Asia Logistics Wrap

The Role of Supply Chain Logistics in "Shrinking the Gap"

Just yesterday I finished reading Thomas Barnett's The Pentagon's New Map. If you have never read this book, I suggest you read some of his articles that preceded its publication starting with the article of the same title, The Pentagon's New Map. The Gap is essentially a term for the area of the world that has yet to realize the fruits of globalization. It is characterized by a deep sense of disconnectedness from what most consider the developed economies of the world. This disconnectedness can occur to any degree across four flows as described by Barnett: political flows, security flows, economic flows and people flows. Thus, shrinking the gap is a phrase that, in the view of Mr. Barnett, describes a goal of bringing globalization (i.e. greater connectivity) to the disconnected.

Earlier on this blog, I discussed the role of logistics in disaster relief, focusing on a great article in the Wall Street Journal. Around the same time, Mr. Barnett mentioned the same article on his blog, putting the content in context of his own work and thought process on "shrinking the Gap." In particular, the following comments are important:

“Amateurs discuss strategy, experts discuss logistics,” so goes the old saw.

Good SysAdmin work is all about business continuity. I know, I know. That seems way premature, but it’s actually true. Stability and security is all about re-/establishing business continuity post-conflict, post-disaster, post-whatever. Once you have business continuity, then society as a whole discounts the residual dangers, and even if the rebels re-emerge, they never capture the high ground of future expectations. People discount them, businesses discount them, investors discount them.

If done right, the rebels/insurgents/whatevers simply become marginalized. They present no future except an end to the “chaos,” so minimalize their “chaos” and their offer to end it becomes meaningless.

You want stuff moved in austere conditions known as war, call the military.

But if you want stuff moved with the continuity associated with peace, then you want logistical pros from the private sector. Keeping the military in that business is wrong: it’s war solutions to peace problems. It’s making the Leviathan do the SysAdmin’s work. This is why the SysAdmin will be mostly civilian in bodies, because that is where most of the talent is naturally found for making the peace work. The military, to the extent they’re needed, are logically front-loaded in this process, this sequencing. (emphasis added)

With one-time disasters and also with the military-market nexus of operations we find in locations like Afghanistan and Iraq and elsewhere, we are dealing with what I like to call islands of connectivity in a sea of disconnectedness that is the Gap.

Basically, in shrinking the gap, the goal is to keep disconnectedness benign and ensure connectivity is malignant. Islands of connectivity most recently include the disaster relief locations of Kashmir (Pakistan) and Aceh (Indonesia) and the current/former war zones of Iraqi and Afghani cities that have received and continue to receive sudden flows of political, economic and human capital. Other islands of connectivity can be found in mainland China's most inner reaches. In order to maintain the peaceful continuity of these flows as Mr. Barnett describes above, we must have resilient supply chains feeding these locations.

In the most dramatic of situations, military logistics ensuring the bulk of supply chain security will parallel civilian logistics ensuring the flow of political, economic and human capital, thus encompassing the four flows described in The Pentagon's New Map. Over time, if the supply chains that are feeding the islands of connectivity are successful, the islands will expand to gradually consume larger portions of the Gap, of disconnectedness. At the same time, military logistics will be phased out in terms of providing daily supply chain security, handed over to robust domestic security systems provided by the private and public sectors.

However, as can be seen on TV and in the news on a regular basis, these supply chains are always in flux. Consistency is terribly difficult to maintain across all four flows of capital, with interdependence amongst the flows making a comprehensive supply chain approach absolutely necessary. Although certain types of capital flows can be sequenced to precede or follow each other, they still must be comprehensively planned.

In one approach to supply chain management, Professor Joe Cavinato of the Thunderbird Garvin School of International Management describes five architectures that support the above capital flows--physical architecture, informational architecture, financial architecture, relational architecture and innovational architecture. For those new with these terms, each can be described simply below:

Physical--the actual movements and flows within and between firms, transportation, service mobilization, delivery movement, storage, and inventories.

Informational--the processes and electronic systems, data movement triggers, access to key information, capture and use of data, enabling processes, and market intelligence.

Financial--the flows of cash between organizations, incurrence of expenses, and use of investments for the entire chain/network, settlements, A/R and A/P processes and systems.

Relational--the appropriate linkage between a supplier, the organization and its customers for maximum benefit; includes internal supply matter relationships throughout the organization.

Innovational--the means by which a firm identifies, prioritizes, and brings new product/service innovation to market.

Thus, the difficulty we face in ensuring the above islands of connectivity are malignant is not only because their proximate infrastructure is so bad, it is because we are in reality having to ramp-up the whole region's dilapidated supply chain infrastructure that happens to parallel a dilapidated security infrastructure. This is due to the fact that the physical, informational, financial, relational and innovational supply chain architectures that feed into an "island" must go through at least one if not several Gap states or networks that are equally poor if not worse in terms of cost, quality, speed, and safety.

