Updated: P&G "Forced" to Shorten Supply Chains, As Are Others

FT.com / Home UK / UK – Oil price forces P&G to rethink its distribution

OK, I’m catching up on an old post since I saw a very similar story in the NY Times yesterday. First the FT story:

There’s been a lot of good discussion here about whether companies are truly “forced” to raise prices (or “forced” to do anything… that’s pretty passive-aggressive, if you ask me).

The word “forced” comes up again in a different context – Procter & Gamble being forced, or choosing, to improve their supply chains given high global oil prices.

“A lot of our supply chain design work was really developed and implemented in the 1980s and 1990s, when our capital spending was fairly high as a cost of capacity and oil was 10 bucks a barrel,” said Mr Harrison in an interview with the Financial Times.

“I could say that the supply chain design is now upside down. The environment has changed,” he said.

“Transportation cost is going to create an even more distributed sourcing network than we would have had otherwise.”

This year, P&G launched a comprehensive review of the design of its supply operations, in response both to rising energy costs and its increasingly global expansion.

Rather than just passing along costs to consumers via price increases (oops, they are doing that too), P&G is taking action on the costs they control.

A “Lean supply chain” looks not just at unit labor costs (or unit manufacturing costs) but also considers supply chain and logistics costs. Now, every company considers these costs, many underestimate the “true” costs of long supply chains. It’s easy to underestimate the risks of a long supply chain breaking down or being slow to respond to market changes.

Is your company using Lean to rethink long supply chains, given how the cost tradeoffs have shifted with higher oil prices? Or are they looking deeper than that?

The NY Times chimed in with a similar piece, more generally talking about how long slow supply chains are bad when energy costs are high. Funny, some companies thought long, slow supply chains were bad when oil was cheap — they were called “Lean.” The long, slow supply chain is even slower now…. thanks to the expense:

Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

Toyota, the king of Lean, has always put manufacturing as close to the customers as possible. Sure, it took them a long time to start building Lexus (Lexii? Lexuses?) in Canada and they’ve been slow to move Prius production to the U.S., but they clearly move in that direction. Toyota isn’t try to ship everything from China.

One exciting startup, for all of its problems, Tesla Motors is getting this right — if only because of the high oil prices, not because of any Lean dogma. But really, if you were starting a car company, wouldn’t you copy Toyota instead of joining the flock that’s rushed to China and maybe regrets it?

Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the United States.

But when it began production this spring, the company decided to make the batteries and assemble the cars near its home base in California, cutting more than 5,000 miles from the shipping bill for each vehicle.

“It was kind of a no-brain decision for us,” said Darryl Siry, the company’s senior vice president of global sales, marketing and service. “A major reason was to avoid the transportation costs, which are terrible.”

Just as a final reminder — I’m not against free trade. I’m against companies making sub-optimizing decisions based just on labor costs.

Oh, and I almost forgot… the “just-in-time” boogeyman raised its head. The NYT and WSJ *love* writing about the “risks” of JIT. It’s been a while (earlier blog posts listed here). The NYT says:

In addition, the sharp increase in transportation costs has implications for the “just-in-time” system pioneered in Japan and later adopted the world over. It is a highly profitable business strategy aimed at reducing warehousing and inventory costs by arranging for raw materials and other supplies to arrive only when needed, and not before.

What? A true “just-in-time” strategy works with LOCAL suppliers. Why does Toyota put their suppliers right along side (or inside) their factories? Because SHORT supply chains = just-in-time. If you try to do “JIT” with long China supply chains, of course you’re asking for trouble. Even a Yalie can figure that out. Oh wait….

Jeffrey E. Garten, the author of “World View: Global Strategies for the New Economy” and a former dean of the Yale School of Management, said that companies “cannot take a risk that the just-in-time system won’t function, because the whole global trading system is based on that notion.” As a result, he said, “they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production.”

How about shorter supply chains instead of redundancies and more inventory? Look to Toyota or “the neighborhood effect” (new buzzword alert!) I like it better when we called it “just-in-time” — from Toyota’s definition, not Dean Garten’s.

Final, final thought: I have nothing against Yalies. It’s just a funny line from a Simpsons episode.

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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