At Long Last, Logistics Reaches the Boardroom
The CEOs of two vastly different companies—The Container Store and Leiner Health Products—share their views on the importance of logistics and supply chain management to their companies' bottom lines.
"When you shop in our stores, you find a solution that you can't find anywhere else. Part of this solution is the product and part is customer service."
In 1978, two friends—Garrett Boone and Kip Tindell—decided to open a store devoted to helping people simplify their lives with adaptable storage and organization products. The result was The Container Store, and since its founding, Boone (chairman) and Tindell (CEO and president) have never looked back.
Today, The Container Store operates 28 retail locations coast to coast, selling everything from modular closet shelving systems to wrapping paper and paper clip holders. The company is credited with "inventing" the storage and organization category in the housewares industry. Its successful retail equation consists of three key elements:
- A unique, high-quality product mix.
- Equal-to or better prices than the competition.
- Service that is beyond comparison.
"Our merchandise is very exciting and our employees and service are the best in the industry," brags Tindell. Others agree. In 2000 and 2001, the company topped Fortune's list of "100 Best Companies to Work For." The Container Store is the first company in the list's history to consecutively win the number-one position. The retailer has recorded 20- to 25-percent growth rates for the last 25 years—an almost unheard of phenomenon in the overcrowded U.S. retail sector.
"We receive high acclaim for the public-facing side of the business," Tindell notes, "but behind the scenes in the logistics and IT areas of our business, we believe we have to be equally excellent. We view our supply chain as an important means of differentiation.
"In a bad economy, we have to be great at this stuff," Tindell says. "We sell rather inexpensive, freight-intensive product, most of which we import. This freight profile demands that we pay more attention to logistics. In fact, logistics is an area that we work to death. Our logistics professionals are among the best in the country."
Everyone Serves the Customer
The Container Store handles all of its distribution through a single central facility in Dallas. "Everything we do has a customer focus," observes Amy Carovillano, vice president of logistics and distribution. "All our product moves into and through our central DC in Dallas. Nothing drop ships to the stores. The most important thing we can do for our stores is to focus on the customer rather than on checking in freight."
"We derive a number of benefits from this central DC approach," Tindell explains. "We manage inbound freight efficiently to one FOB point. This enables us to negotiate better pricing with vendors because we don't have to go through the hassles of managing multiple FOB points. Then there's the efficiency of processing one mass of goods rather than 40. Also there are cultural benefits to having our people all in one place."
The Container Store insists that everyone in the DC understand what happens in the company's stores. "We have to make sure shipments to our stores are perfect," Carovillano says. "We're not some dark backroom."
Knowing exactly what's going on in the stores makes the DC associates feel part of the team. "We communicate constantly with them, sharing information about the company," Tindell notes. "If information is only communicated to them on a need-to-know basis, they won't feel part of the team. Training and communication help maintain their caring and enthusiasm, which in turn drives a very low turnover rate."
The company also makes sure its DC workers understand the corporate culture and Foundation Principles. "They represent our culture just as much as the office or store people do," Tindell asserts.
Employees must understand and live by the following six guiding philosophies:
1. Fill the other guy's basket to the brim. Making money then becomes an easy proposition. Creatively craft mutually beneficial relationships with customers, vendors, and employees.
2. Man in the desert. Don't stop with providing customers with the obvious—water in this analogy. Instead, find out what their needs are and help design a solution to fill them.
3. One average person equals three lousy people; one good person equals three average people; one great person equals three good people. With one great employee, you get three times the productivity, meaning that you can afford to pay that person twice as much. The employee wins because he or she gets paid twice as much. The company wins because it gets three times the productivity at two times the payroll costs. And the customers win because they get exceptional service.
4. Intuition does not come to an unprepared mind. You need to train before it happens.
5. Provide the best selection anywhere plus the best service anywhere plus the best—or equal to the best—pricing in our market area.
6. Create an air of excitement. "We also insist that our 3PLs, carriers, and contract drivers understand us and our culture and practices," Carovillano adds. "We sit the drivers down and tell them, 'this is how we unload the truck at a store, this is how we put merchandise on the store shelves.' We expect 100-percent on-time delivery from our carriers. If they arrive at 5:05 for a 5:00 appointment, they're late. We have 17 people sitting around twiddling their thumbs."
