Architecting the Liquid Supply Chain
A common supply chain misconception equates liquids with process industries. A huge opportunity for discrete and service industries lies in recognizing the quantity of liquids that flow through these industries and exploiting the operational, financial and strategic benefits that liquid-oriented logistics offers. Since supply chain networks for liquid products are fundamentally different from those for discrete products, and the act of architecting the liquid product supply chain network is a critical success factor in gaining full advantage from the differences.
The Hidden World of Liquid Products
We can get our first view of liquid logistics in discrete environments by looking at the normal production-to-consumption flow of liquids. The standard supply chain life cycle of a liquid product is that it is produced as a liquid and converted into a solid/discrete item by putting it into a bottle, jug, tote, drum or other container. It is then stored, transported and handled as a discrete item, and often referred to for ordering, stocking and issuing in discrete terms (12 cases of cooking oil) rather than liquid terms (80 gallons of cooking oil). The liquid product is ultimately reconverted to a liquid at the point of use when it is poured out of the container and used. While B2C streams often require the packaging for consumer convenience, in B2B streams the packaging often represents not only a wasteful and costly addition to the product, but also prevents the utilization of the liquid-based logistics techniques described below.
The magnitude of liquids used in discrete and service industries that are candidates for flow-based handling provides insight into the magnitude of the opportunity. More than 24 billion gallons of liquid commerce is conducted annually in the U.S. civilian market. Military demands and global markets add billions more. Discrete production industries utilize liquids in many areas:
- As part of their bills of materials, including component chemicals, colorants, resins and adhesives;
- Within their production processes as machine lubricants and cleaning fluids; and
- In support activities such as product transport and facility maintenance.
Service industries consume massive quantities of liquids such as fountain beverages in the foodservice industry, detergents in the hospitality industry and automotive lubricants in the automotive servicing industry.
Specific industries utilize liquids, and have the potential to use liquid logistics principles, in staggering volumes. Agribusiness, for example, operates fleets of machinery that use liquids for power as well as for lubrication, and many agricultural products such as grains have logistics characteristics similar to those of liquids. Although no industry is more discrete than airlines, with its serialization and close recording and control over many parts of aircraft, the dozens of liquids used on each aircraft multiplied by the thousands of aircraft used and serviced daily results in a very large liquid component. The construction industry, with its use of paintings and coatings as well as preservatives such as formaldehyde, is another discrete industry that is not normally thought of in liquid terms. But, upon closer examination, construction is seen to function based on a river of liquid products that are used in all phases of industry activity.
Is It Fish or Fowl?
If the quantities of liquids used in discrete and service industries are so huge, why does the opportunity for more efficient logistics go unrecognized? Liquids are very often invisible within the supply chain flow for several reasons. First, since discrete products dominate commerce, the liquid products are swallowed up, so to speak, by being converted to discrete items for supply chain purposes. On the one hand this allows liquid products to be handled using the infrastructure that has been created for discrete products; on the other hand, managing liquid products through discrete systems eliminates the advantages that liquid logistics offers. It is difficult for most companies to identify how many gallons of liquids are held or used as part of their operations simply because liquids are not identified as a separate type of product. Table 1 details a set of general characteristics that differentiate liquid products from discrete products.
Liquids are also invisible within an industry because they run counter to the traditional method of looking at industries vertically but become very meaningful when viewed horizontally. For example, the use of liquids as machine lubricants is similar across many different vertical industries such as automotive, aerospace, construction and many manufacturing industries. Companies are typically grouped by industry or by size. Since standard business practice is to benchmark companies and industries by process excellence, a cross-industry view that reveals the power of liquid logistics is rarely taken and even more rarely acted on.
Play by the Rules
A supply chain network functions best when it is intentional. Supply chain architecture embodies the design and operation of the network in such a way as to take best advantage of the relationships, processes, products and economic conditions of the particular marketplace in which it competes. A liquid product supply chain network is intentional when its architecture is proper, and it takes advantage of the special characteristics of the liquid products being handled (see Figure 1). In this way, a liquid product supply chain network is the same, yet very different from, a discrete product supply chain network.
A
supply chain network is a cascading of seller- to-buyer relationships. In each
stage of the network one or more upstream sellers want to flow their liquid
product to one or more downstream buyers. Where the network consists of physical
pipelines, the buyer/seller relationships are fixed. Where the network breaks
at terminal pumping points, the buyer/ seller relationships can be switched.
For example, crude oil from a singlesource pipeline is pumped into ocean-going
tankers sailing under different flags for consumption at different refineries.
Or the contents of a gasoline barge are pumped into 6,000-gallon over-the-road
tankers bound for the retail pumps of competing brands of gasoline.
Supply chain architecture is built around a set of five fundamental business principles.[1] The principles are best understood from the perspective of the supply chain relationships within the interior of the network. Such an interior node is in business to flow liquid product from the supplier on to the customer. Each interior node represents some friction to the liquid flow, which is this organizations threshold of competitiveness. It will only make a profit if it can support end-to-end network throughput. The 5-V Principles velocity, variability, vocalize, visualize and value are powerful tools that lower the threshold of competitiveness for a node through the matching of network design with network operations and with the product structure.
