Logistics as a competitive weapon.
In today's marketplace, selling products and services is difficult enough. Getting them to customers on time, and in the right size, color, or quantity, can be a lot trickier--and maybe more important. More often than not, logistics conjures images of a chaotic warehouse operation. Some CEOs find the subject an implacable bore. But they do so at their peril. In the following roundtable discussion, conducted in partnership with Miami-based Ryder System, participants discuss how this once-humble operations function is adding value by reducing costs, speeding delivery, and rationalizing the supply chain from raw materials producers through product manufacturers.
In a military sense, logistics is the science of procuring, maintaining, and transporting people and equipment. Confederate General Nathan Bedford Forrest is known for a remark that could serve as the mission statement of any logistics-minded leader: "Get there fustest with the mostest." Gen. William "Gus" Pagonis, the logistics officer in Operation Desert Shield/Storm during the 1992 Persian Gulf War, did just that. In the first 30 days of the conflict, Pagonis moved 38,000 troops and 161,581 tons of equipment halfway around the world. This was layer than the initial deployments of World War II, the Korean War, or the Vietnam War.
In the U.S., logistics accounts for an estimated 11 percent of GDP. Transportation and shipping alone comprise roughly 15 percent of a product's sales in the U.S. In many markets, where price increases are notoriously difficult to pass along, producers seek ways to lower transaction costs. As Larry Mulkey, president of Ryder Dedicated Logistics, observes in the following exchange, taking inventory out of the pipeline and reducing warehouse and distribution costs enables senior executives to focus on core competencies.
Information technology is transforming the supply chain from start to finish. As proficiency increases, the use of logistics gives way to supply chain management (see nearby article on SCM by Al Battaglia, group president, Becton Dickinson and Co.). Baxter International Chairman and CEO Vern Loucks explains his company's relationship with such suppliers as Becton Dickinson and William Little's West Co,: The chain becomes an integrated process starting with the supplier of raw material, and optimizing the flow of information, material, and activity through every stage, including order replenishment, until the product gets to its final customer. In this model, logistics means more than streamlining the delivery of products and materials. Ideally, say Loucks, Mulkey, and Saturn President Skip LeFauve, the function is not merely a collection of independent systems but a seamless web in which customers and suppliers live out of one another's pockets. "We view Baxter as a process company," Loucks says. "We agree to share the risks as well as the rewards."
Achieving maximum flexibility--not to mention trust--among members of a supply chain isn't easy. CE asked roundtable participants to rank their companies on a 10-point scale of SCM excellence, with 10 being the high score. On average, the executives, many of whom had leading-edge capabilities, rated themselves between six and seven. Advice on the subject varies. "Push team management," urges Sealed Air Corp.'s Dermot Dunphy. "Believe it in your heart, "advises Merisel's Mike Pickett. But perhaps Loucks best represents the consensus: "Get your hands dirty," he says.
Larry S. Mulkey (Ryder Dedicated Logistics): There are thousands of definitions for logistics; everybody seems to have a different one. Webster's says it's a military term that means managing supplies, material procurement, and maintenance. At Ryder, we define it as the management and operation of the channel that encompasses procurement, demand forecasting of a product, and its manufacture, distribution, and delivery to the end customer.
Many CEOs don't realize the importance of logistics in today's increasingly global arena--both as an area to cut costs and to provide a competitive advantage. On the surface, logistics appears to comprise only about 5 percent or 6 percent of the profit and loss statement, but the truth is that logistics impacts all the other costs in the P&L equation, such as manufacturing, inventory, and labor. So the real breakdown is closer to 10 percent to 15 percent.
In addition, companies no longer are judged solely on the quality of goods and services. The new paradigm demands speedy product delivery to the end customer, whether he's in New York or New Zealand. And as companies turn to niche marketing and customization, they must partner with suppliers and find more flexible manufacturing methods such as just-in-time, quick-response, continuous replenishment, and point-of-sale technology.
The challenge is ensuring that these approaches run smoothly--getting the truck to the warehouse, loading the correct product, and sending it on time to the correct customer.
