Dropshipping

Drop-shipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.

The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock or own inventory. Instead, the merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders. 

This unique model has a number of benefits and drawbacks:

BENEFITS:

LESS CAPITAL IS REQUIRED – Probably the biggest advantage to dropshipping is that it’s possible to launch an ecommerce store without having to invest thousands of dollars in inventory up front. Traditionally, retailers have had to tie up huge amounts of capital purchasing inventory.  

With the dropshipping model, you don’t have to purchase a product unless you already made the sale and have been paid by the customer. Without major up-front inventory investments, it’s possible to start a successful dropshipping business with very little money. 

EASY TO GET STARTED – Running an ecommerce business is much easier when you don’t have to deal with physical products. With dropshipping, you don’t have to worry about:

  • Managing or paying for a warehouse
  • Packing and shipping your orders
  • Tracking inventory for accounting reasons
  • Handling returns and inbound shipments
  • Continually ordering products and managing stock level

LOW OVERHEAD – Because you don’t have to deal with purchasing inventory or managing a warehouse, your overhead expenses are quite low. In fact, many successful dropshipping businesses are run from a home office with a laptop for less than $100 per month. As you grow, these expenses will likely increase but will still be low compared to those of traditional brick-and-mortar businesses.  

FLEXIBLE LOCATION – A dropshipping business can be run from just about anywhere with an internet connection. As long as you can communicate with suppliers and customers easily, you can run and manage your business.

WIDE SELECTION OF PRODUCTS – Because you don’t have to pre-purchase the items you sell, you can offer an array of products to your potential customers. If suppliers stock an item, you can list if for sale on your website at no additional cost.

EASY TO SCALE – With a traditional business, if you receive three times as much business you’ll usually need to do three times as much work.  By leveraging dropshipping suppliers, most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work.  Sales growth will always bring additional work – especially related to customer service – but business that utilize dropshipping scale particularly well relative to traditional ecommerce businesses.  

All these benefits make dropshipping a very attractive model to both beginning and established merchants. Unfortunately, dropshipping isn’t all roses and rainbows. All this convenience and flexibility comes at a price.

DISADVANTAGES: 

LOW MARGINS – Low margins are the biggest disadvantage to operating in a highly competitive dropshipping niche. Because it’s so easy to get started – and the overhead costs are so minimal – many merchants will set up shop and sell items at rock-bottom prices in an attempt to grow revenue. They’ve invested so little in getting the business started so they can afford to operate on minuscule margins.  

True, these merchants often have low-quality websites and poor (if any) customer service. But that won’t stop customers from comparing their prices to yours. This increase in cutthroat competition will quickly destroy the profit margin in a niche. Fortunately, you can do a lot to mitigate this problem by selecting a niche that’s well suited for dropshipping. We’ll discuss this more in Chapter 4.

INVENTORY ISSUES – If you stock all your own items, it’s relatively simple to keep track of which items are in and out of stock. But when you’re sourcing from multiple warehouses, which are also fulfilling orders for other merchants, inventory changes on a daily basis. While there are ways you can better sync your store’s inventory with your suppliers’, these solutions don’t always work seamlessly, and suppliers don’t always support the technology required.  

SHIPPING COMPLEXITIES – If you work with multiple suppliers – as most drop shippers do – the products on your website will be sourced through a number of different drop shippers. This complicates your shipping costs.

Let’s say a customer places an order for three items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each item to the customer, but it’s probably not wise to pass this charge along to the customer, as they’ll think you’re grossly overcharging for shipping! And even if you did want to pass these charges along, automating these calculations can be difficult.

SUPPLIER ERRORS – Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway? 

Even the best dropshipping suppliers make mistakes fulfilling orders – mistakes for which you have to take responsibility and apologize. And mediocre and low-quality suppliers will cause endless frustration with missing items, botched shipments and low-quality packing, which can damage your business’s reputation.

IS IT WORTH IT?

As we initially warned, dropshipping isn’t a perfect, stress-free way to build a successful business. The model has some definite advantages but comes with a number of built-in complexities and problems you’ll need to be able to address.  

We’ll be examining these problems – and how to best address them – in future chapters. The good news is that with some careful planning and consideration, most of these problems can be resolved and need not prevent you from building a thriving, profitable dropshipping business.

Materials Management & Stock Control

Introduction

Before commencing, it is worth spending a few minutes describing the environments to which these processes and systems are addressed. They range from simple stockist type environments to highly complex manufactured products, manufacturing processes and distribution networks. They also range from intermittent / low volume, or one-off complex assemblies or mixtures, to very high volume mass produced products of varying complexity. It is not surprising therefore that a wide range of techniques have been developed to accommodate this range of applications. So let us start by simply listing the techniques available:

The techniques fall into two themes:

  1. “Push” systems (triggered by interpretation of the expected demand and scheduling of supply to meet that demand)
  2. “Pull” systems (replenishment systems triggered by the usage or depletion of stock)
Push Systems
Pull Systems
All Time Buy Replacement (see Previous Technique T015: Replacement Systems)
Project Manufacturing Top up point of use / Vendor Managed Inventory
Period Batch Control Input / Output Control (see Kanban Systems)
Material Requirements Planning (MRP1) Two Bin
Manufacturing Resources Planning (MRP2) Three Bin
Drum Buffer Rope (although the “rope”, it could be argued, is pulling, the “drum” is pushing) Kanban
Advanced Planning & Scheduling (APS) Reorder Point (ROP)

There is however a third grouping which we call complementary, in that they utilise, or are an adaptation of, some of the above techniques, (principally but not exclusively in repetitive environments), but apply them in a unique way. These include:

Complementary

  • Consignment stocks
  • Outsourced Warehousing
  • Kitting
  • Milk-round
  • Visual control systems (see Previous Technique T036 Visual Control Systems)
  • The use of bar code reading / RFID in stock movement
  • Electronic Data Interchange (EDI) / Internet enabled supplier integration
  • The use of “Back-flushing” techniques in MRP1 systems
  • ERP systems

As a final part of this introduction it is worth positioning “Just In Time (JIT)” in these groupings. The supply of items just in time for their immediate use is an objective ofall materials planning and control systems. It could be said that most of the techniques described above have this objective, except perhaps “all time buy”. However Just In Time has become associated with “Kanban” Systems.

