltwaterpools for Clearwater, one of the world’sbiggest seafood companies. But he does itin an unexpected place: not at the com-pany’s base on the Atlantic coast in NovaScotia, Canada, but in a small warehousefar from the sea in Louisville, Kentucky.

Mr Middleton is the operations man-ager for a distribution centre that everyweek ships some 30,000 pounds of livelobsters to restaurants and adventurouscooks, not only in America but all overthe world. He is based in Louisville be-cause UPS has its giant Worldport hubnearby and can pick up his orders in theevening for delivery the next day.

Lobsters are best cooked just beforethey are eaten to ensure freshness, tasteand texture, so they need to be kept alive$and, as Mr Middleton explains, they canget very stressed if not treated well. Once

they have been caught by the &shermenin Nova Scotia that supply Clearwater,they are taken to Louisville by truck, ajourney that can last more than 30 hours.There they recover in tanks &lled withsaltwater made from mixing the neces-sary ingredients with fresh water. Thewater is kept clean by being passedthrough giant versions of the sort of &ltersand skimmers that keep saltwater aquari-ums in good shape. When an order comesin, the lobsters are packed in special con-tainers for UPS to deliver.

It is not just the proximity of World-port that makes the Clearwater operationattractive. When the company used toship live lobsters from Canada to Amer-ica in small consignments, it faced a pileof paperwork at the border for each ship-ment. Bringing in a whole truckload atonce saves on red tape. Orders can be metmore reliably, so gourmets have a betterchance of being able to crack open theirfavourite delicacy.

Winging it to the potJust-in-time lobsters

World travellers

can’t jump out of the box," he says. !Thebox is their prime business." He points outthat vast amounts of cargo are not actuallycarried in an individual box that can bepicked up, sorted and hand-delivered.Many goods are carried as bulk loads andon pallets, which can be transported in dif-ferent ways for maximum e'ciency.

Box-bound or not, the three biggest ex-press operators are broadening the rangeof services they o%er. FedEx began in theair-freight business and grew into groundtransport. UPS, which started in 1907 as amessenger and delivery service in Seattle,has expanded into aviation. In May, UPSannounced a $1 billion expansion at itsLouisville Worldport to boost its sortingcapacity by 60%. The company is also in-vesting in lots of warehousing.

DHL, which takes its name from the ini-tials of its three founders’ surnames, begandelivering documents by air from SanFrancisco in 1969. It expanded westwardsand eventually reached Europe, where itwas bought by Germany’s Deutsche Post.In December 2005 Deutsche Post boughtBritish-based Exel, a leading logistics-man-agement company, for £3.8 billion ($6.7 bil-lion) and is now integrating Exel with DHL.

FedEx is also o%ering more services,but is being more selective than its rivalsabout the areas it wants to expand into,and less convinced about some of the syn-ergies to be reaped. The company is struc-tured so that each of its operating units is

free to compete in its own way, even ifsometimes they seem to be competingagainst each other.

In 2000, FedEx started a specialisedhome-delivery service to meet the grow-ing demand from e-commerce and onlinesales. The company thinks that residentialdeliveries are a di%erent sort of businessfrom those made to commercial premises,which are generally manned during o'cehours. Many people are not at home dur-ing the day, so deliveries may need to bemade later and alternative collection ar-rangements o%ered. Consumers will alsoexpect overnight packages shipped on aFriday to be delivered on a Saturday. Forless time-sensitive packages, FedEx alsooperates a consolidation service thatpasses packages to America’s postal ser-vice for &nal delivery.

That might seem like giving work to acompetitor, but FedEx sees it as just an-other line of business. Even its trucks arestarting to compete with its aircraft. Trad-itionally trucks set o% as full as possible tomaximise e'ciency. But by runningtrucks to a schedule, which can mean theyleave only partly loaded, transport compa-nies can o%er guaranteed delivery times.In a lean-manufacturing world such a ser-vice could justify higher charges. Likeother fast-delivery services, the shipmentscan be tracked over the internet. The indus-try calls these operations !less-than-truck-load" services. FedEx says its LTL services

now span the whole of America. It even of-fers a money-back guarantee if its trucksfail to turn up at the promised time. For re-gional deliveries, LTL services can providea cheaper alternative to sending packagesby air.