We need to improve rapidly and effectively the supply chain architectures supporting the good guys, and simultaneously destroy the underground architectures that support the bad guys and their utilization of our own. Unfortunately in the Gap, we often have to start out using the supply chain architectures the bad guys have always used, while the bad guys are often using the new architectures we are building as a way of defeating us.

Supply chain logisticians have it relatively easy in the Core, or globalized, regions of the world versus the untested regions that have either recently been devastated by disaster or for so long by armed conflict. But it is the same logisticians that, as shown in the Wall Street Journal article, already have or must now and into the future take up their necessary role in shrinking the Gap.

In my personal career, I have pursued a similar goal since the summer of 2003, although I never expected logistics would be my primary pathway to what I see as my future contribution to shrinking the gap. It was that summer that I made my second trip to South Korea for 3 months to study both Korean and the local logistics industry. After developing a better understanding of the Korean perspective of the region, its progress in logistics, and the political and security issues on the peninsula, I came away wanting to some day play a positive role in resolving the status quo with North Korea.

Having since made the trip 4 more times, in addition to 3 more Japan trips and 4 trips to China--all in the span of less than 3 years--I have been able to develop a more comprehensive knowledge of how the four flows discussed by Mr. Barnett influence Northeast Asia, in addition to shaping the role of the USA in the Asia-Pacific. Thus eventually, after several more years of logistics experience across Northeast Asia, I expect there to be a continuing role for logistics experts with such a comprehensive knowledge of the USA, Koreas, China and Japan. My specific interest is in at least consulting those leading the charge in opening up North Korea to the larger flows of connectivity that are only now trickling through its borders, whether based in the private or public sector. Every investment in work and relationships made now will be the foundation for that opportunity coming to fruition.

Dubai Ports World--A Closer Look

There is much discussion in the media about the transaction with Dubai Ports World (DPW) in which it has acquired The Peninsular and Oriental Steam Navigation Company (P&O). Since this site has recently dicussed ports in Northeast Asia, and because port security and operations are in general a key concern of logistics professionals, I feel I can help shed some more light on this transaction and how it affects global logistics. Hopefully this will provide readers with some context in consideration of the political storm brewing in the USA.

In a press release from November 29, 2005, DPW outlined the nature of the acquisition and how it would proceed, including its strategic value to the firm and its global operations. To summarize, the rationale of DPW is as follows:

"The ports industry is an economic cornerstone for Dubai. DP World believes that the Offer for P&O has compelling strategic logic and creates significant opportunities for both companies’ employees and customers going forward.

In particular, the combination:
· Represents an exciting opportunity to acquire one of the most respected companies in
the sector;
· Elevates DP World to a position of unrivalled global reach;
· Offers an unparalleled complementary geographical fit;
· Addresses the changing needs of a consolidating customer base, adding significant
capacity in key markets;
· Brings together some of the most experienced people in the industry.

The combined group will operate 51 terminals with a gross capacity of 50 million TEU with a strong presence in 30 countries across the Middle East, Asia, Europe, Australia and the Americas. In addition, the combined group will benefit from the opportunity for expansion from projects such as Pusan and London Gateway.

DP World recognises the good progress that has been made with the implementation of the restructuring programme within P&O Ferries and looks forward to restoring the business to strong profitability in 2006."

Sir John Parker, the Chairman of P&O states in the document:

“DP World’s offer recognises that P&O is a unique brand with an exceptional footprint of international port assets. P&O is one of the top four international port operators with 29container terminals and operations in 18 countries across the globe, generating 80 percent. of the Group’s total profits. The Board believes this all cash offer is in the best interests of the deferred stockholders who will receive a substantial return on their investments.

“P&O employees will also benefit. DP World have made clear they regard the management and employees as key to the ongoing success of the combined entity and that they recognise the importance of P&O’s ferries and properties divisions, as well as ports. I am pleased to say that it is intended that Robert Woods, Chief Executive of P&O, continues to head up the P&O business and for P&O to remain headquartered in London.

“Putting P&O and DP World together will create one of the top three leading ports groups in the world.”

I have added emphasis above in bold to parts that hint at the operational strategy, which I believe is geared at keeping the same people as are currently employed but introducing new management systems to increase profitability and global efficiencies. In the report, a summary of DPW explains its strengths further:

DP World’s hallmark is its unique integrated port management model, which brings together container terminals, general cargo, free zones, infrastructure developments and consultancy services. Combined with its common user status, DP World’s cross-sector expertise offers solutions in all aspects of port operations, ultimately driving efficiency benefits for its customers.

From the most recent Lex column in the Financial Times, the reach of P&O in East Asia is the primary target of DPW:

DP World wants a global presence, but the entire North American business, including Canada, accounts for only 12 per cent of operating profit. The Asian business is much more significant, at 60 per cent.