Follow the links on the left of the page for further detailed articles for items coloured red. Now to an overview of each:

PUll Systems

Dealing with the Pull systems first, they are a group of techniques that aim to ensure that when stock is used, it is replenished. It is important to note at this point that pull systems do not plan, they react! This is fine if your processes and logistics are infinitely flexible, uncomplicated and do not vary. If they are not, some degree of capacity or materials buffering will be necessary! For example, there is a need to reduce buffer stock for declining demand and prime stock for sales initiatives. In addition the New Product Introduction process and product change process (see Previous Best Practice B022 Product Change Process) must somehow feed in the new and feed out the old.

Secondly most of these “pull” techniques except reorder point (see Previous Technique T014: Reorder Point Systems) operate principally using visual controls  (see Previous Technique T036 Visual Control Systems) rather than computer systems and are therefore well aligned to “lean manufacturing“.

Replacement

(Also see Previous Technique T015: Replacement Systems)

In it’s simplest form there is “Replacement“, which simply replaces used items. This technique is still very common for many simple applications and is commonly used for maintenance spares, grocery shelf restocking, stationery and my partner’s re-supply of our bathroom consumables, and was probably used by cave dwellers to replenish food stocks.

This is also the underlying principle of all pull systems.

Vendor Managed Inventory

It is now very common for suppliers to manage customer’s inventory by managing the stock levels themselves as a value added service to customers. Usually this replacement is based on simple top up to predetermined levels or by a “Fax-Ban”, (see Kanban).

Top up point of use

Also it is now very common for suppliers to manage customer’s inventory, replacing used items by delivering directly to point of use, avoiding the stores management process, as a value added service to customers. Alternatively this method can be used by stores personnel to replenish line-side stock from a central stores for items in repetitive / continuous use.

Input / Output Control

(see Kanban Systems Also see Input / Output Capacity Control)

This simply delivers (inputs) to a process what has been produced (output). When applied to Work in Process as a whole, this technique has come to be known as a “Conwip” (Constant WIP) Kanban system.

2 Bin Systems

(Also see Previous Technique T010: Two Bin Systems)

Again an ancient technique for which confusingly there are 3 “bins” in the system, 2 bins at the point of use and a third elsewhere, (a “bin” can be any fixed quantity container including a plastic bag, work trolley, or kitting tray):

  • Bin 1 is in use in the shop.
  • Bin 2 is held adjacent to bin 1 (but is not in use) and is used to replace bin 1 by operatives when bin 1 is depleted, without formal authorisation.
  • Bin 3 can be somewhere else (maybe in a stores, WIP, or at the supplier) and is used to replace bin 2 when it is swapped for bin 1.
  • Bin 1 is then refilled to become bin 3 and held waiting for the depletion of the bin in use, for the system to recycle.

When feeding several points of use, the 3rd bin can be a central stores stock.

3 Bin Systems

3 bin systems operate in the same way as 2 bin systems except that a safety stock (perhaps a handful of items in a plastic bag) is stored separately in bin 2. Breaking into this safety stock, if the system has not recycled in time, triggers an expedite request and a review of bin sizes. To maintain stock rotation the safety stock must be refreshed on replenishment, which means that to enjoy the opportunity of an expedite signal you need a bit more administration.

Kanban Systems

(Also see Kanban)

Attributed originally to Toyota in the 1980’s, Kanban Systems are an extension of 2 bin and 3 bin systems, where there is a semi-fixed number of Kanbans (typically but not necessarily primed containers) in the system, which may be spread throughout the system and which are replenished when depleted.

Reorder Point Systems

(Also see Previous Technique T014: Reorder Point Systems)

“Reorder-point” systems, invented by operational researchers, in the Second World War, made more sophisticated the previously simple replenishment processes by taking into account:

  • The variability of supply and demand (introducing “safety stock”, (calculated using statistical probability)
  • Lead-time to replenish, which orders replacements at a point (the “reorder-point”) where allowing for the lead-time and recent historical demand, replacements would be available before depleting the safety stock, with statistical certainty.

Later:

  • Various forecasting algorithms were introduced to more accurately reflect usage within future lead-time rather than recent history. (Trend, Seasonality, Seasonality with Trend, Intermittent etc.) (We select from 6 methods in our training course SSC03 Advanced Forecasting & Inventory Modelling.)
  • “Safety time” began to be used instead of “safety stock” in some early MRP systems in circumstances where lead-time rather than quantity was the major variable.

Current Research

This is an ongoing area of research for us and our latest research:

  • Characterises 7 generic methods to be selected on a “best fit” basis in order to reduce average and maximum stockholding in pull systems. (This will be covered by a future article.)
  • Identifies the characteristics of a further uniquely identifiable forecasting method to incorporate into our “advanced forecasting” methodology and training.