Having introduced guaranteed on-timedelivery services to trucking, could thecompany expand the idea to ships? DanSullivan, a senior executive at FedEx, saysthe company is currently talking to someoperators of fast ships. The ships could, forinstance, carry packages already labelledwhich could by-pass some distributionpoints. !It’s all about fast-cycle logisticsand taking time out of transit at a reason-able cost and with a high level of service,"Mr Sullivan adds.

FedEx’s purchase in 2003 of Kinkos,whose main business was a chain of pho-tocopying centres, has given the companysome 1,300 high-street locations, mostly inAmerica. Fedex is now using these to o%eradditional services. Despite the internetand e-mail, the demand for paper-basedcommunications shows no sign of dimin-ishing. But instead of shipping printeddocuments by air, FedEx now provides itsclients with a remote-printing service. Soinstead of sending, say, lots of bulky bro-chures for a sales conference by air, a clientcould send them electronically to a Kinkosnear the venue and pick them up inprinted form from there.

FedEx is also using Kinkos as an emer-

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2

!WE ARE competing with giants,"says Fadi Ghandour. The Jorda-

nian businessman has &rst-hand experi-ence of consolidation in the logistics busi-ness. He is chief executive of ARAMEXInternational, which began life as the Mid-dle East partner of a number of Americandelivery companies. Partnerships and alli-ances allow operators to link with othersto provide services in places where theyhave no operations of their own. All wentwell until 2003, when DHL bought Air-borne Express, ARAMEX’s chief partner inAmerica. The deal gave DHL a way to com-pete in the backyard of UPS and FedEx. But

for ARAMEX it meant its link to the crucialAmerican market was cut.

To restore it, Mr Ghandour set out hisown strategy of alliances and acquisitions,replicating what his big rivals were doing.ARAMEX now o%ers a delivery service tomore than 190 countries. Last year it waslisted on the Dubai stock exchange. Thecompany is continuing to buy local oper-ators, and recent acquisitions include lo-gistics &rms in Ireland, Britain and Egypt.!There are always entrepreneurs outthere," says Mr Ghandour. !We are nevergoing to be left without a real partner."

ARAMEX illustrates how local markets

present their own, often unique opportu-nities for logistics companies. Aramex’sservices range from the secure delivery ofcredit cards and legal documents to de-livering goods and accepting payments forusers of souq.com, an Arab version ofeBay. The company also o%ers a !shop andship" service for people buying things inAmerica, especially online. Although in-ternational deliveries have become easy,some American companies and traders oneBay will not ship goods overseas. ARA-MEX helps out Middle East shopaholics byproviding them with addresses in Amer-ica to which goods can be shipped. It then

Chain reactionsDelivery companies are consolidating

gency back-up for companies that supplyhospitals with medical devices, such asstents and heart valves. These can be ex-tremely expensive and are sometimes re-quired without notice for unscheduled op-erations. Such a service could replace whatTom Schmitt, chief executive of FedExGlobal Supply Chain Services, calls !mil-lion-dollar cars". Some of the companiesthat make these devices, he says, keep theirback-up supplies in the boots of theirsalesmen’s cars. Now, if a hospital is indesperate need of a particular device, itmay be able to &nd one at its local Kinkos.

The range of logistics businesses the ex-press operators are moving into is huge.One service o%ered by UPS’s localbranches is a drop-o% facility for brokenToshiba laptops. Most owners think thatwhen they have told Toshiba about theirproblem and put their laptop into a UPSbox, it is sent to the Japanese company tobe repaired and then returned by UPS. Butwhat really happens is that when the lap-top arrives at UPS’s Louisville hub, it istaken to a vast estate of warehouses nearthe airport and mended in a repair shopowned and run not by Toshiba but by UPS.The UPS technicians are trained by Tosh-iba and the warehouse holds Toshibaspare parts. Even the people in the Toshibacall-centre that deal with inquiries workfor UPS. The delivery company has beencontracted to provide a complete repairand customer-service operation. And hav-ing done this for one company, UPS couldcapitalise on its investment by providing asimilar service for others.