The pre-P&O acquisition strength of DPW in East Asia can be seen here. In comparison, P&O's reach can be further explored here. Based on some of this information, it is interesting to note that the operations being acquired by DPW are just a part of the full portfolio of operations at each port. Depending on the number of berths controlled and operated at each port in P&O's portfolio, the percentage of trade managed by DPW at each port will vary.

It is interesting to also note, from a political standpoint, that a DPW executive has been recently appointed to the US government:

Dubai, 24 January 2006: - Global ports operator DP World today welcomed news that one of its senior executives, Dave Sanborn, has been nominated by US President George W. Bush to serve as Maritime Administrator, a key transportation appointment reporting directly to Norman Mineta the Secretary of Transportation and Cabinet Member.

The White House has issued a statement from Washington DC announcing the nomination. The confirmation process will begin in February.

Mr Sanborn currently holds the position of Director of Operations for Europe and Latin America for the Dubai-based company

Mohammed Sharaf, CEO, DP World said:
“While we are sorry to lose such an experienced and capable executive, it is exactly those qualities that will make Dave an effective administrator for MarAd.  We are proud of Dave’s selection and pleased that the Bush Administration found such a capable executive. We wish him all the best in his new role.”

Ted Bilkey, Chief Operating Officer, DP World said:
“Dave’s decades of experience in markets around the world, together with his passion for the industry and commitment to its development, will allow him to make a positive contribution to the work of the Maritime Administration. We wish him well for the future.”

Mr Sanborn, a graduate of The United States Merchant Maritime Academy, joined DP World in 2005. He previously held senior roles with shipping lines CMA-CGM (Americas), APL Ltd and Sea-Land and has been based, besides the US, in Brazil, Europe, Hong Kong and Dubai during his career.  He has also served in the US Naval Reserve.

Mr Sanborn is due to take up his new role based in Washington DC later in 2006.

The timing of this appointment is very interesting, but Mr. Sanborn's position with DPW certainly must have lent it some credibility and leverage in the acquisition approval process. From the Transportation Institute, an announcement was made on the first hearing in regards to Mr. Sanborn's confirmation process:

On Tuesday, February 7, the Senate Commerce, Science and Transportation Committee conducted a hearing on the nomination of David Sanborn to become the next Administrator of the Maritime Administration.

Mr. Sanborn, a graduate of the Merchant Marine Academy, has extensive experience in the industry from both a shore-based port operational perspective and in management positions with then- Sea-Land Service, Inc. and American President Lines. During his confirmation hearing, Mr. Sanborn pledged to call upon these experiences as he approaches the problems and opportunities of the U.S.-flag maritime industry.

Senators Allen (R-VA), Lott (R-MS) Stevens (R-AK) and Inouye (D-HI) stressed the need for the Maritime Administration to assume a proactive leadership role to address the needs of the industry. In his prepared statement, Mr. Sanborn stated that “if I am confirmed I will take this opportunity to play a leadership role in bringing our U.S.-flag fleet back to the preeminence it once enjoyed and to expand upon our domestic cargo carrying capability.”

The Committee will markup the nomination of Mr. Sanborn at a date yet to be announced .

If the DPW transaction is further scrutinized and criticized by Congress, then it is possible Mr. Sanborn's confirmation could be held up even longer due to his ties with the firm. Although, it is comforting to know that, assuming Mr. Sanborn is a good American, he was part of the DPW executive circle while overseeing Europe and Latin American operations. Some conspiracy theorists might eventually say that he could be a DPW plant in the US government, but from his background I personally feel he would be a great resource to have in better understanding the role of DPW and other port operators in relation to homeland security.

For those like me who are unaware of what the heck the Maritime Administrator does:

To strengthen the U.S. maritime transportation system - including infrastructure, industry and labor - to meet the economic and security needs of the Nation. MARAD programs promote the development and maintenance of an adequate, well-balanced United States merchant marine, sufficient to carry the Nation’s domestic waterborne commerce and a substantial portion of its waterborne foreign commerce, and capable of service as a naval and military auxiliary in time of war or national emergency. MARAD also seeks to ensure that the United States maintains adequate shipbuilding and repair services, efficient ports, effective intermodal water and land transportation systems, and reserve shipping capacity for use in time of national emergency.

Overall I believe that consolidation of this nature in the ports industry will benefit global logistics in terms of increased efficiency, increased innovation, better technology and yes, better security. Ports will still be held by respective countries, but their operations should continue to converge so that the experience of logistics and supply chain professionals is increasingly consistent. For DPW, the pressure from countries and from customers in terms of performance demands will ensure it respects the rule sets employed in each location.

