Business Not As Usual: Ideas, Insights & Intuition

Supply Chain Competence & Apple's Competitive Position

(i) Apple has built a closed ecosystem with a direct influence on all aspects of supply chain from design to retail store.

(ii) Large volumes allow Apple to negotiate big discounts of parts, manufacturing capacity, and air freight.

(iii) Operations expertise enables Apple to handle massive product launches without having to maintain large inventories.

(iii) The overall supply chain competence helps Apple to create a competitive pricing for its iPad and still earn a 25 percent margin. 

(iv) Supply chain expertise provides Apple to enter into new territories (e.g. the planned entry into television market by 2013)

(v) The focus on supply chain competence began in 1997 when Steve Jobs returned to Apple. Instead of choosing the cheaper option of transportation (ocean freight), Apple paid $50 million to buy up all the available holiday air freight space to ensure that the company's translucent blue iMacs would be widely available by Christmas the following year. This move handicapped rivals such as Compaq who later wanted to book air transport.

(vi) Similar transportation strategy was adopted when iPod took off in 2001. Apple found it more economical to ship iPods directly from Chinese factories to consumers' doors.

(vii) The approach of spending exorbitantly wherever necessary and reaping the benefits from greater volume in the long run is institutionalized throughout Apple's supply chain, and begins at the design stage.

(viii) Apple's design guru Jony Ive and his team sometimes spend months living out of hotel rooms in order to be close to suppliers and manufacturers, helping to tweak the industrial processes that translate prototypes into mass produced devices. For instance, for new designs such as MacBook's unibody shell, cut from a single-piece of aluminum, Apple's designers work with suppliers to create new tooling equipment. 

(ix) The company gains tremendous advantage from its strategy of focusing on a few product lines, and to do little in the way of customization.

(x) Apple has more than $80 billion in cash and investments. It plans to nearly double capital expenditures on its supply chain in the next year, to $7.1 billion, while committing another $2.4 billion in prepayments to key suppliers. This tactic ensures availability and low prices for Apple and sometimes limits the option for everyone else. For instance, before the release of iPhone 4 in June 2010, rivals such as HTC couldn't buy as many screens as they needed because manufacturers were busy filling Apple's orders. To manufacture the iPad 2, Apple bought so many high-end drills to make the device's internal casing that other company's wait time for the machines stretched from six weeks to six months.

(ix) Apple expects its suppliers to provide a detailed accounting of how the manufacturer arrived at a certain price quote. The supplier is also expected to provide details regarding the estimates for material and labor costs, and its own projected profit.

(xii) Apple requires many key suppliers to keep two weeks of inventory within a mile of Apple's assembly plants in Asia.

(xiii) Sometimes Apple doesn't pay until as long as 90 days after it uses a part.

(xiv) For weeks in advance of the announcement of a new launch, factories work overtime to build hundreds of thousands of devices. To track efficiency and ensure pre-launch secrecy, Apple places electronic monitors in some boxes of parts that allow observers in Cupertino to track them through Chinese factories. When the iPad 2 debuted, the finished devices were packed in plain boxes and Apple employees monitored every handoff point - loading dock, airport, truck depot, and distribution center - to make sure each unit was accounted for.

(xv) Apple's retail stores also provide an important supply chain advantage. Once a product goes on sale, the company can track demand by the store and by the hour, and adjust production forecasts daily. If the company realizes that a given part wil run out of stock, teams are deployed and given approval to spend millions of dollars on extra equipment to get around the bottleneck.

(xvi) The supply chain competence enabled Apple to earn gross margins of 40% in the third quarter of 2011, when most other hardware companies were only able to achieve 10-20% gross margins.

Source: Satariano, A. and Burrows, P. 2011. Apple's supply chain secret? Hoard Lasers. Bloomberg Businesweek, November 7 - November 13, 

Using Segmentation to Manage Supply Chain Complexity

An article published in CSCMP's Supply Chain Quarterly provides some interesting perspectives for managing supply chain complexity. The authors present three step approach:

(i) uncover underlying drivers of operational complexity;

(ii) design differentiated supply chain segments tailored to address these complexities;

(iii) create customized end-to-end operational blueprints and performance metrics for each segment.

Using the example of consumer packaged goods industry, the paper presents a segmented approach for supply chain design. In the typology, the y-axis captures three customer segments ("A", "B", and "C") and the x-axis presents four types of product segment - High volume low variability, High volume high variability, Low volume low variability, and Low volume high variability. Five supply chain designs are prescribed. Supply chain design termed as "Lean/Steady Flow" is most appropriate for the customer-product segment characterized by "A" and "B" customers with high volume and low variability. "Responsive" supply chain design is recommended for "A" and "B" customer segments with high volume and high variability.  For "C" customers with high volume but varying variability the paper suggests a supply chain design that "implements menu options." "Basic replenishment" is the suggested approach for "A" customers who are characterized by low volume and low variability, whereas, for "A" customers with low volume and high variability the focus should be on "managing complexity." Finally, for "B" and "C" customers with low volume and varying levels of variability the authors suggest the companies should "rationalize SKUs."

For high tech industry the paper presents a somewhat different framework. In this typology, the y-axis represents two types of customers - (i) those who expect short lead times and (ii) those who allow longer lead times. The customers expected short lead times are further segmented into "high priority customers" and "low priority customers." The x-axis is divided into two broad categories: High configuration (i.e. Engineered) and Low configuration. Low configuration products are further segmented into three types - Stable, Non-trendy, and Trendy. For high and low priority customers who expected short lead times as well as high configurations, the paper suggests a "late stock-up" approach whereby inventory is pushed up to the step before massive SKU explosion. For high and low priority customers who expected short lead times and stable or non-trendy products, "reactive loop" criteria is recommended in which production at every step is driven by inventory reorder points at next step. The paper suggests that for high and low priority customers who expected short lead times and trendy products, companies should incorporate "early stock up" where inventory bets are placed to minimize lost sales. For customers that allow for longer lead times (irrespective of the specific product segments desired), the paper suggests an "order to order" approach in which no safety inventory is maintained in the supply chain. In this situation undifferentiated inventory is positioned at suppliers to allow six weeks lead time. 

Using the example of apparel/softgoods, the paper emphasizes the need for defining individual segments and then identifying the value drivers for each segment.

