Yesterday, Today & Tomorrow

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Logistics innovations take courage, resources, and time—but the payback can be great. Here's a look at key logistics developments over the years, what companies are doing today, and how to become a logistics innovator.

Yesterday's logistics standard bearers had the courage, work ethic, and commitment to make hard choices. Their past logistics success and efforts have a ripple effect to this day.

But, a long tradition of logistics excellence, and a heritage of time-tested business practices, is not enough to ensure continuing success. True innovators don't rest on yesterday's laurels. They continue to create tomorrow's traditions today.

The following pages illustrate all the components—the fusion of tradition and innovation—needed to become, and stay, a logistics leader.

Only a handful of companies are true logistics innovators, notes Ralph Drayer, chairman and founder of Supply Chain Insights, a strategy consultancy based in Cincinnati, Ohio. He should know. Formerly Procter & Gamble's chief logistics officer, Drayer was instrumental in developing many logistics and supply chain innovations at P&G, and helped transform an entire industry through his leadership of Efficient Consumer Response.

Traditional thinking about logistics hampers innovation. "People don't think about using logistics and their supply chain as a strategic differentiator," Drayer explains. "They think more about efficiency. It traces back to the heritage of logistics as a function primarily within the four walls of the firm, being largely efficiency-based and cost-driven."

Also, few senior executives understand the power of the supply chain, he says. As a result, they don't push their logistics professionals to be innovative.

"The first mover advantage is critical, but many executives don't understand that. While innovators have to invest resources and time to make things happen, the payback is incredible," Drayer says. "You get the benefits from the innovations faster—internally from efficiency gains, externally from higher customer satisfaction and top-line growth—and you are well positioned to take the next leap in supply chain innovation."

Innovate to Serve

Logistics innovations range from big ideas, such as Efficient Consumer Response, to continual fine-tuning of logistics operations.

"Companies that innovate have a clear understanding of what their customers want," notes Clifford F. Lynch, principal of C.F. Lynch Associates, Memphis, and former vice president of logistics for Quaker Oats Company. "They anticipate customer needs, are quick to adapt to change, and are responsive to customer wishes."

Take Owens & Minor, a Fortune 500 company headquartered in Richmond, Va. The company distributes national name-brand medical and surgical supplies to customers that include hospitals, integrated healthcare systems, and group purchasing organizations.

Owens & Minor helps customers control healthcare costs by reducing their inventory and sharing supply chain practices and logistics technology. For example, it recently announced an innovative agreement with Moses Cone Health System of Greensboro, N.C., to jointly build "the supply chain of the future."

Moses Cone Health System will outsource its materials management function to Owens & Minor, which will assume the on-site management of the materials department for five facilities. The companies will work together toward a specific target for cost reduction.

Critical Factor: Executive Support

One of the enablers of the massive change management effort was "having a passionate champion of the project," notes Patrick Caine, director of core applications for Owens & Minor.

Strong commitment from executive leadership was also critical, he says. "Otherwise, the team can get sidetracked so easily whenever a distraction comes along."

For example, it might have been tempting to shift focus during the rollout while Owens & Minor completed a major acquisition, but senior executives never wavered in their support of the project, Caine recalls. Senior executives at sportswear and outerwear manufacturer Cutter & Buck, Seattle, Wash., were also highly supportive of extensive supply chain changes that have been made at that company over the last several years, reports director of distribution Dennis Hilborn.

Cutter & Buck consolidated three paper-based warehouses located in Seattle into one automated distribution center in Renton, Wash., invested heavily in new materials handling and information technology, and hired a new management team for the DC.

"The entire executive group played a key role in the process of transitioning from an old, low-ceiling, paper-based warehousing environment to a state-of-the-art distribution center," Hilborn says.

Hilborn has also been working within the company to raise awareness of the potential contribution that logistics can make and to transfer logistics-related knowledge to others within the company. The logistics operation, for example, has trained customer service and sales people on the nuances of carrier and mode selection. They also put together transportation handbooks for the sales organization so that they can better advise customers.

Hilborn also heads a high-level crossfunctional team that is developing a comprehensive freight management plan.

"We're driving transportation costs down, and moving from a cost center to a revenue center," he says. "We're using transportation and logistics knowledge as a strategic advantage in the company's sales efforts.

"Couple a great product with several cost-saving transportation options during the sales negotiations, and it makes for a great sale," Hilborn says.

Change Management By the Numbers

Some principles of change management can be applied in any situation where you want to make something happen," says Robert W. Jacobs, a change management consultant based outside Ann Arbor, Mich. "They can be used anywhere in the organization, whether to align an entire supply chain or when you have a problem with a specific supplier."

Among these principles:

1. Think and act in real time. "Think and act as if you were already the organization that you envision," Jacobs suggests. This enables innovation and change. "Many times people get challenged by saying 'It'll never fly, Orville,' or 'we tried that before and it didn't work.'"

Instead of falling into that trap, he advises, "act as if the future is now." For example, ask yourself: "If we are serious about working with suppliers in an integrated way, what would that look like? We'd bring all the suppliers together for conversation and dialogue." Then act the way you want to be, he says. By doing so, changes can happen quickly, encouraging even more innovation and change.

2. Develop a clear vision of your preferred future. "Figure out what needs to stay the same, and what needs to change," Jacobs says. "The clearer you are about what you want, the more energy people will have to create it."

The more people who understand what the preferred future is, the more you can leverage the changes. "It becomes exponential," Jacobs says.

3. Make reality a key driver. "Resist the temptation to oversimplify," to see just part of the picture, Jacobs advises. "We get trained from the beginning to manage projects and to avoid scope creep, to allocate certain resources, budgets, and time lines, and to stay within those. That's the way businesses run efficiently."

Change, however, often doesn't stay within neat boundaries. "Sometimes the real picture goes outside the frame we've put around it," he says.

