So Fast: challenging the majors on the basics; Logistics does not have to be complicated.

THINK OF LOGISTICS in Japan, and most people conjure up visions of huge automated warehouses and to-the-minute tracking systems.

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But the fact is that more than 80 percent of foreign firms selling products in Japan are small operators, selling less than JPY1bn ($10m) of product a year, and are unlikely to want to invest in a million-dollar logistics operation. Nevertheless, even a JPY100m operation requires some logistics infrastructure, and the investment to go with it. Or they can outsource ...

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The problem with logistics is the need for infrastructure and its associated costs. For this reason, many smaller foreign importers move the physical handling and storage of products to domestic transport firms, accepting that automation and service capabilities will be limited. However, what starts out as a cost-reduction exercise gets cancelled out as staff are hired to manage the operation and to devise ways to compensate for a makeshift system. The result is that while immediate logistical needs can be met, cost-creep, slow and inaccurate deliveries, and rising customer complaints can become major headaches.

This has created a gap in the logistics market: for a company which can keep systems simple and low cost, and yet at the same time is able to provide fast, accurate turn-around of goods and resolution of customer problems. So Fast Ltd. is one such company. The CEO, Keiichi Ito, started the company in November 2002 after 23 years with Yamato Transport . While at Yamato, Ito oversaw the company's now famed road transport system. He was there from the start, and probably knows more about Japan's transport and warehousing infrastructure than any one else alive. At 47, Ito decided that he had enough years left for one more turn around the track, and to cap his career, he wanted to start his own operation and prove that his ideas could be commercialized in a start-up, not just a major operation.

Simple Can Be Best

So Fast (the name comes from a client's comment on Ito's rapid customer response) was created to take advantage of a basic opportunity--logistics and support systems for small to medium-sized (SME) companies. Ito has learned that not every company requires a high-level of systemization and automation. Business volumes have to get to a certain size before such tools pay for themselves, and below that, work flow reorganization and intelligent use of staff and facilities can bring just as much efficiency. His approach is not to re-engineer a client's entire system, but instead to go in and study the major needs and weaknesses and tackle those first. Importantly, early on he sets up a pattern of continuous communication with the client, so that he and his team are informed and involved--to the point where they can anticipate customer needs and implement ideas without having to bog the customer down in time-consuming details. Then, as the client's business performance starts to improve, his staff continues the close contact, ready to move the client to the next stage of development when the time is right. In essence, So Fast acts like a long-term best practices consultant--albeit without the experts' fees.

This closely coupled and incremental approach differs from the many Western logistics specialist companies that have entered Japan and tried to re-engineer client processes from top to bottom. Frequently these efforts alienate the clients' often conservative and busy staff and result in partial or complete failure of the project. The Western specialists then walk away wondering why Japanese are difficult to please and reluctant to change. Basically, small Japanese clients, as well as the Japanese operations teams of newly arrived Western clients, have enough challenges on their plate and do not want to overcomplicate a fundamental business activity such as product logistics. They'd rather ramp up slowly, watching their budgets and retaining control. This is a simple point, but one easily overlooked in the rush to systemize a logistics operation.

Ito relates a specific example that highlights his approach. "Take one customer who needed to augment staff for fielding calls from customers late at night. The standard procedure would be to put in a dedicated late-night call center, an expensive proposition. However, we realized that we might be able to utilize our existing late-night resources, and have started training our night-shift warehouse staff to provide multiple services. Now they work in the picking and packing areas until about 22:00, then move to a call center at the same location until two am. Thereafter, they move back to the warehouse--continuing to prepare for shipments to start at six am."

Initial tests with multi-skilling show that the client's immediate needs can be solved and at a reasonable price. As a result of this and other simple but effective innovations, the client is opening up to So Fast and the trust level climbs. Indeed, both companies recently signed an agreement for the client to completely outsource their logistics to Ito's company.

Everything about So Fast is geared towards SMEs. For example, they can implement a project in just 10 to 12 weeks after the quotation, compared with a minimum of 6 to 8 months from larger logistics vendors such as Mitsui Bussan. Next, companies without computerized warehouse operations in Japan can elect to have near real-time XML data from So Fast's back office systems, or request a browser-driven web page in which to enter and check shipments and inventory.

The start-up phase, tailored specifically for SMEs, is a big departure from Japanese warehouse vendors' usual offerings. So Fast doesn't charge for systems consulting or set-up--instead offering a fixed-charge contract, thus keeping initial costs way down. Another service is the provision of outsourced production lines for packaging localized manuals and cables and other accessories.