Some companies decide to face this challenge alone, relying on their own in-house talent. Others outsource logistics management to a third-party provider such as Ryder. We believe the key is integrating logistics functions across the channel, from raw material sourcing to finished-goods distribution. A good third-party provider can start at any point in the channel--warehousing, packaging, sub-assembly, or demand forecasting--and provide an integrated solution often based on information technology.
Information is rapidly replacing inventory in the new logistics paradigm. Third-party providers can show you the tools to help you make strategic decisions, such as where to locate a distribution point or how to select a vendor and transportation mode (truck, boat, plane, or train). The operations decision depends on the technology a company wants to use: on-board computers, voice response, bar coding, or satellite link-up. Each system we create for a company is custom-designed to fit its needs, but we generally abide by one guideline: "The system that touches the product the least is the winning solution."
To date, we've created a world-class logistics system with Saturn that eliminated all warehouses. Instead, Ryder is linked by electronic data interchange to the supplier base, allowing us to deliver parts to Saturn plants. Every five minutes, there are 2,000 shipments to feed the assembly line.
We also formulated a system for an office-equipment manufacturer that reduced the time and expense required to install and check the product. We created a driver technician position. This employee delivers the product, installs it, gets it up and running, and conducts a customer satisfaction survey before he or she leaves.
One word of advice: If you use a third-party network, make sure its resources will provide you with 40 percent-to-50 percent savings. Generally the biggest reduction comes in inventory, because you're speeding products through the system.
J.P. Donlon (CE): So is it best to use a third-party provider that is dispassionate and has an expertise in logistics rather than attempt to manage logistics internally?
Vernon R. Loucks Jr. (Baxter International): I don't think it can be done internally.
Dennis J. Gormley (Federal-Mogul): You can't farm logistics out. I don't say you can't have help from the outside, but I won't give the responsibility to someone else. It's all mine.
The key is a learning organization. You learn from experience; the logistics experts just help you implement it. But if somebody implements it for me, I don't learn and, therefore, I can't take it to the next step.
Richard G. (Skip) LeFauve (Saturn Corp.): If you have a true logistics partner, and you're both learning and implementing together, this idea of either/or is not the right question.
Alfred J. Battaglia (Becton Dickinson and Co.): Outsourcing is one effective strategy. However, the one thing that cannot be outsourced or delegated is how you plan to align the logistics capability with your business strategy.
Richard A. Altomare (Packaging Plus Service): I disagree with using the word, "delegate." Those companies that have a problem can't always look at it objectively. They understand their business, but they need someone to help translate their direction and calculate the possible costs and savings.
DOLLARS AND SENSE
Efthimios O. Vidalis (Owens-Corning Fiberglas): What is the total cost of logistics?
Mulkey: It is difficult to define. We say it encompasses the whole channel and all the activities needed to manage and operate that channel to deliver the product to the end customer.
Let's look at Saturn. When a dealer gets an order, all the parts are ordered through the multiple suppliers through the EDI link. That link also tells us exactly what we have to do as soon as the order is processed. We get the supplies, bring them to the plant on a just-in-time basis, build the car, and sell it to the customer. You have to calculate all the costs associated with this process.
LeFauve: And don't forget all the labor costs involved in purchasing, supplying, and engineering.
Michael D. Pickett (Merisel): I sometimes separate transportation costs from logistics costs in general, because transport is so important. For example, in Europe distribution costs are high, because the trucks can't get across borders, and some of the regulations are very stringent.
Mulkey: At Saturn, we look at total logistics cost per car rather than just the transportation costs. So, even if the transportation costs are higher, the overall savings of the logistics solution cancels them out.
Robert W. Lear (CE/Columbia Graduate School of Business): Larry, how do you coordinate a global logistics program?
Mulkey: You need innovative, enabling technology and great partners. For example, if you don't have the ability to access and track materials flowing from offshore to the manufacturing plant, you should partner with someone who does.
SATURN'S LOGISTICS ORBIT
DonIon: Skip, tell us more about Saturn's logistics alliance with Ryder.