UPDATE ON SECURITY ASPECT: In Wednesday's Wall Street Journal, an editorial on the ports transaction clarifies some of the security concerns:

Dubai Ports World would be managing the commercial activities of these U.S. ports, not securing them. There's a difference. Port security falls to Coast Guard and U.S. Customs officials. "Nothing changes with respect to security under the contract," Defense Secretary Donald Rumsfeld said yesterday. "The Coast Guard is in charge of security, not the corporation."

In a telephone interview yesterday, Kristie Clemens of U.S. Customs and Border Protection elaborated that "Customs and Border Protection has the sole responsibility for the cargo processing and cargo security, incoming and outgoing. The port authority sets the guidelines for the entire port, and port operators have to follow those guidelines." Again, nothing in the pending deal would affect that arrangement.

UPDATE: The WSJ today (3/9) has a great brief on the management of US port operations. It is subscription only, but I will email it to you if you send me an email requesting the article. In the meantime, I have added a JPEG file that provides a visual of US ports.

Japan Logistics 2006: Part III

The third part in this roundtable discussion from Logistics Systems focuses on the environment. As some readers might be aware, Japan is very particular when it comes to environmental protection activities. Trash recycling is the most noticeable and I must admit I still haven't been fully broken in on how to separate every little thing I decide to throw away. A simple plastic bottle must be divided into its cap, its label wrapping, and plastic container before disposal. But I digress...

"Environmental Response in Logistics"

"The era of collaboration/cooperation in environmental response starts now"

Watanabe: There was big movement in 2005 in regards to environmental problems, wasn't there.

Takahashi:  All industry, the entire country, is talking about temperature warming countermeasures and CO2 reduction, but transportation is an area with a high burden of environmental responsibility. Even at JILS, through several committees and organizations focused on "green logistics partnerships", there is no question about the large impact this has on the future.

Watanabe: In the Comprehensive Logistics Policy, the realization of environmentally friendly and efficient logistics in the name of "green logistics" is expressed as one of the directions that the country should drive towards. In this process, it is expected that customer firms and logistics professionals collaborate and work together, advancing countermeasures with originality. Besides that initiative, including the acquisition of ISO14001 certification, etc., I believe that continuous, environmental improvement activities must be implemented. I am curious what all of you have done in this area.

Hayashi: Of course, we are treating environmental response as a corporate social mission. However, I think depending on the level of burden placed on society by corporations, I feel that the difference in environmental awareness is clearly shown. For example, for those companies that can't help but consume large amounts of materials and energy to make a product, along with the large environmental burden awareness is also high. On the other hand, companies that operate mainly from desks have a low environmental awareness to go with their small environmental burden. In that context, our warehousing business is relatively low in terms of environmental burden. Although we have acquired ISO14001, we are struggling to instill environmental awareness in all of our employees. In terms of the environmental behavior we should be doing, the first things we thought of included reducing scrap pallets, reducing vinyl wrapping, and working using less electrical power. Our philosophy is to start with what's within individual reach and then expand from there, increasingly moving forward to reduce the overall environmental burden.

Watanabe: Yes, if you look at our survey, the manufacturing and distribution industries are most concerned with environmental topics. On the other hand, the service industry is low.

Hironaka:  In terms of industry type, since my company is placing a not insignificant influence on the entire earth in terms of the environment, we are sincerely tackling environmental countermeasures. First, through the products themselves, we are working to make automobiles that place even less burden on the environment. Also, we are conducting activities in the areas of production, logistics, etc. Our philosophy is to create a factory environment that seeks the ideal of not allowing any waste to exit the facility.

In relation to logistics, we are working with our customers to introduce such things as "low public harm vehicles" and "eco-drive." Since we are sending parts to the entire world, we are working to reduce the packaging material involved in that flow of goods. For example, there are returnable cases. But at the same time, in the case of overseas operations, an issue is managing the flow of these returnables in the context of customs duties. Taking the concerns of each country into consideration, we are moving forward.

Seien: For certain, from here on out, we are in an era where corporations and logistics professionals will advance environmental countermeasures in collaboration. Such things as collaborative distribution, eco-packaging, and recycling cannot be done alone. Although it can also take money to respond to the environment, there are additionally indirect benefits in increased productivity and improved customer satisfaction.

In terms of the construction industry, it's ok if you are a big operator but for small to mid-size operators waste treatment is an issue. Although there are lots of cardboard, metal and water waste, recycling vehicles have little room to work with since there is no stockyard for this waste material. Furthermore, there are few if any treatment locations in cities and thus a huge cost and waste is incurred in transport. Although a research organization to advance fluid recycling collaboration, there is yet a realization of this dream.

Takahashi: I can really feel the suddenness with which this era of "do or die" in regards to environmental response has come upon us. That corporations must work separately to improve their environmental behavior is a given, but from here on out I think it will be necessary to cooperate through mediating organizations. Corporations, industries, entire countries must become one body. If we don't move forward comprehensively from each position, we cannot create an environmentally friendly society.