Push Systems

All Time Buy

Perhaps the original method of ordering, you buy everything you think you are likely to need. The obvious disadvantage being that it is difficult to forecast all time requirements. However for items which are likely to be difficult to acquire in the future and are of low value, this is still a widely used technique, particularly in the aerospace and electronics industries towards the end of original equipment production.

Project Manufacturing

(Also see Previous Technique T004: Chunking)

Very different in concept to MRP systems (below), and much better suited to small volume production, job shops, engineer-to-order environments, or capital / development projects, this system schedules both parts and processes. Bills of material are created for each “chunk” (work package) of the project, and capacity planning may include technical / engineering resource as well as manufacturing resource. Items are made and purchased (“multi-level pegged”) for individual projects / final products. Actual costs are accumulated during manufacture, with estimates to completion (time and cost) routinely calculated. The more sophisticated versions employ “critical path” (“PERT”) network or Advanced Planning & Scheduling (APS) scheduling.

Period Batch Control (Cyclic Re-ordering)

In the 1930’s, but more famously during the second world war, the first simple scheduling technique to adopt a JIT philosophy was introduced by RJ Gigli to deliver to the next stage in the process all the parts required for the next period’s work in a UK aircraft manufacturing plant. This technique (“Period Batch Control” by the late Jack Burbidge, who I had the privilege of working with at Lucas Industries) synchronised the arrival of components for sub-assembly and sub assemblies for final assembly by allowing a fixed period for the production of all the parts required for the next stage.

Using a weekly period as an example:

Week 1: Order parts from supplier

Week 2: Deliver to the component manufacturing process by the end of the week

Week 3: Make components by the end of the week

Week 4: Make sub assemblies by the end of the week

Week 5: Make final assemblies and deliver to customer by the end of the week

In this example the lead-time is fixed and is 5 weeks.

The technique was a huge step forward in coordinating the supply of parts for “A”, and “X” type products (see Postponement & Mass Customisation. It required a Bill of material (parts-list), to drive the schedule for the preceding stage. This concept was later adapted by Lucas Industries in 1991 to incorporate variable work packages of fixed duration (without Bill of Material restructuring) (see T038: Bills of Materials Simplification) in their JIT-MRP project which integrated the two concepts in a single philosophy.

In the automotive industry, computer based scheduling based on multiplying demand by exploded Bills of Material was starting to be used to produce forward fixed weekly schedules for suppliers by the mid 1970’s, using commercially available computers. These fixed cycle schedules, are still the most common method of communicating medium term demand (advisory schedules) to suppliers in the automotive and aerospace industry today, and the technique has come to be known as “cyclic re-ordering“. Also although this technique has largely been overshadowed by the wide adoption of MRP systems by software suppliers (see later), it is now enjoying a comeback due to its simplicity and the ability to live comfortably with Kanban systems. (See below.)

MRP1

(Also see MRP1)

Chronologically Materials Requirements Planning (MRP1) came next in the late 1960’s, initially with fixed period lead-times (“bucketed” systems). This was the scheduling engine required for Period Batch Control, which utilised the Bill of Material within it and the scheduling rules (periods) to produce a schedule for the preceding stages, using the example above, five weeks in advance. At this time computers began to be used commercially to generate these schedules. Later variable lead-times (“bucket-less” systems) and safety stocks were accommodated.

MRP2

(Also see MRP2)

This was followed in the 1970’s by Manufacturing Resources Planning (MRP2) (“Manufacturing Resource Planning: MRP2 Unlocking America’s Productivity Potential”: Oliver Wight), which combined MRP1 and capacity planning together with a control system. Whilst widely implemented, the faulty implementation of MRP2 systems became a scandal, with little regard for data accuracy, ownership, and accompanying (new) management processes.

One of the major criticisms of MRP is the concept of a staged Bill of Material, which represented the stages of manufacture and which also enshrined that into a sequential process, which ignored the potential for parallel working. Work by Burbidge, showed that by flattening the Bill of Material, and parallel working not only simplified the administration of production but also reduced lead-times. However this created tension between the engineering view of the product and the logistics view of the product which “phantom bills of material” did not fully resolve and which also complicated the question of bill of material ownership. This difficulty remains today in most commercially available ERP systems. (See Previous Best Practice B014: “Effective Bills of Material Design”, and Previous Technique T038: “Bills of Materials Simplification”)

However MRP1 is still the dominant technique used by most computer ERP software commercially available today. Whilst the concept of MRP2 is sound, the advent of “Just in Time” (JIT) and it’s control system Kanban created an attractive and significantly simpler mechanism. This for a while in the early 1980’s seemed to provide an alternative to the concept of MRP1, to an extent where the leading gurus of the time predicted the demise of MRP1, in favour of the more pragmatic approach. This was unfounded and in fact ignored the requirement to plan “A” and “X” type product (See Postponement & Mass Customisation) production in advance from both a materials and capacity viewpoint, which JIT did not provide. Even “I” and “T” and “V” type product production require a forward view to provide a planning ability. This led the computer software suppliers to attempt to integrate the two approaches with so called “Electronic Kanbans” (a replenishment signalling mechanism sent electronically). Although rarely needed for internal company signalling, this mechanism has found later usage in the inter-company replenishment signalling involved with “Agile” communications.