The Container Store CEO is fanatical about the people aspect of his company. His attitude, in fact, makes him an anomaly in the retail business.
"We believe you can have retail people who are not just a bunch of bubble gum chewing kids," Tindell says emphatically. "Retail can be a great career. Most retail executives gave up on that idea years ago.
"Find great people, believe in them, and share success with them," he says. "They will run the business for you. That same belief applies to the DC. Just because it's a distribution center and people are running forklifts and moving boxes around doesn't mean they can't do the same. If you can get great people to work enthusiastically in a hot DC in the summer in Texas, you can do anything."
The first things The Container Store looks for in a prospective employee are attitude and enthusiasm. "In fact in the DC," Carovillano says, "we don't necessarily look for people who have warehouse experience. We don't want them to bring any bad habits or preconceptions about the work."
How do you find those people? "Our director of recruiting realized that it's not his job to recruit great people," Tindell explains. "It's the job of our 2,500 employees. We want their friends, their family, their cousins."
Thanks to this approach, The Container Store has not had to run an employment ad in more than two years. The employee turnover rate is about one-quarter the industry norm of 100 percent. This low rate enables the company to invest heavily in employee training—235 hours for a full-time salesperson, for example.
The Container Store imports products from all over the world. "We used to do lot of sourcing from Europe," explains Tindell. "European consumers insist on better design for their mundane household articles. So we found these great products, and we just went nuts in Europe."
Today, in addition to Europe, The Container Store imports a lot of product from China and India. In fact, the company eventually liked its best-selling product—the "elfa" ventilated shelving and drawer system from Sweden—so much that it bought the company.
How does The Container Store deal with vendors? According to Carovillano, "Once we establish a vendor relationship, we don't view it as 'well, now that's taken care of, we don't have to talk to the vendor anymore.' We want to build a relationship. So our vendors are touched by our buyers, our import department, traffic department and so on. We communicate constantly throughout our supply chain."
Not Just Another S.O.B.
Developing and maintaining these close relationships with vendors, transportation service providers and other trading partners is one of The Containers Store's ongoing strategic challenges, Tindell believes. "We are a medium-sized retailer so we don't have the muscle of a Wal-Mart. This means we have to work at maintaining the way our vendors view us. We want to be viewed as their favorite customer.
"We think communicating constantly and building relationships works better than being the arrogant buyer and cracking the whip," he continues. "We have been growing at 20 to 25 percent every year for 25 years. We need our transportation vendors, manufacturers, customs officials—everyone in the world—to do what they say they will. And that's hard. We overcome this by relationship building. If you become one of a vendor's best customers, you get shockingly good service. You're not just another SOB."
Looking to the immediate future, Tindell sees several challenges. First, the company is in the process of building a new central DC in Dallas to replace its outgrown 300,000- square-foot facility. The new DC ultimately will expand to one million square feet. The Container Store makes the move in 2004.
Second, The Container Store will continue to expand its retail store footprint, albeit in a slightly new direction—downtowns. The company has plans to open stores in New York City. To accommodate the urban settings, the company must change its distribution approach.
"Right now," notes Carovillano, "our stores get their deliveries in 53-foot tractor-trailers. These won't work in an urban setting, so we are working with one of our carrier partners—National Freight—to develop a solution that will. "
As The Container Store grows, Tindell believes it will continue to look to logistics as a source of both savings and innovation. "It's gratifying to continue the evolution to being more efficient and innovative when it comes to our supply chain," he says. "It allows us to be more competitive with pricing, reap higher profits, and reward our employees extremely well."
"Twenty years ago," he says, "we were a regional retailer in Texas. We'd send trucks out to the store every day half empty. We've gradually evolved to a higher level of professionalism when it comes to our supply chain."
"To me," Tindell concludes, "it's a necessity. Aim high; insist on world-class excellence and efficiency. I am very pleased at how we work logistics to death and keep getting better at it all the time."
Leiner Health Products
"Business today is all about managing complexity. And managing complexity is all about inventory turns."