COMMENT: In terms of my own work in the area of truck transportation, environmental considerations are very front and center. These considerations include primarily exhaust regulations which require firms to equip trucks with cleaning devices depending on their area of operation. In addition, of course, there are regulations on area of operation depending on truck size and weight. Lastly, there are regulations on the age at which vehicles must be recycled, with regulations continuing to shorten the allowed length of usage--thus making it harder to earn a substantial ROI. So if you are a firm relying on trucking transport, the procedural costs involved with satisfying environmental regulations are high, thus adding to the total cost of doing business in Japan.

China/Japan Cooperation on Logistics

Last Friday, February 10, I had the pleasure of being invited to and attending a business exchange between the city managers of China's Jiangyin port and business professionals in Japan.

The business exchange was a chance for Jiangyin officials to promote the growing development of its port infrastructure, including supporting logistics and services industry. Jiangyin is located half-way between Shanghai and Nanjing on the Yangtze River (see map). It is a short distance north from the Wuxi manufacturing center where 1000 Japanese companies currently engage in a variety of businesses. Thus, cooperation with Japanese business professionals in the development of the Jiangyin port, including in the acquision of FDI, is an extremely important endeavor.

After a morning presentation and subsequent Q&A session, I had the chance to chat with the mayor of Jiangyin and his associates over lunch. In addition, I spent 30 minutes in a special session designed for business professionals in Japan to individually ask specific questions about Jiangyin in a private setting. Interestingly, there weren't as many business professionals attending as I expected, so the interaction with officials was much more intimate than I expected. In addition, I was the only Westerner there allowing me to stand out more in the eyes of the Chinese officials. Using what little Chinese I know, I feel I managed to make a good impression. In fact, in promising to visit Jiangyin I wrapped pinky fingers with the Director of Jiangyin Port Logistics Development! I know he really wants my company's investment, but that seemed to me a very genuine, and very unexpected, gesture wrapped in good humor.

I will do a specific post on Jiangyin later this week, giving some specifics that I received in my materials. Since I will be visiting the city in May on the way from Shanghai to Nanjing, I will report then with pictures and first-hand insight.

China Logistics News Source

After running a search on the Yangshan Port through Yahoo, just to see what sites came up, I came across a nice blog focused on China supply chain topics and news. You can find the link to the right under Asia Logistics under China SCM Feed.

Some of the posts overlap with my own, but for the most part the postings are very complementary. It is a good place to get some more depth on the issues I am covering in regards to China.

If anyone finds any other links of good value, please send them on to me. I will be sure to add them to my list of links.

Shawn

North Korea Opens Rail Sector (UPDATED)

In FTB Asia, an article from January 12 and written by Paul French based in Shanghai briefly discusses the relationship between North Korea and China in regards to railways.

Many readers are probably aware that Kim Jong-Il makes trips to China and Russia by rail. The most recent trip touring several sectors of China caught a lot of attention in the Japanese press, although it was officially classified until Kim returned to Pyongyang.

The Korean Central News Agency, in an article titled "Kim Jong Il's China Visit Hailed," opened its praise of the China trip with the following paragraph:

"Newspapers here today come out with editorials saying that spectacular successes and immortal feats registered by leader Kim Jong Il during his visit to China will shine long along with the history of the DPRK-China friendship. Rodong Sinmun says that Kim Jong Il's recent China visit offered a momentous occasion as it provided a new landmark in boosting the unbreakable friendship and solidarity and developing the sincere and comradely cooperation between the parties and peoples of the two countries despite the whirlpool of the turbulent 21st century."

Unfortunately, Kim hasn't been able to perform any "immortal feats" or "spectacular successes" in his country's rail sector, as Paul French states:

In a desparate attempt to try and reverse decades of decline and to enhance cooperation with its largest trading partner, North Korea (DPRK) is to open its rail sector to Chinese rail companies and organizations. A consortium of Chinese railway companies and the North Korean Ministry of Railways have agreed to open all railway lines in North Korea to Chinese corporations.

The details illustrate the one-sided nature of this deal, a real call for help from the North Koreans:

As well as freight, the trade includes consignments of humanitarian aid from China to prop up the DPRK's ailing economy and precarious food situation. The joint railway venture will initially buy 200 used trains from North Korea to initiate trade with a long-term plan of purchasing an additional 500 to 1000 trains. These will most likely be Chineses given the lack of available trains in the North and the generally run-down state of its train building facilities.

Despite their weak position, the North Koreans still drive a hard bargain:

However, discussions have bogged down over differences in user charges.

