Logistics play a role in successful business strategy
Read an article below and answer the following questions.
1. How can logistics play a role in successful business strategy? Give examples of organizations with excellent logistics processes, not mentioned in the article.
2. What trade-offs must be considered in the logistics process to achieve optimum SCM performance?
3. What is the state of capacity in the global logistics network? How will this situation impact global SCM operations?
IT COMES DOWN to this: All your TQM and reengineering and teamwork and delighting the customers are riding on the back of a double-clutching, diesel-guzzling, steel-girded mastodon rumbling down the highway while the rest of the economy sleeps. Passing through a hub like the one shown at right is the truck pictured on the following pages, a 23-ton rig laden with odometers and speedometers for General Motors` Saturn assembly plant in Tennessee--just one link in a supply chain that covers more than 99,000 miles every day. That`s 36 million miles a year, not long enough to reach the planet that shares the name of the popular GM car, but plenty long enough to command attention.
Call it distribution or logistics or supply-chain management. By whatever name, it is the sinuous, gritty, and cumbersome process by which companies move materials, parts, and products to customers. In industry after industry, from cars and clothing to computers and chemicals, executives have plucked this once dismal discipline off the loading dock and placed it near the top of the corporate agenda. Hard-pressed to knock out competitors on quality or price, companies are trying to gain an edge through their ability to deliver the right stuff in the right amount at the right time. Says Robert Sabath, a vice president with Mercer Management Consulting in Chicago: "Logistics, long an unsung, operations-intensive area, has suddenly become very strategic."
Just how strategic? Compaq Computer, the white-hot company that recently became the world`s No. 1 producer of PCs, estimates it has lost $500 million to $1 billion in sales so far this year because its laptops and desktops weren`t available when and where customers were ready to buy them. Says chief financial officer Daryl White: "We`ve done most of what we need to do to be more competitive. We`ve changed the way we develop products, manufacture, market, and advertise. The one piece of the puzzle we haven`t addressed is logistics. It`s the next source of competitive advantage. The possibilities are just astounding."
Last year American companies spent $670 billion--a gaping 10.5% of GDP--to wrap, bundle, load, unload, sort, reload, and transport goods. So clogged is the gross national pipeline with unnecessary steps and redundant stockpiles that the grocery industry alone believes it can wash $30 billion, or nearly 10% of its annual operating costs, out of the system. A typical box of breakfast cereal spends a stunning 104 days getting from factory to supermarket, haltingly progressing through a concatenation of wholesalers, distributors, brokers, diverters, and consolidators, each of which has a warehouse. Says James Alampi, president of Van Waters & Rogers, the largest U.S. chemicals distributor: "Frankly, the cost of making a product is almost irrelevant. You have far more opportunity to get cost out of the supply chain than you do out of manufacturing. There`s so much duplication and inefficiency."
Think of supply-chain management as nothing less than the reengineering of the entire economy--one convoluted chain at a time. Once you start reconceptualizing your company as a collection of business processes, it becomes dauntingly clear that those processes extend beyond the portals of any one building, the boundaries of any one corporation, and the borders of any one country. Says Harold Sirkin, a vice president of the Boston Consulting Group: "As the economy changes, as competition becomes more global, it`s no longer company vs. company but supply chain vs. supply chain."
Streamlining processes that traverse companies and continents is about as easy as reforming the health care system. But the payback can be enormous. In two years National Semiconductor has cut its standard delivery time 47%, reduced distribution costs 2.5%, and increased sales 34%. How? By shutting six warehouses around the globe and air-freighting its microchips to customers worldwide from a new, 125,000-square-foot distribution center in Singapore.
What works with chips can work with chintz. Laura Ashley, British purveyor of clothing and home furnishings, turns inventoryroughly ten times a year, five times faster than three years ago, after overhauling its information systems and consolidating warehouses. Saturn, whose world-class logistics system links suppliers, factories, and dealers, turns its parts inventory so fast--300 times a year--that it`s barely there. Even Compaq, which says it has just begun to fight, has quintupled production since 1991 without expanding factory space, partly by working with suppliers to reduce stockpiles of unassembled components.
CHARGED WITH bringing luster to the nation`s supply chains is a new breed of executives, as adept at managing information technology as they are at managing inventories. Says Greg Owens, co-managing partner of Andersen Consulting`s logistics strategy practice: "Logistics used to be a position you got moved into when you couldn`t handle anything else."