The commercialisation of computer packaged software, incorporating the mathematical approaches of MRP2 and later ERP / APS systems, unfortunately ignored the inherent weakness of computers, in that it is notoriously difficult to change computer programs quickly and reliably in the event of requirements, suppliers, or system changes and the lack of visibility of the process. This led to the expansion of parameters held within the computer system that could be changed to reflect different environments. This has now led to a process of “configuration” where the software can be “configured” to reflect different circumstances. Presently and unfortunately the process of reconfiguring can often be difficult and does not reflect the need in some cases to reflect hybrid requirements. (For example some items are repetitive whilst others are not.) Another trap that the software suppliers have fallen into, in the race to provide increased functionality, is to add complexity to the configuration process. This has resulted in many horror stories of incorrect configuration, and a demand for highly skilled “configurers” which for a time outstripped supply. These factors combined to constrain sales of the software, and has led to the sale of preconfigured or cut down versions of complex software. However this completely ignores the “KISS principle” (Keep It Simple Stupid). (See “Implementing ERP Systems“, and B018. Production Planning and Control The KISS Principle (Overview) (Or how to live without the computer))

MRP1 and JIT have now resolved into split roles. In a mixed MRP1/JIT environment MRP1 is primarily used for long term capacity planning and forward ordering of indicative material requirements with JIT pulling the next job when the previous one is finished or stocks depleted. In the absence of JITMRP1 schedules may be treated as firm.

In mixed mode operation MRP1 can provide firm schedules in parts of the supply chain not covered by JIT replenishment signals, and indicative schedules in parts of the supply chain where JIT replenishments are used as shown below. (See “Kanban“.)

Relationship between planning & Kanban control systems

Drum, Buffer, Rope

The terms were defined by Goldratt and Cox in their book “The Goal” the early 1980’s. The “Drum” is the schedule for the bottleneck  (drumbeat for the whole system). The “Buffer” is surplus stock put in front of the bottleneck to make sure it never runs out. The “Rope” is the coupling mechanism for ensuring that inputs (release of raw materials) do not exceed the bottleneck capacity, avoiding build-ups of unnecessary WIP.

The mechanism later became confused with the software “OPT” and its successors ” Advanced Planning & Scheduling (APS)“. Here we have deliberately separated the two.

Drum, buffer, rope can be implemented in its own right manually. In this case:

  • The Drum is an MPS for the system based on a Rough Cut Capacity Plan for the bottlenecks
  • The Buffer needed can be calculated using statistical approaches
  • The Rope can any one of five methods of making work flow (See Workflow Management / Scheduling)

Advanced Planning & Scheduling

(which are probably best generically described as, multiple constraint, finite capacity, network, planning systems (Also see Advanced Planning & Scheduling (APS)systems))

This type of system originated with the increasing availability of high speed computers in the 1960’s to perform combined, complex, materials and process, scheduling calculations for complex environments. They incorporate highly mathematical optimisation approaches to scheduling and are therefore intellectually appealing. (Research on the ideal scheduling algorithm is still going on.) Perhaps because of this, they have enjoyed, (based on our own experience and research), unjustified commercial success. But if your environment cannot be simplified, they have application. We have identified 11 different levels of sophistication in these models, but each software has its own methods and cannot simply be paraphrased, so I will not attempt to do that here. Suffice it to say that this methodology is:

  • Sophisticated, (some would use the word “complex”)
  • A computer based modelling system which is principally based on Bill of Materials, Routing, & Costs, but can be based on more complex scheduling / optimisation rules and parameters such as space, profitability etc.
  • Uses critical path networking or optimisation routines
  • JIT but not very lean

Complementary Processes

In this group, developments include:

Consignment Stocks

Originally this technique was adopted by customers who wanted to lose inventory from their balance sheet, whilst still having it available, giving rise to bonded warehouses, where the stock was available but still belonged to the supplier until issued for use in the shop. However suppliers then recognised that this gave them more opportunity for increasing value added services by maintaining this stock for the customer. It also locked in the customer to a long term arrangement. It is now widely recognised that the benefit is largely in the supplier’s hands rather than with the customer. Also care must be taken to ensure that the financial transfer of ownership from supplier to customer is auditable, and that liability for risk of obsolescence in the event of change is agreed.

Sales and purchasing departments continue to use consignment stocks as a bargaining chip and a way of losing stock from the inventory respectively. Depending if the accountant belongs to the customer or supplier, each will argue: “a way of reducing stock and deferring payment”, or “increased administration” respectively.

In a lean organisation and to the inventory planner, the arguments are irrelevant, the stock is still there and it should be minimised to improve the whole supply chain.

I wrote in the year 2000, in the first version of this article: “A logical extension of this concept is that the major retail outlets become property owners rather than retailers with their aisles owned by the supplier!”. I think we have deviated from this concept now where the supplier still owns the stock due to extended credit terms and payment on use, and sophisticated off-balance sheet accounting of buildings is used to make the retailers tenants, so they do not own anything!

Out-sourced warehousing

Again, in the year 2000, I wrote that off-site, (out-sourced) warehousing was an increasing trend. At that time it applied to Distribution Centres (DC’s) to consolidate supplies for JIT customers for onwards delivery to point-of-use destinations, primarily in the major automotive assemblers. This alleviates the logistics congestion which can arise in feeding hundreds of different items per day to an assembly line. However, now, out-sourcing is applied to many pre-assembly stores, most distribution networks and is also being applied to raw materials. Of course there has also been a massive growth in warehousing to accommodate increasingly imported goods. (We will cover this in a future article.)