Stepping back to make sure you see the whole picture is important when working with a far-reaching and complex extended supply chain. Consider the needs of every stakeholder, and look for patterns that can lead to breakthrough improvements.

4. Create a community. Think about the community you're trying to create. To build a collaborative organization, the community needs to be founded on trust and a free flow of communication. It should find and leverage each supplier's unique contribution, and share best practices.

Understanding these requirements will have an impact on the future roles of your managers, and will help them build relationships among groups rather than individual suppliers.

Overcoming Culture Resistance

At a recent seminar, every hand was raised in an audience of 300 supply chain and logistics professionals when asked if they were involved in a major organizational change effort. Were they satisfied with the results? Not one hand was raised.

This stunning disavowal of confidence in the ability to manage change revealed a common frustration of many supply chain and logistics professionals. Permitting the audience a few minutes to vent, many recounted their frustrations and disappointments: "Dispatchers would not give up their old ways of routing." "Conflict between IT and Operations overwhelmed project goals." "Purchasing rebelled against new Activity-Based Costing."

What soon became apparent was that these 300 supply chain professionals from 300 different companies were stopped in their tracks by the same phenomenon—culture resistance.

How is it possible that the same mistake is made throughout the corporate world? The answer lies with culture. Business managers are acculturated to ignore culture simply because "that's the way it is around here." They know culture exists, but to them, it is an invisible force. Like the air we breathe, culture is so ubiquitous that its material presence is taken for granted and, therefore, easily ignored.

During periods of stability, culture tends to fade from view. Traditional managers are easily lulled into a false sense of security, believing that what they can't see can't hurt them.

During periods of change, however, culture comes out of hiding like a ghostly force and wreaks havoc on change efforts. Managers can see the trail of debris left behind by the culture, but it remains invisible—a shadow organization operating out of management's line of sight.

Lurking beneath the business is the sleeping culture giant. Management often learns the hard way that the invisible and intangible culture can defeat supply chain innovation, proving that what you can't see can hurt you.

The Culture Web

All organizations have a culture, a written and unwritten "code of conduct" that regulates and guides the behavior of its human system. The architecture of the culture is unlike that of the formal, hierarchical, pyramid structure found on the business side of the organization.

Existing in parallel, the culture generates an informal web-like structure connecting larger and smaller work units into a distributed network of subgroups and subcultures. Each subculture models the behavior characteristic of the larger core culture.

A comparison of the larger culture and its smaller subcultures reveals that each is a macroscopic and microscopic version of the other. The web's maze of subcultures criss-crosses the organization, providing the infrastructure necessary for individual and work group interactions and transactions to take place.

Each subculture unit is linked to multiple subculture units at higher and lower levels, both upstream and downstream in the organization. When Individual A in Department A needs to do business with Individual B in Department B, they don't pull out the organizational chart to figure out how to get it done. They rely on the culture web's informal channels to make things happen. This is what is meant when insiders say, "You have to know how to work the system."

Culture Blind

While most logistics professionals recognize the existence of corporate culture, they are blind to its inner workings and its powerful role in regulating change. For most professionals, culture is too elusive to grasp, let alone control.

The cure for culture blindness begins with an understanding of The Universal Principle of Organizational Growth. The principle states that there must be a balance between business and culture change. For every step taken in the business arena, an equal or greater step must be taken in the culture arena, maintaining a constant state of business/culture alignment that supports achievement of change goals.

Organizational Anatomy

The anatomy of an organization reveals two rule-making systems. Business sets the formal rules, "What we say we do," while culture sets the informal rules, "What we really do." Business and culture are two sides of the same rule-making coin.

Traditional managers follow the dictates of a command-and-control philosophy. They are trained to see the business and are accustomed to formal system rule making, issuing formal behavior commands as written and stated policies.

Blind to the culture, however, traditional managers do not manage informal system rule-making. Instead, using a pressure and process management model, peer groups spontaneously bundle informal culture behavior into a system-wide culture code of accepted, expected, and demanded behavior that sometimes supports, and other times undermines, formal business rules.

Culture-blind managers allow a misalignment between the business and the culture. The unintended split between the two rule-making systems builds an organization in which formal business is managed, but informal culture is unmanaged. Instead of formal and informal rules working in concert, they work at odds. Caught in the middle between the visible formal business and the invisible shadow culture is supply chain and logistics change.

(Excerpted with permission from The Shadow Organization in Logistics: The Real World of Culture Change and Supply Chain Efficiency, by Jo Ellen Gabel, PhD, and Saul Pilnick, PhD, published by the Council of Logistics Management. For information on purchasing this book, see www.clm1.org)

The Courage to Change

It takes courage to innovate," says Richard J. Sherman, chief marketing officer of V3 Systems, a supply chain execution systems company located in Charlotte, N.C.

"The reason it takes courage is that many people who control the corporate purse strings don't understand logistics."

While it is relatively easy to quantify the benefit and value of logistics innovations, he says, it is very difficult to describe those benefits so that others in the company can truly grasp them.

"Describing the complexity, commitment, and benefits of investing in logistics innovations is one of the biggest challenges to such innovations," Sherman says.

Having an executive leadership that understands the strategic value of supply chain management is a prime characteristic of logistics innovators. Logistics innovators also share the following common characteristics:

Vision

Companies that are logistics innovators have a clear vision of the extended supply chain, says Ralph Drayer, chairman and founder of Supply Chain Insights, a Cincinnati, Ohio-based strategy consultancy.

They also have a solid logistics strategy fully aligned with that vision, according to Clifford F. Lynch, principal of C.F. Lynch Associates, Memphis. "They know what they want to accomplish and how they're going to do it, instead of doing it by accident or constantly reacting to circumstances."

Leadership

Innovation requires leadership at the operational as well as at the executive level, notes Sherman. Simply managing won't lead to logistics breakthroughs.