No more. Duane Weeks helped design a cutting-edge replenishment system at Procter & Gamble before Compaq appointed him its first-ever vice president of worldwide logistics last January. Weeks, a former consultant, now oversees activities that involve 2,000 people, some 15% of the computer maker`s work force. To help bring all those employees up to speed, Weeks plans to set up an in-house logistics training program modeled after McDonald`s Hamburger University.
Gus Pagonis, the three-star general who stage-managed the movement of men and materiel during Operation Desert Storm, now masterminds the flow of lawn mowers, lingerie, and lug wrenches at Sears` once troubled, now reviving merchandise group. Neil Novich, the new president of Inland Steel`s materials-distribution group, holds degrees in physics, nuclear engineering, and management from Harvard and MIT.
Companies that don`t import high-priced talent often export their logistics systems--lock, stockpile, and barrel--to outside contractors. Ryder System, best known for renting trucks, manages Saturn`s far-flung supply chain from supplier to factory to dealer showroom. Federal Express, the pioneer in overnight delivery of documents, has developed a thriving sideline running transportation and distribution services for companies like National Semiconductor and Laura Ashley. Cass Information Services, a transportation accounting firm in St. Louis, expects the contract logistics business to expand from $16 billion in revenues today to as much as $50 billion by the turn of the century.
That estimate could prove conservative as more companies discover that logistics, for all its strategic value, is a great mass of trucks, trains, planes, ships, parts, products, people, materials, and machines that often seems governed by Murphy`s Law. "In logistics, if you go an hour without having a screw-up, you`ve had a great day," says Pagonis of Sears, as he strides briskly through a one-million-square-foot distribution center in Manteno, Illinois, stocked floor to ceiling with everything from tires to vacuum cleaners to word processors.
DELVE into supply-chain management and you quickly confront a litany of recondite concepts, including heijunka (Japanese for "even flow"), cross-docking: usable cube, electronic data interchange, efficient consumer response, and activity-based costing. Companies that revamp their logistics operations often wind up adopting solutions that fly in the face of popular management nostrums. Why? In an age of delegation and empowerment, logistics demands centralized control. And sometimes the best way to get closer to your customer is actually to fold your tent--or your warehouse--and move that process to a more efficient location farther away.
National Semiconductor, the world`s 13th-largest chipmaker, has gleaned those insights--and many more--on its way to overhauling a logistics network that circles the globe. The Santa Clara, California, company, whose products end up inside cars, computers, and telecommunications gear, began looking at distribution in the early 1990s as part of a broad effort to reverse a spate of corporate losses.
The first step was to figure out how much the company was spending to move and store parts and products along its supply chains. Says Dennis Samaritoni, National`s vice president of corporate services: "We had no idea what this process was costing us."
National begins producing chips at six high-tech silicon wafer fabrication plants (known as fabs): four in the U.S., one in Britain, and another in Israel. Next the company ships the wafers to seven assembly plants, most in Southeast Asia. Then--and here`s where the real fun begins--the company must get finished products to an array of heavy-hitting customers, including IBM, Toshiba, Compaq, Ford, and Siemens, each with its own network of factories scattered around the world.
Everywhere National`s logistics team looked--just collecting and collating the data took a year--it found costly stockpiles. They were sitting at assembly plants, at customer warehouses, and at all points in between: consolidators, forwarders, customs clearers, and distributors. To reach the customers, the chips traveled 20,000 different routes, mostly in the bellies of planes flown by 12 airlines, stopping along the way at ten warehouses.
National delivered 95% of its products to those customers within 45 days of the time they were ordered, leaving considerable room for improvement. But the real trouble was with the other 5%, which required as long as 90 days for delivery. Since customers never knew which 5% would be late, they demanded 90 days` worth of everything. Says Patrick Brockett, president of National`s international business group: "We had buffer stocks all along the line. The whole system was awash in inventory."
Using activity-based costing, a method of measuring the expense of everything done to a part as it meanders along the supply chain, National reached an eye-popping conclusion. Explains Brockett, a bearded Brit who once ran the company`s European operations: "We found that most of the stuff we were moving around didn`t generate a damn in revenues or profits." As a result, National has slashed the number of products its sells by 45%.
