Extreme Makeover: Supply Chain Edition
Transforming sub-par supply chains into competitive powerhouses takes knowledge, persistence, and guts. So move that bus, and see how it's done.
Shortly after arriving at Pinnacle Foods, Gregory B. Bostick, vice president of transportation, realized that the Cherry Hill, N.J.-based food distributor was a candidate for a supply chain makeover. The company did not have tight control over its carriers, and was completely lacking supply chain metrics, among other issues.
Luckily, shrewd negotiating skills come naturally to Bostick, who won over senior management and outside partners in his effort to transform Pinnacle's supply chain.
During his first few months on the job, Bostick cut millions of dollars in transportation costs from Pinnacle's budget. "My boss and I get along really well," he notes.
Any logistics manager who has experienced a supply chain makeover knows that optimization is as much an art as a science.
A deep knowledge of business operations, finance, transportation systems, and technology are all important attributes, but so are negotiating skills, an eye for spotting waste, and an ability to work diligently and effectively with a variety of partners.
The manager behind a successful supply chain transformation works like a conductor and orchestra. "If you listen to an orchestra's performance, ideally you do not notice the conductor," says Sujit Singh, chief operating officer of Supply Chain Consultants, Wilmington, Del.
Good managers quietly and unobtrusively add both operational and financial efficiency to a company's supply chain. Poor managers, on the other hand, endure the wrath of management as the wheels spin off the supply chain.
"Poor managers are very visible because they are constantly fighting fires, and discussing with employees all the problems they face," says Singh. "A supply chain becomes very visible when it is full of problems."
Finding ways to resolve those problems without drawing negative attention to the supply chain is what an effective logistics makeover is all about.
Time for a Change
When Gregory Bostick launched Pinnacle's makeover he analyzed the firm's shipments to determine if carriers were living up to their commitments. What he discovered was disturbing: some carriers were indeed not meeting their availability obligations.
To build his case against uncooperative carriers, Bostick made better use of Pinnacle's transportation management system (TMS), supplied by Holland, Mich.-based LeanLogistics. "We were using the TMS as a tracking system only," he says.
Bostick pushed the technology to its full potential, checking to see which carriers regularly accepted and rejected tendered loads, and whether any of them were shirking their committed capacity deals with Pinnacle. Whenever he identified a carrier that was dodging its obligation by cherry-picking loads, he called the company on the carpet and threatened to cut back its commitment level.
"That strategy worked well," he recalls.
As a tough negotiator, Bostick takes capacity commitments seriously. "If a carrier only wants to take 10 loads a week, I promise that carrier it will get only 10 loads a week, no matter how much volume we have," he says.
Moving forward, Bostick realized he was most likely to secure favorable carrier deals, and hold carriers to their capacity commitments, if he had access to reliable data. For him, data was the key that opened the door to potential cost savings. "Knowledge is power," he says.
Unfortunately, after only a short time on the job, Bostick realized that he couldn't access the knowledge he needed. "Pinnacle wasn't doing a good job of managing supply chain metrics and key performance indicators," he explains. "In fact, we didn't have metrics at all."
Bostick began building a data warehouse system, using business intelligence tools from Ottawa, Ontario-based software provider Cognos, to collect, track, and analyze an array of company logistics information.
One way the data warehouse has helped Pinnacle is by enabling the company to hold carriers to their rate commitments.
"We are able to go back to carriers that charge inaccurate rates and say, 'We need you to do one of two things: not take loads for us anymore, or honor the rate you committed to,'" Bostick explains.
This system helped the company cut transportation costs by more than $1 million between June and November 2006, he says.
The data warehouse has also helped Pinnacle in several other ways. Bostick is now able to spot potentially lucrative backhaul opportunities, identify customers who are willing to haul their own shipments, and calculate fuel charges on a more favorable per-mile basis rather than on a cost percentage.
The combined savings are impressive. "In six months, we've taken out almost $5.5 million in costs," he says. Yet Bostick admits that he feels pressure to continue delivering savings.
"This is the honeymoon period," he says. "If I can't reduce costs by $5 million or $6 million next year, management will probably be unhappy."
Missing customer deadlines was the critical factor that drove George Cameron to make over his company's supply chain. As the industrial controls division manager for Moog, a manufacturer of precision control components and systems located in East Aurora, N.Y., Cameron faced serious inventory imbalances.
With an oversupply of some key parts and a shortage of others, the time required to make and deliver custom components to customers was stretching to unacceptable lengths. "We missed some deliveries, and customers were getting upset," Cameron recalls.
Before he could start correcting the imbalance, Cameron felt he had to become more knowledgeable about supply chain behavior and practices. He enrolled in an executive education program offered by Northwestern University.
"I thought the course was the right step to help solve the problem, because I didn't know how to set accurate inventory levels on my own," he says.