3rd Party Kitting

Since the late 1990’s we have seen the out-sourcing of kitting from assembly operations. There are a few important considerations here, but in principle this is a perfectly valid method of managing inventory. Often combined with 2 bin systems (above) (where the kit is a bin), one kit can be prepared, whilst the previous one is being delivered. Kitting suppliers are either suppliers with dominant kit content, specialist kit consolidators, or increasingly part of a wholly outsourced stores operation.

Milk round

Unlike the USA, delivery of goods in the UK was principally the responsibility of the supplier. The increasing use of third party carriers has given rise to significant economy of scale by having a full load on the return journey. “Ex-works costing” has facilitated a carrier to create a milk round, delivering and collecting goods on a daily or weekly cycle, ensuring full loads at all times. Also an in-house customer can often arrange to collect raw materials in the vicinity of their important customers, or other suppliers, to gain economy of scale. However the latest statistic I have seen for the UK, still suggests that 25% of all vehicles are running empty on our roads.

Visual Control Systems

(Also see Previous Technique T036: Visual Control Systems)

Along with the introduction of lean thinking has come the re-introduction of visual control systems, whereby the control of stock is now becoming genuinely achievable through “eyeball control”, rather than sophisticated computer systems and heavy reliance on “Perpetual Inventory” stock checking.

Bar coding / RFID

Stock recording and stock movement recording has been greatly simplified and improved by the automation of the data entry by bar coding. If used as a common identifier between sales outlet and first tier manufacturer this becomes a significant element of “Agile Manufacturing“. Radio Frequency Identification (RFID) has now made an entrance into this arena. RFID is capable of identifying an item at radio frequency distances, as opposed to bar code scanning. However this may be distracting us from the simplification of stock control which can also be achieved by visible control systems, and 2 Bin / Kanban replenishment systems.

Electronic Data Interchange (EDI)

(Internet enabled supplier integration (Also see E-commerce: “E-nabling” Your Business)

The use of computers to communicate demands between organisations has grown significantly from the introduction of faxes which were used to send schedules, thenKanbans, to the use of electronic buying via the Internet and electronic payment settlement towards e-commerce. It is now common to communicate the output of a delinquent MRP system to a supplier, with much greater speed via electronic means! Genuinely seamless, fully integrated customer ordering, to supplier sales order processing and onwards through their manufacturing scheduling and out into the next tier of the supply chain is still rare but is becoming an interesting development area, but I feel that the technical barriers are much less significant than the commercial barriers.

Back-flushing

The computer technique of deducting component parts from stock based on the arrival of a sub-assembly at some key measurement (“deduct”) point has been developed in response to the need to automate the stock issuing process in conjunction with the introduction of JIT techniques. This has also been used as a basis for paying suppliers. However “backflushing” has created a situation where the Bill of Material accuracy for these generally inexpensive parts must be totally accurate in order to avoid stock discrepancies. Often these parts’ usage is probabilistic anyway rather than deterministic (with selective assembly shims for example) (see Previous Question Q001. Managing “C” class items in a deliver to point-of-use situation), with average usage entered into the Bills of Material (“Planning Bills of Material”) making the usage approximate. But, these parts require minimum administration and supplier top up or two bin systems are usually more appropriate than issuing MRP1schedules for these parts which are notoriously unreliable. (See Malpractice M007: The Cost of the Costing System) Any significant delay in “backflushing” from the point at which these items become committed to sub-assembly can also cause the situation to become un-auditable.

Enterprise Resources Planning (ERP) Systems

(Also see Implementing ERP Systems)

These systems grew out of MRP2 and / or Inventory Management and / or Accounting systems in the early 1990’s depending on the pedigree of the software supplier into a “total” business control system, integrating the functions and data from various areas. For example: a goods receipt would automatically update outstanding purchase orders, reduce requirements generated by MRP, update the stock balance, create a creditor in the Purchase ledger and eventually update the general ledger with the new asset. Many ERP systems incorporate MRP2 planning processes. Fewer incorporate Project Manufacturing. Many also incorporate links to Advanced Planning & Scheduling (APS) as an optional extra avoiding the MRP2 module of the software.

Conclusion

In 1986 it was concluded by a European conference of leading MRP guru’s, which I attended, that the logical solution to the problem of Manufacturing Planning and Control was an appropriate use of techniques to match the circumstances. Unfortunately there are a number of inhibiting factors here:

  • No one method is universally applicable!
  • Any one business has an array of circumstances and the situation will change with product life cycles, product mix, volume changes, and process changes.
  • No one except us has yet catalogued the control systems available in a logical way such that the strengths and weakness of the techniques are apparent and can be used in a mix and match way to solve an individual problem. (See “What control systems do you need?)
  • It is not a simple task to change the technique.
  • Each new technique is often viewed as universally applicable and better than the last!?
  • It is easier to blame the system rather than the implementation and move on to the latest fad. In particular the success rate of MRP2 implementations is very poor, such that it may be replaced when it could have been easily corrected. (See Implementing ERP Systems).
  • There are a number of vested interests and significant sunken investment.
  • No method is “fit and forget”.
  • This is an area steeped in conventional wisdom, poor design, implementation and operation, generating a “gap” between the potential and the delivered reality. (An interesting aspect of our current research!) (Gap Analysis available on request)

Choosing a manufacturing control system to suit your environment

This poses the question, in what circumstances is an approach valid? The correct choice is primarily determined by an individual operating environment. In fact in any one company there is likely to be a diverse range of requirements. (See Expert Systems and Development Tools: What control systems do you need?). You can often make a technique work in less than ideal circumstances (in an inefficient and ineffective way), but the correct choice of technique, implemented and maintained well is the key to realising ongoing bottom line benefits. A strategic, periodic review of the appropriateness of your current application of a technique is essential to avoid degeneracy! We call this process “reimplementation”.