One of the big investments UPS is mak-ing at Louisville is the development of ahuge logistics centre for health-care com-panies. Vast racks containing boxes ofover-the-counter medicines, medical de-vices, testing kits, surgical supplies andother goods are held in its buildings, someof which are temperature-controlled. !It’sa patient, not a package," states a large ban-ner in one of the buildings where teams ofworkers sort through the orders that comein from pharmacies, hospitals and doctors.The required items are retrieved and dis-patched from Louisville overnight.

Changing the landscapeHistorically, transport technology has al-ways made a physical impact on centres ofcommerce. In the days when cargo wasloaded onto ships mainly by hand, fac-tories would often cluster nearby becausetransport costs were high and deliveryslow. With the arrival of the shipping con-tainer, factories were able to move tocheaper locations and away from crowdedcity ports such as New York City and theLondon Docks. Container terminals didnot have to be so close to large populationcentres, provided they had plenty of space,railways, good roads and workers pre-pared to handle containers, which manystevedores in older ports were not.

Something similar is now happeningaround logistics centres, especially at air-ports. Companies are moving some or allof their operations to be near such centresbecause this allows them to process orderslate into the day and put their goods on the

last #ight out, for delivery the followingmorning. As a result, some surprising busi-nesses are setting up shop near logisticshubs. For instance, even though Louisvilleis a long way from the sea it is now home tothe world’s biggest distributor of fresh lob-sters (see box on the previous page).

The idea that if you build a logistics cen-tre companies will come is being taken toextremes in the United Arab Emirates. Du-bai is investing heavily in infrastructureand businesses for when its oil starts to runout about a decade from now. When itsstate-owned port operator, DP World, tookover Britain’s P&O for $6.8 billion earlierthis year, America’s Congress was up inarms because the purchase came with thecommercial operations of six Americanports. DP World decided to sell them. Evenso, it still ended up as one of the world’slargest port operators, alongside Hutchi-son of Hong Kong and PSA, Singapore’sstate-backed port authority.

Now Dubai is building what it de-scribes as the world’s &rst !logistics city". Itwill be next door to the new Jebel Ali Air-port, which will eventually have six run-ways with a capacity for 120m passengersa year. One runway will be dedicated tocargo aircraft. The new airport is also adja-cent to DP World’s giant Jebel Ali Port, nowone of the region’s busiest container termi-nals. Will the gamble pay o%? Dubai is wellplaced midway between Europe and thebooming markets of Asia. But as the re-gion’s own businessmen know to theircost, consolidation in the logistics businessis creating formidable competition. 7

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2 couriers the items to the buyers. Consolidation in the logistics industry

also extends to postal services, which facea decline in standard mail as more peoplepay their bills online and send e-mails in-stead of letters. Coupled with deregula-tion and privatisation, this has led somemail &rms to move into other areas.

Deutsche Post, which became a listedcompany in 2000, has been the most ac-tive with its purchases of DHL and Exel.Britain’s Royal Mail has also done wellwith its express-package business, Parcel-force International, which has grown out-side the regulated postal market. But thisyear there has been more deregulation inBritain and now the Royal Mail, which isstill state-owned, faces new competitors.One of them is TNT, a big Dutch post anddelivery service. In May it bought a couriercompany to allow it to deliver to about80% of all addresses in Britain. TNT also re-cently formed a partnership with JapanPost, the world’s second-largest postal op-erator after America’s. Japan Post, too, isbeing privatised.

The internet has already had a pro-found e%ect on the delivery business, notleast because it enables customers to tracktheir goods. When parcels are beingshipped by an express service they aregiven a tracking number, and every timethe parcel’s barcode is scanned at a hub ordispatch point its whereabouts are auto-matically recorded. Customers can followthe progress of their packages by enteringtheir tracking number. Some systems alsoallow shippers to see online who hassigned for an item, thanks to the digital de-vices now carried by delivery drivers. ALondon courier company even o%ers a ser-vice that lets people watch their packagesmove in real time on a web browser (seebox on the next page).

Soon the labels on packages will carry alot more information. Talk to logistics ex-perts about the future, and they are boundto mention RFID. The acronym stands forradio frequency identi&cation, a technol-ogy going back to the second world war.Devices using it were &tted in aircraft tobounce back radio signals, distinguishingfriend from foe. Today RFID technology isalready commonly used in things like mo-torway-toll tags and keyless-entry devices.Shrinking these devices down to the sizeof a barcode has now made it possible toattach them directly to products, carrying awealth of information about them. Someare already printed as part of a product’slabel, using electrically conductive ink.

