Raytheon zeroes in on logistics excellence: the defense contractor now applies six sigma quality principles to its logistics operations benefits could top $45 million over five years.
As recently as 2002, the Waltham, Mass.-based company had 38 different ways to pay its freight bills, most of them manual and paper-based. Many shipping and warehousing activities, moreover, went unmeasured and lacked adequate controls. One manager recalls a box of documents that had been sent coast to coast between Raytheon facilities in preparation for an audit. The box was signed for on an Andover, Mass., loading dock ... and was never seen again.
The situation had become especially difficult in the late 1990s after the $18 billion defense conglomerate acquired ESystems and the defense divisions of Hughes Electronics Corp. and Texas Instruments--all huge operations themselves. Years later, the company was still digesting those acquisitions.
But those issues have been resolved, thanks to corporate initiatives that have replaced chaos with consistency and un certainty with uniformity. In 1999, Raytheon's leaders crafted a "one company, one culture" vision. They chose the "Six Sigma" quality doctrine to overhaul corporate culture and management practices, cut waste, and measure value in customers' terms. By doing so, they've ensured that logistics innovations and best practices are communicated and implemented companywide. The big payoff: The estimated five-year cost benefits of Raytheon's drive for uniform quality total some $45 million.
WALKING A TIGHTROPE
Raytheon had been eager to change the way it managed logistics for some time. In 1997, the defense contractor formed a logistics council comprising representatives from each of its business units. The council had a worthwhile mission--using Six Sigma approaches to leverage its spending on carriers with more "bulk buying" across businesses. But the group wasn't as effective as it might have been.
For one thing, there was very little knowledge-sharing across business units, and few processes were standardized. The council's members, moreover, all had full-time jobs that required most of their attention. And although the council had launched important initiatives, including a bold new freight-payment program, a materials-stracking project, and import/export improvements, its focus was more on tactical payoffs for individual business units than on their companywide application.
Timothy Wholey, Raytheon's vice president of supply chain management, understood that a new, centralized approach to decision making was needed. "In very large companies, the more successful ones have corporate [logistics] centers that help influence business units," he observes.
In 2002, Wholey won approval to hire a top-notch logistics professional to drive change at the corporate level. The new manager would be charged with tapping Raytheon's Six Sigma capabilities to align inbound and outbound logistics with the "one company, one culture" view.
Later that year, Wholey brought in George Ellis as director of integrated logistics. Ellis knew he had a tightrope to walk: Not only did he have to capitalize on the gains made by the logistics council, but he also had to change its mission--and do it quickly.
Ellis spent his first three months establishing baseline information on costs, processes, and resources. "When I started, people would ask me, 'What do we spend on logistics across Raytheon?' No one had an idea," he recalls.
The new logistics chief also became familiar with how Raytheon used two key tools: its "R6S" (Raytheon Six Sigma) initiatives which embraced methods such as just-in-time inventory management, supplier-managed inventory, and lean production; and its knowledge management (KM) competencies involving "communities of practice" (COP). (See the sidebar on page 74.)
RILCOM TAKES SHAPE
Ellis quickly saw a need to send a message about the importance of the new logistics initiative. One of the first steps he took was to expand the scope of the logistics council from its narrow focus on freight costs to covering the supply chain from end to end. To reinforce that change, he and the members of the council crafted a new name: RIL COM, for "Raytheon Integrated Logistics Community of Practice."
At the heart of RILCOM's strategy would be a push to replicate best practices and lessons learned, using the R6S and KM tools to better tie logistics into the "one company" concept. That strategy was rooted in six principles espoused by supply chain consultants CapGemini: collaboration, optimization, connectivity, execution, speed, and visibility.
First, RILCOM had to prioritize its initiatives for 2003.The group segmented its projects into five categories: transportation optimization; materials handling optimization; performance-based logistics infrastructure; communications; and people development. Each of those categories included five or six individual projects, which were further classified according to whether they were "core," or of value to all Raytheon units 'common," meaning useful to two or more units; or unique. The resulting grid helped RILCOM identify priorities, set schedules, and allocate resources. At the top of the list were the freight-payment system, the materials-tracking system, and the import/export management activities that the logistics council had already begun.
That segmentation also made it easier to see how best to harness Raytheon's fast-developing knowledge management capabilities. Late in 2002, Raytheon began sending selected employees to train in community-of-practice disciplines at the American Productivity & Quality Center in Houston, Texas. Many of the trainees became KM champions in their business units. They began to teach others about knowledge mapping, collaborative online tools, best-practices databases, and Web-based KM portals.