Velocity: Accelerate the Order-to-Delivery- To-Cash Cycle for Liquid Products
Each interior node in the network buys from its upstream seller, meters in some flow from that seller, and sends a cash payment for product received. This interior node then sells to its downstream buyer, meters out some flow to that buyer and receives a cash payment for product delivered. The higher the velocity for these orderto- delivery-to-cash cycles, the more competitive this node becomes within the network. When discrete product thinking is applied to a liquid product network, there is quantization and physical packaging of the product contributing to non-value-added cycle time. It is better when real-time information metering, together with the physical flexibility of the product, can place highly targeted inventory balances with the buyer and accelerate cash payments. As soon as product flow is detected, cash payment can be authorized and completed electronically.
Variability: Eliminate Logistics Variability in the Flow of Liquid Products That Amplifies Unwanted Product Inventory And Unnecessary Cash Inventory
Every process has some variability, and the business processes used by an interior network node are no exception. Processes that are serial, such as one pipeline in series with another pipeline, tend to amplify the total variability seen by the network. Network variability is really the deviation in the order-to-delivery-to-cash cycle for the network node. The common solution to this problem is to use an inventory buffer to decouple serial processes, and the inventory buffer may be either an inventory of product or an inventory of cash, or both. The network node realizes that it cannot accurately predict when it will run out of product or cash, and it manages this risk by storing some extra of each. The lower the variability of the order-todelivery- to-cash cycles, the more competitive this node becomes within the network. When discrete product thinking is applied to a liquid product network, non-value-added packaging steps are put in series with the flow, and inflate cycle time variability. For example, variations in the availability of forklift trucks or the drum space remaining in a warehouse are just not factors in a liquid-base logistics environment.
Vocalize: Broadcast Tank Levels and Flow Capacities Throughout the Network
The ability to match supply with demand depends, in part, on information sharing of product inventory, flow capacity and consumer demand throughout the network. When an interior network node manipulates price by withholding inventory and capacity information from the buyer or by withholding demand information from the seller, network throughput suffers. Unnatural delays and unexpected constraints are introduced into the network encouraging the end consumer to switch to a competitor. When consumer demand is vocalized among all the network nodes and there is good collaboration over capacity and inventory planning and control, the network can achieve high throughput at a competitive price. When discrete product thinking is applied to a liquid product network, inventory is the stationary product that can be counted in the warehouse. On the contrary much of the liquid product inventory is moving through the pipeline. For example, capacity constraints and inventory levels can be broadcast in real time using telemetry from data sensors embedded in the pipeline.
Visualize: Measure the End-to-End Flow Performance for Liquid Products
The interior node in a supply chain network needs different kinds of performance measure from which to run its business. These performance measures cannot be internally focused for example, on minimizing cost, because the node can only be successful when buying in-network and selling in-network. Rather these performance measures must be refocused to capture end-to-end throughput, or flow. When capacity and inventory is visualized in real time among all the network nodes, the supply chain network is driven to achieve end-consumer needs competitively. When discrete product thinking is applied to a liquid product network, revenue is dollarized against canisters, drums or railcars, while liquid product revenue can be measured as a flow rate over a time period such as gallons per hour for six hours. For example, the distribution stage of the liquid product network uses pre-existing liquid balance technologies to provide ongoing inventory balance and throughput information to drive a network performance scorecard. The scorecard is then integrated with the performance scorecards from the other nodes to fully describe the end-to-end network.
Value: A Big Win From Architecting for Liquids
The opportunities for investment returns on liquid product supply chains are significant when the network focus shifts from discrete-based to liquid-based. This is an essential shift in strategic thinking from the nature of the packaging to the nature of the product. In addition to the advantages of a streamlined network, as defined by the 5-V Principles described above, liquid-based logistics for liquid products provides extensive marketing, financial and environmental benefits.[2] From a marketing perspective, the flexibility of packageless logistics provides new product opportunities in terms of product placement and at-dispense product configuration. This puts the final characteristics of the product quite literally into the hands of the consumer. The financial benefits of the approach result from the elimination of complexities throughout the network. The elimination of non-value-added packaging in liquid-based supply chain networks provides obvious environmental benefits. The key to success in architecting a supply chain network for liquid products is not to build a network that is an adaptation of that for discrete product. The key to success is to go with the flow in architecting a new network from source to dispense based on the tremendous logistics advantages that liquid products can provide.
Endnotes
- Walker, William T. Supply Chain Architecture: A Blueprint for Networking the Flow of Material, Information, and Cash. Boca Raton, FL: CRC Press, 2005.
- Klatch, Wally. Supply Chain for Liquids: Out of the Box Approaches to Liquid Logistics. Boca Raton, FL: CRC Press, 2005.