"Managers enforce rules," he notes, "while leaders challenge others to innovate—they make the rules, they change the game." Perhaps that's why, as Lynch says, "the most successful companies always seem to have the best people, pay them well, and motivate them into staying."

Willingness to take risk

Companies that are logistics innovators "are willing to invest in the innovation, are willing to take chances," Sherman says. Fear of failure, and of not getting a good return on investment, can be major barriers to innovation.

"Companies generate more fear than they generate innovation because they're so unforgiving, they're so intolerant of error," Sherman says.

Whether or not your company is currently a logistics innovator, you can take the following steps to increase its level of innovation:

1. Understand your assumptions, then challenge them. "Look at how you do your work, then ask why you do it that way," advises Robert W. Jacobs, a change management consultant and author based outside Ann Arbor, Mich. "Get clear on your assumptions. Then pick a few, and write them out. Find a few that you consider to be truths—facts, not assumptions—and replace them with something else."

Jacobs suggests selecting those truths "that you hold most dear. If you feel you can't challenge an assumption or a truth, that's generally where the potential leverage is. So stand that assumption on its head."

Replace that assumption with a new one that runs counter to what you've always done. For example, if the company believes strongly that warehousing is a core competence, consider what would happen if you outsourced management of the warehouses, or moved from large regional distribution centers to a centralized DC and forward distribution using smaller facilities operated by third parties.

Consider what the effect would be if you operated with the new assumption; identify what types of decisions you would make, Jacobs says.

"This kind of activity challenges you to look at the world with a fresh perspective," and can lead to real breakthroughs. "So often we're like fish in the water—we just swim, and don't realize that there are other ways to do business," he adds. It's easy to fall into a habit of nay-saying. Rather than saying, "it'll never work," Jacobs suggests saying, "Here are the downside risks, how can we mitigate them?"

2. Never stop challenging the status quo. "Organizations get into routine ways of operating that become 'good enough,'" Jacobs says. "Even excellent companies become satisfied with the way things are, rather than looking at what they can do to achieve a quantum leap of improvement."

Part of a manager's responsibility, he says, is to "shake people's thinking up around entirely new ways that they could do business—ways that would be better for them, their suppliers, and their customers in terms of timeliness, quality, business processes, and practices."

Ralph Drayer advises that logistics managers "think about how they can leverage the supply chain to achieve the company's overall objectives." Realize that you're only as good as your extended supply chain, so "think outside your own part of the supply chain. Explore how you can leverage and leapfrog competition with the Internet, build consensus within the company, and help others see your vision."

3. Lead the way. "Coach your people to be more innovative, and give them the freedom to look at things in a new way," Sherman suggests. "It's a classic leadership story," Drayer says. "While you personally may not be creative, it is easy through leadership to build an innovative organization, to find, nurture, and support creative people."

4. Learn. Innovators learn by listening as well as by doing, Sherman points out. This means actively pursuing new technologies, listening to new vendors, being an active participant in professional associations and conferences, reading the research, learning from the logistics academic community, and generally staying ahead of the curve.

Driving logistics innovation is hard, Sherman warns. "It's a lot like competitive swimming—if it were easy, everybody would be doing it." Those companies that do dive in, however, have a good chance of winning the race.

Stability Drives Innovation

The most compelling future that organizations have combines the best of their past and present with exciting new opportunities," notes Robert W. Jacobs, a change management consultant and author based outside Ann Arbor, Mich.

But stability is a requirement for change to be effective. "If all you ever do is change, you have no foundation. If you focus too much on change, you lose the benefits of the tested approaches that have worked well in the past," he says.

Change and stability go hand-in- hand. To be successful, "you have to have the creative tension that exists between the two," he explains.

Jacobs suggests that companies conduct a rigorous analysis of the "upsides" and "downsides" of stability and innovation.

"Once you work through the downsides and upsides of stability, and the downsides and upsides of innovation, look for ways to get the best of both worlds," Jacobs says. "You want to maximize the upsides of both innovation and stability, while minimizing the risk of running into the downsides."

The world that companies operate in today is decidedly different than it was in the 1920s, when W.W. Grainger, Old Dominion Freight Lines, and the company that became The Mallory Group were founded. It's different than it was in 1930, when Roadway Express was founded, and even than it was in 1953, when United Facilities was founded.

While the rate of change has accelerated, the values, principles, and beliefs that guide the companies that have successfully stayed the course have largely remained constant. Here's a look at how leading companies discovered the right blend of innovation and stability—and the groundwork they're laying today to ensure continuing success tomorrow.

W.W. Grainger: The 75-Year-Old Supply Chain

Industrial distributor W.W. Grainger Inc. was founded in Chicago in 1927 when William W. Grainger sought to meet companies' needs for a speedy and consistent supply of electric motors. Grainger's MotorBook, its original catalog, is the basis for the current version, which includes approximately 100,000 MRO (maintenance, repair and operating) supplies and parts.

"W.W. himself infused a strong customer focus into our culture," says Rick L. Adams, vice president of logistics for Grainger.

The distributor continually reinvents itself to meet the changing needs of its customers. Today, for example, customers have the option to "click, call, or stop by" to order product.

"We have a supply chain that's 75 years old," Adams notes. It looks very different today than it did even 20 years ago. Grainger branches remain a key part of the company's logistics network, providing the personalized local service that enables it to compete with local specialty MRO companies. The number of branches has grown from 200 in the late 1980s to more than 380 branches today.

Product Growth Explodes

Another significant change has been a fourfold expansion in the number of products offered to customers. "In the late 1980s, our catalog offered 25,000 items," Adams says. "Today our catalog offers about 100,000 items." This year alone, Grainger added some 9,000 new products.