LeFauve: We recognize that logistics affects our ability to manufacture a quality product and respond flexibly to the marketplace. Our new logistics system came from the General Motors-Toyota joint manufacturing venture known as Nummi (New United Motor Manufacturing Inc.). In partnership with Ryder, we developed an approach that provides us with the minimum inventory in the event of a quality spill. In other words, if a supplier makes a mistake, we have only a few errors in the inventory and can quickly get our production back on line.
For example, a major snowstorm last winter shut down the automobile industry in the Midwest. Our plant is in Spring Hill, TN, but our materials come from Michigan and Ohio. Ryder trucks arrive about every hour with parts. When the first truck got stuck in the snow, information went to the central control system, and Ryder rerouted all the following trucks around the snowbound areas. We only lost 35 minutes of production, while other parts of the business lost one, two, and sometimes even three days.
The system has allowed us to focus on our core business--producing quality cars--instead of putting out fires in the logistics channel. I grew up in the manufacturing world, and I will always remember the guys on the dock at the back of the plant screaming they just ran out of a part and didn't know what to do about production. It was not a pleasant world to grow up in. [Laughter.]
Today, our production runs like clock-work, because it's monitored by a proactive system that circumvents problems. We know when a supplier is going to be short a particular product, because the Ryder route manager checks the material on the dock and makes sure it's the right part number, quality, and quantity before loading it on the truck. If something is wrong with a shipment, we have a 10-hour warning to shift to a different part.
DonIon: How long does it take for a Saturn buyer to get a car?
LeFauve: About 10 days, depending on the color or accessories the customer wants. We generate a dealership order based on national trends and color selections, except when the retailer says there's one coming down the pike he wants.
Battaglia: That type of service is critical. Three years ago, I decided to trade in my Mercedes for a domestic luxury car. The salesman said he'd deliver it to me in three months. That was no good: I wanted the car when I wanted it, where I wanted it. Needless to say, I didn't buy the car. That's proof that the best product alone will not suffice.
LeFauve: Would you say marketing is part of logistics?
Battaglia: Absolutely. It would be absurd for a manufacturer to develop the best product and not introduce it through sales and marketing.
Edward B. Jobe (American Re-Insurance): Several years ago, we changed to a client-oriented approach, in which clients deal with a team of multifunctional insurance specialists--experts in areas including claims, underwriting, and property and casualty insurance. Today, clients don't have to shuffle from department to department when they have questions. The way a product is processed is moving from a support function to becoming the product itself.
Vidalis: The benefit of putting together a product and its service component--integrating logistics--is obvious. But it presents a difficult question for a company that manages different businesses rather than just insurance or just automobiles. Should we have integrated logistics for the entire company, across all businesses? Or should we let each business have its own logistics approach? Could what you are learning spread to other divisions or even throughout GM?
LeFauve: As a matter of fact, Ryder already is picking up the Detroit-Hamtramck assembly plant as the first step into GM. It's not a fully integrated process within Hamtramck, since there are different suppliers, but we all use some of the same ones. Instead of a truck going to a particular supplier and picking up only the Saturn parts, it can also pick up the Hamtramck and Buick City parts.
Gormley: But Saturn and GM are both in the automotive business.
LeFauve: Yes, but if you were using Ryder as a third-party provider, we would be happy to see you use the truck heading north. That's the beauty of the third party; it provides opportunities you wouldn't have if you were running your own trucking business.
Vidalis: How are you going to keep the focus on your particular business rather than on GM as a whole?
LeFauve: We are not separate in the sense that if we win and GM loses, we shout, "Hurray!"
Vidalis: How do you maintain what you have accomplished as the system spreads to GM?
LeFauve: We think the system gets better, because our costs start to decrease as integration begins at the rest of GM.
For example, when we started out, two-thirds of the trucks returning north were empty. Now we can utilize those empty trucks as part of the GM logistics system. The more you can integrate, the better off you are. But you shouldn't force integration for integration's sake.
William G. Little (West Co.): When you implemented your new system, how did your employees react?
LeFauve; The classic corporate statement was, "We're going to make these improvements and eliminate all these jobs. So we'd like you to help us..." [Laughter.] And you wonder why employees don't want to change. The change has to make their jobs more exciting.
