Katrina Called "Wake-up Call" for Business to Rethink Supply Chain Strategy

Latest "shock to the supply chain" should refocus attention on balanced inventory management models, Colography Group says

Latest "shock to the supply chain" should refocus attention on balanced inventory management models, Colography Group says

Atlanta, GA  September 26, 2005  "The tragedy of Hurricane Katrina sends yet another urgent message to businesses that they need to protect their supply chains against catastrophic events that disrupt the normal flow of their global inventory," says Ted Scherck, president of The Colography Group.

Keynoting Delta Nu Alpha's 2005 National Education Conference in Milwaukee, Scherck said Katrina, though different than other crises that came before it, has spawned a similar set of outcomes  inventory outages and bottlenecks, costly diversion of cargoes to alternate locations and delivery delays.

"In the wake of this disaster, businesses are rightly focused on ensuring the safety of their people and loved ones, and assessing the damage to their property and operations," Scherck said. "In the weeks and months to come, however, companies that have not already done so should take a long, hard look at how their supply chains are constructed so they can cope with future incidents that threaten to cut off their inventory."

"Major Events" Once a Year

Scherck cited the September 11, 2001, terrorist attacks, a typhoon in Taiwan that severely damaged many high-tech production facilities during the same period, the 10-day West Coast port work stoppage in fall 2002, and the four hurricanes that hit Florida during six weeks in 2004 as examples of external events that disrupt the movement of goods, compromise operations and, ultimately, customer relationships.

Of significant note is the simple fact that major external events that interrupt the global supply chain are occurring at the rate of at least one per year.

"For years, businesses have taken on increased supply chain risk by not keeping sufficient inventory close to points of end consumption, instead relying exclusively on long-range intercontinental supply chains to bring goods to market on an as-needed basis," Scherck said. "Katrina reinforces the notion that while most U.S. businesses escaped the brunt of its wrath, they may not be so fortunate when, not if, the next disaster strikes and safety or buffer stock is not available."

"Bifurcated" Distribution Model

Scherck called on businesses to examine The Colography Group's "bifurcated" distribution models that use mathematical formulas to calculate a product's value relative to the transportation needed and determine if the goods can afford to sit in inventory or if they should move from shipper to consignee as quickly as possible.

"High-value commodities subject to rapid obsolescence should not be resting as inventory in warehouses, and thus should be produced, fulfilled and shipped with rapid turnaround," Scherck said. "But there are goods of lower value with reduced time-sensitivity that don't demand such expedited distribution. Businesses shipping and distributing around the world need to strike a balance so they can check increases in inventory carrying costs while maintaining frictionless delivery flows in normal times and during times of crisis."

Scherck said the need to shield global supply chains from sudden and unexpected disruptions is driving renewed demand for warehouses and distribution centers to house localized inventory. "Increasingly, businesses are recognizing the value of positioning inventory so it could be accessed and shipped over relatively short distances at a moment's notice," he said.

"Core Themes" Shaping Shipping

In his speech, Scherck addressed the four "core themes" that The Colography Group believes have influenced worldwide shipping activity for the past 20 years and will continue to do so for the foreseeable future. They are: the increasing dominance of the transportation buyer; a decline in the weight of the average shipment; the growing importance of time of delivery over mode of transport, and the reduction in the distance  or length of haul  that the typical shipment travels.

According to The Colography Group data, the weight of the average U.S. shipment peaked at 36.9 pounds in 1997 and is forecast to fall to 31.7 pounds by 2007. In addition, more than two-thirds of all U.S. commerce is shipped 600 miles or less to market, underscoring the shortening of cargo lengths of haul in the United States.

In its 23rd year, The Colography Group delivers primary research, strategic planning and new program development services to businesses looking to identify and capitalize on growth opportunities in the global time-definite, or expedited, cargo market, as well as to governments worldwide. The Colography Group is based in Atlanta.

Additional Articles of Interest

 Supply chain executives are discovering new ways to apply technology and innovative processes to the challenge of managing uncertainty. Read more in "Rethinking Risk," cover story in the August/September 2005 issue of Supply & Demand Chain Executive.

 Freight capacity and transportation budget pressures continue to hound transportation managers. But savvy companies have discovered how to fight back. Read more in The Analyst Corner column in the August/September 2005 issue of Supply & Demand Chain Executive.

 Eugene McCabe, architect of Sun Microsystems' Customer Fulfillment in Transit process, discusses the challenges and rewards of taking links out of the company's supply chain in "Anatomy of the 'Zero Touch' Supply Chain," in the August/September 2005 issue of Supply & Demand Chain Executive.