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Rattling the Supply Chain


In the lubricants industry, as in all areas of business, supply chain management (SCM) can be the engine that drives a product from creation to customer. Its strength lies in having an organized network of suppliers, distributors, manufacturers and end-users. Its durability lies in how efficiently each of the links synchronizes with the customers requirements, and the flow of products, information and finances up and down the system to form a single entity.

In unskilled hands however, experts warn that your supply chain can turn into a bullwhip, snapping and stinging everyone it touches. Only by recognizing and addressing the challenges that threaten to disrupt the chains unity can supply chain partners maximize the benefit to both their business and customers.

The primary focus of supply chain management is the integration of goods and services, said John Gordon, a professor at the Queens University School of Business in Kingston, Ontario. In a time of shortening product life cycles, complex corporate joint ventures and stiffening requirements for customer service, it is necessary to consider the complex scope of supply chain management – from supplier of raw materials, through factories and warehouses, to demand in a store for a finished good – as a total system.

Each company or entity along the chain has the same core responsibility of balancing supply and demand. This directly reduces the amount of inventory, which is a principal goal of supply chain partners, the professor explained. With proper forecasting, a business can limit overstocked inventory that adversely results in excess costs associated with working capital, spoilage, discounting and obsolescence. If you know what is happening upstream and downstream from you, he said, then you dont have to build as much inventory.

Sharing, Trusting

One way to maximize efficiency is to develop a culture of trust where everyone doing business in the same chain is working together and sharing information. And that, according to Gordon, encapsulates one of the key challenges facing todays supply chain managers: information sharing and trust. This inevitably leads to coordination, another challenge to supply chain management. It used to be that they told you put your cards face-down on the table, he said. Now its, put your cards face-up, so I can see what youve got.

The more communication and idea sharing there is among the supply chain partners the better, Rick Johnstone, a buyer of lubricants, grease and additives at Shell Canada Ltd. in Calgary, Canada, told Lubes N Greases.

Harvey Golubock, president of American Refining Group agreed. Customers drive our business so we are constantly in contact with [them] so that we can meet all their needs. The Bradford, Pa.-based refiner, a supplier of base oil and blended lubricants, stores its raw materials in tanks and operates on a rolling three-month forecast that projects customer requirements.

Further back up the supply chain is Meredith Early, manager of Sunocos foreign crude supply and trading in Philadelphia. There is constant contact with our customers to optimize our system and inventory levels, she explained. Inventory management is one of our primary functions. We want to keep enough to be able to run the right mix of crude on our units but also keep it low enough to minimize demurrage and working capital costs.

Tighten the Chain

Disintermediation, or cutting links out of the chain entirely, is another current that lubricant companies must navigate in their supply chains, Gordon explained during a seminar he conducted in March for the Petroleum Packaging Council. Disintermediation means dealing directly with suppliers and establishing a direct connection with the consumers; it effectively eliminates the go-betweens – but not their function. Inventory, promotion and receivables, for example, may be shifted either up the channel to the suppliers or down the channel to the consumers.

This is good for the customer because costs that are cut in the chain can be passed on as a savings to the end-user, Gordon recently reiterated.

Eric Kielts, vice president at lubricants manufacturer Wallover Oil Co., in Strongsville, Ohio, says his company does this by choosing, wherever possible, to buy directly from a chemical additives supplier. Although a chemical distributor (the middleman or intermediary between Wallover and its raw material suppliers) must be used to purchase certain products, and in some cases may employ a sales staff with a deep technical understanding, Kielts said that cutting out the distributor cuts costs and makes things happen quicker. If I have a technical question, all the distributor will do is relay my question to the supplier, he commented. It just makes more sense.

Not so fast, counters Joe Clayton, president of specialty chemical distributor Sea-Land Chemical Co. Fifty percent of its volume is sold directly into the lubricants industry, and to stay competitive in the field, the Westlake, Ohio-based firm goes beyond being just a distributor to also offer technical sales and consulting services to its customers. Over the last four years, even as supply chain management and disintermediation was gaining momentum, Sea-Land more than doubled its annual sales, bulked up its sales force by 30 percent, and added new product lines.

