Thought Leadership

Commoditization of Supply Chain Logistics Can Improve Bottom Line---By Gordon Fuller

How much of your product’s costs are accumulated in your supply chain? Once you have made the critical purchasing and manufacturing decisions, do you resign yourself to the constant nibbling at your profit from documentation fees and routing mishaps before the goods finally appear at your store or factory? You may think that the new import regulations from the Department of Homeland Security are yet another inescapable bite out of your margins.

Think again.

The government, whether by design or by accident, has commoditized the logistics aspect of the supply chain with its ongoing regulations. Commoditization means that logistics events are no longer unique transactions determined by the logistics provider: they are now standardized communications set by the U.S. government.

Like today’s telephone service where calls on any carrier sound identical, the logistics products will become indistinguishable between providers. As data and tracking events become universal companies can turn their attention from merely locating their assets to maximizing the return on those assets. Companies today have an unprecedented opportunity to offset the costs of regulatory compliance with improved efficiency and lower marginal cost for each of these newly-standardized transactions.

The international security initiatives implemented through the Container Security Intiative, C-TPAT and the 24-hour rule have standardized three key elements of logistics: data, transaction formats, and events. Data and transaction formats are defined in the required fields and transmission requirements of the Automated Manifest System (AMS). The 24-hour rule is the first instance of a standardized event but not the last: follow-on effects for purchase orders, shipping instructions, and arrival notices will be determined by the private sector if not the government.

By setting standards for each area that are more demanding than existing capabilities the government is taking control of these traditional logistics functions; additional regulations due in October of this year will extend those standards to exports as well as for any transport modes crossing U.S. borders. The American National Standards Institute (ANSI) has even created a group for codifying Homeland Security edicts.

Looking ahead, two more issues are converging.

First, the Department of Transportation is expected to implement the Electronic Supply Chain Manifest system (ESCM) for road and air links, effectively standardizing domestic cargo logistics. As with international logistics, data formats and events are to be mandated and synchronized with Homeland Security regulations.

Second, on January 1 2005 the Sunrise Date will further alter the logistics process. On that date the Uniform Code Council (UCC) will no longer issue company codes for the standard North American UPC-12 barcode format, instead synchronizing with newer European and Japanese barcode standards. However, the high-throughput scanning and detailed manifest reconciliation demanded by Homeland Security may be signaling the coming obsolescence of barcodes entirely; technology such as Radio Frequency ID (RFID) chips may supersede barcode capabilities by enabling tighter tracking and inventory reduction.

Within two years the combination of new regulation and cheaper technology will be dictating how companies identify and track their assets both internationally and domestically. These logistics standards will determine what data you send, when you send it, and in what format the transaction will occur. Companies may then aspire to the Holy Grail of logistics, Total Asset Visibility:

• Companies may track cargo at the item rather than pallet/container level, offering tighter control of manufacturing, transport, and allocation at the warehouse and store level.
  
• If a company moves to RFID chips and adds scanners at new locations, each additional scanning event is just another standard transaction.
  
• Trade associations are already examining ways to synchronize the various GTIN coding standards such as ePC, UCCNet, and Customs’ own Harmonized Tariff Schedules (HTS).

When everyone moves the same data, in the same format, at the same event checkpoints, commoditization reduces competitive advantage to two areas: quality and price. Quality is determined by regulatory guidelines; prices of standardized transactions fall to the levels of those providers with the lowest marginal cost on each of those transactions. Additional features above the minimum reporting requirements can be immediately duplicated by competitors since they’re based on open government standards.

Companies can achieve operational excellence by focusing on the business opportunities inherent in their supply chain rather than the data acquisition and management. Homeland Security will level the playing field for asset tracking and notification at the lowest cost; the savings in logistics, asset management, inventory levels, and software management will alleviate and perhaps ultimately outweigh the costs of complying with the regulations.

Be ready to take advantage of your opportunity.

Gordon Fuller is the Director of e-Business for Covansys Corporation (a CSC company), a global consulting and technology services company headquartered in Farmington Hills, Michigan. Mr. Fuller has more than 15 years of experience in technology, logistics, finance, marketing, and strategy planning.