SME's need competitive pricing. We asked Ito on the spot to quote us for a hypothetical company importing several thousand items in a 40-foot container once every three months. Including receiving from the freight forwarder, storage, inventory control, and shipping oversight, his

logistics service would cost about JPY400,000 per month--less than the cost of an experienced employee to do the same job internally, let alone the warehousing and tracking costs.

Small and simple has worked well for So Fast. In just the second year of operation, the company's sales jumped from JPY120m to JPY320m in FY2003 (through to September 2004)--extraordinary growth by any measure. The firm has its own multipurpose 24-hour warehouse in Heiwajima. The warehouse has basic automation and systems, but So Fast tries to focus more on the human element for overall efficiencies with its SME customers. Thus, each client gets its own team of staff, handling every aspect of its logistics. The team leader knows the location of every product, and is able to relate on a personal level to the client's shipping and inventory needs.

It sounds counterintuitive, shifting work processes from automation to people--but as Ito emphasizes, at a certain level of volume--typically the volume experienced by boutique importers--automation makes no sense, and people actually can control things for the same net result at lower upfront and maintenance costs. This is not to say that So Fast doesn't use systems and bar coding. They do. But they don't impose any particular system until it makes commercial sense for the client. This represents a refreshing level of reality for So Fast's clients.

Do You Need Outsourcing?

Many foreign manufacturing firms start off with a trading partner in Japan, but over time start to realize that their products will only make headway if they represent themselves. Thus, we see the phenomenon of small Japanese trading outposts of foreign manufacturers, which can cover costs, but show little profit. After high hopes, such organizations fall into a pattern of hard grind, and build their businesses slowly and organically.

This is a situation that no one wants to see, but all too often, after the original cost of setting up the office, creating localized products, and setting up marketing and logistics operations, the tendency is to leave the Japan office to its own devices, so long as it doesn't lose money. The management of such companies know this and once they hit an equilibrium between fixed costs and revenues/profits, they become conservative, doing sales through wholesalers and engaging in minimal marketing. Basically, staffers are just interested in keeping their jobs--not radical risk and growth.

To avoid this situation, existing operations can benefit from outsourcing logistics and using the savings to refocus on marketing. So Fast has several case studies showing how after they became involved, the clients were able to focus on the business of selling.

Case Study One: DMC 

Set up in 1984, DMC Japan is the Japanese subsidiary of a famous French embroidery patterns and accessories maker. The French company is privately owned and has been in business for over 250 years, so it has its traditions and wishes to stay focused on the embroidery business. In some respects the Japanese office is a reflection of the French parent, in that it is conservative, and has established a comfortable niche in the Japanese market. The management until recently were happy with the status quo.

Unfortunately, the economy and Japanese demographics have not been kind. The core market, housewives with time on their hands, is dwindling as women start working again, or turn to computers and other pastimes to replace traditional home arts and crafts. For this reason, two years ago, the local CEO, Mr. Koji Honda, realized that something had to be done to reduce costs, or else the company would slip into the red.

There were few places where Honda could cut costs. DMC Japan really is a small business, with annual sales of around JPY200m. Sales, marketing, and accounting could hardly be cut further, so this left logistics and rent as targets. The problem is that embroidery in Japan is a unique market, with small quantities of product being shipped at irregular intervals to more than 400 retailers all over Japan. DMC's entire inventory is between 3,000 and 4,000 SKUs, and the annual sales value for any particular SKU for all of Japan is less than JPY1m. Average sales for the top 50 stores is about JPY80,000 per month In short, DMC is a logistical challenge, and the traditional solution of implementing a full-blown inventory and warehouse control system would swallow any profits for years to come.

DMC's business model is one of selling through wholesalers to retailers all over the country. Although some marketing and sales are done at store level, most of the activity is conducted through 15 main wholesalers, who have their own account reps and are better able to maintain personal relationships with each store. When new product is released, the promotional materials and display packs are delivered to the wholesalers, for distribution to the retailers. DMC has considered going direct, but for such a niche product, the cost of a direct sales force would be uneconomic.

Pre-outsourcing Operations

Before deciding to outsource their logistics, DMC struggled maintaining the huge line of products themselves. Through natural growth, in the late 1990s they had decided to take an office with attached warehouse space, in Asakusa, Tokyo. They took more space than needed to allow for future expansion. But instead the market contracted, leaving the company with more space than needed, and a high rent bill.