Three article informs that in the high tech sector, segmentation typically improve service levels by 5 to 10% while reducing inventory levels by 15 to 20%. In the food processing industry with seasonalities associated with supply and demand, segmentation reduces inventory by up to 40% while simultaneously improving service levels. With appropriate use of segmentation, retailers can also improve margins by 5 to 15% while reducing overall logistics and warehousing costs by as much as 15 to 20%. Three key lessons offered by the article are:

- Pick the right number of segments

- Let customer requirements determine your focus

- Implement segmentation in steps

Source: Swan, D., Pal. S., and Lippert, M. 2009. Finding the perfect fit. CSCMP Supply Chain Quarterly, Quarter 4/2009, 24-32.

Intra-Port Container Terminals

In a working paper, my co-author and I are investigating the issue of intra-port capacity planning by considering the differences between two container terminals within a major U.S. port. We focus our attention on empty container management to gain insights regarding capacity management. Specifically, using data spanning one year, this study investigates the difference between full and empty containers at a new and a relatively older terminal. The study also examines how a new and an older container terminal differ in terms of the reuse of empty containers for exports. 

Ports play an important role in global logistics by acting as a node for a network of parties engaged in shipping and receiving goods. In its role, ports facilitate material transfer and associated information flow and thereby contribute towards efficient and effective global supply chain management. Ports serve as logistics platform and coordinate the requirements placed by several stakeholders, such as shippers, ocean carriers, terminal operators, and forwarding companies.  To provide services as a business partner of choice to these stakeholders, ports fulfill three key functions – the regulatory function, the landowner function, and the operator function. In its regulatory role, ports ensure that statutory requirements are fulfilled. The landowner focuses on managing and planning the real estate, implementing policies and strategies for development of infrastructure, coordinating marketing and promotional activities, and providing access for road and rail based transportation. Finally, in its operator role, ports engage in physical transfer of goods between sea and land. In our study we focus on a port’s landowner and operator role and examine how it utilizes its available capacity to manage container traffic.

Port container traffic is given in terms of TEUs (twenty-foot equivalent units, a standardized maritime industry measurement used when counting cargo containers of varying lengths). According to the data compiled by the World Bank, major trading regions have witnessed tremendous growth in the container port traffic. For instance, from 2000 to 2008 the United States container port traffic grew by an astounding 42.56%. Containerization is increasing at the rate of ten percent per-annum and the number of TEUs has increased from 39 million in 1984 to over 356 million in 2004. With larger vessels that are currently used for maritime transportation, each vessel transport nearly 14,000 TEUs, which is putting pressure on capacity requirements at ports and their abilities to contain costs at approximately $65,000 per ship. Capacity planning issues at the port can result in various forms of operational inefficiencies such as ship delays, missed feeders, extra manpower, yard congestion, re-handling, increased idling times for trucks and emissions, and longer lead times for shippers. 

To manage this growth in global logistics, port authorities utilize several strategies and tactics to ensure that they have adequate capacities in place. Physical expansion of the port facilities, the use of container terminals, and efficient resource utilization are some of the strategies that port authorities employ. Container terminal management is typically faced with issues such as lack of planning and lack of a systems view. Studies have emphasized the role played by organizational structure as a determinant of container terminal performance. Container terminals have typically been organized in terms of various planning subgroups such as, ship planners, yard planners, and resource planners. With this departmentalized orientation, the holistic goal of enhancing container terminal performance by simultaneously impacting ship turn-around time, reliability of service, cost efficiency of operations, and enabling adaptive shipping line schedules becomes difficult.

The integrated decision process becomes even more challenging when the port authority is required to manage multiple container terminals, synergizing their efforts towards overall performance of the port. The competitiveness of individual container terminals and the ability of a port to coordinate capacity and operations of multiple terminals play a significant role in reducing the total cost of shipping goods. Approximately 55 percent of port related costs can be reduced by improving ship turn-around times and cargo handling speeds. In essence, the terminals are the real adversaries in the competitive struggle between ports. Terminals (between ports as well as those within a single port) compete for tangible assets such as port infrastructure. Their competitive strength stems in terms of provision of services that add value within the supply chain for its users.

Port authorities managing multiple container terminals develop strategies to balance the capacity such that the imported and exported containers could be managed efficiently while maintaining high customer satisfaction. Container terminals are primarily managed by means of operational planning and control. In this regard, the research focus in the area of container management has primarily been on sub-systems within container terminals. In this study we consider the overall port system comprising of multiple container terminals. Containerization and advances in logistics has resulted in a change in a terminal’s role from one of being a facilitator of synchronizing goods between transport modes, shippers and logistics service providers to that of a buffer or consignment storage point. For a port maintaining multiple terminals, it behooves one to examine if there are systematic differences between the roles (i.e. synchronization vs. buffer) played by different terminals. This issue has not received adequate attention in research literature. In this paper we specifically focus on this issue and examine if a newer container terminal differs from an older container terminal in terms of their role in global supply chain management. Differences in the role played by the terminals will manifest in terms of differences in operational planning and control. Some of the aspects that are likely to highlight the difference include: the number of full imported containers coming into the terminal, the number of full exported containers shipped from the terminal, the number of empty imported containers coming into the terminal, the number of empty exported containers shipped from the terminal, and the number of empty containers resulting from the full imported containers at the terminal. Our study undertakes a closer examination of how a port manages its capacity by utilizing a portfolio of container terminals, especially when these terminals differ in terms of their age and consequent technological capabilities. 

To undertake our research, we obtained data from two different marine container terminals from a major U.S. port that is ranked in the top 10 ports in terms of cargo volume. The port is a complex of diversified public and private facilities. Terminal 1’s six berths provide 6,000 feet of continuous quay. Thirteen wharf cranes ensure efficient and reliable handling of containers. The facility also includes a roll-on/roll-off platform, a LASH dock, a cruise terminal, 230 acres of paved marshaling area and 255,000 square foot of warehouse space and acres of open marshaling and storage area. A computerized inventory control system tracks the status and location of individual containers. The terminal also features electronic data interchange capabilities. A comprehensive refrigerated food warehouse is located near the terminal. Combined with competitive tariff rates, this facility's efficiency makes it an ideal port of call for shippers with cargo originating from or destined for the US Midwest, Gulf Coast, and West Coast. Terminal 2 was built to meet marketplace demand with an investment of about $1.4 billion. When fully developed, the terminal will have a total of seven container berths with the capacity to handle 2.3 million TEUs on a complex which includes 376 acres of container yard and a 123-acre intermodal facility. 

