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Creating & Maintaining a Cost-Effective Supply Chain

A detailed mapping of the supply chain, locational considerations, and the use of foreign-trade zones can all help to reduce supply-chain costs, while increasing velocity.

Intermodal Sites 2015
In order to operate and execute a supply chain cost effectively, it is important to correctly map the details of the supply chain. Mapping a supply chain actually takes four separate flow charts, as follows:
  1. Individual custodians who move goods from one point to the next point within the supply chain — This route or segment links the names of each custodian who has a role in moving goods from origins to destinations. For example:
    • Foreign manufacturing center – stuff container – truck to foreign port – in gate at foreign ocean terminal – load to vessel – steam to destination port –unload to arriving terminal – truck to rail terminal – load on rail to destination inland city – discharge at inland rail terminal – truck to distribution center – truck to store or pick for fulfillment
  2. Third-party service providers or the buyer/seller who actually manages the individual custodians (above) based on the terms of sale and ensures that each custodian functions appropriately to keep the goods moving in transit
  3. Financial documents necessary to keep the supply chain moving at the appropriate pace without stops and starts between the custodian transfers within the supply chain
    • Letters of credit, payment for cartage/drayage, terms of sale, etc.
  4. Information bursts that are necessary to support the timely transfer of custody from one custodian to the next in order to keep the pace of the supply chain intact
    • This would include the information such as the manifest, bill of lading, seal details, delivery notification, gate in/out notices, entry filing, entry release notice and proof of delivery A good supply-chain manager or a third-party logistics service provider will manage and balance the tension between lowest cost end-to-end delivery and speed to market. Speed in a supply chain always adds costs, but cost must always be balanced against the requirements for delivery deadlines or production requirements. The key element to a successful supply chain is predictability, in terms of time between origin and destination and the control of costs to keep the supply chain competitive.
A good supply-chain manager or a third-party logistics service provider will manage and balance the tension between lowest cost end-to-end delivery and speed to market. Locational Considerations
Site selection often plays a role in the costs associated with supply chains. In order to “get it right,” the site selector must understand the complexities of both the inbound — from foreign factory to distribution or fulfillment center —and the outbound — from distribution center to retail stores, production centers, or as direct fulfillment to individual consumers — components of the supply chain. Getting it right means that both the inbound and outbound components of the supply chain function at the lowest costs, while allowing goods to arrive and depart meeting all key milestones between the production center and the consumer.

Some of the most important locational elements to be considered due to their impact on supply-chain costs are heavy-haul truck corridors, distance from rail intermodal terminals, trucking distances to/from stores, access to local and regional package delivery services, and available labor. Proximity to a rail intermodal terminal, and selecting a site that can be served “through the fence” from the terminal rather than on public roads, can mean a difference of saving hundreds of dollars on every container move required from the user or third-party provider. One or two miles can save millions of dollars annually in transportation costs. This means that the building user saves as much as a dollar per square foot in rent each year as a result of good transportation management analysis.

Identifying Anomalies
One way to make a supply chain more competitive and cost-effective is to establish event notices that identify when time-activated anomalies occur within the supply chain. For example, if the truck route from the foreign factory to the ocean terminal is just over five miles, it is expected that the terminal in-gate notice will be received within one hour of departure from the factory. If this event does not occur or notice is not received from the ocean terminal in-gate, an event notice is generated internally to determine if a security compromise has occurred within the supply chain. These notices may also serve as an indicator that a custodian is not performing as promised. In either case, such an event notice protocol provides visibility into the details of each custodian and their activities, part of the overall mapping exercise that can offer insight into events that cause disruption, add costs, or change the delivery expectation for the arrival of goods.
Selecting a site that can be served “through the fence” from the (intermodal) terminal can mean a difference of saving hundreds of dollars on every container move required. One or two miles can save millions of dollars annually in transportation costs.
New “Dimensional” Weight
Achieving a cost-effective supply chain may be done in a matter of inches. This year, both FedEx and UPS are changing their parcel shipping calculations to be based on “dimensional weight” and not just the actual weight of the package. This means that for qualifying packages (packages measuring less than three cubic feet are exempt from this new pricing) the shipping rates will be calculated based on the greater amount of actual weight or dimensional weight.

Under the previous system, a box weighing five pounds would be charged based only on the weight of the box. However, now, based on its size, the box could be billed under the new formula as if it weighed 20 pounds. This change in shipping costs, if not anticipated and integrated into the engineering and packaging metrics, may result in only a few inches of volume in a carton costing exponentially more in transportation costs. Shippers will need to reduce package size — not just weight — to cut shipping costs. Manufacturers will be pressured to reduce the size of products in order to decrease both their weight and size to save on shipping costs. In some cases, a few inches will make the difference between dimensional weight fees and actual weight shipping charges.

Foreign-Trade Zones
The final consideration for managing supply-chain costs is the evaluation and use of the foreign-trade zone (FTZ or Zone) program as a tool to decrease the overall costs, increase supply-chain pace, and provide the FTZ user with a more competitive cost structure. The federally managed Zone program produces three distinct opportunities to save money in supply chains and to lower overall operations costs: Site selection often plays a role in the costs associated with supply chains. In order to “get it right,” the site selector must understand the complexities of both the inbound and the outbound components of the supply chain.
  1. Duty delay and/or duty reduction: All goods entering the U.S. are subject to a “duty rate” based on formulas for imports from U.S. Customs and Border Protection (CBP). Under normal programs, duties are paid at the time of entry into the commerce of the United States. However, under the FTZ program, duties are only paid on goods when they are removed from the FTZ, producing a strong cash-flow benefit to the users who store goods in their FTZ. Outside the FTZ, goods that arrive for production or manufacturing are assessed duties at the time of their arrival based on their duty schedules. If such goods are assembled, and the assembled duty rate is different, they must apply for duty drawback in order to gain a “refund” on the duty paid on the higher cost components. However, in an FTZ, the duty is not paid on the components that arrive in the zone. Only when the finished products are removed from the zone is the duty calculated (based on the duty schedule of the finished good, not the components), and the lower duty is due to be paid when the product is removed or sold from the zone.
  2. Inventory tax exemption: In an FTZ, certain inventory taxes are exempted in specific states. In this case, goods held in an FTZ are not subject to the ad-volorem or inventory taxes, or are subject to a reduced tax rate based on payment in lieu of tax agreements between the tax authority and the user.
  3. Merchandise processing fees: These fees are paid when a Customs entry is filed with CBP. The fee is paid based on the value of the goods documented in the entry. Upon review of the entry, CBP will post a release; and the goods are considered “domestic” and can be moved after the entry fees are paid to CBP. Each entry requires that a fee, entry, and release be completed. In an FTZ environment, rather than pay multiple entries and wait for multiple releases, the FTZ operator only pays one entry fee per week, regardless of the number of entries filed. This “weekly entry” program allows the FTZ operator to access goods immediately upon discharge from a ship or airplane, which also increases the velocity of the supply chain and, in many cases, saves the zone user millions of dollars annually.
In sum, there are many ways to manage supply-chain costs, resulting in more efficient and predictable supply chains. Many importers, exporters, and third-party logistics providers do not do conduct a detailed mapping of their supply chains, which can result in delays or shrinkage within supply chains. In addition, these companies often overlook the benefits of the foreign-trade zone as an effective tool to manage supply chains, while simultaneously reducing costs and increasing the supply chain’s velocity.
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