While no stock was lost, many slower selling items would get stuck at the back of the inventory pile, while hot selling items would often wind up being out of stock. Thus, frequently it would take two to three weeks to source/locate and dispatch products, causing distributor and customer dissatisfaction, slow returns on inventory investment, and substantially more manual work by the internal staff.

Handover 

About the same time that the DMC senior management decided that they needed help to bring inventory shrinkage and handling costs under control, Ito of So Fast was introduced to the DMC CEO, Honda. The two men got on well together, and the thing that Honda remembers about Ito was, "He wasn't pushy and didn't try to sell me more than I needed. We're a company which believes in organic growth, and DMC offered us a 'starter' package which suited us down to the ground."

Honda and Ito agreed upon a deal where So Fast would charge nothing for initial set up and consulting, but would receive a monthly fee based on volume of product shipped and the sophistication of service for a guaranteed minimum period.

So Fast then sent in its workflow experts to analyze the current system and come up with ideas for improvement. The process took one week of 12-hour days, interviewing managers and mapping out workflow. They rationalized inventory storage and control, and a got a better bulk deal on freight and handling from the shipping partner. In addition, systems were implemented allowing both DMC, and eventually their wholesalers, to look at stock in real time and be able to give better ETAs to their clients.

Typically, So Fast's solution has been a pragmatic one, mixing computerization and simple workflow improvements. For example, orders from wholesalers are still taken over the phone or by fax, meaning that the distribution channel is not being forced to take on new systems and technology. Indeed, only one of the 15 wholesalers is even using bar-coding equipment. DMC's Honda is confident that online inventory checks and ordering are on the way, but he only intends to introduce such options when the timing is right in the marketplace. In the meantime, after the fax and phone orders are taken manually, they are outsourced to So Fast, which then computerizes and stores them, to integrate with head office reordering and reporting systems.

Post-outsourcing

As a result of moving their logistics to the flexible space in So Fast's Heiwajima warehouse, DMC could examine other ways to cut costs. For one thing, they decided to move to a much smaller space in Kanda. The improvement of the bottom line allowed for the employment of another salesperson, and a consequent increase in repeat sales.

Freed from logistics worries, DMC is now focusing on marketing. It has two major local competitors, who own 70% of the market. DMC positions itself as a marketer of exclusive European designs and colors, and has significantly increased its stock of colors and patterns in Japan, something which wouldn't have been possible without the new logistics partner. In particular, fade-free colored yarn has become an important selling point to older women, who like artistic control over their creations--DMC offers about 20 shades of blue alone.

Since public interest in handicrafts in general has been on the decline for 20 years, DMC sees hope in the recent awareness of natural food and natural living. It is expanding its product range to attract young people interested in fringe lifestyles, with beads, new patterns, and better thread color ranges. It hopes that in fad-obsessed Japan one of its products will find favor with free-spending young people. With a little luck, smart marketing, and help from So Fast, DMC will be well prepared to get product out and ride the next wave.

Case Study Two: Guthy Renkler

If you watch any of the popular TV shopping channels, you might recognize the Guthy Renkler brand of cosmetics from its use of Hollywood stars, such as Victoria Principal, to promote its lines. When the company first came to Japan in 1996, it tied up with trading company Nissho Iwai, to start and run the operation independently. Given that Nissho Iwai was getting the company's cornerstone product, a best-selling acne cream called Proactive Solution endorsed by Britney Spears, expectations were high. Unfortunately, Nissho Iwai had trouble understanding the Guthy Renkler approach, and stumbled in both marketing and customer service, losing money for five years straight.

Then, in 2000, senior management in the USA decided to set up a small independent office manned by just one person, the current CEO, Desmond Brennan. His job was to fix what was wrong. Brennan found that the Nissho Iwai logistics company couldn't provide service that satisfied the core market of women in their 40's and 50's. Product took three weeks or longer to deliver, packages were scratched and worn, inventory that was supposed to be in one warehouse was found to be under piles of other companies' products elsewhere, and generally, customer service response was uncaring.

"If you're dealing with cosmetics and Japanese customers," notes Brennan, "they are very particular and have lots of other products that they can buy. If you don't keep them happy, they won't buy again." And taking three weeks to deliver a product bought on impulse on a TV shopping channel was a problem requiring an urgent solution.