Gormley: When we began our logistics integration, managers resisted, perhaps because the end result was less management intervention that led to a flatter organization.
Little: Skip, how difficult was it to train employees in the new system?
LeFauve: In terms of technology, we had no problems. The hardest part of training was persuading people to accept new ideas.
Little: But you started with a clean sheet of paper, so to speak.
LeFauve: Everybody thinks so, but the only thing we started clean on was the ground in Spring Hill. [Laughter.] All 6,000 people in Saturn are GM employees from 34 states. They each had a different proposal for the "right" system. That's not exactly a clean sheet.
Lear: Does your company have a logistics manager?
LeFauve: In a sense. We don't believe in having one executive who focuses solely on logistics throughout his or her career. We look for someone to focus on new technologies and ways to utilize them, in addition to solving problems as they arise.
T.J. Dermot Dunphy (Sealed Air Corp.): We have a logistics coordinator who integrates our transportation, communications, and warehousing functions.
WORKING THE SUPPLY CHAIN
Battaglia: A recent A.T. Kearney study discovered that most CEOs would find the discussion of logistics boring.
LeFauve: I know I always thought this end of the business was dull, and I never wanted to touch it.
Battaglia: I'm trying to change that mind-set by introducing supply chain management: an integrated alternative to warehouses, transportation, production planning, inventory, and all the other fragmented activities comprising logistics (see sidebar and nearby article).
SCM optimizes information and product flows from the purchase of raw materials to the delivery and consumption of finished goods. Becton Dickinson derives a significant competitive advantage from SCM. We evaluate our supply chain program against strategic imperatives involving productivity, quality, service development, and chain integration. As such, we engage in supply chain relationships; in one, we've paired with health-care products firms West Co. and Baxter International.
Here's how our strategic alliance works: West obtains raw materials and manufactures rubber stoppers, then sells them to us. We, in turn, manufacture final medical products and supply them to Baxter, which distributes them to hospitals. What's important is the activity going on in our companies at all management levels. Working together, we reduce cycle times and costs and improve quality and service. We have built strong relationships, and each company is winning.
Loucks: Some 10 years ago, we viewed logistics as nothing more than assembling warehouses and trucks. Then we began to think of distribution as an asset.
It all started in 1983, when the federal government passed its prospective rate payment program, which fixed prices for 400-plus categories of medical products. In that context, everybody who served Medicare patients was expected to provide the required care at a set cost. That squeezed our margins, so we began to shift from a focus on unit margin--which allowed us to pass on our cost increases to the customer--to total margin. We knew a hospital wasn't going to buy more products from us when it's trying to cut costs.
We moved from being a manufacturer of niche items in blood products, artificial kidneys, and IV fluids to a process company providing all the products/services for an entire procedure. For example, we collect from our various suppliers all the products a patient needs for an appendectomy and charge the hospital one flat price for the kit.
We either distribute or manufacture 120,000 health-care items, so we can supply over 75 percent of everything a hospital needs to provide care. Thus, hospitals get the advantage of low-cost distribution across the whole line of products they buy.
Working with our suppliers, we were able to eliminate costs that didn't affect the product value, such as freight transportation, inventory, and order patterns. Our state-of-the art information system allows us to call Al Battaglia at Becton Dickinson and tell him which of his products are moving to which customers and which inventory we want him to hold. We also have a process called Value-link that does material management of hospital inventory.
We also are moving into the managed-care sector and trying a risk-sharing approach. For example, General Motors joins an HMO and asks for a capitated rate for employees. The hospital, in turn, tells its suppliers, including us, that it wants a capitated rate. Essentially we agree to share the ups and downs in supply costs with our customers. We accept the cost of total supplies for the current year and then distribute for a fixed cost over the next five years. And any savings or overruns are divided. We've done something like this with Allegheny Hospital System in Pennsylvania and with Barnes Jewish-Christian in St. Louis.
There are two elements in managed care that affect the supplier. First is standardization. From the customers' point of view, the more they can standardize on a single product that goes into a procedure tray, the fewer suppliers they have to deal with.