Identifying the suppliers of its thousands of products, managing supplier relationships, negotiating with suppliers, and buying and merchandising products are the responsibilities of Grainger's product management function.

How it operates has certainly evolved over the years, notes Fred E. Loepp, Grainger's vice president of product management. "Ten years ago, we had buy-sell relationships with our suppliers. It was 'Don't call us, we'll call you.' If we liked a supplier's products, we'd send a purchase order, they'd send the invoice, we would pay it, and that was that. Back then, we didn't have a lot of supplier involvement in our business."

Today, however, Grainger has moved away from such transactional relationships, establishing instead collaborative relationships with its suppliers.

"We want to be our suppliers' most valued customer," Loepp says. And the company works hard to make that happen.

"We have cooperative business meetings and strategic planning sessions with our suppliers," Loepp says. "We meet monthly with some suppliers to talk about our goals and objectives from the standpoint of performance, product development, and strategy."

A key part of the increased collaboration is Grainger's willingness to share information with its suppliers—and vice versa. "We are evaluated on economic earnings and return on invested capital," Loepp says. "We share that information with our suppliers, and evaluate them on how they're helping us to improve our return and economic earnings.

"Suppliers are also sharing a lot more information with us," Loepp notes. The mutual sharing of information "lets us look at weak spots and close up gaps, which enables better cost control and leads to more profitability for both partners."

Managing Supplier Performance

During the last three years, Grainger has implemented a detailed, sophisticated supplier performance management system. In real-time, suppliers can log on to an extranet, enter their company name or number, and view the details of their performance, including receipt variances, early or late shipments, and warranty returns.

The process enables Grainger to communicate to suppliers the true cost of poor quality. When a receipt variance occurs in the distribution center, for example, Grainger can go back to its supplier and demonstrate the direct effect it has on its operations and costs.

"Whenever we have a problem with a receipt, we immediately e-mail a Supplier Communication Form, or SCF, to the supplier," Loepp says. "If there's damage to the shipment, we attach a digital photo."

But that's just the beginning. Grainger also tracks how long it takes for the supplier to respond to the SCF, the quality of the response, and the corrective action the supplier takes to address the problem's root cause. The performance measurement system has enabled Grainger to drive approximately $10 million of poor quality out of its system during each of the past two years.

Loepp says the company will expand the system, looking at additional elements of poor quality and addressing internal issues that may be adding cost to Grainger's suppliers.

The DC of the Future

Grainger is in the process of reengineering its distribution network. During the 1990s, the network consisted of six Zone Distribution Centers (ZDCs) and three Regional Distribution Centers (RDCs).

"The ZDCs shipped to customers, and the RDCs received from suppliers and replenished branches and ZDCs," Adams explains.

That distribution model was implemented to shift customer shipping from the branches to the ZDCs, freeing up space at the branches so they could carry a broader and deeper line of products. The model worked well for Grainger for years.

But, "three years ago, we decided to take a clean-slate approach to the distribution network," Adams says, ultimately electing to collapse the two layers of DCs into one. The new facilities, called "DCs of the Future," will do it all—receive from suppliers, replenish branches, and ship to customers.

The new DCs, designed with radio frequency technology, bin modules, and takeaway conveyors, are expected to see a productivity increase of approximately 55 percent. The first DC of the Future became fully operational in Los Angeles in August 2001, with the Dallas facility coming on line in November.

"We'll bring up another seven buildings over the next two years, with the platform in place by the end of 2003," Adams says.

Grainger's redesigned distribution network will also include a national DC for slow movers, and four master branches in locations where a full DC isn't warranted.

Grainger is also looking at logistics changes beyond the distribution network. The company is currently re-engineering its approach to inventory management. Whereas only the three RDCs performed demand forecasting in the past, all nine DCs will do such forecasts in the future.

In addition, Grainger's logistics department is conducting a transportation line review, evaluating the best way to manage its transportation. Inbound transportation was outsourced 18 months ago to Transplace, and freight bill payment also has been outsourced. "We're looking at other opportunities," Adams says.

Living the Values

What Grainger calls its "enduring set of values" are integrated in the way the company operates. "They're the ground rules for how we treat each other," Adams says. "We call it 'living the values.'"

It's not just lip service, either. "We take the program to heart," Loepp says. "Within the product management department we frequently survey our people to find out how we, as employees and managers of Grainger, are living the values of agility, teamwork, empowerment, and accountability. Our employees grade us. We consolidate and analyze that information to identify areas where we haven't improved from the last survey. Then we develop an action plan to close that gap."

Rick Adams meets weekly with the LIVE It (Logistics Incorporates Values Everyday) team, and holds a quarterly State of Logistics meeting, which all logistics employees at the corporate offices attend. Individuals who live Grainger's values are recognized via Grainger Grams, which come with a free lunch and other goodies.

In the logistics department, "we measure how many people send them and how many receive them," Adams says. "This is a highly visible way to reinforce the kind of behavior we are looking for and that has made the company successful for 75 years."

How Grainger is handling the redesign of its distribution network exemplifies the company's values at work, Adams says. First, the reengineering of the DCs will be headcount neutral, with no layoffs expected. While two RDCs, which are being phased out, "have more people than we'll need when we're done, we are naturally downsizing them almost transparently," Adams says.

Three Regional Assembly Master Break Bulk Operations (known as RAMBO), will siphon off the volume handled by these RDCs, enabling normal turnover to shrink the staff at the RDCs in preparation for their closing.

Communications are critical to the change management effort, Adams says. "We're changing the way 3,000 people work daily. It's a tremendous amount of change."

To help facilitate the process, Adams works with a steering committee, and has designated individuals responsible for communications inside the corporate office as well as in the field.

Much of the framework for Grainger's 75-year record of success and innovation comes from its enduring values. Another core component is the distributor's focus, on doing whatever it takes to satisfy the customer. Operational excellence, which stems in part from Grainger's process orientation (similar to GE's Black Belt process) is another key element.