The first thing that Brennan decided to focus on was getting product out to customers by the next business day, reinforcing their impression about the overall quality of the company and the product. He decided to switch from Nissho Iwai's logistics subsidiary and find someone smaller who could meet the delivery deadlines and ensure packages arrived in prime condition. He found Ito at So Fast in 2001.

On first meeting Ito, Brennan was impressed when the So Fast CEO promised he would personally apologize to a customer disappointed with So Fast's service. As it turns out, he seldom had to make good on the promise. Nevertheless, there have been times when, if a customer complained, Ito really did hop on a train and travel outside Tokyo to make the apology. Not many logistics firms would be willing to offer the Ito "apology guarantee" as a test of their service levels!

A Matter of Caring About Presentation

So just how fussy is the Japanese customer? Brennan says that presentation is everything. "In a typical warehouse, you can get lots of dust and paper fragments. If these are left inside product packages or if the packaging itself is sub quality and no one picks up on that, the Japanese customer will never accept it or forget it. That's why, if you go into the Guthy Renkler operation at So Fast, you will find that the pick-and-pack team all wear gloves and caps, and the flooring is covered and properly cleaned on a daily basis--if not more frequently."

So Fast also checks everything from the US factory, because customer standards here are much more demanding. A full "check" means more than just checking the condition of the contents and any damage to the tubes and tubs. Rather, it includes repacking in locally produced packaging, Japan-only customized kits, brochures, and filler materials.

Guthy Renkler and So Fast meet at the start of each week, and discuss issues and plans for product packaging and delivery. At one such meeting last year, the concept of selling products in a mix and quantity of the customer's choice came up--the immediate challenge was to get products to fit standard boxes. The solution was that the joint team developed a new flexible packaging system, and now any combination of products can be shipped in one of the new boxes. "These guys are willing to come in on a frequent basis and have open conversations of issues and how to solve them," says Brennan. "That's what we want and need, and it shows in our growing reputation for top-notch client service."

Certainly Guthy Renkler must be doing something right. In just three years since its split with Nissho Iwai, the company has grown from just one person to over 50--including a call center with more than a dozen beauty and customer care representatives. Products shipped have gone from 2,000 units a month to 50,000 (peak demand). And Japan now has 50,000 plus members.

Real Partnership Means Extra Value

Brennan gives an example of just how far So Fast has gone to ensure that Guthy Renkler gets what it wants. The nature of the TV shopping cosmetics business is such that often customers only want to try out a couple of products and reorder in volumes of one or two pieces. With the costs of picking, packing, and transport, such orders may almost cost more than they are worth. However, So Fast was able to help Brennan cut costs by redesigning the workflow, both speeding up shipments and further slashing costs. After Ito made the changes, the business doubled within months, proving that Ito's remake of the workflow was indeed both scaleable and robust.

Another example of So Fast's innovative thinking is that of the floating pick-pack/telemarketing team mentioned earlier. As Brennan points out, "We had a lot of trouble with telemarketing, especially late at night. Japanese telemarketing firms are generally designed for catalog business or user support business--which means steady allocation of resources throughout the day or evening. In our case, however, we needed a peak availability of staff to take phone calls late in the evening for about two or three hours, after which volume falls off dramatically. The problem is that you can't bring a team in for just three hours, and then expect them to get home again using after-hours transport. The costs and difficulty of recruiting kill that notion."

One likely solution, suggested by Ito, has been for So Fast to multi-skill its warehouse work force to handle both warehousing and inbound telemarketing. Since these people are usually on night shift anyway, there is no pressure to provide them with expensive after-hours transportation, or to have a team waiting for a phone call outside of core audience response hours.

Why So Fast?

Recent Japanese business guides brim with listings of logistics companies. So why consider using a smaller company like So Fast? Probably the best reason is Ito himself. Where else could you find out that Yamato transport is best for customer-directed deliveries, while Sagawa is best for wholesaler-directed deliveries? Or that in getting restricted products, such as health supplements from Japan into Taiwan, the cheapest way is by Taiwan post office? It's local knowledge like this, plus low pricing and service flexibility, that makes So Fast a solid alternative for handling logistics cheaply and quickly.

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In wrapping up, perhaps a last client testimonial is appropriate. We asked Brennan how So Fast has done with the dramatic 3,000 percent increase in shipment volumes over the last three years. His answer was succinct: "They haven't missed a beat."

So Fast Corporation

Nippon Express Co., Ltd.

Omori Branch C-7

1-2-20 Heiwajima Ota-ku

Tokyo 143-0006

Tel. [phone]

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www.so-fast.co.jp/en/index.html