I presented the preliminary findings of this study in the recently concluded CSCMP conference (Supply Chain Management Educators' Conference) at Philadelphia, PA. Overall, the results of this study present some interesting findings pertaining to differences between terminals within a port. We find that terminals within a port show systematic differences in terms of their focus and role. A newer terminal receives more numbers of imported empty containers and ships out higher numbers of exported full containers. The results provide evidence that these newer terminals are focused on throughput and thereby contributing to the revenues earned by a port. In contrast, older terminal carry a larger proportion of empty containers resulting from full imports and ship out more numbers of empty containers than newer terminals. The results suggest that these older terminals focus on the warehousing role, which also contributes towards the financial performance of ports.

This systematic difference between newer and older container terminal could be a result of conscious managerial decision or it could be simply be a result of an adaptive process within the port, whereby, the terminals focus on their relative strengths. The new knowledge, routines, work processes and technological capabilities within a new terminal allows them to take a fresh look at the synchronization role. Since a new terminal is not constrained by existing routines and business relationships, new inter-organizational relationships could be formed and the services offering could be better orchestrated. The older terminal focuses on the existing real estate asset and starts apportioning a larger portion of this asset for providing storage facilities. In contrast to our earlier assertion, the results of this study indicate that for the specific port studied in this paper, the throughput capabilities of the two terminals are not significantly different. This suggests that while there are systematic differences between the terminals pointing towards a gradual shift in role, the older port still fulfills the two important roles of synchronizing goods/information as well as providing warehousing related options.

There are a couple of reasons for the above results.  Upon completion of terminal 2, the port had to decide which services to move to terminal 2.  This decision came down to (1) move the biggest services to terminal 2 to justify the need for building terminal 2, and (2) main throughput balance between the two terminals since both terminals are managed by the set of staff (terminal manager, operations manager, vessel services superintendents, logistic associates, customer service, billing, etc.).  Unlike other U.S. ports, this particular port handles more exports than imports (60% export vs. 40% import).  Thus, the bigger services at terminal 2 contribute to higher numbers of exported full containers.  Terminal 1 also has nearby empty container depots.  Lastly, with this port being an operating port, it strives to balance the workload between the terminals for its staff and thereby providing equal level of service for its customers.  Otherwise, there will be challenges from the staff and customers. 

We are currently running various scenario-based experiments using a simulation model. The simulation results will shed further insights into the underlying issue of capacity management among multiple terminals in ports.

Source: Nair, A. and Huynh, N. 2011. Intra-port container terminals: A comparative investigation of their role in global supply chain management. CSCMP Supply Chain Management Educators' Conference, Philadelphia, PA.

Food Supply Chains - Key Considerations

Akkerman et al. (2010) present an excellent review of research in the area of food distribution management. Some of the key points mentioned in the review are presented here - 

There are three key considerations in managing food supply chains: (i) Distribution Network Design; (ii) Distribution Network Planning; (iii) Transportation Planning

Distribution Network Design

In food industry profit margins can be quite low and distribution operations constitute a significant portion of total supply chain costs. Hence, it is important to make appropriate levels of investment of time and money on network design decisions. Design food supply chains for products that have good quality, are not expensive and are environmentally friendly can be challenging. The network design significantly affects the eventual safety of the food product, as the design determines the number of actors, and the extent to which products are dispersed through the network. For instance, the design of the network influences the time a product is subject to quality degradation during distribution. The design of distribution networks also has a strong impact on sustainability since the distance products have to travel to reach the final consumer as well as the transportant method used impact the carbon footprint of the product. For food service chains, the aim is often to pursue a low stock level or a no-stock overnight policy in distribution centres, and to frequently ship in smaller amounts with high variations in demand. This will often also affect the length of the chain: direct delivery from the producer to the caterer is, for instance common for these products. Another typical aspect found in foodservice systems is that production activities are not always confined to the initial food manufacturing stage, as it is often the case that additional production steps take place at the caterer (e.g., final meal assembly and preparation).

Distribution Network Planning

Distribution network planning concerns mid-term decisions related to fulfilling demand (or forecasts) on an aggregated level. Here, the distribution network is a given, but the focus is on achieving efficiencies in managing distribution as an integrated system. In comparison with distribution network design, distribution network planning requires more detailed modelling of production and distribution. Most importantly, a time dimension is added. In optimization models, the time horizon is discretized into periods which are linked through inventory, i.e. food is produced in one period and distributed and consumed in a later period. This may be an efficient way to, for instance, cover a peak in seasonal demand or achieve efficiencies in distribution. This also means that most of the decision-making on distribution is integrated with decision making on production and inventory. An examination of distribution network planning can be categorized into three kinds: Aggregate Flow Planning, Distribution Frequency Determination, Miscellaneous. 

Modelling approaches in aggregate flow planning differs from the network design problems in that it is important to incorporate the time dimension and the possibility of keeping product in inventory between periods. A general model for distribution network planning uses continuous decision variables to decide on the product flows in the distribution network for each time period and the inventory levels at the various locations are taken into account. Typical other model constituents include inventory balances and demand coverage constraints. In terms of objectives, typically the focus is on financial aspects, occasionally combined with customer-related aspects such as service levels or flexibility. An interesting aspect in relation to modelling food production systems is the distinction between processing a certain quantity of a food product and packaging a certain SKU. Processing and packaging activities need to be treated separately. This means that next to inventory balance constraints, there are also constraints necessary to balance processing and packaging. It might be important to plan for return shipments (e.g. in soft drink bottles) and to consider not only the improved efficiency production and distribution, but also to facilitate rescheduling during the season to account for changing production rates which may be due to varying harvesting volumes or qualities (e.g. in sugar production and distribution). Setup time considerations also play an important role in food network planning (e.g. set up required to produce different types of sugar). It is important to include product quality degradation in the network planning models as well, both in terms of a limited storage time and in terms of a decreasing value of the product over time (based on a linear decrease during the shelf life). Using an index to keep track of the harvest period, it is possible to track the shelf life. In a typical aggregate flow planning model this leads to the revision of the demand coverage constraint to only include products that have been harvested in the most recent periods (depending on the maximum number of periods the product can be stored). Perishability can also be modelled by a maximum number of periods the product can be stored by adding a constraint to make sure that product inventory in distribution centres is not used to cover the demand after having been stored beyond the specified maximum number of periods.