A review on green logistics

“Sustainable development implies meeting the needs of the present, without compromising the ability of future generations to meet theirs” (UN, 1987). Since the Industrial revolution, the world has seen a dramatic growth wherein technology has played a major role in the global economy. With the implementation of improved technology, industries turned capable to deliver products to their customers in large scale and in relatively reduced time. Also, this allowed industries to continually come up with new and improved production techniques and thus new products to appear in the market with lowered product lifecycle. Consequently, the time of acceptance of newer products by the customers has dramatically dropped with the advancement of technology over time as illustrated below in the figure. (Henriques, 2001)

 1

       Figure 1 : Rate of technology change and the shrinking time of acceptance. Adapted from (Henriques, 2001)

With such a trend in practice, the scale of production is extremely huge at the present day to meet the demand of the customers. Owing to such an increased demand, the use of raw materials has also increased proportionately. However, such a trend cannot continue forever because most of the raw materials being used to manufacture these goods and to supply them to the customers are exhaustible and cannot be replaced. “According to the Global Footprint Network, we currently are using 1.3 times the amount of resources available in the planet”(Taborga, 2010).

It is a well known fact that manufacturing industries play a major role in global warming. Due to the release of CO2 and other SOX/NOx at an overwhelming rate, the temperature of the earth’s atmosphere is on a rise. As a result, changing weather patterns, rising sea levels, changes in wildlife, etc. have been observed around the globe. If corrective action is ignored, an unfavourable condition for survival of ecosystem seems inevitable. In addition to above mentioned environmental issues, several other social and economic issues are also prevalent which constitute the triple bottom line that industries strive to keep a balance.

Hence, it is important not only for the industries but also for individuals to act responsibly to reduce such adverse impacts. It is required to spread awareness and together as one, work our way towards a sustainable and green world. One could add value in our pursuit towards sustainability of by finding ways to reduce their carbon footprint. “Carbon footprint is a measure of the exclusive total amount of CO2 emissions that is directly and indirectly caused by an activity or is accumulated over the life stages of a product.” (Wiedman & Minx, 2008). Given below illustrates an approximate breakdown of carbon footprint of UK households and it shows that the carbon footprint of an average household in the year 2011 was an overwhelming 20.7 tonnes of CO2.

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Figure 2: Carbon dioxide emissions associated with UK household consumption in 2001

Adapted from (Wiedman & Minx, 2008)

                Industries on the other hand need to focus on locating their unwanted energy usage and trying to minimize their carbon footprint, thus taking part in the utopian dream of a green earth. The intensity of globalization has also contributed to the pollution levels adversely in its supply chain. David Rich, an associate at the World Resources Institute says that many companies are agreeing to the fact that almost 90% of their carbon emissions are due to activities in their supply chain (Perkins, 2010).

Sustainability in Supply Chain

In this section, supply chain and importance of sustainability to be implemented into a supply chain are discussed. In essence, a supply chain has inputs which transform into outputs adding value to the supply chain. The design and management activities of a traditional supply chain had been focused keeping just the economic gain in mind. However, since Sustainability has become a prime concern, industries have constantly been working ways to decrease costs, minimize wastes, and increase productivity thus creating a supply chain that’s sustainable. The product life cycle approach that few industries have adapted seems like a sensible way to achieve sustainability. A product goes through four stages during its lifecycle which are pre-manufacture, manufacture, use and post-use stages. Such an approach highlights the importance of taking into considerations, all the above mentioned four stages (Seliger, et al., 2011). Also, an industry trying to implement sustainability needs to encourage its suppliers and consumers to have sustainability all through their activities and integrate them. A typical supply chain with an open loop material flow is illustrated here under in the figure. It can be derived that if more time and energy is spent during concept and design stages, there will be a possibility to reduce the input costs, resources and energy used in the supply chain thus reducing the adverse impacts accordingly. Raw material is extracted, transported to the manufacturing unit where in a finished product is developed which is again transported to retail stores for customer use. Once the product’s life cycle reaches its exit door, it is then transported to be disposed. In this process, huge amounts of material, energy, etc., are underutilized and ways to improve the utilization of a material and consequently improving the product life cycle is important.

(Ethans, et al., 2009) On the contrary, in a closed loop material flow, the disposal phase reconnects back to the raw material extraction phase. Such a process is termed as ‘remanufacturing’. In remanufacturing, a product once used, is subjected to industrial checks and any components of the product that are still ‘alive’ are reused in the making of a fresh product thus pushing pre-manufactured material into its manufacturing process. Xerox, a global document managing company founded in the US who have adapted remanufacturing and have gone a long way creating a sustainable infrastructure. They design, manufacture, sell and support printers, multifunction systems, photo copiers, digital production printing presses, etc. They have been recovering used equipment since the 1960s and have had success in maximizing profitability by using recovered equipment in remanufacturing operations.

