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Trade and Transportation by Dr. Thomas O’Brien

When Postponement Means Something Other Than A DelayTrade And Transportation By Tom O’Brien

June 4th, 2013 - Last month the Center for International Trade and Transportation at CSULB hosted its annual Town Hall meeting. The topic was efficiency and competitiveness and what both mean for jobs in the region. Supply chains are dynamic, and the most successful companies find a way to use logistics in order to combine efficient operations with customer service. Companies that manage to do both usually define the standard against which others are measured. Regions that facilitate efficient operations (through reliable infrastructure and services, available labor and predictable regulatory measures) tend to win as well. Companies want to locate there. That means jobs.

But figuring out what matters to companies and their supply chains is not always an easy task. Rapidly changing economic factors call for agility and flexibility. The rest of us can only try and keep up.

Consider Amazon. Just two years ago the e-tailer seemed to be focusing on a location strategy for its distribution centers based on Internet sales taxes. The states that collected them (or proposed them) were not high on Amazon’s list. That list included California. Fast forward to 2013. Amazon is now building fulfillment centers in or near places like New York, Los Angeles and San Francisco. The company has added more than 30 such centers to its network over the past two years. What has changed?

In the ever-changing landscape of supply chain management, what now appears to matter most to Amazon (and similar companies) is the ability to provide same day or next-day delivery service to a majority of the U.S. populace. By placing fulfillment centers in strategic locations near population centers, Amazon is relying upon logistics to help it meet customer demand in a way that makes it more competitive with traditional retailers. If a customer knows that (s)he can get a product within 24 hours, it might negate a trip to the store. In what might be a case of adding insult to injury for the bricks and mortar store, shoppers might stop in to view a product before making a purchase through Amazon online.

The Amazon strategy has caught the attention of the industry. The technology company Gartner, Inc. just released its annual listing of the Top 25 supply chains. Amazon is number three overall but ranked second just behind Apple based on the opinion of its industry peers.

What Amazon is doing is setting a standard for postponement. Given the competitive nature of the retailing industry, where time and cost mean everything, the ability to marry scale economies with customization is a winning strategy. Traditional supply chain strategies require inventories based on business forecasts and planning. And inventory still plays a critical role in ensuring product availability. Full line inventories at strategic locations feed the fulfillment centers.

But more agile strategies that incorporate postponement of final manufacturing, assembly and distribution until the receipt of a specific customer order reduce the need for costly safety stock and make customers happy. Customization through postponement also allows a company to offer a greater variety of products. Increases in transport costs that result from smaller shipping loads are offset by a reduction in inventory costs, fewer risks of bad forecasting and planning, and the customer’s willingness to pay for timely delivery of a product.

All this should be good news for our region. Many of the facilities that support fulfillment are typically located near major ports and big cities. These include transload facilities, distribution centers and warehouses. As Amazon’s strategy suggests, proximity to major markets also matters. We have that as well. That means options for local consumers as the well as the potential for jobs serving an efficient supply chain.

(Dr. Thomas O’Brien is the director of research for the Center for International Trade and Transportation at CSULB and associate director for Long Beach Programs for the METRANS Transportation Center, a partnership of USC and CSULB. For past articles in this series, please go to www. ccpe.csulb.edu/IndustryArticles.)