Delivery frequencies refer to a fixed pattern of deliveries to customers. Often, such recurring patterns are fixed for a reasonable time period, as that facilitates retailers/caterers to plan their activities around that. Therefore, the decisions on how often and when exactly customers will get deliveries are made on a tactical level. In the determination of delivery frequencies, one need to consider whether customers get deliveries once or twice a week, and on which day(s), taking into account that the workload of weekdays should be reasonably balanced. Different types of products - for instance, products that require chilled, frozen or ambient distribution - require their own vehicle type. This also need to be explicitly considered to focus on cost minimization, while making sure the shelf life of the different product classes is considered in the resulting time between deliveries.

Miscellaneous planning approaches could involve considering optimal procurement plans for a distribution system of temperature-sensitive products, which have a distinct seasonal demand pattern, but are supplied throughout the year. Further, the plan should consider uncertainty in the actual receipt quantity after ordering. Planning approaches also can consider minimizing the quality loss of the storage assignment plan developed by assigning products to the different temperature zones in the warehouse. Further, assignment planning could consider interaction between products in terms of their quality degradation. Planning can consider refrigeration power used and processing time before distribution so that the product temperature can be adjusted in combination with distribution decisions, with the objective to deliver the product at a certain time and a certain temperature. The main focus is on the impact of use-by-dates, customer selection behaviour in stores (steering the customer towards buying the older products) and lead time reduction in the distributionchain.

Transportation Planning

Transportation planning concerns the short-term planning of the distribution operations and mostly deals with the planning of deliveries to different customers. Transportation plays a key role in today’s economies, accounting for up to two-thirds of the total logistics cost. Moreover, it also has a major impact on the level of customer service. Transportation planning takes place in a highly dynamic environment requiring frequent re-considerations of previously made decisions.Typical decisions on this decision level are the details of delivery routes: at what exact times, by which vehicle, and in what sequence customers will get their products delivered. In addition, also warehousing decisions may have to be made on the operational level, such as the assignment of inbound and outbound trucks to dock doors. For certain food products, international agreements have been made to regulate the transportation of chilled and frozen foods. the transportation of food products requires different temperature levels. A vehicle may be divided up into multiple compartments with different temperature control.

Transportation planning level mainly encompasses contributions related to extending the Vehicle Route Planning applications to the food industry. For instance, one could include time windows since in many food related situations the shipments need to reach early in the morning. One could consider the distinction between different types of vehicles, such as vehicle capacities, the potential use of a trailer, and different refrigeration capabilities. Time-dependent travel times, which are becoming more and more relevant to today’s busy road networks, could be part of the transportation planning. The difference in travel times between rush hours and non-rush hours can be significant and often needs to be taken into account. In order to explicitly model product quality, Transportation planning could consider the quality of products by considering a linear relationship between quality and transportation time. An interesting factor that can be considered in transportation planning is how often the temperature-controlled cargo hold has to be opened since these temperature disruptions negatively affect the food product. Another interesting characteristic, that can be considered is the use of compartmentalized trucks to distribute different products at different temperatures. Transportation planning could also deal with the operational scheduling of trucks at a cross-docking terminal. At times the frozen foods cannot be stored since it would lead to defrosting and product degradation. This means that the inbound and outbound operations are strongly connected and should be synchronized.

Keeping quality during transportation of foods is a challenge for food distributors. Often, a product would be considered completely perished at a certain quality level. Because initial quality status might not be easily detectable, it can be hard to estimate the remaining shelf life in some cases. Related to this is an effort to improve coordination between production and transportation planning, allowing for better quality control. Transportation planning need to identify efficient ways to improve safety measures and to reduce the impacts of safety problems. Several approaches try to utilize driver knowledge by assigning certain groups of customers to the same driver. Indirectly, this is a way to increase food safety, as the driver’s knowledge would also include information of food control systems used by the customer (e.g., temperature checks and sampling forquality control). Also, the development of methods that use or improve the traceability of foods in the chain could be one way to improve the safety of foods. Transportation planning could consider the dispersion of raw materials in the production and distribution systems. 

In transportation planning oftern involves reverse flow, ranging from empty containers or boxes in the retail industry to bowls and plates in the food service industry. Including these flows can be very useful in relation to sustainability and could,for instance be used to evaluate the impact of using recyclable packaging material. 

Source: Akkerman, R., Farahani, P., Grunow, M. 2010. Quality, safety and sustainability in food distribution: a review of quantitative operations management approaches and challenges. OR Spectrum, 32: 863–904

Key Regulatory & Industry Guidelines for Pharmaceutical Cold Chain

Bishara (2006) summarizes the key regulatory and industry guidelines for pharmaceutical cold chain as follows:

The World Health Organization’s (WHO) working document QAS/04.068 on Good Distribution Practices (GDP) is applicable to all persons and companies involved in the distribution of pharmaceutical products including the: “manufacturers of intermediate and/or finished products, brokers, suppliers, distributors, wholesalers, traders, transport companies, forwarding agents, processors, etc.” This WHO document indicates that the distribution process has generally been “neglected” regarding the: “establishment, development, maintenance and control over the activities involved.” Further, because the distribution segment of the pharmaceutical supply chain involves multiple parties, the risks involved become complex. As stated in the (WHO) working document QAS/04.068: “In order to maintain the original quality, every activity in the distribution of pharmaceutical products should be carried out accordingto the principals of GMP, Good Storage Practice (GSP) and Good Distribution Practice (GDP).” The (WHO) working document QAS/04.068 states: “where special storage conditions (e.g. temperature and relative humidity) are required during transit, these should be provided, checked, monitored and recorded.” It goes on to state: “Temperature mapping of vehicles (where applicable)should support uniformity of the temperature across the vehicle. Recordedtemperature monitoring data should be available for review.” The overall objective of these guidelines is to: “ensure the quality and integrity of pharmaceutical products during all aspects of the distribution process.”