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Green Logistics

Logistics involves acquiring incoming materials and distributing the finished products to their destined locations in desired time and in optimal quantities (Markley & Davis, 2007).  It can be noticed from the figure 3, that transportation plays an important part in a supply chain. Freight transportation involves emission of GHGs (Green House Gases) which affect the environment polluting the atmosphere. Also, such emissions mainly depend on the type of fuel used, diesel & fuel oil being one of the main fuel and a proportionately smaller amount of them using petrol (gasoline) as fuel. These fuels contain hydrogen and carbon in them. delete. In an ideal world, if the fuel undergoes complete combustion, hydrogen and carbon converts to water and CO2. However, complete combustion of fuel does not occur due to engine inefficiency, which gives way to toxic pollutants like carbon monoxide, hydrocarbons, nitrogen oxides, etc It is estimated that freight transportation, warehousing and goods handling account to approximately 10% to 11% of global CO2 emissions (Kahn & Kobayashi, 2007). The reason why CO2 has fallen under the environmental ‘spotlight’ is for the fact that CO2 accounts to about 85% of the GHGs in the atmosphere. (McKinnon, et al., 2010). Hence it is important to implement sustainability in logistics to avoid firms exploiting non renewable resources like fuel oil. In July 2008, the price of oil reached $147.30 per barrel increasing the transportation costs from 20% to 50% of total trans ocean shipping. This event enabled many firms to squeeze sustainability into their operations to reduce wastes. About 60% of operating costs of Xerox’s Canadian logistics operations were attributed to fuel consumption in 2006 (Dey, et al., 2011).

Sustainability in Shipping Industry

Shipping has been traditionally considered to be the most favorable and sustainable modes of transportation (Bode, et al., 2002). Since globalization has accelerated over time, the growth of shipping has increased at a fast pace. Shipping is relatively sustainable because of its low energy consumption per unit freight movement which has enabled firms to prefer ship liners to transport goods thus reducing logistic costs. However, with advantages come disadvantages too. Sulphur is considered to be the weak link of this industry. Ships burn very dirty ‘bunker fuel’ rich in sulphur content during the refining process. They also contribute to about 17% of the global nitrous oxide emissions. The table below shows collated information on energy consumption and sulphur content in fuels used for different modes of transportation (McKinnon, et al., 2010).

Table 1: Energy consumption and sulphur content statistics of different modes of transportation

S.No.

Mode of transport

CO2 emitted per metric tonne of freight per km of transportation (gms)

Energy consumption per unit movement (kW)

Sulphur content in respective fuels (ppm)

1

Shipping

10 – 40

0.02

27,000

2

Rail

30 – 150

0.067

400

3

Road

60 – 150

0.18

10-15

4

Air freight

500 – 950

2

<20

(McKinnon, et al., 2010) The implementation of sustainability in shipping practices has been at a considerably lower rate as it is argued that it has attracted less public attention as they usually operate away from land. However, according to International Council on Clean Transportation (ICCT), about three quarters of their toxic emissions are emitted within 400km of land areas thus affecting the coastal ecosystem (Kassel, 2008). This has forced the International Maritime Organization (IMO) to establish limits on global as well as zonal emission of sulphur and nitrogen related oxides and other GHGs. Regulations and standards such as Euro III, Euro IV, Marpol regulations, Kyoto Protocol, etc have been implemented. Since then, shipping firms have constantly been trying to head towards sustainability by increasing their carrying capacity, energy efficiency, etc. The carrying capacity overtime has increased from Ideal X carrying just a mere 58 TEUs during 1956 to Emma Maersk carrying 13,000 TEUs by 2008. Ships with larger carrying capacity being more stable require less ballast water and thus consuming less fuel. It is believed that ships nowadays carry ten times as many containers emitting just about a quarter of the CO2 as it did during the 1970s. NYK, a Japanese shipping line has released design for a ‘Super Eco Ship’ planned to be launched before 2030 and they claim that their latest design would offer a 69% reduction in the CO2 footprint per container. With a case study on Maersk Line below, initiatives undertaken, their pros n cons are discussed in detail and comparisons are made wherever necessary.

Maersk Line: A Case Study

‘Maersk, the shipping giant, launched their manifesto for change in June, 2011. Shipping has had many changes in its commercial life – shifting from sail to steam, from steam to oil, from individual loading to containerization. Maersk believe that it is now time for the next revolution – to sustainability.’ Companies don’t change the status quo when they are performing well. However, leading industries Maersk have changed their system for a better future reaping profits and addressing global concerns (Draper, 2011). With low end customers like Walmart, Ikea, etc demanding better sustainability in their supply chain, Maersk is put under pressure to ‘go green’ by decreasing their sulphur content in their bunker fuel, reducing GHGs and other such traditional pollutions (Draper, 2011).

‘Triple E’ is what Maersk have named their latest, technologically advanced, environmentally sound container vessel project which claims to reduce CO2 emissions by more than 50% per container. Energy efficiency, Economy of scale and Environment are the three factors that have influenced the design of the vessel and also explains why the vessel series is named as Triple E.

Brief History

On July 14, 1928, ‘Leise Maersk’, the first  cargo ship by Maersk launched its voyage from the American east cost via the Panama Canal to the far east and returned back. It was a project tie-up between Maersk and Ford who transported Ford car parts and other cargo. Mr.Maersk McKinney Møller after graduating eventually took over his father, Mr.A.P.Moller’s business after the latter expired. After the Second World War, they expanded their activities developing cargo and tanker vessels, establishing shipyards, etc. They built at one of their yards, the largest gantry at that point in time. During the 1960s, Maersk concentrated on expanding their oil, off-shore and retail activities. During the late 1970s, Maersk group invested DKK 2 billion in containers, vessels, terminals marking the biggest projects taken up by far (Anon., n.d.). During this period, ships were loaded and unloaded piece by piece, ports were chaotic and dangerous to operate, and material handling was of low quality. These unfavourable activities formed a bottleneck. Although the concept of containerization was in existence, it was not implemented due to complications until it was a success upon intensive research by Malcolm McLean, a trucker and industry outsider, who worked with Keith Tantlinger, an engineer to design standardized containers. It was during this period that Maersk adopted containerization; the first shipping firm to do so and their commitment and investment made containerization to be an efficient method of transporting goods. ‘Adrian Maersk’, the first container vessel made its first voyage from Port Newark, USA on September 5, 1975 (Draper, 2011). Since then, Maersk witnessed a tremendous growth making them now one of the biggest shipping industries around.