The next big thingProducts &tted with RFID tags could workall kinds of magic. In a supermarket, for in-stance, they could eliminate the need tounload the trolley and scan its contentitem by item. Simply pushing the trolleyup to a checkout would relay all the pro-duct and price information, so supermar-kets could automate most of their tills. In awarehouse, an RFID reader would recordevery item loaded into a truck, and a simi-lar device at the truck’s destination wouldrecord everything being unloaded.

With the addition of suitable sensors, itwould become possible to tell whether aproduct had been dropped or kept at thewrong temperature. Finding a single pro-duct in a mountain of containers wouldbecome a simple matter of getting an RFIDreader to analyse the contents$withouteven opening the doors. And combiningRFID technology with GPS tracking wouldmean that nothing need ever get lost in thesupply chain again.

But such magic is not yet imminent.Some companies that have carried out

trials of RFID tags say that the technologyis promising, but it still needs to becomecheaper and more reliable in the rough-and-tumble of a commercial environ-ment. Christian Kern, chief technology of-&cer of InfoMedis, a Swiss company, hasoverseen the successful introduction ofRFID tags in libraries, where they keeptrack of books, and medical clinics, wherethey identify patients to make sure theyare given the right treatments. For manyapplications, however, he thinks the hum-ble barcode is su'cient. !There will beapplications I am not even dreaming of;that is quite possible," says Mr Kern. !But Idon’t expect miracles."

One of the biggest boosts to the adop-tion of RFID tags has come from Wal-Mart,which in 2004 began testing them in 150stores around Dallas, Texas. By the end of2006, the tests will be expanded to some1,000 stores in America. Wal-Mart has al-ready seen some bene&ts, including a 16%reduction in out-of-stock items in storesusing RFID. Moreover, items with RFIDtags were replenished three times fasterthan non-tagged items.

The technology promises other bene-&ts, too. One is a reduction in inventory!shrinkage"$the industry’s polite term forpilfering. There have been some concernsthat RFID tags might breach personal pri-vacy, but these are mostly overblown.When a customer buys an item the tag canbe removed, just like the anti-theft devicesattached to existing products.

If Wal-Mart and other retailers greatlyexpand their use of RFID tags, the price ofeach tag will keep falling and mass adop-tion will move closer. Within 15 years mostitems in shops will carry RFID tags, pre-dicts Sebastian Taylor, an RFID expertworking for IBM. Many high-value goodsalready carry them. Mr Taylor says the av-

Chasing the competition

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2 erage cost of an RFID tag at present isaround 20 cents. Next year he expects it tofall to around ten cents. That may seem asmall price to pay to put such a clever de-vice on, say, a television set. But attachthem to millions of cans of baked beans,and the cost starts to mount up.

Even with existing technology, theamount of information that a supplychain can provide changes the way inwhich companies deal with both ship-ments and inventory. !It has allowed ourcustomers to treat our trucks and planes asa warehouse," says David Abney, presi-dent of UPS International. !They know ex-actly when they are going to receive theirgoods and they can make decisions basedon this information."

Managing operations such as replen-ishing stock or delivering spare parts canbe outsourced too. This is an area many lo-gistics &rms are keen to expand into. !Wewant to manage our customers’ supplychains," says Mr Abney. In the past it wasonly multinational companies that coulda%ord to compete with global supplychains, not just because of the cost andcomplexity of operating trucks, aircraftand warehouses on di%erent continentsbut also because of the di'culty of man-aging all these diverse elements. Yet ac-cording to Mr Abney, all that has changed.Even small companies can now a%ord tooperate internationally by contracting outthe management of the process.

The logistics business used to be all

about the management of transport costs,says John Allan, !but it is now more aboutthe ability to transform the capital natureof the business." Mr Allan ran Exel, one ofthe leading logistics companies before itwas taken over by Deutsche Post. He hasnow joined the board of the German com-pany and is chief executive of DHL Logis-tics. More companies, he reckons, are start-ing to realise that if they can move goodsthrough a supply chain faster and more ef-&ciently, the e%ect on their performancecan be profound, going well beyond beingable to keep stocks low.