Leiner Health Products is the largest private-label manufacturer of vitamins, minerals and nutritional supplements, and a leading manufacturer of private label over-the-counter (OTC) pharmaceuticals in the United States. The company produces more than 27 billion pills a year, and markets only to the nation's top retailers.
The retail/drug store sector, which includes such giants as Wal-Mart, CVS, Costco and Safeway, is undergoing massive consolidation. Competition is cutthroat; cost pressures are monumental. "Retailer demands are higher in terms of improved service levels and downward cost pressure," says Gale Bensussen, president of Leiner Health Products.
"Retailers are reducing their warehouse inventories and compressing lead times from as little as two weeks on standard products and 10 weeks on major promotions," he says. "We supply as many as 200 different SKUs to a given retailer. Each SKU may have as many as 50 different ingredients. When you explode that back up the supply chain, you have to be able to manage incredible complexity."
"We are a marketing-oriented manufacturing company," Bensussen explains. "So we start with customer needs. What do they want, then how are we going to get it to them? We partner with the retailers to understand their unique needs and the tools that the customer has available to us that can be integrated into our inventory management systems.
"Basically," he says, "our ability to plan is directly related to the quality, availability, and information we receive from retailers and how well we use it. With accurate, timely, well-formatted information, we can work the supply chain to increase retail turnover and reduce out of stocks. Connection to the retailers is fundamental."
There are two types of retailers, in Bensussen's estimation: "Those that have online VMI (vendor managed inventory) capabilities where we can track and monitor sales trends by SKU and respond accordingly, and those that do not have the data and cannot plan efficiently.
The second group is losing the market-share battle because:
- Inventories are out of balance.
- Inventory does not turn as fast as more sophisticated competitors.
- Promotions cannot be executed efficiently.
- Lack of historical data prevents identification of consumer trends.
"Sophisticated retailers, on the other hand, know precisely the lift on various types of promotions," he says. "They plan ahead and provide adequate leadtime. This allows time to build stock at the lowest possible cost, making promotions more efficient."
Managing the Supply Line
To manage retailer needs, company managers meet weekly to review and/or revise forecasts to ensure 97-percent-plus service levels.
In 2001, Leiner launched a reengineering effort with the help of consulting firm REM Associates of Princeton, N.J. As a result, inventory turns increased from 2.5 to four.
"At the same time, our service levels are 100 percent for many customers—up from about 70 percent two years ago. Average service levels are 97 percent. We supply more than 4,000 SKUs. That's big-time complexity management," Bensussen says.
"The result of the reengineering effort is margin improvement, which allows us to keep our retailers competitive. And the substantial reduction in inventories has strengthened our balance sheet," he notes.
Going through a major reengineering project was, as Bensussen puts it, "an epiphany."
"We had been growing in double digits every year," the president recalls. "That puts the pressure on to keep increasing market share.
The natural focus is on more products, more sales, distribution gains, and push promotions. The danger is not paying enough attention to developing operating systems to support growth. We needed to step back and understand the quality of the business. That was our epiphany."
Leiner set goals to:
- Be the highest quality, lowest cost supplier to the mass market.
- Generate increasing cash flow from internal operations.
- Focus on the customers and the products where it makes the most profit.
With REM's help, Leiner analyzed its customer portfolio to rank its customers. "We discovered that our top 15 customers represent 85 percent of our profit. Then we looked at our products, and found that 3,500 of our 7,000 SKUs were generating most of the profit. We also found that the bottom-tier SKUs were profit negative.
"So we went through the painful process of discontinuing approximately 65 customers and 3,500 SKUs. These actions provided a basis for improved efficiency of Leiner's manufacturing facilities," Bensussen says.
"Our run times are much longer, down time is less, SKUs are fewer, raw material purchases are large, but we eliminated a lot of commodities. We know what we have to produce, and are not lost in trying to get thousands of unprofitable SKUs out the door," he says.
"We're seeing greater efficiencies, which put us in a more competitive cost position. We can now deliver vastly superior customer service.
"In fact," he says, "the personality of the company has changed, and we are having much more fun."