"We have a group of people who understand quality and project management, who identify gaps and barriers and help to overcome them," Loepp says.

Blurring Internal Silos

The company is cross-functionally oriented. "We're collaborating internally," Loepp says, "and the internal silos are blurring."

A supply chain team might include representatives from marketing and sales, for example, while a marketing team would have members from supply chain management.

In addition, Rick Adams says, "we're aligned around where we're headed. We have the right amount of resources and structure. We have amazing people and amazing leadership."

It all goes back to values, he says—one of which is having fun. As he oversees the massive redesign of Grainger's distribution network, Adams is certainly living that value.

"How many people get this kind of opportunity in their lifetime?" he says. "If you're not having fun, you shouldn't be in logistics!"

United Facilities: Manufacturing Your Way Into the Warehouse Business

The founders of United Facilities Inc.—D. Altorfer and his brother A.W. Altorfer Jr.—grew up working for the family business. Altorfer Brothers Company was a home laundry equipment manufacturer, founded by their grandfather.

In 1953, after that business was sold, the Altorfer brothers bought a five-story, 125,000-square-foot building that they intended to use to manufacture on their own. In the meantime, they began warehousing products for other companies.

So it was quite by accident that the company that was to become United Facilities Inc. (UF) started in the public warehousing business.

The Altorfer brothers' design and manufacturing background enabled them to spot opportunities that were unfolding in the public warehousing industry in the 1950s. Rather than focusing solely on product storage, they thought creatively—developing innovations such as mixing inventory received from different points in order to ship consolidated orders to customers.

It was this kind of innovative thinking that led to the beginning of one of the first multi-year warehouse contracts in the United States in 1959. That first long-term contract helped establish UF as a true pioneer of logistics warehousing.

In 1967, a customer asked United Facilities to start a new distribution center out of state, making UF one of the first multi-state warehouse service providers in the country.

In 1953, the Altorfer Brothers bought this five-story, 125,000-square foot building intending to find something to manufacture on their onw. In the meantime, they began warehousing other companies' products.

Customer-Driven Expansion

Throughout the company' s history, " customer needs have driven our expansion," explains Daniel J. Altorfer. As vice president of United Facilities, he is one of the third generation of Altorfers managing the company, which today operates 3.5 million square feet of warehousing space in seven cities.

Customer needs have also driven United Facilities to offer a wide range of additional services, such as contract manufacturing, which includes packaging, kitting, filling, painting, light assembly, and in-store display setup. The company also offers corporate support services such as programming and technical writing expertise, purchasing services, and Internet services including order and stock status visibility, and order fulfillment.

Over the years, United' s personnel have done a lot more than just receive, pick, and ship product. They have passed out samples of cereal in theme parks, put together kits of samples and mailed them to daycare centers, and set up initial displays in stores to support new product launches.

While United Facilities is true to its core competency of warehousing, " we are willing to experiment," Altorfer says. " We' re willing to try new things to enhance service to customers. Sometimes they work out, sometimes they take us someplace other than what was originally intended. In the meantime, we develop a base knowledge and new capabilities that we add to our portfolio of services."

United Facilities has elected to work with a limited number of carefully selected customers in order to develop a deep understanding of customer needs and requirements.

" This enables us to take partnerships with customers to new levels," Altorfer says.

Innovation is part of United' s culture, one of its core values. Indeed, UF' s value statement notes, " We offer our customers a resilient and innovative resource to meet the competitive challenges of our global economy."

" The desire to continually improve and a can-do attitude are part of our culture of innovation," Altorfer says.

The company takes a number of steps to ensure that its employees are equipped and encouraged to innovate, including:

  • Highlighting productivity innovations and best practices in weekly conference calls with management.
  • Sponsoring brainstorming and knowledge-sharing meetings with operational and corporate personnel.
  • Rewarding innovation and other behaviors through the ABCD (Above and Beyond the Call of Duty) program. Employees are given toy money called UF Bucks to distribute to other employees in recognition of their efforts. The UF Bucks can be traded in for merchandise such as jackets, sweaters, and baseball caps.

The management team at United Facilities continually seeks new and better ways of serving customers. " A lot of companies out there just move boxes in and out of buildings," Altorfer says. " That' s not enough to be successful as a third-party warehousing provider today.

" Yes, you have to be a good material handler, but that' s just the beginning," he notes. " The most important thing for us is to take excellent care of our customers' business in a cost-effective way, and to give them the very best service they can get."

The Mallory Group: From Cotton Bales to Video Game Sales

On Sept. 10, 1925, Memphis Compress & Storage Company pressed its first bale of cotton in Memphis, Tenn. President of this new company was B. Lee Mallory Sr. Since then, the firm has handled more than 50 million bales of cotton and hundreds of millions of pounds of general merchandise.

" Over the years, we' ve made some major shifts," explains B. Lee Mallory III, grandson of the founder and executive vice present of the company that became The Mallory Group.

In 1960, the company entered the public warehouse business under the name Chickasaw Warehouse Company (known today as Mallory Distribution Centers).

The company sold Memphis Compress to a major customer in 1966 and migrated from cotton warehousing—a maturing market with a reduced number of customers—to general merchandise. " We knew it was important to diversify and broaden our base," Mallory says.

The company began putting its extensive real estate holdings to work, building or renovating close to one million square feet of warehousing space in the 1970s.

Memphis was a major rail center, which attracted a number of companies to the area. Mallory began providing overflow and in-transit storage to these companies, which included Kimberly-Clark and Libby-McNeill-Libby.

Customers' needs and shipment characteristics have changed dramatically since Mallory worked with companies that transported full rail carloads of product.

Contrast that with the work Mallory did for Nintendo two years ago, when it shipped more than 750,000 video games and provided kitting, inspection, and quality control services.