But as supply chains become longerand more complex, they are becomingharder to look after. !This reinforces theneed to have them professionally man-

MANY successful businesses havebeen started by someone exasper-

ated by being given poor service. Tom Al-lason was convinced he could do betterwhen a courier company failed to delivertickets for an important tennis match intime for the recipients to attend it. He gottogether with Jay Bregman, an Americafriend he met at college in the UnitedStates, and in the autumn of 2004 the pairlaunched eCourier in London.

When they took a closer look at thecourier industry, they found it had lowbarriers to entry and was very frag-mented. Most companies were small andcompeted solely on price, which resultedin low levels of service and discouragedinvestment in new ideas. The way mostof these businesses operated was to takean order over the telephone and pass it onto a dispatcher, who then sent a radiomessage to &nd a free courier. If a deliverywas late, more phone calls and radio mes-sages would be needed to &nd out whereit had got to$and every time that hap-pened, costs would go up.

The idea behind eCourier is to put thewhole system online. Bookings are mademostly on the company’s website. Thecustomer enters the collection and de-livery addresses and the order is automat-ically relayed to the courier best placed todo the job. Customers can then watch thedelivery vehicle’s progress on their com-

puter screen as it collects and delivers thegoods. Collections and deliveries are con-&rmed by e-mail. The company’s couriersuse global-positioning-satellite (GPS) de-vices and hand-held computers to keepeCourier’s computer system updated.

The key to the service is picking theright courier, says Mr Allason. The onewhom the GPS system shows to be near-est to the job may not necessarily be themost appropriate. For instance, a courierin London may be only a few hundredyards away from a collection address, but

if he is on the other side of the Thames itcould take him 15 minutes just to cross theriver. Other information, such as tra'cproblems and the performance ofindividual couriers, also needs to betaken into account.

This is a mathematical problem, andeCourier spent some time huntingaround for someone able to solve it. Even-tually it found a team led by CynthiaBarnhard, a logistics expert at America’sMassachusetts Institute of Technology,which devised an elaborate algorithmthat is now at the heart of eCourier’s busi-ness, in much the same way that a math-ematical formula drives Google’s searchengine. What Mr Allason particularlylikes about his internet-based courier sys-tem is that it is easily !scaleable": morecouriers and markets can be added with-out having to hire many more dispatchersor people to run a call-centre.

!There is no longer any need to pick upa telephone to &nd out where your pack-age is," says Mr Allason. !Now you cansee where it is." Some 85% of the com-pany’s bookings are made over the in-ternet. Business is growing quickly:whereas in its &rst month in September2004 eCourier delivered only 25 itemswith four couriers, it is now deliveringaround 15,000 items a month with 90couriers. Needless to say, Mr Allason nowgets all his tickets delivered on time.

A courier company goes online Delivering the goods

Check out my algorithm

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IT BEGAN on a stormy evening in NewMexico in March 2000 when a bolt of

lightning hit a power line. The temporaryloss of electricity knocked out the coolingfans in a furnace at a Philips semiconduc-tor plant in Albuquerque. A &re started,but was put out by sta% within minutes. Bythe time the &re brigade arrived, there wasnothing for them to do but inspect thebuilding and &ll out a report. The damageseemed to be minor: eight trays of waferscontaining the miniature circuitry to makeseveral thousand chips for mobile phoneshad been destroyed. After a good clean-up,the company expected to resume produc-tion within a week.

That is what the plant told its two big-gest customers, Sweden’s Ericsson andFinland’s Nokia, who were vying for lead-ership in the booming mobile-handsetmarket. Nokia’s supply-chain managershad realised within two days that therewas a problem when their computer sys-tems showed some shipments were beingheld up. Delays of a few days are not un-common in manufacturing and a limitednumber of back-up components are usu-ally held to cope with such eventualities.But whereas Ericsson was content to let thedelay take its course, Nokia immediatelyput the Philips plant on a watchlist to beclosely monitored in case things got worse.

They did. Semiconductor fabricationplants have to be kept spotlessly clean, buton the night of the &re, when sta% wererushing around and &remen were tramp-ing in and out, smoke and soot had con-taminated a much larger area of the plant

than had &rst been thought. Productioncould be halted for months. By the time thefull extent of the disruption became clear,Nokia had already started locking up allthe alternative sources for the chips.