Larger companies [see us] as serving a big need, said Clayton. We serve them locally, are readily available, and offer quantity discounts that save money. We bring value to the table [so there is] reason for us to be there from both a supplier and customer standpoint.

Gordon observed that one issue that used to confront supply chains was the concept of vertical integration, where a partner would be bought or absorbed and thus become a captive, in-house source of supply or sales channel. In some cases, integration even led to eliminating multiple links in the chain. Today, that tactic has been superseded by outsourcing, in which a company does not create the product or service, but chooses to buy it from a supplier. If so, this has to work to both partners advantage. [In many cases the business] has been outsourced to us, commented Clayton. Sea-Land is not only handling logistics but has taken over [the suppliers] marketing as well.

Taming the Whip

Gordon and other experts also highlight another major issue: distortion and noise. For example, there are times at the retail end of the chain when end-user demand for a product may go up or down by 10 percent. This small variation, when transmitted back upstream through the chain via distributors and manufacturers, gets magnified as much as 50 percent. This bullwhip effect – a physical analogy that begins as a small up-and-down movement of a whip near the hand and become wider and wilder at the end – appropriately illustrates the ripples that can start small but later magnify back up the chain.

This disturbance is precipitated by exaggerated information which includes, most importantly, poor product forecasts. According to a paper published in the MIT Sloan Management Review, each company along the supply chain does forecasting of its product such as production scheduling, capacity planning, material requirements planning and inventory control. When a downstream operation places (or cancels) an order, the upstream manager processes that piece of information as a signal about future product demand. Based on this signal, the upstream manager readjusts his or her demand forecasts and, in turn, tweaks the orders placed with the upstream operations own suppliers. Together, these tweaks ultimately set in motion the wild bull-whip effect.

The distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules, said Hav Lee, V. Padmanabhan and Seungjin Whang, the papers authors.

The one way to combat this effect, Professor Gordon urged, comes back to the issue of information sharing and trust -and eliminating the extra layers that distort the forecasts. If retail talks directly to the manufacturer, then that 10 percent stays 10 percent. This will get rid of the fluctuations that go up and down the system, he said.

The Big One

Supply managers will always face challenges. At times of unforeseen emergencies and natural disasters, supply chain operations are inevitably interrupted. [We dont have] supply issues but we have demand issues, for example during hurricanes, said Glenn Sherburne, president of South Minnesota Lubes, a lubricants distributor based in Albert Lea, Minn.

Sherburne now must cope with the snarled logistics caused by the collapse of the Interstate 35 bridge, a major artery across the Mississippi River in Minneapolis, 100 miles to the north. So far, the company has managed to reroute without problem. Clearly this issue does not come up very often but when it does the entire supply chain is disturbed, he commented. The manufacturers of finished goods will run into supply issues which cause them to allocate supply to their distributors. We in turn work very hard to manage that supply to make sure customers who need the product have it, and customers with supply on hand may have to wait.

Ciba Specialty Chemicals also has contingency plans, such as secondary raw material sources, alternate transport carriers and strategically located global production capacities to deal with unforeseen supply chain interruptions, said Michael McHenry, vice president of process and lubricant additives for the Americas region, based in Tarrytown, N.Y.

In this small sampling of the lubricants industry, there is a hint that lubricant partners – up and down the chain – are honing their supply management strategies, to leap over any and all hurdles that could potentially keep their respective businesses from running efficiently and prevent them from best serving their customers.

Added Shell Canadas Johnstone, Success in supply chain is to provide value to the business, and being involved in decisions from the beginning is crucial to this success.

Its a customer-service-driven industry. If we dont give the customer what they want, someone else will, said South Minnesota Lubes Sherburne.

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