To speed its remaining products to market, National set out to craft a drastically simplified system. All finished chips would be transported to a central facility in Asia, where they would be sorted and air-freighted to customers. A big problem remained. Says Brockett: "To do that, we would have had to make our company into Federal Express." Instead, National hired Federal Express. As part of a deal that took 16 months to negotiate and involved the chief executives of both companies, FedEx now runs all National`s storage, sorting, and shipping activities out of a distribution center in Singapore.
As a result, National can move products from factory to customer in four days or less and is well on its way to its goal of 72 hours. National has increased sales by $584 million in the past two years. But distribution costs have fallen from 2.6% of revenues to 1.9%. So pleased are National`s managers that they want to share their logistics insights with competitors. Call it self-serving altruism: National believes it and the whole electronics industry would benefit if companies could take money now wasted on distribution and redirect it into what they do best--inventing new and better products.
Move another few steps along National`s supply chain and you land in the Houston headquarters of Compaq, where executives are hurrying to overhaul a logistics system that is creaking under the strain of the company`s growth. With production lines whirring around the clock and new factories opening in China and Brazil, Compaq should hit revenues of $10 billion this year, more than triple the 1991 level. In this year`s first half Compaq reached a milestone it hadn`t figured on attaining for another two years when it vaulted ahead of Apple and IBM to become the world`s top PC maker, as measured by International Data Corp., a Framingham, Massachusetts, research firm.
COMPAQ`S next ambitious goal is to achieve double the market share of its closest competitor by the end of 1996. Says Gregory Petsch, senior vice president of corporate operations, who appears mildly bemused at his own choice of metaphors: "What we`ve done to improve manufacturing is not a home run. It`s a base hit. We won`t widen our lead unless we send the logistics batter up."
Petsch, a thin, deceptively soft-spoken man with a pronounced Texas drawl, has already enlisted--some might say dragooned--his suppliers into smoothing the flow of parts into Compaq`s inordinately clean Houston factories. Picking up an idea from a newspaper article on Wal-Mart, Petsch cleared most of the parts inventories off the factory floor. Those pieces are now stored 12 miles away in a warehouse leased by 35 major Compaq suppliers, all of which moved their inventories to Houston at Compaq`s behest. In addition, Compaq convinced seven sheet-metal suppliers to relocate to Texas. All these suppliers now truck the parts to Compaq exactly when and where the computer maker needs them.
Petsch secured the suppliers` cooperation not by promising them an uninterrupted flow of business but by agreeing to keep them better informed about Compaq`s production plans, thereby helping them keep their own parts inventories under control. Petsch predicts that the new system, combined with the ever-falling prices of electronic components, will help knock more than $600 million off Compaq`s supply costs this year.
Compaq`s biggest challenge looms much further along in the supply chain. The company wants to drastically improve the way it gets computers from its factories to distributors, wholesalers, and retailers, whose ranks have swelled tenfold to 31,000 in the past three years. When it comes to deliveries, Compaq, like most computer companies, has an on-time arrival record that would land it in bankruptcy court if it were an airline. On average, only 40% of Compaq`s computers reach the customer on time.
Compaq has already cut from four weeks to two the average amount of time a boxed computer spends in its 350,000-square-foot Houston distribution center. Sophisticated software matches customer orders to inventory on hand every day. Radio signals then tell the drivers of Aisle Rangers, the 30-foot-high trucks that run on tracks between the shelves, which items need to be picked up. All increasing number of Compaq`s finished products buzz through the distribution center without ever tarrying on a shelf. Workers sort them onto pallets and then load them into waiting trucks, a practice known as cross-docking.
As part of its $100 million corporate reengineering effort, Compaq is testing an automatic replenishment system in its Erskine, Scotland, plant that electronically links the factory to some customers. By next year Compaq will no longer make computers on speculation, hoping that supply will match demand somewhere down the road. Instead. in this build-to-order program, every unit that rolls off the line will be destined for a particular customer.
None of these concepts--cross-docking, build-to-order, or electronically swapping information with customers and suppliers--are novel. Compaq logistics czar Duane Weeks helped forge one of the first electronic data interchange (EDI) links between Procter & Gamble and some of its customers way back in 1984. Automakers have long been building cars with specific dealers in mind. Says Weeks: "I`ve learned that there is nothing new under the sun. But while you could see any one of these practices at other companies, it`s unusual to see them all in one place."