That left Ericsson with a serious partsshortage. The company, having decidedsome time earlier to simplify its supplychain by single-sourcing some of its com-ponents, including the Philips chips, hadno plan B. This severely limited its abilityto launch a new generation of handsets,which in turn contributed to huge losses inthe Swedish company’s mobile-phone di-vision. In 2001 Ericsson decided to quitmaking handsets on its own. Instead, it putthat part of its business into a joint venturewith Sony.

This has become a classic case study forsupply-chain experts and risk consultants.The version above is taken from !The Resil-ient Enterprise" by MIT’s Mr She' and!Logistics and Supply Chain Manage-ment" by Cran&eld’s Mr Christopher. It il-lustrates the value of speed and #exibilityin a supply chain. As Mr She' puts it: !No-kia’s heightened awareness allowed it toidentify the severity of the disruptionfaster, leading it to take timely actions andlock up the resources for recovery."

There are two types of risk in a supplychain, external and internal. As in theEricsson case, they can conspire togetherto cause a calamity. This seems to be hap-pening more and more often. It is not justthat inventory levels are getting leaner, butthe range of items that companies arecarrying is also growing rapidly, points out

Ted Scherck, president of Colography, anAtlanta-based logistics consultancy. Justlook around a typical supermarket. Whereit once stocked mainly groceries, it nowalso sells clothing, consumer electronics,home furnishings and many other items.

The many faces of riskThis compounds supply-chain problems.!In many cases shippers have gone too farin implementing the lean supply chainand have found themselves virtually outof business because of a by now annualcatastrophic event," says Mr Scherck. Asexamples, he cites a dock strike in Califor-nia, a typhoon in Taiwan, a tsunami inAsia and a hurricane in New Orleans.More recently a huge explosion at the Bunce&eld oil storage terminal in Britain’sHertfordshire caused widespread pro-blems for businesses not just locally butacross a large part of England.

In 2003 a number of companies suf-fered serious disruption because of severeacute respiratory syndrome (SARS). Eventhough SARS turned out to be not as viru-lent as in#uenza, and only 8,000 peoplegot infected, with one in ten dying, it stillcost an estimated $60 billion in lost outputin South and East Asia. The latest worry isthe spread of avian #u. If the virus con-cerned were to mutate and become infec-tious for humans, the consequences couldbe far more devastating.

Sometimes even a political wrangle inBrussels will bring a supply chain to ashuddering halt. Last autumn some 80mitems of clothing were impounded at

When the chain breaksBeing too lean and mean is a dangerous thing

aged," says Mr Allan. He would say that,because that is what he does for a living,but he has a point. The ability to design,engineer and put in place a supply chain isno mean feat, even for a big company. Yetthe employees who carry out the opera-tions that make up much of a supplychain’s individual components, such asdriving trucks, overseeing warehouses oroperating fork-lifts, are not always treatedas though their jobs are important. Spe-cialist logistics operations are in a betterposition to look after them by o%eringmore training and better career prospects,and will be able to spread their investment

in these things across several clients.The most critical factor in logistics is

people. Companies may deploy lots ofpowerful technology, but a close examina-tion of successful supply chains showsthey also pay a lot of attention to their em-ployees, says John Gattorna of the Centrefor Supply Chain Research at Australia’sUniversity of Wollongong. In a new book,!Living Supply Chains", he argues that thisinterest in people is not con&ned to whathappens in the individual &rm, but ex-tends to customers as well. !Most success-ful companies also understand, almost in-tuitively, what is happening in their

marketplace," he says. Supply chains come in a number of dif-

ferent forms, and some companies usemore than one for di%erent parts of theirbusiness. One chain may run lean to keepinventory costs low, whereas another maybe more #exible to enable it to respond tonew opportunities as they arise. The im-portant thing, says Mr Gattorna, is that dif-ferent supply chains within an organisa-tion must work together. These dayscompanies cannot a%ord to make mistakeswith their logistics. When supply chainsbreak, the consequences can quickly be-come disastrous. 7

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2 European ports and borders because theyexceeded the annual import limits that theEuropean Union and China had agreed ononly months earlier. Retailers had orderedtheir autumn stock well before that agree-ment was signed, and many were leftscrambling to &nd alternative suppliers. Acompromise was reached eventually.

