Supply chain and logistics executives have been focused on traditional supply chain strategies for far too long. Approaches such as mechanization (for example, pallets and pallet lifts); physical distribution (warehousing, material handling, and freight transportation); logistics automation (automated machinery); and enterprise resource planning (ERP) systems have relegated the traditional, siloed supply chain to a role as a cost center. This "tunnel vision" focuses on optimizing operational processes in order to achieve greater efficiencies and thereby drive down costs.
While that may have been a successful strategy in the past, leading many to take an "if it isn't broken, don't fix it" attitude toward their supply chain management (SCM) solutions, that kind of thinking could doom them to the same fate as once-successful industries that have failed or are in trouble today. Think about companies like Sears, Blockbuster, Life Magazine-all experienced a time as premier brands, but they struggled to adapt when faced with a "perfect storm" of disruptive technologies, an expanded competitive marketplace, new consumption models, and changing consumer expectations. They and others like them focused on cost containment instead of adapting and leveraging new technologies and business models to drive growth.
In our industry, this kind of disruptive change is exemplified by the "Amazon effect," the phenomenon that has raised customer expectations with respect to the speed and visibility of goods in-transit and the demand for same-day delivery. In contrast to the old-line businesses like those mentioned above, modern supply chains are adopting new technologies and business models championed by innovation leaders like Amazon.com. We now have a global marketplace that offers easy access to a broad variety of products and satisfies customer expectations regarding the speed and visibility of goods in transit, while also focusing on innovation with an eye toward growth and consumer satisfaction. Nevertheless, if companies continue to view their supply chains as a linear, static cost center, the result will be a dead end. Those embracing a model that relies on cooperation and collaboration across the industry rather than siloed, internal operations are and will be the winners.
In this new world, the key to successful supply chain strategies that will meet increasing customer demands revolves around one concept: macro-optimization.
Micro- vs. macro-optimization
Traditionally, organizations have run their orders and shipments through an optimization engine based on a siloed network, resulting in their SCM solutions being "micro-optimized."When supply chains are driven by micro-optimization strategies-that is, they are treated as a cost center instead of as an asset, and they are inwardly focused on a single existing network-they become static and inflexible. As a result, models, prices, and agreements become outdated as soon as they are put in place, and companies are unable to react to changes in the market.
For example, in the micro-optimized approach, no matter how efficient the optimizer is, it will always leave some portion of a shipment un-optimized because it is working with slightly outdated information, therefore there is a finite amount of opportunity in that data set. On average, users of optimization software will find that this lag time results in 4 to 10 percent suboptimal output from micro-optimization.
Comparatively, macro-optimized approaches embrace a new supply chain model, one that relies on cooperation and collaboration as well as the connection of many supply chains, as opposed to focusing on an organization's own supply chain. In a macro-optimized model, companies are able to adapt to customer demands because this approach allows for modifications within supply chain processes; for example, they can adjust to fluctuations in available capacity and have visibility into optimization opportunities that may be available through multiple networks. Micro-optimized approaches cannot allow for modifications, because there is a limit to its effectiveness, as it is inherently limited to an organization's own orders, rates, and carrier capacity.
When organizations adopt macro-optimization, two essential elements are required for success:
1. A global trade network (GTN): A connected, collaborative network enables companies to have access to a broader, deeper community of shippers, trading partners, carriers, freight forwarders, and so forth. The power of a network lies in its ability to bring clarity and certainty to a volatile situation and its ability to offer "on-demand" connections to thousands of potential carriers.
2. A single-instance, multitenant environment: This environment allows for the aggregation of data from multiple companies, where real-time visibility is a reality. Data is captured, analyzed, and operationalized to an organization's advantage.
Here are two real-life examples:
Capacity constraints can be a daily concern for shippers. In a micro-optimized approach, a shipper ends up overpaying for a less-than-truckload (LTL) pick-up, because the individual shipper has no ability to take advantage of the additional empty space in the truck. With macro-optimization, shippers can share capacity on less-than-truckloads or on backhauls. Additionally, in macro-optimization, if a shipper always moves freight on a particular lane but never has a return load, another shipper could use that empty capacity on the backhaul for one of its difficult lanes. In this scenario, both shippers saved money, and the carrier didn't waste "empty miles."
As another example, a group of small-parcel shippers located in one major city can use macro-optimization to pool their freight while also engaging in the cost-saving option of "zone skipping." In this situation they pool and move their freight by local carrier several zones away, and then tender their parcels for delivery to a major carrier like UPS to avoid expending the time and resources required to complete the shipment themselves. This option is not available to them if they stay in their own, siloed operations. But with macro-optimization through a global trade network and a single-instance, multitenant environment, the power of the network takes hold and provides new cost-saving opportunities.
Our industry can leverage such disruptive technologies to compete in an expanded competitive marketplace. Taking a macro approach helps companies engage in new consumption models; adapt to natural disasters and other causes of damage that are out of an organization's control; adjust to changing trade agreements and customs requirements; and meet changing consumer expectations driven by the Amazon effect. Changing from tunnel vision to a wider view will be key to the future of our industry. Macro-optimization is the strategy that can make it happen.
Doug Surrett is Chief Product Strategist for the technology and supply chain services company BluJay Solutions (www.blujaysolutions.com).