" We' ve moved from handling rail carloads to Nintendo games," Mallory says. " We' ve moved from agricultural chemicals to providing dot.com flower services"—picking, packing and shipping flowers via FedEx to consumers' homes overnight.

Service at Cyberspeed

In 1971, the company purchased an international freight forwarding business, known today as Alexander International. Alexander has expanded from one office in Memphis to 18 offices around the country, and is today one of the top 10 container exporters in the United States.

Today, The Mallory Group owns and/or operates almost two million square feet of warehouse space, and provides a full range of logistics services that include warehousing, trucking, air and ocean freight forwarding, customs brokering, and fulfillment.

" Reliable service has always been important to customers," Mallory says. " Now it has to be instantly reliable. Service is at cyberspeed these days." So The Mallory Group continually strives to stay current with the latest technologies. It has always been that way.

" We were an early pioneer in the electronic data processing field," Mallory says, and one of the first warehouses to use IBM punch card equipment in the cotton industry. Today, The Mallory Group uses the latest technology in both its warehousing and freight forwarding businesses.

But they never forget, Mallory says, " that relationships are still very important—you cannot replace a customer relationship with a computer."

Building Long-Lasting Relationships

The company established long-lasting business relationships with customers, friends and family, and throughout the industry from the very beginning, Mallory notes.

In the cotton business, for example, " from cotton farmer to the mill, we knew them all," he says. " When we expanded into general merchandise, transportation, and freight forwarding, we took that same commitment to strong management and continued developing those personal relationships, one by one.

" Our business is based on service," Mallory says. " And service is provided by our employees."

Many Mallory Group employees have been with the company for 30-plus years, and multiple generations of families—fathers, sons and cousins, for example—work there.

" We work hard to keep our employees," Mallory says. " If you don' t take care of your employees, your employees can' t take care of your customers. If your business doesn' t take care of your customers, you won' t have any business."

Old Dominion: Putting Your Eggs in One Basket

Old Dominion Freight Line Inc., based in High Point, N.C., got its start in 1934, during the Great Depression. When husband and wife Earl and Lillian Congdon couldn' t find good jobs, they bought their own truck and began working together as owner-operators.

" Their first operation ran out of the back of a grocery store," says David S. Congdon, Earl and Lillian' s grandson, today president and COO of Old Dominion. " They hauled eggs from a chicken farm to Norfolk." The carrier was granted ICC authority to serve the lane between Richmond and Norfolk, Va., and stayed there until the late 1950s.

Old Dominion, which has grown through a series of 15 acquisitions, today provides direct coverage to 37 states; 23 of those are covered 100-percent direct. The company is an inter-regional and multi-regional motor carrier that transports primarily less-than-truckload (LTL) shipments of general commodities to a diversified customer base.

Its international offering, called Transline, offers service to Canada, Mexico, and Puerto Rico, with intermodal ocean container service to and from eight ports. Old Dominion also offers expedited service, including next-day air service, through its Speed Service Division.

" We' re an old-time company that doesn' t act old-time," Congdon says.

Old Dominion embraced the Total Quality concept in the early 1990s. Dave Congdon, a long-time student of quality management, completed training as a quality programs facilitator, then built a team of facilitators specially qualified to teach Old Dominion employees about the process.

At the same time, Old Dominion management developed the company' s Foundation of Success Model " Our senior management team built this house," says Congdon. The model includes Old Dominion' s vision, mission, values, and success elements. An officer of the company leads each of the success elements.

Innovation is a core value and an integral part of Old Dominion' s corporate culture. The company' s business model, which combines regional and national coverage, is itself innovative, reflecting a unique approach to customer service. Old Dominion tailors its service to individual customers, whether the customer wants to interact with a local customer service person, call the centralized customer service, or go the self-service route via the company' s web site.

Enabling Innovation with Technology

Old Dominion has long embraced technology to enable innovations. Today, for example, local drivers use handheld computers to communicate with local dispatchers and provide real-time tracking.

The carrier employs radio frequency identification tags on all trailers, tractors, and dollies, and implemented a new dock yard management system that captures movement of freight when it is processed at the dock.

In addition, the carrier is implementing Descartes Systems Group' s pickup and delivery optimization software, which will enable Old Dominion to provide more timely response to last-minute pickup requests, routing visibility, and exceptions alerts.

The company is also implementing linehaul optimization software from Transport Dynamics Inc. The software will help optimize outbound loading, manage transit times, and blend regional freight with interregional and transcontinental freight.

In the works is a new solution that will allow customers to have multi-carrier and multi-modal visibility via the Old Dominion web site.

" We want to be more than a freight hauler for our customers," Congdon says. " We want to deliver new solutions for them. So we take every tool that' s appropriate, try to be as flexible for our customers as possible, and give them as much data as we can."

Old Dominion' s values and common vision drive that commitment to customer service, Congdon says. " When a customer needs something, we don' t wait six months to find out how to do it. We look for ways to do it now."

Roadway: True to the Core

The company that was to become Roadway Express was founded in 1930, when Carroll Roush and Chick Morrison began R&M Transportation to move tires between Akron, Ohio and St. Louis, Mo.

Later that year, it adopted the name Roadway Express Inc. and soon the Akron, Ohio-based carrier established its presence in 15 major markets, working with independent owner-operators.

In 1945, Roadway began a massive changeover to a company-owned fleet. By 1956, the fleet was 100-percent Roadway owned, and in 1977 it became a transcontinental carrier.

" Prior to deregulation in 1980, we expanded solely through the purchase of other transportation companies," notes James D. Staley, Roadway' s president and chief operating officer. " In the mid-1980s, we started looking internationally. We began to provide services as a Non-Vessel-Operating Common Carrier (NVOCC), pretty much worldwide on an export basis."