Road to Sustainability

Since Maersk has realised sustainability to be one of their driving forces to have a competitive edge, they have invested a lot to achieve their set targets. In this section, various initiatives undertaken by Maersk are discussed keeping the environment as the prime focus for analysis.

As already discussed, Maersk have had the privilege to be the first one to adapt containerisation which set as a benchmark for their competitors. John Kornerup Bank, Maersk’s lead advisor on climate and environment expressed his pleasure in Maersk being a member of Ocean Sustainability Group and stated their involvement in sustaining use of sea (Leach, 2011). Containers used in the shipping industry usually have their floors made of illegal uncertified tropical hardwood. Maersk have extended their commitment by ensuring that they would phase out the use of such wood and replace them with timber from suppliers using responsible forestry practices or other alternatives such as bamboo or recycled plastic (Barnard, 2011). With many end customers demanding CO2 footprint reduction in their supply chain, Maersk has taken a step ahead by becoming the first shipping line to receive independent verification of its CO2 emissions data for every vessel. This initiative is in collaboration with Lloyd’s register and Maersk include CO2 data in their scorecards which they provide it to their customers (Leach, 2011).

(Maersk, 2011) On the 27th June, 2011, Maersk came in terms with Shipbuilding & Marine Engineering Co., Ltd. to build the worlds largest and the most efficient container vessels by far. They call it the ‘Triple E’ with a capacity of 18,000 TEUs as opposed to their previous series, ‘Emma Maersk’ whose capacity is 15,000 TEUs, 16% less than that of ‘Triple E’ which is considered to be the biggest ship as of today. The ‘Triple E’ series claims to produce 20% less CO2 per container moved compared to Emma Maersk and 50% less than the rest on the Asia-Europe trade lane. It is also calculated to consume 35% less fuel per container compared to its 13,000 TEU competitors. These vessels are equipped with waste heat recovery system which would save up to 10% of the engine power. They would travel 184 kilometres using 1 kWh of energy per ton of cargo as opposed to a jumbo jet travels half a kilometre using the same amount of energy per ton of cargo.

(Maersk, 2011) Maersk have released their Sustainability reports in which they have described in great detail their achievements, current projects they are working on and their vision for a greener future. The table below which includes statistical data collated from the sustainability report 2011 shows clearly that Maersk have taken the road to sustainability which has given them a competitive edge over the other shipping lines with many suppliers preferring Maersk to reduce their direct and indirect CO2 footprint.

Table 2: Sustainable Performance Growth

S.No

Subject under Analysis

2007

2008

2009

2010

1

Fuel oil consumption (1,000 tonnes)

13,848

13,017

11,390

10,724

2

Diesel consumption (1,000 tonnes)

577

422

383

296

3

Direct CO2 emissions (1,000 tonnes)

50,296

46,555

40,766

37,700

4

Direct N2O emissions (1,000 tonnes of CO2 eq)

1,076

200

192

188

5

Sulphur oxide emissions (1,000 tonnes)

656

653

501

456

6

Profit for the year USD million

3,422

3,462

-1,024

5,018

Limitations & Improvements

It is understood that efficiency would increase proportionately with the carrying capacity of a vessel, the very reason why Maersk are building the ‘Triple E’. However, the infrastructure at most of the ports are not yet capable of accommodating such vessels with high draft limiting its trade to only three ports in Europe, one port in Egypt and four ports in Asia as of today who handle these mega-ships. Moreover, they can pass through the Suez Canal but not the Panama Canal (DiBenedtto, 2011). Also, improvements in sustainable performance of ‘Triple E’ series as claimed by Maersk remains to be seen.

Ports could invest in using advanced technology to upgrade their draft levels so that they would accommodate vessels of high capacities. This would enable trade between many more countries whose consequence will be the extended use of greener modes for transportation. Maersk should also consider encouraging the use of green methods. Mr.Hutienne, the Managing Director of the Port Authority at Hamburg revealed their plans to expand the facilities at the Burchardkai terminal, Hamburg to accommodate high capacity containers like the ‘Triple E’ (Anonymous, 2011).

NYK, the Japanese shipping liners have released a design for their ‘Super Eco Ship 2030’. It is said that by decreasing the weight of the hull and reducing water friction, the power required to propel the ship can be reduced. With the use of LNG-based fuel cells, solar cells, and wind power, the propulsion power can be increased leading to a CO2 footprint reduction by 69% per container carried (NYK, 2009). Maersk should consider using alternative sources of energy in their design like NYK as benchmark.

The figure below illustrates a mind map of Maersk and their plot for Sustainable development and Environmental protection.

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Figure 4: Mind map of Maersk’s Sustainable Growth

Conclusions

From the discussions on importance of sustainability in a supply chain with an environmental perspective and case study to analyze the methods used by Maersk to achieve their set goals gives a clear idea of what it takes to head towards an environmental stability and achieve one of the three bottomlines.

An old proverb says that the planet we live is not inherited from our ancestors but is borrowed from our children; it boils down to taking good care of what is already ours.

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