COMMENT: Actually, I am very interested in this story even given its brevity and lack of attention elsewhere. One of my hopes in the long-term future is to work in a position where I can be engaged in any efforts to bring North Korea into full-fledged economic cooperation with the rest of the globalized world, perhaps in the mold of modern China. Just as in China currently, there will be a significant need for logistics expertise in rebuilding infrastructure and the links to trade. This news illustrates that this process is in its most infantile state, but nevertheless a start in the right direction.

UPDATE: The Korea Liberator points out that North Korea has taken a new approach to opening up its rail sector. The country has shot itself in the foot so many times, it is only standing on the "prosthetics" slipped to it via China. When will China graduate from this nonsense?

Framing SCM Concepts

The previous post that continued to discuss Japan logistics illustrated the wide range of activities encompassed by SCM. To assist readers of this blog, especially those fairly new to supply chain, I will provide here a definition of SCM and some questions that help frame SCM concepts. This information is in accordance with the current thinking of professorship at my alma mater, the Thunderbird Garvin School of International Management.

SCM (Supply Chain Management) Definition:

"The integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders."

"Goods firms" are built through the design and execution processes used to acquire, convert, and move goods to markets. "Service firms" are built through the design and execution processes used to configure and mobilize its offerings to the market. SCM is the overall planning and execution of supply chain activities.

Traditional components of supply chains include: transportation, purchasing, materials management, inventories, handling, packaging, ordering, and customer service.

With these components in mind, there are a set of questions that can be used to frame today's supply chain expertise:

1. How do you piece them together for a cohesive effect or output for your firm?

2. How do you tap value in both the supply and demand markets for best competitiveness and business performance?

3. How do you measure business performance benefit from the supply chain's activities and output?

4. How do you identify, build, and implement competitive chains/networks for what your business seeks to accomplish?

In other words, modern SCM is not simply a matter of adding up all the listed functions above. Depending on the operating environment, product or service types and internal capabilities of a particular firm, certain functions will be more prominent than others in order to maximize supply chain effectiveness. Since many firms in logistics originally operate as one component of a supply chain, it is very difficult for the same firms to develop end-to-end supply chain expertise.

Thus when you see the term 3PL, basically they are a supply chain, single- or multi-component operator. When you see the term 4PL, this is essentially an end-to-end supply chain component manager. Thus 4PLs are managing teams of 3PLs from one end of a particular client's supply chain to the other.

Japan Logistics 2006: Part II

This is Part II in my coverage of the Japanese logistics sector outlook for 2006, drawing from Logistics Systems. Please refer to Part I for a more detailed explanation.

A note about translation: Often, translation of words from Japanese to English can be arbitrary depending on the translators perspective and experience with vocabulary in context. Below I have translated the Japanese word "情報化" into "digitization," a word that is becoming more common in the business world to describe the transformation of physically executed processes to digitally executed processes utilizing computer-aided programs, automation, etc. In other words, this involves turning physical work into information.

"SCM Configuration in Response to Globalization"

"The key is managerial decisiveness...and driving the digitization of revised work systems."

Watanabe: First, regarding SCM, I'd like to consider its implications including the response to globalization that is sure to continue increasing from here on out. These days supply chains are taking several forms, with the two most obvious involving products that are made domestically and exported or built overseas and imported for distribution in Japan. In the "Comprehensive Logistics Policy" released by the government, one of the measures that must be advanced in the future is "realization of transportation that brings together domestic and foriegn supply chains as one body where cost is minimized and operations both speedy and seamless." This policy also has iterated the need for logistics site creation where interaction with overseas counterparts is easier and where processes are simplifed, both in the context of globalization.

I'm curious what the others here are doing at their companies in terms of SCM configuration in response to globalization.

Hironaka: For us, overseas production is overwhelmingly large and so following that expansion the logistics volume that doesn't pass through Japan will increase significantly. In other words, departing from Asia or arriving in Asia, and arriving in North America or Europe will be the pattern. In addition, we are forecasting that parts for those operations will be sent out from Asia as a region to the rest of the world, versus supplying from Japan.

Because of this trend, we believe that an SCM revolution is indispensable. More concretely, unification of order receiving/issuing rule-creation and systems, logistics tracking and traceability, and the talent to support that is necessary. As a result, SCM configuration in response to globalization, which covers all the above, has become an urgent business. In terms of scope, our company considers SCM issues from the parts supplier stage to the point when the finished product is delivered to the customer.

Hayashi: Our company is really in the business of harmonizing warehousing with SCM. The warehousing business has been influenced by globalization and as a result has changed. For example, if the productions base shifts to overseas, products at one time and in large quantities will then be inbound to domestic warehousing in large numbers. Based on this phenomenon, it is easy for unbalances to occur in warehouse spacing. Furthermore, if those inbound products are immediately outbound, the need for speed increases. For that reason, activities driving lower warehousing costs exist, but even more than that the "acceleration" of the market environment is a large topic. Previously where safety and accuracy primarily drove warehousing operations, the "sense of speed" and "low cost" drive today's operations. Although there is confusion about the level of customer requirements, meeting these requirements is the logistics company's role, its path of survival, from which our company is responding and making proposals.