Little: That's right. You add a hell of a lot of cost when you start customizing a common product with a common component.
Loucks: The second element is utilization management, which means the customer wants to use less of the product. Now how do I make money if my customer uses less of what I make? One way is by getting lateral penetration through other related products you manufacture. That means you need a wide range of products on which to earn your total profit margin.
Al Battaglia wants to be our choice in terms of whose syringe goes into the packs. We work with him, because he gives us the best cost. This lowers our interface costs.
Arnold B. Pollard (CE): Were you able to measure the consequences of your process re-engineering? And how did the competition respond?
Loucks: Measurement at the outset was not easy. We took many risks, and the early Value-link experiments were not profitable. But we learned from them. Initially, we got more value by reducing customer costs than by managing the hospital inventory system.
To the degree that we can drive costs, we're not limited to the supply chain. We also have the opportunity to manage labor costs--65 percent of hospitals' costs. The key is long-term contracting and having a manufactured product that gives us the profit margin to afford the services that distribution alone cannot achieve.
Pickett: Drug companies have 80 percent margins to support their logistics strategies. But pharmaceutical distributors, such as Medco, don't have those kinds of margins. They're really just one leg on a stool.
Loucks: There's more to your statement than meets the eye. Medco provides drug-benefits management. A physician prescribes medication for his patient, and the Medco representative may call him and say, "Hey, Doc, I have an alternative for 20 percent less. That's better for your patient and better for me. And by the way, if you have to prescribe the higher-cost product, the patient will have to pay the difference." That's a powerful incentive for change. The question is can you do that and represent only one manufacturer?
Pickett: Do you distribute products competitive to your own manufactured ones?
Loucks: Sure, we do.
Donlon: What happens when your own product doesn't win?
Loucks: We lose out, but we still get the distribution. And it travels at low cost.
Donlon: I'd like you to rank your organizations on a scale of one to 10; 10 meaning your company is a totally integrated logistics, supply chain management organization. And then tell me what a CEO needs to do to achieve supply chain management.
Jobe: Though we're the only re-insurer to attempt this type of management, I'd rank us a three. We have a lot of work to do.
A CEO must stay ahead of the curve. That keeps me awake at night. This business is changing rapidly, just as buyers' product and service needs also are changing. The provider that proactively assembles the necessary logistics resources will be the winner.
Rochelle B. (Shelly) Lazarus (Ogilvy & Mather North America): It's a funny question for an advertising agency, but it's not irrelevant. We deal in ideas, so I would rank us a five, because our clients want us to deliver integrated brand and marketing communication solutions. Often, we're still simply producing good ads and commercials instead of persuading a client's customers to choose the client's product.
Dunphy: We think we're a six or seven. The CEO has to push the concept of team management, because we've introduced a new element to the equation. Employees have to work together and interact with suppliers and customers.
Altomare: I would give my company a similar rating. The CEO has to be more of a coach than a cop, because he's linking different elements/divisions that always considered themselves separate.
Gormley: I've often described our company as a logistics company that manufactures when it has to. We have a long way to go to reach our goal: When somebody walks into Skip's Saturn's dealership and buys a car, our raw materials supplier immediately sends the engine bearings and seals to the plant. I also want to extend that ideal globally.
Loucks: We're probably only a five or six at this stage. The CEO must take an integrated team approach beyond what the company can do inside its headquarters. The supply chain and the marketplace play critical parts in business decisions. CEOs must get their hands dirty in the supply chain process, not just read project team reports.
Robert J. Cronin (Wallace Computer Services): Even though we provide a premier value-added service tool--information management products and services--we are probably only a five.
What do we have to do? First, we must define our company identity. Then, we have to determine our core strengths and our customers' goals. This is especially important, because we supply a custom-manufactured product.
Little: We're also a five, at best. We must continue to invest and install the information systems to support supply chain management.
Pickett: We distribute computer products; we don't manufacture or develop anything. I'd rate us pretty high in understanding the concepts of supply chain management and having the technology. But our industry in general ranks as a one or two. Manufacturers drive the changes in our industry. I don't see major microcomputer hardware and software companies pushing supply chain management. It probably will require some economic upheaval for the situation to change.