The International Conference on Harmonization document (ICH Q1A (R2)) states: “a drug product should be evaluated under storage conditions (with appropriate tolerances) that test the thermal stability and, if applicable, its sensitivity to moisture or potential for solvent loss. The storage conditions and the lengths of studies chosen should be sufficient to cover storage, shipment, and subsequent use.” Furthermore,“data from the accelerated storage condition and, if appropriate, from the intermediate storage condition may be used to evaluate the effect of short term temperature excursions outside the label storage conditions (such as might occur during shipping).”

The Food and Drug Administration (FDA) Guidance on Stability for the industry notes that adverse shipping and/or environmental conditions may affect the product quality. Deficiencies in good distribution practices with specific focus on temperature control and monitoring during shipment have been cited by the FDA. Several studies by the United States Pharmacopeia (USP) demonstrated temperature and humidity variations during shipping of drugs and vaccines. Time and temperature recording devices documented values as high as 60°C.

The USP standards are cited in <1079> Good Storage and Shipping Practices. USP <1079> describes procedures to maintain proper storage environments for individual articles and ensure the preparation’s integrity until it reaches the user. Risks associated with distribution routes include exposure to temperature excursions, humidity, light and oxygen.Pertinent sections include: “Storage in Warehouses, Pharmacies, Trucks,Shipping Docks, and Other Locations”, “Controlled Room Temperature”,“Personnel Training”, “Qualification of “Cold” Equipment or Stores”,“Distribution and Shipment of Pharmacopeial Articles”, “Qualification Protocol”, “Temperature Challenges”, “Receipt of Pharmaceutical Articles”, “Distribution or Shipping Vehicles”, “Vehicle Qualification”,“Pharmaceutical Delivery Staff”, “Shipment from Manufacturer to Wholesaler”, “Shipment from Manufacturer or Wholesaler to Pharmacy”,“Shipment from Pharmacy to Patient or Customer”, and “Storage of Physician Samples Handled by Sales Representative in Automobiles”.

Recently, Health Canada has published guidelines that place greater responsibility on members of the supply chain including manufacturers,distributors, transporters and retailers to ensure that the drug products will reach the customer uncompromised.The key concepts presented in the European Union Guidance on Good Distribution Practices include: “The quality system operated by distributors (wholesalers) of medicinal products should ensure that storage conditions are observed at all times, including during transportation” and “products requiring controlled temperature storage should also be transportedby appropriately specialized means.”

Source: Bishara, R. 2006. Cold Chain Management - An Essential Component of the Global Pharmaceutical Supply Chain. American Pharmaceutical Review, January/February.

China’s Production and Demand for Perishable Food Products - Implications for Cold Chain

The following information is extracted from USDA Foreign Agricultural Service GAIN Report that focuses on China's Cold Chain Logistics:

Food Production

In 2006, total production of all perishable foods was approximately 700 million tons. The total expenditure of urban residents on perishable foods was 51 percent of total food expenditures. China has more than 2,500 meat enterprises that produce over 60 million tons of meat, an amount that is increasing by five percent annually. There are more than 2,000 frozen food enterprises that produce 8.5 million tons of frozen products and more than 4,000 beverage enterprises that produce 1.5 million tons of products. Beverage production is increasing by seven percent annually. There were 1,500 dairy enterprises, producing overeight million tons of dairy products. Until the 2008 diary scandals, the industry was growingby 30 percent annually. Total aquatic product production was 44 million tons, and is increasing 4 percent annually.

Food Demand

It is estimated that the Chinese middle class of approximately 500 million will spend more than $650 billion on food annually by 2017. About 75 percent of that market is in second and third-tier cities located outside the wealthier cities such as Beijing, Guangzhou and Shanghai. Demand for chilled dairy products and fruit juices, as well as frozen foods, is growing rapidly in China, especially among urban consumers who increasingly shop at the numerous supermarkets opening up in the cities. All of these changes are leading to high demand for cold chain logistics in China. Reaching those consumers will require an efficient nationwide distribution network that still does not exist yet today.

China’s Cold Chain Industry

China’s cold chain was first introduced in 1950s to export meat products. Promulgation of “Food Safety Law” in 1982 marked the start-up of the modern cold chain logistics industry in China. For over 20 years, China’s cold chain logistics has developed slowly. The result has been a rudimentary cold chain system established with a number of key food processing enterprises creating systems for their own products. This includes firms handling frozen food, meat processing and dairy products as well as a large number of fast food chains and supermarkets. Despite the ongoing development, China’s cold chain is still highly fragmented -- with few companies having reach outside their home cities. The logistics industry is growing rapidly. In the first half of 2007, total cargo transportation reached 10.59 billion tons, an increase of 11.9 percent from the same of period in 2006.Total value-added of logistics industry was 750.3 billion RMB, an increase of 17.2 percent compared with the first half of 2006. Although there were no separate statistics for coldchain logistics, industry sources believe it is growing much larger than for the industry as a whole. 

Cold Chain Issues

Although the cold chain logistics industry has continued to develop rapidly, China still faces a lot of problems and challenges. Insufficient infrastructure and poor management are regarded as significant obstacles to the development of the cold chain logistics. As a result, every year cold chain problems in China result in massive product losses. This is largely because only 15 percent of all perishable products are transported by refrigerated vehicles compared to nearly 90 percent in developed countries. Currently about 90 percent of meat products, 80 percent of aquatic products and a large amount of dairy products are managed without cold chain logistics. It is estimated that the total output value of food was about $30 billion and that more than 20 percent of this total is lost because of poor storage. Some products have even larger losses. For example, about 25 – 30 percent of fruit and vegetables are lost in the process of harvesting, transportation and storage. Because of China’s size and large scale food production, the country has a huge need for storage and transportation of perishable items. Infrastructure problems are the result of inadequate facilities and equipment. Cold storage capacity in China covers only about 25 percent of total output, compared to 70 to 80 percent in developed countries. China currently has 30,000 refrigerated vehicles, which is only 0.3 percent of total cargo transportation. Meanwhile, there are only 6,970 refrigerated railcars, which is only 2 percent of the total 338,000 railcars. Only about 25 percent of perishable food is transported with the refrigerated railcars, which is only 1 percent of total railtransportation. The total cold storage capacity is about 7 million square meters, which is mainly used for the storage of meat and aquatic products. Most cold storage facilities are significantly out of date. As a result many products need to be moved manually and handstacked.The location of storage compounds the problem for Chinese producers: coldstorage warehouses generally are in major port cities or first-tier markets such as Beijing, but few are close to production areas and second-tier cities are very underserved.