Within logistics, there differences in range of what is considered part of SCM. In addition, there are various patterns of logistics such as with supply management and market distribution. However, regardless of the focus, lead time is given importance. While staying aware of safety, accuracy, speed and low costs, there is a desire to shorten lead times. Our logistics professionals encompass these concepts.

Watanabe: In order to respond to "acceleration," I wonder if it cannot be accomplished well without the ability to digitize processes. Those corporations that continue to survive today's intense competition hold tightly onto their core competencies, which become the base for driving additional efficiencies. Also, I feel that whether you are operating production domestically or overseas, successfully utilizing information technology is an important factor.

Seien: Speaking from the perspective of consulting, the purpose of SCM is to basically maximize sales while minimizing costs. In order to do that, lead time is shortened and inventory reduced through accurate demand forecasting. I think it can be said that the way to make this reality is through information technology. In order to configure SCM, there are a number of issues that must be overcome, but I believe the most important issue is leadership at the top. This is because we are dealing with several organizations following a large revolution. I've been to many corporations and where a tight project organization has been created following the top setting clear goals there is success. However, there have been many situations where logistics is kept on a limb without full support, resulting in insignificant reforms.

Takahashi: In response to that, the corporations that can actually tackle SCM are just one part of the majority of corporations within Japan. For most firms, even if they wanted to tackle SCM, current conditions are such that they have a hard time executing this effort. The major point in whether this will continue or not comes down to what Mr. Seien was saying earlier, and that is managerial decisiveness.

Watanabe: Yes, although IT is necessary as a way to make SCM a reality, ahead of that is "frontline strength"--in other words, the flow of products at the frontline and the movement of people at the frontline. In this context, I feel the utilization of IT is important. I too have been shown several production facilities and where normal products are flowing, I saw first hand how when told "hey, make this special express" or "make this the priority" systems could not respond.

Hironaka: Regarding that key phrase of "frontline strength," the top management of our company is always saying that the starting line for competition in relation to each area of SCM--manufacturing, sales, logistics, etc.--is at the frontline.

Takahashi: Since IT doesn't go beyond being a method, the process of revising work systems and then digitizing them needs to be experienced before kaizen projects can be drawn up.

Hayashi: The frontline is always changing. Work should be conducted so as to change systems, then apply IT to those new systems, leading to the eventual ability to execute SCM practices.

Seien: With environmental changes as difficult as they are, even after introducing systems, they must be made to be flexible and adaptive.

COMMENT: I believe what the conversation above shows is the difficulty traditional logistics firms have in reducing SCM to a set of principles from which their employees can derive executable strategies and related initiatives. In my view, SCM is not something most mid-size companies can tackle comprehensively in one giant leap. A firm must consider all their strengths and weaknesses and find the areas where they can create small successes towards realizing a more long-term strategic goal. As was mentioned, organizational leadership and the strength of workforce, or frontline operations, is key in enabling any type of SCM initiative. There are very few initiatives, if any, that will survive, let alone experience marginal success, in the face of a poor organizational environment.

Japan Logistics 2006: Part I

Now that I have warmed up discussing some easy to access English articles on Asia logistics, I am going to start to provide what I feel will be higher-value postings. My firm receives two primary logistics publications dedicated to the Japanese logistics sector--Logistics Systems and Japan Logistics. The former is a journal published every 2 months and the latter a weekly newspaper. Despite containing detailed reporting and research on Japanese logistics, the content is published entirely in Japanese and thus a barrier for those limited to reading English content.

Starting with Logistics Systems, I am going to go through two sections of their New Year's issue. The first section, "2006: View on Logistics," is a roundtable of four logistics industry professionals discussing the themes deemed most important to the Japanese logistics sector in 2006.

Participants:

Ichie Watanabe, Seikei University, Dept. of Science and Engineering

Hideaki Takahashi, Nittsu General Research Center

Masashi Hironaka, Honda Technology Research Industries, Product Sales Logistics Dept.

Nobuo Hayashi, Fuji Logitech, Kasai Warehouse Manager

Kazuhiko Seien, Daisei Construction, Engineering Administration Dept.

Themes are divided into six parts. Today I will go through the first part, translating and conveying key points. Thus, all content associated to each participant is partial. For those fluent in Japanese, see Logistics Systems for the full article.

"Summary of 2005 Conditions and the Condition of Firms"

Watanabe: Looking back on the overal conditions of Japan's economy, we can see that it is headed in a good direction. However, there are differences depending on the type of industry, with differences in performance quite pronounced. Also, corporate streamlining continues, with the number of bankruptcies still high. How is Nittsu analyzing logistics conditions?

