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Living with low velocity: as the world goes global, supply chain velocity will actually decrease in many instances. The key is how you respond.

Over the past year or two, we've heard a growing buzz about high-performance, high-velocity supply chains. In these discussions, a high-velocity supply chain typically is defined as one in which product moves rapidly through a pipeline from manufacturer to customer. The key characteristics usually ascribed to these supply chains are rapid turnover, high technology, and customer focus. Given these stellar qualities, what supply chain executive would not want a high-velocity supply chain?

The reality is that as new economies emerge and as globalization takes hold in more and more industries, supply chains grow longer, more uncertain, and generally less efficient. As this happens, companies find that efforts to upgrade their global supply chain to meet the standards of their domestic, high-velocity operations come with a substantial cost increase--in transportation, manpower, warehousing, and IT support.

If we accept globalization as inevitable, the key questions become: As we go global will the efficiencies currently enjoyed in our domestic supply chains erode? If we attempt to upgrade our global supply chains to domestic standards, who will pay the additional costs of this upgrade? The buyer? The seller? An intermediary or third-party services provider? Large firms can often shift risks to other players in their global supply chains, but can small-and mid-sized companies do the same?

The reality is that in many cases, operating a high-velocity supply chain on a global scale is impractical or uneconomical--and often both. In fact, it appears that globalization is driving supply chains generally in the direction of lower velocity, a trend with special significance for U.S.-based firms accustomed to higher velocity. It's important to note here that a low-velocity supply chain does not necessarily translate to lower customer service--particularly if there's sufficient inventory on hand to meet demand. The challenge is to manage this type of supply chain in a way that keeps customers happy and keeps any associated costs from eroding profits.

Having thrown down the gauntlet, it's probably time to define some of the characteristics of low-velocity supply chains. Six in particular stand out:

1. Lumpy supply/demand. Goods tend to arrive at the warehouse is large quantities (for example, ten containers or more), and sometimes without notice.

2. Greater break-bulk activity. Because product typically arrives in bulk quantities, more customer-assortment building needs to be done downstream.

3. Long-distance transportation moves. Products moving in the low-velocity supply chain usually travel longer distances and via the slower carrier modes, such as ship and rail.

4. High inventory "dwell time" in the pipeline. Long transit times and intermodal transfers lead to longer periods of inventory at rest.

5. Relatively low-value products. Goods moving in the low-velocity supply chain tend to have a lower value (in terms of dollar/pound or dollar/cubic foot) than goods moving at higher velocity.

6. Seasonality. Products with high seasonality generally move in low-velocity supply chains.

This list is not to suggest that all global supply chains are low-velocity or that every low-velocity supply chain will display all six characteristics. But low-velocity supply chains tend to he more prevalent on the global scene, and most will display at least several of the characteristics noted above.

Many Cost Implications

It's important to understand the significant cost implications of a low-velocity supply chain. Costs increase when the total supply chain order cycle is 30 to 60 days. When inventory is floating in the pipeline for an extended time period like this, the carrying cost for the inventory increases. In addition, with multiple intermodal exchanges taking place, the product could be damaged, delayed, or fall off the tracking screen. (And remember that tracking and tracing is a lot more difficult in extended supply chains.) All of these factors exert an upward pressure on inventory-carrying costs.

Downstream in the supply chain, more warehousing is needed for the slow-moving product--a challenge that gets really tough when that inventory is seasonal. Before the Christmas selling season, the warehouse is full. After Christmas is over, the warehouse storage requirements might fall off a cliff. But even when seasonality is not an issue, the arrival of 10 containers at once can put the warehouse manager in a bind between labor overtime and detention charges. Dwell time in the container, trailer, or the warehouse slow the movement of inventory and raise costs in a low-velocity supply chain pipeline.

Traditional overhead costing methods might not be adequate to capture the costs associated with low-velocity supply chains. As noted in earlier columns, a technique such as activity-based costing would more accurately reflect the true costs incurred in such pipelines. Channel-segment costing or customer costing are other approaches to more accurately capture the costs for low-velocity flows.

Low-velocity supply chains raise other questions that extend beyond cost. For one, where do you locate your distribution centers? The answer is based of the economics of building consumer assortments. The typical company will probably move product in bulk to the United States, combine it with other products for a customer, and then ship the combined load to that customer. The economics of break bulk, building customer assortments, labor costs, and transportation costs will determine the pipeline's final design.

Low Velocity Here to Stay

The world is a long way from "free trade" as witnessed by the discord at the recent World Trade Organization meeting in Hong Kong. The politics of free trade, combined with the threat of terrorism associated with import/export activities, suggests that the high-velocity free flow of goods across many borders remains a dim, distant vision in many parts of the world.

Technology will certainly help in this regard going forward. Everything from high-tech container scanning to low-tech bomb-sniffing dogs will speed the flow of goods in future supply chain pipelines. However, given the geopolitical realities and the economics in play, it's unlikely that technology will instantly transform global supply chain pipelines from low velocity to high velocity anytime soon.

Bernard J. "Bud" La Londe is professor emeritus of logistics at The Ohio State University.
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Author:La Londe, Bud
Publication:Supply Chain Management Review
Geographic Code:1USA
Date:Jan 1, 2006
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