The Need for Cold Chain Services

The need for capable third-party logistics services providers (3PLs) is acute in China. The country has more than 510,000 such companies but most only offer basic transportation and storage services in a limited area. Most perishable food logistics is provided by the enterprises themselves with little involvement of 3PLs. This increases costs and diverts the enterprises from focusing on their core business. In the major cities, this pattern is shifting because of the recent financial crisis and increasing competition in the food production, food service and retailing sectors. More and more food production, service and retailing enterprises are starting to outsource cold chain logistics services to better focus on their core business. This has greatly increased demand for the professional third-party logistics services.

One example is the Beijing East Friendship Food Supply & Delivery Co., LTD (BEFFSDC), the largest food cold chain logistics company in Beijing. According to Mr. Yuan Zonghao, the deputy manager, the BEFFSDC has maintained an annual growth of more than 100 percent since the opening of the company in 2004 and is expected to ma intain this high growth in 2009. To keep up with the demand, the company is looking to establish cooperation with an international strategic partner that can provide capital and help them further improve management of the business.

Source: Pei, Z. 2009. China’s Cold Chain Logistics – The View from Beijing. USDA Foreign Agricultural Service GAIN Report.

Food Distribution Management

The challenges of food distribution management include:

- Limited shelf lives of food products
- Requirements with regard to temperature and humidity
- Possible interaction effects between products
- Time windows for delivering the products
- High customer expectations
- Low profit margins

Temperature control is an important characteristic of many food distribution systems. It ensures a control on food quality and food safety. However, since temperature control requires high energy consumption, the sustainability objective also requires adequate attention in food distribution systems. . Temperature control can basically be categorized into: frozen, chilled and ambient. For the frozen and chilled chain, a number of different temperatures are used. The frozen chain mainly operates at −18 degrees Celsius, although a product like ice cream requires a frozen chain with an even lower temperature of −25 degrees Celsius. For the chilled chain, temperatures range from 0 degree Celsius for fresh fish to 15 degrees Celsius for, e.g., potatoes and bananas.

Food Safety

Food safety requires careful attention since any failure of food safety requirement has both legal and economic consequences. Food safety requirements have been enforced by means of several legislations. The economic implications of food safety failure could include product recalls, damage to reputation and punitive liability damages.A well-known example of such a food safety crisis is the recent recall of peanutbutter in the USA due to the presence of salmonella. It was the largest product recallever in the history of the country, involving more than 200 food manufacturers downstreamin the supply chain—in total recalling more than 2100 products. In addition to such well-known large recalls, it has been shown that there are also avery large number of recalls of smaller scale, which in some cases still lead to seriousillness or death.

Various systems and standards have been developedover the past decades to ensure food safety. The best-known are the hazard analysis critical control point (HACCP) system, the ISO 22000 standard and the British Retail Consortium (BRC) standards. Systems like HACCP are developedto manage food safety, based on risk management principles and cover a rangeof biological, chemical and physical hazards. The basic idea behind a HACCP systemis to provide a structured way to identify food safety risks and reduce or eliminatethese. Standards like ISO 22000 and BRC normally include HACCP aspects, but alsoprovide a management system to incorporate food safety in an organization.Although HACCP development is currently quite widespread in large food manufacturers,its use is limited within smaller businesses, especially in the foodservicesector. It should, however, be noted that there have recently been activitiesto improve this situation by developing (and validating) an alternative food safetymanagement system that is tailored to the foodservice sector. In addition, governments are imposing legislations that enforce traceability of foodproducts during all stages of production, processing and distribution. Despite the importance of traceability, the reality isthat in complex, interconnected food supply chains, complete traceability is more theexception than the rule.

Food Quality

Food quality refers to the physical properties of food products as well as the quality of the food as perceived by consumers. Hence, it covers the microbial aspects as well as the texture or flavor. Quality assurance by means of certification and auditingis increasingly becoming important in the process of production and distribution. This is leading the way for technological innovations in terms of time-temperature integrators or indicators to improve temperature monitoring throughout the distribution system and tie enhance shelf life estimation with a chain perspective.

Sustainability

Sustainability in food supply chains include cost-based performance measures, environmental aspects as well as a social dimension. This entails, for instance employees’ health and safety, ethical trading in procurement of rawmaterials, and animal welfare. For example, fair trade initiatives have been developedto improve the position of food producers in developing countries.The business practices of retailers and caterers have a direct impact on sustainability, mainly in terms of temperature control and distribution. Sourcing sustainable products from food manufacturers is also an important requirement and it relatesto waste and refrigeration related to storage, and foodservice operations during preparation and service. Another well-known concept in relation to the sourcing and the sustainability of food chains is that of labeling, for example in the form of food miles, which relate to the distance a food product has travelled to get to the consumer. Although this only partially reflects the carbon footprint or even total environmental impact of the production and distribution system, the concept has become relatively popular. It should be noted that any assessment of sustainability must be made for the supply chain as a whole. Benefits of local products in terms of food miles may be lost through a production and or storage stage with a higher environmental burden. This evaluation may also depend on whether a product is ‘in season’ or not, as this may have a large impact on the energy usage during storage.

The environmental dimension of sustainability has probably received the most attention. One of the best-known examples is Life Cycle Assessment, an analytical tool that helps in assessing a product’s environmental impact from product development to consumption. Although these assessments can be and are used to decrease the environmental load of products, further standardization is still needed to improve comparative studies and to broaden practical applications in the food sector.

The social dimension has received less attention.Numerous companies have started to work on these issues under the label ‘Corporate Social Responsibility’ (CSR). In many cases they also communicate their CSR performance to stakeholders like employees or customers. For instance, all ten major retailers in the UK have stated that they see CSR as an integral element of theirbusiness environment, although there are substantial variations in the nature and extent of the CSR information they provide. Recent work has, however,provided some guidelines on how to approach this with a combination of methodologiesto eventually be able to combine all three dimensions. Also, there are several developments towards a ‘social LCA’, which is supposed to supplement the existing LCA methodologies and as such work towards a methodology that would address all dimensions of sustainability.

Promoting social and environmental awareness can also be beneficial for a corporate image, and in some occasions it might lead to cost savings at the same time, for instance while reducing food waste.