It quickly became clear that enthusiasm for sharing knowledge wasn't enough to meet Raytheon's needs. It was fine to share documentation and swap ideas, but four-fifths of the company's knowledge was "tacit"--that is, in employees' heads. Mark Palla, the KM expert who supports RILCOM, puts it this way: "We recognized we had to come up with a blended KM strategy drawing on people, process, tools, and our culture. And it had to be integrated into our R6S strategy."
Palla and his colleagues emphasized the value of certifying KM expertise and processes, of institutionalizing and proliferating the communities of practice, and of recognition for sharing knowledge. Today, Raytheon employees--logistics staff included--visit a KM portal to search the best-practices database for something they can use or adapt. There are KM forums where subject-matter experts lead sessions on knowledge-sharing practices in the context of Six Sigma principles. And Raytheon gives out KM awards to those who best exemplify ways to apply the lessons they've learned.
Ellis and his group have used KM "peer assist" techniques to promote MTrak, a materials--and property-tracking system developed by engineers at Raytheon's Network Centric Systems (NCS) division. The logistics council chose the program for tracking shipments between plants. Elevating MTrak as a priority RILCOM project allowed the company to apply the full power of peer assistance to other operations--flying in the NCS engineers and transferring their knowledge during short-term assignments at other plants. The engineers also helped develop training materials, documentation, and project implementation processes. MTrak is being adopted by five of Raytheon's seven business units, which will use it to automate and simplify tracking, reduce the amount of "lost" materials, and free up resources for other logistics initiatives.
PowerTrack, the new freight-payment system, also moved fast on RILCOM's watch, replacing multiple manual payment processes with a uniform, Web-based product offered by U.S. Bank in Minneapolis. The system improved cash flow, paying carriers within an average of 22 days (compared to the previous 52 days). It also provided timely access to data, enabled electronic billing and remittance, and set up management-reporting processes, carrier-performance metrics, and a dispute-resolution path.
THE COMMUNITY LOOKS AHEAD
Ellis says he has discovered hidden value in RILCOM's quick wins. The community approach has created deeper trust among logistics professionals, which means RILCOM can move quickly and confidently on upcoming projects. He'll need that edge: RILCOM has a full plate this year and next. The checklist includes leading Raytheon's efforts to comply with the U.S. government's mandates for Unique Identification (UID) and radio frequency identification tracking; integrating a single, SAP-based warehouse management system into all of the divisions' warehouse operations; moving faster with performance-based logistics capabilities; progressing with supplier-managed inventory initiatives; and investing in the skills of Raytheon's roughly 1,500 logistics staff members.
Due to RILCOM members' commitment and hard work, Raytheon has made substantial progress toward achieving excellence in integrated logistics. Wholey and Ellis estimate that the company will save $45 million over five years, thanks to such improvements as standardized documentation, shorter cycle times, better supply chain visibility, and higher customer-satisfaction levels.
What Raytheon's logistics operation has achieved is striking in both its scope and its pace; its gains owe much more to the company's top-down approval of compelling strategic principles than to layers of resources.
"Having an expanded vision was the key to getting everyone on board and striving for improvement," says Ellis. "In turn, that encouraged professionals with personal commitments to work together as a team."
John Kerr is a veteran business journalist who frequently writes on supply chain management issues.
Deciphering Six Sigma, KM, and CoP
In working toward achieving excellence in integrated logistics management, Raytheon has made extensive use of three business management concepts: Six Sigma, knowledge management, and communities of practice. Here's what those terms mean, together with some suggested information sources.
Six Sigma is a quality-control methodology that sets 3.4 defects per one million events as the highest threshold of allowable errors. Based on measures of standard deviation, Six Sigma relies on data analysis to eliminate wasteful costs and unproductive steps while improving customer satisfaction. Employees may become certified as Black Belts (full-time Six Sigma pros) or Green Belts (part-time) after receiving required training.
[check] American Society for Quality--www.asq.org
[check] Six Sigma Consultants Inc.--www.sixsigmaco.com
Knowledge management (KM) identifies intellectual assets and creates tangible value from them. These assets include explicit knowledge, such as research and intellectual property, and tacit knowledge (individuals' knowledge). Implementing a KM program requires a dedicated staff, a corporate culture that promotes sharing between employees, and a technology backbone that supports the KM process.
[check] American Productivity & Quality Center--www.apqc.org
[check] Knowledge Resource Institute--www.krii.com
[check] The Knowledge Management Resource Center--www.kmresource.com
Communities of practice (COP) consist of people who need to stay up-to-date on what others know in order to better perform a common task. CoPs develop naturally in a collaborative environment, Healthy CoPs speed up problem-solving and encourage innovation and creative thinking.
[check] TCM's CoP Page--www.tcm.com/trdev/cops.htm
[check] Community Intelligence Labs' Communities of Practice Site--www.coil.com
[check] Fred Nickols' Communities of Practice Home Page--home.att.net/~discon/KM/CoPs.htm