The cost of failureHowever, most supply-chain disruptionshave internal causes, says Vinod Singhal, aprofessor of operations management atthe Georgia Institute of Technology (seechart 3). His research on the e%ects of sup-ply-chain failures shows that they can beimmensely damaging. This emerged froman investigation into what happens toshareholder value when companies an-nounce supply-chain problems, based ona sample of 800 such announcements bigenough to generate news in the &nancialpress. The disruptions ranged from a delayin 2000 of shipments of workstations andservers by Sun Microsystems to a partsshortage at Boeing in 1997 that the com-pany said would delay some deliveries.

Typically a company’s share pricedropped by around 8% in the &rst day ortwo after such an announcement. This isworse than the average stockmarket reac-tion to other corporate bad news, such as adelay in the launch of a new product(which triggers an average fall of 5%), unto-ward &nancial events (an average drop of3-5%) or IT problems (2%). And the e%ectscan be long-lasting: operating income, re-turn on sales and return on assets are allsigni&cantly down in the &rst and secondyear after a disruption.

!It’s like having a heart attack," says MrSinghal. !It takes a long time to recover."And have the dangers increased in recentyears? Like other experts, he believes thatsome companies may be running theirsupply chains a little too lean: !It’s great

when it’s working, but too much leannessand meanness can actually hurt you."

The &nancial information analysed forthis study came out before the terrorists at-tacks on America on September 11th 2001and the subsequent massive tightening ofsecurity around the world, so global sup-ply chains today are subject to many morepotential hold-ups. Still, it is impossible forcustoms o'cials to search every con-tainer, box or package entering everycountry, so the responsibility for securityand import declarations rests with theshipper and the company carrying thegoods. In e%ect, the system works by a pro-cess of pre-clearance. The details of every-thing contained in a shipment now have tobe sent ahead electronically, and customsand security o'cials at ports and cargohubs divert anything they want to take acloser look at.

Companies that put a lot of e%ort intoensuring the safety of the goods they aresending, or carrying on behalf of others,are likely to be rewarded by seeing thempass swiftly across borders. Customs clear-ance is itself a huge business. !Informationand technology is the only way to accom-plish this," says Ed Clark, chief executive ofFedEx Trade Networks. These systems alsoneed to be able to cope with unplannedevents. For instance, if a cargo aircraft hasto divert to another airport because of badweather, centrally held electronic versionsof the necessary !paperwork" can betransmitted to a new port of entry.

Sometimes even computer systemswill not alert a company to a problem. Forinstance, Toyota is upgrading its business-interruption planning to a higher level in

response to the &ling for Chapter 11 bank-ruptcy protection last year by Collins &Aikman, a big American-based supplier oftrim items for cars. The parts company hadbeen supplying Toyota in Europe, whichhad an inkling that something might bewrong and started to arrange alternativesupplies to be on the safe side.

!We realised that through good com-munication and contacts we had managedto identify a risk in good time and take ac-tion," says Mark Adams, Toyota’s Euro-pean purchasing manager. It was a lessonthe company wanted to apply morewidely, so it launched a weekly get-to-gether for managers, sometimes by video-conference, to discuss any new rumoursand potential risks$and work out a recov-ery plan just in case.

Toyota builds more than 600,000 cars ayear in Europe, where it has some 200 &rst-tier suppliers operating more than 400 fac-tories. They work with second, third andfourth-tier suppliers, so the overall num-ber grows exponentially the further you godown the chain, where problems can beharder to spot. This means the suppliersthemselves have to be involved in the risk-management process.

Mr Adams says a supplier may &nd itdi'cult to tell the company that it has aproblem. But Toyota emphasises thatgiven the co-operative nature of a supplychain, with early knowledge there is morechance of putting things right. Mr Adamsexplains that as a &rst step the companywould seek to help its suppliers solve theirown problems. !We are hugely more com-petent at this than we were a year ago," headds. And so far, Toyota has been able to

Bunce!eld burned, !rms faltered

Inside job

Source: Vinod Singhal, Georgia Institute of Technology andKevin Hendricks, University of Western Ontario

*From a sample of supply-chain disruptionsannounced between 1989 and 2000

Cause of supply-chain disruptions*% of firms replying:

0 5 10 15 20 25 30 35

3

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act swiftly enough to prevent any supplyproblems holding up production.