Interdependence between quality, safety, and sustainability

The fact that food distribution deals with products that are eventually meant for human consumption results in a strong focus on food quality and food safety. This is especially true for products that do not undergo extensive shelf-life-extending treatments and remain ‘fresh products’ with short shelf lives. Both quality and safety are based on changes in the food product. The main difference being that food quality is based on a more continuous process of degradation, whereas safety is mostly assessed in terms of either a product fulfills safety requirements or it does not. However, underlying is often a continuous process related to, e.g., the growth of a certain bacteria.

Product changes are often reduced by temperature-controlled storage and distribution, which, however, normally require a significant amount of energy, thereby negatively affecting the environmental impact of the products. Cold storage and distribution sector is facing challenges pertaining to environmental concerns and increasing electricity costs. Not only new technological solutions should be developed, but also theuse of existing machinery and processes should be optimized.

Nowadays, systems that are originally designed to control food safety (like HACCP) are also used to increase the product quality throughout the supply chain. This also concerns nutritional quality, as can for instance be seen in the recent development of the nutritional control points (NCP) concept. This is based on the HACCP system, and can be used to identify the critical points in production and distribution systems related to nutritional product changes and eventually help to increase nutritional quality. Extending these quality and safety control systems into transparent food chains that are able to supply affordable food with high quality and diversity are some of the challenges related to the sustainability of the food industry.

The challenge for the industry is to extend responsibility for product quality into social and environmental performance of food supply chains. Existing technology can be designed for enhancing thetransparency of food supply chains such as the safety focused traceability systems can be expanded to also help to improve sustainability.

Furthermore, food distribution is rapidly moving towards globally inter-connected systems with a variety of relationships. This means that products are sourced from markets all over the world, leading to a focus on quality preservation, and at the same time cost-effectiveness.

In light of sustainability, wasted product is also an important performance measure. In general, food products that are not ending up being consumed have had a significant environmental impact without adding value. Partly, this is due to food products deteriorating and having to be thrown away. Inmost countries, around 30% of food products is said to be wasted throughout the supply chain (Chapman 2010). Even though a large part of this waste occurs at the final consumer, retail and foodservice also contributesignificantly.

All in all, the aforementioned aspects illustrate the strong interdependence between sustainability on the one hand and the control of food quality and food safety on the other hand and demonstrate why food quality and safety are often included in wider definitions of sustainability and can even be seen asfundamentalfor a sustainable food supply, especially with regards to global sourcing and its environmental impact.

Source: Akkerman, R., Farahani, P., Grunow, M. 2010. Quality, safety and sustainability in food distribution: a review of quantitative operations management approaches and challenges. OR Spectrum, 32: 863-904.

Managing Context in Six Sigma Process Improvement Projects

In  a recently published paper, my co-authors and I use field studies, extant literature, and domain knowledge to develop a theory of managing context in Six Sigma process-improvement projects. By means of a participatory action research investigation involving ten projects in manufacturing and service firms, the paper examines the interrelationship among project context, elements, and success. Rich text-based information for each project was analyzed for the underlying patterns and relationships using the NVIVO 8 qualitative data analysis software package. The insights gained from this in-depth field investigation are presented in the form of 12 inductively derived research propositions that, when taken together, uniquely contribute to context-based theory-building in this area.

The results of the study emphasize that the overall configuration-based emergent theory (as presentedin in the figure below) needs to be considered for a holistic understanding of the impact of various themes on project success within different project contexts. Specifically, our study finds evidence about the existence of three underlying themes (identified for the first time in literature in this study) of expanded scope of analyses, clarity of metrics, and cross-functional integration, which together serve as a linchpin in determining the success of process-improvementprojects. Project elements of leadership engagement, strategic project selection, and psychological safety positively affect these three themes, albeit in different ways in different project environments. Although the link between project management elements and business outcome has been examined in extant literature, our field investigation revealed that the managerial and contextual factors are tightly intertwined in determining project success. The figure shows that, depending on the quadrant of specific level of complexity and uncertainty within which the project exists, project elements influence key project themes differently and, thereby, play a different role in project success. In addition, unlike in prior studies, we identify conditions under which some project elements, such as the use of structured methods and improvement specialists, can actually have a negative impact. Therefore, we provide a much more nuanced and finer-grained interpretation about the role that project elements andassociated project themes play in leading to project success underdifferent contextual conditions.



In essence, there is a reciprocal correspondence among the three themes and project context with respect to at least two project elements – the use of improvement specialists and the structured method. This view is in concert with the configurational perspective, which asserts that the effectiveness of an organization is contingent on the congruence between structural and environmental variables. This perspective calls for a holistic stance, whereby emergent order is generated from the interaction of various parts. Although the fit between structural and environmental attributes has been widely studied at the organizational level, its investigation in a project context is less common.The project context may be defined by the organization or division in which the project is undertaken, as well as by the varying levelsof complexity and uncertainty that distinguish one project from another.

Finally, it could be argued that organizational context, such as the maturity of a firm in implementing Six Sigma process improvement initiatives, can affect project success.We did not find that to be the case, and actually encountered instances that contradicted this caveat. For example, our findings indicate that a firm with a high level of Six Sigma maturity was unsuccessful in executing some of its projects, while a firm with a low level of Six Sigma maturity was successful in executing its project. These findings suggest that project level factors were perhaps more important determinants of project success in our action research investigation. Nevertheless, a closer examination of organizational Six Sigma maturity and its impact on project success would be an important topic for future research.

Source: Nair, A., Malhotra, M. K., Ahire, S. 2011. Toward a theory of managing context in Six Sigma process-improvementprojects: An action research investigation. Journal of Operations Management, 29(5): 529-548. 

Collaboration and Competition in Buyer-Supplier Relationships

In a recently published paper, my co-authors and I propose an approach for a joint examination of competitive and cooperative (i.e. co-opetitive) relationship between a buyer and a supplier. Specifically, the paper considers the scenario in which the buyer and the supplier invest in strategic capabilities to increase their relative bargaining power. The article examines how dynamic investments in strategic assets are influenced by the locus of bargaining power and by the underlying context (synergistic vs. adversarial) of the interfirm relationship. The dynamic evolution of bargaining power is also examined. A dynamic game model is considered to examine the evolution of investment strategies in critical resources and to investigate the issues of bargaining power in a buyer-supplier dyad. Equilibrium expressions for the investment strategies of the buyer and the supplier are presented and their implications for buyer-supplier relationships are examined. The behavioral experiment complements the analytical model and examines the correspondence between “optimal” behavior suggested by the analytical model and the boundedly rational behavior of decision makers in an experimental context. The results from the model and behavioral experiments suggest that the strategies are a function of the risk adjusted returns obtained from investments.  The experiment shows that in a synergistic relational context when the buyer maintains bargaining power, the investment shifts of the buyer and the supplier accord well with theoretical predictions. In an adversarial relational context, the results of the experimental study do not correspond well with that predicted by the theoretical model. 