Looking Back and Forward
Cameron's next move was to examine the inventory system and prioritize the parts that the production department needed most.
"We looked at historical parts usage, then projected forward demand," he says.
Moving ahead, Cameron began to reconfigure Moog's supply chain to find partners that were better positioned to keep inventory fully replenished.
"For example, we replaced a low-cost supplier with one that was a bit more expensive, but was local and could provide much quicker turnaround," he says.
Yet Cameron couldn't simply eliminate Moog's existing partners.
"Changing suppliers results in switching costs," he notes. In the precision controls world, even a small change can have expensive repercussions. "We may have to re-qualify an end product because we changed the source of supply," Cameron explains.
Instead, he opted to enforce a new delivery strategy with Moog's remaining suppliers.
"Instead of giving them an order for six months' worth of product they could deliver at once, we gave them visibility to one year's worth of product and asked them to deliver every three weeks," Cameron says.
Technology also played a role in Moog's supply chain transformation. A web-based order transaction system improved visibility between Moog and its suppliers. The company also began using Lean Physics Stock Optimizer to set inventory levels and cover demand and supply variability.
The software, developed by Bryan, Texas-based Factory Physics, made it easier for Moog to quantify tradeoffs between fill rate, inventory investment, and the number of setups. The technology was part of Cameron's larger plan to examine the value stream and reduce overall cycle time.
"We changed the factory from a 'push' system, where parts are combined together and put out on the factory floor, into a structured line, first-in, first-out short cycle time system," he explains.
After the dust settled, Cameron was managing an entirely revamped supply chain, one that could meet Moog's current and future needs. The steady parts inventory helped production efficiency soar.
"We now complete end product roughly 10 days ahead of schedule," he says. "Prior to these changes, we were about 15 days late."
The streamlined supply chain provided yet another benefit for Moog. While Cameron set out to improve delivery performance and reduce cycle time, he also reaped cost savings for the end product.
"We reduced costs by about seven percent—a pure bonus," he says. Cameron attributes the reduction to a calmer, smoother production process.
"We don't have to scurry around as much because production is not late anymore," he says.
Keys to Success
Making the right choices—whether selecting the best carriers or choosing a solid software product—lies at the heart of an effective supply chain turnaround.
"Supply chain planning and management is all about smart decision making," says Singh of Supply Chain Consultants. Finding the processes and discipline to continuously make good decisions is key, he notes.
Businesses typically want to work as a team, but swift, definitive logistics decisions are rarely reached by committee.
"Companies achieve logistics success most often when the entire supply chain reports to one senior individual," says Pete Stiles, LeanLogistics' vice president of strategy and marketing.
That is why a growing number of businesses now use such a setup for their entire supply chain team, from purchasing all the way through warehousing and transportation, he says.
The individual in charge of a supply chain makeover needs to have a broad understanding of the company's basic logistics needs and goals. An encyclopedic knowledge of logistics minutia, such as daily shipping schedules, is not always required, however.
"The goal is to know roughly where the biggest opportunities for improvement are, and what is needed to fix them," says Steve Banker, a supply chain management analyst at ARC Advisory Group, located in Dedham, Mass.
At most companies, supply chains simply grow organically along with the business. Little thought is given to restructuring the supply chain to meet new business practices and needs.
"Only rarely do companies step back and take a fresh look at the entire network," says Mark Hillman, a supply chain strategies analyst at AMR Research, a Boston-based consultancy.
A Model Analysis
Companies need to periodically analyze their supply chain network to locate and evaluate existing elements, such as key suppliers, customers, facilities, and shipping lanes. This type of analysis can often be accomplished with software that documents and models the various entities and processes within the supply chain.
"After completing this exercise, many managers realize that their supply chain, as it currently exists, doesn't make sense," Hillman says.
To nail down an effective supply chain overhaul, managers need to plan their strategy with solid data, not just gut feeling, says Cameron. "It's worth the time and hassle to analyze and understand your supply chain, as opposed to using a rule of thumb or some empirically derived strategy," he emphasizes.
The turnaround consists of two different approaches. Talking to carriers, suppliers, customers, and other external partners represents only one side of the supply chain negotiation process. The other side involves getting internal decision makers to buy into new business arrangements and strategies.
"Effective supply chain managers always know what their key challenges are. The issue is getting the organization to focus on them," says Stiles.
Stay Calm, Be Honest
For one logistician, the best way to garner internal support for a supply chain overhaul is to calmly outline the project's costs, goals, and potential benefits.
"Be honest about what the project will entail," says Bostick of Pinnacle. "Each department will have its 'sacred cows,' but if you can't get the warehousing, manufacturing, and transportation departments to work together, nobody wins."
As they strive to revamp their supply chains, Cameron advises managers not to underestimate the project's scope or complexity.
"Don't fall into the trap of trying to make it too simple," he says. "Supply chain transformations are difficult. Don't shy away from the necessary work."