Is a lean, #exible and highly outsourcedsupply chain like Toyota’s any safer thanthe vertically integrated production meth-ods of old, as practised at Henry Ford’sgiant River Rouge manufacturing complexnear Detroit? At its zenith in the 1920s,ships carrying raw materials such as ironore and coal$often from Ford-owned oper-ations$would unload directly into theplant. Steel was produced on site, thencast, pressed and machined into all thecomponents needed to assemble a car.The process was in#exible$which is whyFord’s cars could be any colour as long as itwas black$as well as rather ine'cient.Toyota has turned that process on its head,making its manufacturing system far morecapable of responding to change. That isone of the best insurance policies a com-pany can have.

!You are always looking for #exibility,particularly as you manage risk," saysCisco’s Mr Mendez. Again, transparency isimportant. !Once you understand whereyou are, you can begin to design and bud-get for contingencies," he adds. The risk-management budget should perhaps beseen as separate from the operating andcapital budgets, he suggests, to allow risksand their potential costs to be dealt withmore directly.

The limits to leannessAre competitive pressures pushing compa-nies towards running their logistics opera-tions ever leaner? !They are gallopingthere," replies Michael Cherkasky, theboss of the company that owns Marsh, theworld’s largest insurance and risk special-ist. !I don’t think many understand therisks that are involved." He is concernedthat companies are outsourcing not onlyperipheral activities but many core func-tions too. That makes it di'cult to pick upthe pieces when things have gone wrong.

Britain’s Cran&eld University is run-ning a research programme into the fragil-ity of supply chains, prompted by the Brit-ish government after protests over highfuel costs in 2000. Lorry drivers blockadedfuel-delivery depots, bringing many busi-nesses to a standstill. !I reckon this was the&rst time the government realised therewere such things as supply chains, and justhow fragile they had become," Mr Christo-pher told a recent conference.

Some people even suggest that supplychains should be regulated, a bit like pub-lic utilities, because countries have be-come so highly dependent on private-sec-

tor production infrastructure. Barry Lynn,author of a book on this subject, !End ofthe Line", thinks that perhaps companiesshould be required to limit their outsourc-ing and use more than one supplier of es-sential items. In his book, he argues thatglobalisation and outsourcing provideonly a temporary bene&t to consumers be-cause the companies that form part of sup-ply chains will buy each other up in pur-suit of ever greater e'ciency, and thus losemost of their #exibility.

There are signs that some companiesare already alert to these concerns andmay be planning to reorganise their sup-ply chains to make them safer. That pro-cess could speed up if disruptions becomemore common. Mr She' is in no doubtthat the best way to achieve a resilient sup-ply chain is to create #exibility$and that#exible companies are best placed to com-pete in the marketplace.

!Customers are rethinking their globalsupply chains for a lot of their products,"says Mr Scherck. For bigger &rms, thatcould mean adopting what he calls the!continental strategy": having a spread ofsuppliers in di%erent continents for added#exibility, as Dell and Cisco do. Smaller&rms may not be able to achieve a geo-graphical spread. But in any case, compa-nies do not want to go back to carrying lotsof inventory in di%erent locations. !So youneed to do something in-between," con-cludes Mr Scherck. !You will have to carrya little more cost than an absolutely leanmodel, but you get protection."

!There are very legitimate, very goodbusiness reasons not necessarily to com-plete and ship from Asia," says Flextron-ics’s Mr Wright. Companies may consider

other options in other parts of the worldeven though these may look more expen-sive. !Sometimes you might have to go to ahigher cost structure to make your supplychain more robust and reliable," observesMr Singhal.

So the limits of globalisation may endup being de&ned by the management ofsupply-chain risk. And unfortunately theworld is unlikely to become any safer.There will always be natural disasters, aswell as corporate mistakes. In order to in-sulate themselves from the consequences,companies will have to spread their risksmore widely. That does not necessarilymean fewer aircraft will be queuing up toland at Louisville and Memphis, or thatfewer container ships will set sail fromAsia’s bustling ports. But it does mean thatin future companies may spend rathermore to maintain a number of di%erentsupply chains, and some of those may becloser to home. 7

Ford’s way with supply chains

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