Takahashi: Actually, the overall shipping volume is decreasing every year. Why? First, factors include constrained public investment and changes in industry structure. Furthermore, there is a reduction in logistics volume due to the overseas advancement of Japanese corporations following globalization. In other words, there is progress these days in logistics kaizen, or continuous improvement.

Watanabe: So what is the status in terms of your specific firms or industries?

Hironaka: Our firm is obviously focused on automobiles as the center of our business. Even with higher fuel prices, we can say that comparatively the Japanese auto industry is in good condition, our firm included. Japanese and foreign firms continue to ride the China wave. In this environment, while having to utilize the same infrastructure, each company is aiming to create a product that is strong in QCD (quality, cost and delivery), a new competitive stage being born. The advantage of Japanese firms is their competitive strength in fuel efficiency technology and the volume of complete vehicles shipped is greatly expanding. Solidifying the auto shipping process in this regard is a key topic for us.

Also last year, we could really feel the rising pressure of logistics costs, including fuel, container, and packaging costs. In regards to higher fuel costs that can't be passed on to shippers, we think we have no choice but to take some responsibility as the client and bear a portion of these costs.

Hayashi: As for my overall feeling of 2005, what was more than remarkeable was the coming of the era of the market determining products. For example, there are consumers selecting cheap alcohol in styrofoam while on the other hand others choose premium beer regardless of the price. This is the general trend regardless of product. In another case, sensitivity to food safety by consumers has retailers being highly selective of suppliers, managing purchases according strong individual tastes.

Although the first half of last year was a tough period for us, our managers and employees united to strengthen our organization. Humans, no matter who, will err, but by focusing on the elimination of repeated mistakes as most important, we employed corrective activities through such initiatives as ISO implementation. Our effort is now focused on moving ahead, balancing accuracy, safety and efficiency.

Seien: Compared to the bubble era, we are not only busier but under pressure to reduce costs. In the manufacturing sector, devices, automobiles, and especially medical products are in good condition. With deregulation of medical law in July of 2003, in effect from April 2005, a variety of medical producers including generics have been building a large base of factories. Linked to the deregulation of logistics, warehousing and food processing firm factories for instance have been able to build, a phenomenon I expect to continue steadily.

Related to logistics, warehousing industry demand is high. Outside of Japanese warehousing firms, foreign real estate investment firms and traders, for instance, are building. Also, in parallel with this trend, producers are fundamentally entering facilities as tenants versus acquiring facilities as assets, a trend I foresee to be in favor for 2-3 years. I can also feel demand for outsourcing and transformations to 3PL status as picking up speed. Within warehousing, low-cost management enabled by centralized IT systems is primary.

Attached to this section of the roundtable are two tables based on a survey of the logistics sector. The first table illustrates what different sections of the supply chain view as the three main themes of interest. I have listed the three for each below in order of priority.

Manufacturing: SCM, environmental response, RFID

Logistics: 3PL, personnel development, customer satisfaction

Distribution: SCM, 3PL, logistics center control and management

Service: RFID, SCM, logistics information systems

COMMENT: There is some overlap of interest here, especially in regards to SCM, but nothing consistent enough to say that each sector is mostly "on the same page" in terms of interests. As for logistics, I can attest to from my own experience the focus on 3PL transformation, personnel development (or lack thereof) and customer satisfaction.

In the second table, survey respondants chose the top three issues they are facing in relation to logistics. I list them below as I did above.

Manufacturing: logistics cost reduction, logistics quality improvement, SCM configuration and inventory reduction (tie)

Logistics: personnel development, logistics quality improvement, logistics cost reduction

Distribution: logistics cost reduction, logistics quality improvement, efficient management of logistics centers

Service: SCM configuration and configuration of new business model (tied), response to digitization

COMMENT: It seems pretty obvious that cost reduction and quality improvement are driving logistics performance from the ordering above. But these are really loaded terms, by which I mean a lot of different issues drive such an interest. Logistics firms really have to know themselves in terms of what their current capabilities are and what those capabilities need to be in order to execute the chosen strategy, a strategy that should result in sustainable cost reductions in parallel with quality improvement. Cost reduction and quality improvement alone are not strategies. They are objectives that should be tracked with metrics relative to specified targets.

The fact that personnel development comes up in both tables for the logistics section suggests that logistics firms understand that workforce talent/capability, along with a cultivating information and organizational system, is the foundation for executing all the activities necessary to ensure strategic success. But as I am currently experiencing myself, enabling and managing a paradigm shift in workforce perspectives and habits here in Japan is a long-term project and requires the dedication of the entire organization, with middle managers in the real change manager role. Such a transformation WILL NOT occur directing from top-down unless middle managers are empowered, and unless they understand how to leverage that empowerment.