Roadway acquired Canadian carrier Reimer Express Lines Ltd. in 1997, and has expanded its presence in Mexico, operating 10 terminals there now. " Our true marketplace today is North America, with seamless crossings between Canada, the United States, and Mexico," Staley says.

Last year, through its acquisition of Arnold Industries, Roadway added New Penn Motor Express and Arnold Transportation Services as subsidiaries. " New Penn Express is a highly regarded next-day carrier in the Northeast. That' s a market we had never participated in," Staley explains.

Roadway is also branching out through its involvement with Integres Global Logistics Inc., an integrated airfreight service provider whose partners include American and United Airlines. Roadway is the primary North American ground carrier for Integres. Through Roadway Corporation, a holding corporation formed last year, Roadway is a minority shareholder in Integres.

A Solid Foundation

While Roadway is a dynamic company, continually growing and evolving, it is built on a solid foundation. Employees tend to stay with the carrier for a long time. " The real strength of our company is the people who work here, from drivers and dock workers to the senior management team," Staley says.

" We have great seniority within our driver and dock worker ranks," he notes. " A lot of that comes from the strength of our Teamster labor contract, which offers great stability." Staley himself began his career at Roadway in 1971 as a dock supervisor trainee at the company' s terminal in Athens, Ga.

Roadway' s four core values—engagement, pride, innovation, and customer focus—while only articulated as its values three years ago, have long been part of Roadway' s culture.

" Everybody is engaged in satisfying the customer," he says. Engagement happens naturally in that arena, as employees understand that the more they satisfy the customer, the greater the opportunity for job security and career growth.

But that' s just the beginning of Roadway' s push for engagement, according to Staley. " We engage our employees in the fundamentals of the business. We want them all to understand what their job means within the company, and the value they bring to Roadway."

The only way to do that, Staley says, is to teach employees the fundamentals of the business. This involves more than skills training or education. " It' s going to the next level, having employees truly understand what they' re supposed to do, and why what they do is important to overall corporate results," he says.

A core component of Roadway' s push to further engage its employees is what Staley calls " leaders developing leaders"—employees educating fellow employees—and it takes place at every level.

" It' s part of the overall concept of breakthrough leadership at Roadway Express," he says. " We recognize that to gain any kind of sustainable advantage in the marketplace and in the workplace, we need breakthrough leadership, not just management."

Other key ingredients in Roadway' s success, Staley says, include a company-wide commitment to safety, attention to detail, commitment to the customer, and a spirit of innovation within the company.

" We do not take our eye off the ball," Staley notes. " We are consistent in our approach with our employees and with our customers. We are always looking for ways to bring more value to our customer."

Innovation: The Sum of its Parts

Vector SCM, the lead logistics manager for General Motors, is designed for innovation from the ground up.

" GM embarked on a new strategy to reduce cycle time and improve material flow," says Gary D. Kowalski, president and CEO of Vector SCM. "The company recognized that it needed assistance to accomplish that."

The new company is a joint venture between GM and CNF Inc. It draws upon the logistics expertise of CNF' s operating companies, which include Con-Way Transportation and Menlo Worldwide.

GM' s objective with Vector SCM is to improve the speed, flexibility, and reliability of its global supply chain, with the goal of slashing vehicle order cycle time from 60-plus days to an average of 15 to 20 days. Vector SCM will ultimately function as GM' s fourth-party logistics provider (4PL), managing all aspects of the auto giant' s supply chain.

GM and CNF had the luxury of starting with a clean sheet of paper when they began building the new organization. Here are some of the elements that have made it work:

Carefully crafting the new relationship. While GM and CNF officially signed the Vector SCM contract on Dec. 13, 2000, " we had worked pretty hard for six months to define the requirements for the new organization," Kowalski recalls. He spearheaded CNF' s contract discussions with GM.

" Those contract negotiations served as the foundation for the venture itself," he explains. " We sat down in a closed room with GM, and talked about what our vision would be."

Some considerations addressed during these discussions were: the types of work Vector SCM would do for GM, how the logistics company would support that work, how Vector SCM would be organized, what incentives would drive desired behavior, as well as the contract itself.

The long hours spent developing the final contract have paid off handsomely, Kowalski says. Establishing the vision; making sure that it' s clear; identifying desired behavior, worst- case scenarios, and risk mitigators all helped clarify expectations of both parties. " The elements of agreement are so clear and well-known that we haven' t referred to the contract in a year," he notes.

A high-level governing body. Vector SCM has a board of directors that includes the most senior people at CNF plus GM' s vice president of procurement, and its executive global leader for logistics.

" The governing body is a clear enabler," Kowalski says. " It helps provide strategic direction, making sure our strategy is executed flawlessly and that we' re operating according to plan." It also provides a mechanism for resolving problems in an open forum.

Process enablers. GM named a Vector transition team that acts as process enablers. " Once a business case is decided, the team helps us transition the work, and identify and stamp out potential roadblocks," Kowalski says. GM and Vector SCM co-champions, who work together as partners, are named for each project.

Building a team of innovators. Vector grew from zero employees to nearly 250 in little more than a year. The first 20 or 30 employees who moved over to Vector from CNF have been supplemented by others brought in from outside. With the ability to build a workforce from the ground up, the 4PL has been very careful about who it brings onboard.

" Vector SCM is a new, completely innovative approach to managing logistics," Kowalski says. " To be successful in this environment, employees have to have an entrepreneurial spirit, perseverance, drive, and the ability to manage through setbacks, then restart and go again."

When building the team, Vector SCM sought out individuals comfortable with innovation and continuing change.

Open communication. Vector representatives sit in on the staff meetings of GM' s global logistics executive director. " The benefits of this are huge," Kowalski says. " Having Vector attend GM staff meetings breaks down communications barriers, and ensures that we' re aligned strategically on GM' s goals."