LeFauve: Internationally, we're a three. On the outbound side in North America, we're probably a five, because we have to go beyond delivering cars to the lot. The biggest problem is that once the cars get to the lot, we don't have the systems to keep the minimum inventories at that point. We have a lot to learn there.
The key for CEOs is listening to their organizations, rather than to the media or to the so-called "experts" in their industry.
Mulkey: Internally, I would rank us a six. We know we need to improve. We must listen carefully to our customers, develop the talents in our companies, bring in new expertise, and break paradigms. We're in the solutions business: We have to provide the best solution to bring the highest value to our customers' end customer.
Logistics brings all the pieces together and leverages them in a new way to serve customers. Companies may package logistics in different ways, but they all share the same goal: successfully leveraging the logistics weapon to beat the competition.
CEOs AND THE SUPPLY CHAIN
The benefits of supply chain management, including lower costs and better customer service, are described in a nearby article by Becton Dickinson Group President Alfred J. Battaglia. According to research by A.T. Kearney's James E. Morehouse, CEOs place the following initiatives high on their agendas. Battaglia asserts an effective SCM strategy can contribute significantly to each of them.
* Cost reduction: Order processing and product fulfillment can easily represent 10 percent to 15 percent of sales, but effective SCM can eliminate between 5 percent and 30 percent of these costs.
* Alignment: Integrating certain functions into a coherent process will yield significant benefits.
* Redefining and investing: Redefining means re-examining a company's competitive requirements, assessing strengths, identifying gaps, and refining strategies. A major opportunity exists to define and invest in an SCM service strategy that creates a competitive advantage.
* Globalization: Most global strategies involve import/export operations either for finished goods or raw materials and services to support local manufacturing. But the CEO must choose a strategy that has an effective plan to deliver products where and when customers want them.
* Extending: To attract good partners and to be one yourself--whether it be at the supplier end or the customer end--you must ensure that your company's logistical and supply chain processes are up to speed.
* Managing change Sustainable, breakthrough performance levels will only be achieved by "out of the box" thinking and effective change management--two topics Battaglia addressed in an earlier Chief Executive article, "Getting Out Of The Box: The Role Of Leadership" (CE: April 1993).
Many consultants, executives, and academicians use different names to describe virtually the same concepts Battaglia defines as supply chain management, including "product supply" and "integrated logistics." But these concepts are not the same. And in any event, they have not attracted the attention of most CEOs. A word to the wise: Effective SCM must be championed by a new breed of executive leaders.
SCM EXECUTIVE COMPETENCIES
Supply chain management, a first cousin of integrated logistics, works best when it is coordinated by a dedicated, senior-level executive. Beyond the required technical and academic requirements, a senior SCM executive must possess certain core competencies:
* Understand the business implications of customer and distributor requirements.
* With other senior executives, develop the operating unit's business strategy.
* Translate knowledge of customer requirements and business strategy into a cohesive, aligned supply chain management strategy.
* Utilize above-average knowledge of manufacturing, information technology, sales and marketing to interact effectively with these functions.
* Influence others, especially where there is no formal administrative responsibility.
* Build multi-organizational "bridges" and teams.
* Exchange open and honest feedback with peers, suppliers, distributors, and customers.
* Build trust with internal and external supply chain participants.
* Develop and articulate a "case for action" to lead process changes.
* Articulate a results-oriented vision that includes measurable objectives.
* Sell the benefits of new SCM ideas to all levels of the organization.
* Challenge the organization to seek new approaches for continuous improvement in the supply chain.
* Leverage implementation capabilities, including the ability to prioritize and manage programs and projects.
* Establish the appropriate measurements and milestones to assure implementation.
* Initiate the appropriate adjustments to reward and recognition systems to reinforce desired changes.
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|Title Annotation:||CE Roundtable; includes related articles|
|Publication:||Chief Executive (U.S.)|
|Article Type:||Panel Discussion|
|Date:||Nov 1, 1994|
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