A great many of these practices converge at the Saturn operation in Spring Hill, Tennessee. So adroitly does the automaker manage its supply chain that in four years it has had to halt production just once--for only 18 minutes--because the right part was not delivered at the right time. Saturn maintains almost no inventory of components. Instead, a central computer directs trucks to deliver pre-inspected and presorted parts at precise times to the factory`s 56 receiving docks, 21 hours a day. six days a week. Especially striking about this just-in-time system is that most of Saturn`s 339 suppliers aren`t located anywhere near the plant. They are in 39 states and an average of 550 miles away from Spring Hill.
Charged with making the Saturn network run on schedule is Ryder System, the Miami transportation services company that has become the biggest logistics management firm in the U.S. Ryder`s mandate is to keep parts. people, and trucks in nearly constant motion. Tractors, pulling trailers that are, on average, 90% full (an exceptionally high ratio), arrive daily at Ryder`s command post some two miles from the Saturn factory. There the drivers uncouple the trailers. Specially designed shuttle tractors then take the trailers, which contain barcoded, reusable plastic bins full of parts, and deliver them to the plant.
The long-haul drivers, meanwhile, hitch their tractors, the most expensive part of Ryder`s $32 million of assets, onto other waiting trailers, which are stocked with empty bins to be hauled back to suppliers. In a first for the auto industry, the trucks also carry boxes of service parts to be delivered to Saturn dealers. Drivers plug a plastic key, loaded with electronic data, into an onboard computer. The screen then tells them exactly where to go, which route to take, and how much time to spend getting there.
Yet another of its graceful reinventions is the way Saturn replaces parts. Linked electronically to all its suppliers, the company automatically reorders parts each time a car rolls off the line. This so-called pull system of replenishment replaces the old, endlessly intricate computer programs used by General Motors to forecast future needs. Says Curt Gibbs, Saturn`s director of materials flow and transportation: "We had systems so complex they bordered on artificial intelligence. Now, when we use a part, we pay for it, and then we order another one."
It is not, of course, quite that simple. Logistics rarely is. Fixing the technology is often the easiest part of the equation. Changing people`s ingrained behavior patterns can be more challenging. In no industry is this more evident than in the grocery business.
At first glance, your average supermarket looks like a marvel of supply-chain efficiency. Think of the wide aisles, the fully stocked shelves, the wondrous variety, the endless checkout lines (okay, you can`t have everything). But pull back the curtain, Toto, and the wizardry fades fast. Behind the scenes is an industry that actually rewards people for building unnecessary inventory. All along the supply chain, sellers push discounted products onto merchandise buyers, who in turn are compensated for purchasing things cheaply even though they may languish in a warehouse for months on end. So addled are the industry`s practices that a whole class of characters known as diverters thrives by buying caseloads of discounted food in one state and transporting them to another where the discount isn`t being offered.
But the grocery business has been shocked out of its torpor by some big-footed players with very efficient distribution systems. These "alternative format" retailers, of which Wal-Mart is the largest and most menacing, have been steadily stealing market share from supermarkets.
To parry the threat, food manufacturers, wholesalers, and retailers have rallied around an industrywide initiative known as efficient consumer response (ECR). Two years ago a study by consultants from Kurt Salmon Associates in Atlanta concluded that the industry could save $24 billion in operating costs and another $6 billion in interest expenses by streamlining its logistics and changing its behavior.
Spartan Stores, a Grand Rapids food distributor and a leader in the ECR movement, was recently able to shut down a 300,000-square-foot warehouse, which cost $1 million a year to operate, when it stopped stockpiling discounted products. Says Keith Wagar, vice president of procurement and in-bound logistics: "We`ve got to eliminate all the activities that don`t add value to the consumer. Our only chance is to look at the transaction from manufacturer to consumer as a single process. It`s a strategy for survival, a strategy for growth."
Logistics. It may not be cool. But it`s flush with potential. Says the Boston Consulting Group`s Hal Sirkin: "We`re miles ahead of where we were five years ago, but we`ve only just begun to tap the savings we can get out of the system." May your trucks run full, your warehouses stay empty, and your supply chains come alive with the sound of cooperative suppliers and truly delighted customers.