Establishing a new culture. " It' s a challenge to blend the two cultures," Kowalski says. " GM has been around for many years, while we' ve just started."

As a critical first step to building a new culture for the organization, the Vector SCM leadership team drafted a mission statement and culture statement, sent them out to all employees for review, then incorporated their feedback in the statements.

The mission and culture statements are effective coaching and counseling tools. They are often used when internal or customer behavior is inconsistent with the statements, Kowalski says.

Continuous improvement. " We hold the Vector SCM senior leadership team accountable for adherence to our culture statement," notes Kowalski. " We sent a survey to our people to check how well we' re adhering to the culture statement. We' ve gotten some good feedback and have taken action on it."

Vector SCM also shared its culture statement with GM, using it as a base point to discuss opportunities for improvement. " We told GM that we hold not only ourselves accountable, we also hold them accountable for how we treat each other," Kowalski says.

Vector SCM' s overall approach, Kowalski says, is to " analyze the current state and look at the future desired state. The difference is the gap—and the gain."

GM and Vector SCM work together to identify potential solutions, and decide jointly on what innovations and technology they should apply. " We look at what we can do differently from an innovation standpoint that hasn' t been done at General Motors," he says.

It' s highly creative and stimulating work, Kowalski notes. " The chance to develop and design a 4PL relationship across the total supply chain of the number-one customer in the world—and to be successful at it—drives continuous improvement and innovation," he says. " That' s what gets me up in the morning."

The Milemarkers of Change

Decades ago, logistics just happened, it was not managed," recalls George A. Gecowets, who for 32 years headed the Council of Logistics Management. " There were no logistics managers. Someone was responsible for routing, someone else was responsible for receiving and shipping. A lot of traffic managers pushed their costs into the warehouse box and vice versa."

All that started to change in the late 1960s. " We started seeing inventory management and customer service aspects being added to transportation and warehousing responsibilities," says Clifford F. Lynch, principal of C.F. Lynch & Associates, Memphis, and former vice president of logistics for Quaker Oats.

The term physical distribution became more widespread. Others referred to those activities as materials management, and a few began using the term logistics.

Logistics life was very different in the 1970s. " Fuel costs skyrocketed, and people who had been shipping by truck switched back to rail. Then there was a major boxcar shortage, and companies bought boxcars to make sure they had a supply," Lynch recalls. " You just didn' t ship by truck unless you had an urgent shipment."

Distribution costs were also much higher then, Lynch adds. " Food distribution costs in the 1970s were about 12 percent of sales. Today, they are a fraction of that."

Some very smart people working at enlightened companies over the years have contributed to logistics innovations that, combined with other developments, have sharply reduced logistics costs and cycle time.

Some of these major developments include:

Transportation deregulation

" We had regulated inefficiencies into the transportation system," Gecowets says. " At one time, more trailers on the road moved empty than loaded. Once we deregulated, the loaded ratio was at least twice what it used to be. Deregulation made it possible for logistics managers to become very efficient."

" For five years after deregulation, transportation and logistics managers were viewed as geniuses, because transportation costs were dropping so dramatically," Lynch says.

Logistics-based pricing

Whether it' s called " activity-based costing" or " menu pricing," this methodology enables companies to get a better handle on their actual logistics costs and better identify the inefficiencies in their supply chain.

Procter & Gamble used logistics-based pricing to build a highly successful program called Streamlined Logistics, according to Ralph Drayer, former chief logistics officer for the consumer goods giant, and today chairman and founder of Supply Chain Insights, Cincinnati, Ohio. The program recognized the greater efficiencies of certain methods—such as unitized loads or EDI orders—and enabled P&G to share the benefits with its trading partners.

Flow distribution

" For a long time, companies would buy an order, put it away in the warehouse, pick it, and ship it," Drayer says. Then crossdocking—which has been around for many years—began to be embraced by more and more companies. " The whole concept of flow logistics started with crossdocking, which was a key innovation that facilitated the new concept of flow distribution," he explains.

Shift from Push to Pull

Pull systems such as inbound logistics and continuous replenishment represented the first time that companies, on a broad basis, began sharing information to match demand to supply more efficiently.

" For example, continuous replenishment produced hard benefits as well as demonstrating the power of collaboration," Drayer says. That credibility and trust formed the foundation of the deeper levels of collaboration that are being established today, setting the stage for more sophisticated supply chain management systems.

Information technology

" We can now communicate information about supply chain and demand changes at the speed of light. The IT that enables companies to communicate and collaborate is the most significant development of the past five years," notes Richard J. Sherman, chief marketing officer, V3 Systems, Charlotte, N.C.

" The traditional constraints of physical distribution have not changed. We will not be shipping sugar by air soon. Product is still not capable of being instantaneously manufactured," he adds.

Third-Party Logistics Providers

Controversial for many, the advent of third-party logistics providers marked a distinct change in the theory and practice of logistics management.

Whether or not you believe in the value 3PLs create, that they exist at all frees many logistics managers from the constraints of a " commodity" approach to transportation management.

Some logistics managers soon discovered that the cost of putting an intermediary between the buyer and seller of transportation services could be more than offset by the value 3PLs bring. That discovery helped create the fundamental shift away from a commodity approach toward an enterprise or holistic approach to logistics management.

Executive Recognition of the Importance of Logistics

Along the way to the 21st century, Gecowets says, " corporate America discovered that it' s not sufficient to make it and sell it—they have to get it to the customer when and how the customer wants it."

That' s when logistics and supply chain management began to be noticed at the executive levels and in the boardroom.

Companies first began noticing logistics as those costs skyrocketed, says Lynch. The bottom-line focus has broadened to include the top line, as companies realize the strategic contribution logistics and supply chain innovations can make.

Logistics executives have become an important part of the senior management team in many companies, poised to lead the way to even more logistics breakthroughs.

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