The results of the study motivate firms to develop specialized or unique resources in conjunction with the assets of a collaborating partner. The expressions for the equilibrium investments of the buyer and the supplier suggest that, along with the risk adjusted returns from investments, the investments of the exchange partners are also a function of correlated gain processes representing the degree of collaboration and the bargaining power. The correlation coefficient characterizes asset inter-connectedness (initial relation-specific investments create conditions for subsequent specialized investments) and resource indivisibility (partners combine resources or jointly develop capabilities so that the resulting resources are both idiosyncratic and indivisible). The results suggest the importance of high correlation in the investments made by the buyer and the supplier.

The study finds that competitive advantage results when firms critically examine both risk adjusted returns and synergistic investment with network partners. Appropriate incentive mechanisms, such as formal equity arrangements or informal norms of reciprocity, are critical for knowledge-sharing. As an example, Toyota has developed a number of practices that foster knowledge-transfers with suppliers. An alternative approach to gain relational rents by facilitating high correlation between the investment patterns of the buyer and the supplier is to leverage the complementary resource endowments of the collaborating partner.

It is to be noted that the correlation between the gain processes of the buyer and supplier firm can be influenced by managerial actions. Specifically, when the buyer has bargaining power, incentives can be built into purchase contracts to induce suppliers to consider synergistic and complementary innovation investments. For example, gain sharing agreements in partnership agreements between buyer and supplier are meant to accomplish this.

The theoretical and experimental investigation in this paper considers self-enforcing governance mechanisms within an inter-organizational context that are fostered by a bargaining power based informal safeguard. The study extends our present understanding of strategic issues associated with the buyer-supplier relationship by providing insights regarding resource investments to develop core competence, synergistic gain sharing and bargaining power issues.

Source: Nair, A., Narasimhan, R., and Bendoly, E. 2011. Coopetitive Buyer-Supplier Relationship: An Investigation of Bargaining Power, Relational Context, and Investment Strategies. Decision Sciences, 42(1): 93-127.

Advanced Planning & Scheduling Solutions

Changes in the business paradigm such as the networked economy, increasingly demanding customers and strong competition makes supply chain planning and scheduling challenging and complex. Customer demands for more options, more last-minute changes, precise delivery dates, shorter lead times, and quicker responses it makes knowledge and understanding of supply chain planning process critical for business education. Over the past 20 years, industry has evolved from an efficiency focused planning and scheduling logic such as material requirements planning (MRP) to customer-centric applications that offer greatly improved responsiveness and productivity. Optimizing productivity within individual facilities is not enough any more. Supply chain integration and synchronization requires consideration of inter-organizational resources and capabilities. It is important to create a supply chain that enables each of its participants to cooperate openly to:

• shorten throughput times;
• reduce stock to a minimum;
• improve product quality;
• provide more reliable delivery dates;
• coordinate global demand, supply, and production efficiently;
• lower costs over the entire supply chain; and
• continually re-engineer processes to be more responsive to customers and competition.

To resolve and accommodate for these conflicting objectives, many firms are looking to enhance and formalize their planning and scheduling processes.

One such information-based process is Advanced Planning and Scheduling (APS) software. APS is an information-driven model that can influence business processes, corporate cultures, as well as planning logic. As illustrated in the Figure below, APS forms the link of the extended enterprise with the end consumer. APS applies the requirements and capacity data from a combination of supply chain partners to enhance the forecasting, planning and scheduling capabilities of the extended enterprise. Such developments in the planning, forecasting and scheduling extending across broader supply chains functions including purchasing, manufacturing and logistics. 
 Software analysis firm AMR defines APS as an ‘umbrella technology’ that acts in the following ways:

• Considers material and plant resources simultaneously;
• Provides a modeling environment to incorporate constraints, business rules and goals in the planning process;
• Optimizes algorithms that incorporate business goals;
• Leverages memory-resident programs and databases to provide real-time plans and create and regenerate schedules;
• Supports real-time decision support with what-if analysis;
• Provides real-time ATP (available to promise).

Advanced Planning and Scheduling (APS), has been described in various trade journals and promotional literature as a planning process designed to assist firms create plans and schedules that consider system constraints. Much of the emphasis on the scope of APS has been established by the leading software product and consulting organizations. APS is characterized as a software tool to utilize data residing in ERP and manufacturing systems to develop better management decisions. Since the major focus of ERP applications is internal transactions, it often fails to incorporate information beyond the corporate entity. In addition, ERP applications typically do not provide useful information for decision support applications. Many ERP vendors are incorporating data warehouses building on their transactional data. These data warehouses are used to support various analytical applications such as Advanced Planning and Scheduling (APS), Executive Information Systems (EIS), or Decision Support Systems (DSS).

APS is a software approach developed to provide true constraint-based planning capability. The software in APS develops a plan, which considers a wide range of constraints to balance conflicts, and presents an optimum plan for consideration by the planner. The memory resident databases and the data replication technology are foundations of the APS system. APS applications are memory-resident, which means that business models are loaded in the memory temporarily for manipulation by specially designed algorithms for efficient solutions whereas ERP applications are stored in the traditional databases. APS tools enable planners to run a sophisticated what-if analysis to proactively determine the optimal response to any number of potential market changes. Added to that APS tools allow planners to quickly analyze the impact of customer order changes or production scheduling changes. The computer does not replicate the thinking process, but it can improve decision-making and strategy. For planners, APS quickly analyzes the implications of alternative decisions. By performing what-if simulation analyses, APS systems provide information about whether plans are reasonable or if they, for example, exceed resource constraints or result in inadequate performance. 

Source:  Closs, D. and Nair, A. 2002. Supply Chain Planning with Advanced Planning and Scheduling: Implications for Academia. 2002 CLM Logistics Educator’s Conference, San Francisco, pp.317-34