Is fast freight too expensive? Maybe it’s time to go short instead

By Jon Gilbert, TFI Logistics Consultant

As product lifecycles grow ever shorter, increasing velocity becomes more critical in managing the supply chain. Reducing new product development time, supplier lead-time, and speed of transport are all key in gaining competitive advantage.

Despite all the desire for speed, numerous factors are working against speeding up transportation. In the past few months, steamship lines have begun “slow steaming” programs, reducing capacity and adding as much as 50% to transit times in certain lanes. Airfreight costs are rising with demand as capacity remains constrained, and fuel costs are on their way up once again. This all adds up to higher and higher costs to go fast.

How do industry leaders cope with these issues? Many have been looking to near-sourcing alternatives, moving manufacturing, final assembly, and/or test closer to demand. This allows for fast cycles at low cost. A recent Stanford Business Journal article talks about the benefits of keeping production close and supply chains short. The result: much greater profits. Their story focuses on fashion, but the similarities to our industry are obvious.

Interestingly, we see commonalities evolving in regional supply markets. While component manufacturing has largely been driven to Asia, it has become popular to build subassemblies and finished goods in Eastern Europe and Mexico. This specialization is partly an effect of the tendency of similar businesses to locate near each other, but it also has much to do with the economics of shipping. As components are built into subassemblies, and finally combined into finished goods, density (kilograms divided by cubic meter) of the items generally decreases. Think of shipping capacitors versus assembled circuit boards, versus finished goods. Each is less dense than its precursor. Shorter shipping distances are optimal for the lower-density finished goods.

In an ideal world, perhaps the entire supply chain would be replicated close to demand in multiple places. Instead, the manufacturing economics work in favor of a split-manufacturing strategy with multiple regions participating in the supply chain (lengthening the chain). It makes great sense to create large capacity to build high volumes of uniform parts in a single location, and Asia has largely won this market. For final assembly, the scale is much smaller, and localizing production and adding opportunities for postponement make much more sense.

For these reasons, we are seeing many of our clients pursuing strategies to satisfy demand with more localized capabilities. The benefits are clear – reduced transportation costs, greater speed to market, and greater responsiveness.

What are you doing to shorten your lead-times?

How does your company plan to compete as transportation costs rise and cycle times grow ever shorter?

Posted by Pamela J. Gordon, June 11th, 2010