Logistics at the C-Level. Are We There Yet?
Logistics and supply chain management continue to grow in stature within the corporate world. But merely gaining visibility in the boardroom doesn’t make logistics and supply chain equal players at the senior executive table.
What Drives CEOs
Your CEO Doesn’t Get It? Avoid These Fatal Flaws
We have made some progress on the road to parity, but CEOs still need convincing—an uphill battle sometimes, but one well worth pursuing. As you’ll see in the following success stories, a CEO’s focus on the supply chain can act as a change agent for the entire enterprise, making it more efficient and profitable.
Borders Group Inc.: Logistics By The Book
Based in Ann Arbor, Mich., Borders Group Inc. is a publicly held Fortune 500 company with annual sales of $3.9 billion. Borders Group operates more than 1,200 stores in the United States and abroad, selling books, music, movies, and other entertainment items.
“Senior management’s top challenge can be summed up in one word: growth,” says Steve McAlexander, the company’s vice president of logistics. “Borders is a public company, so we have a commitment to drive earnings and returns for our investors.”
Borders’ senior management views logistics as a core competency, and believes that logistics helps grow sales and cultivate brand allegiance. To that end, management sets “stretch goals” for the logistics department. These goals revolve around improving logistics while at the same time continuing to manage costs in a disciplined way.
“A lot about logistics is tactical, but overall, it’s a strategic issue,” McAlexander notes.
Borders is in the midst of a multi-year program to reengineer its entire supply chain. Its current infrastructure—both systems and facilities—was built in the 1990s. To compete in the tight book market, and handle store growth, senior management recognized the need to upgrade and make the supply chain more efficient.
As part of the reengineering program, Borders will implement a new warehouse management system; consolidate its domestic distribution centers from nine to four; review its international DC network to either expand or contract the number of facilities, depending on the market; and create infrastructure to support an aggressive multi-year plan to expand both domestically and internationally.
Logistics is critical to Borders’ corporate mission—getting the right product to the right stores at the right time in good condition.
“One thing that’s unique to our industry is that we have ‘lay down’ or release dates for certain books,” McAlexander explains. “We have to back those release dates through our system and make sure we can meet them. Time is critical when customers are at your door eagerly awaiting the newest bestseller.”
The upcoming sixth book in the Harry Potter series, for example, will be the largest book release in history, to date. Its ‘lay down’ date is midnight, July 16.
“Imagine all the pieces that need to fall into place to make that happen,” McAlexander says. “We have to make sure we have sufficient initial quantities on hand to supply our stores. We need to have the right allocations to the right stores.”
Borders established a cross-functional team that works with Scholastic, which publishes the Harry Potter books, to get product to its distribution centers early enough.
“The team knows down to a gnat’s eye how books will get to the DCs, and how replenishment will work if a store runs out of stock that weekend,” he says. “We’re on call and we have our DCs ready to handle replenishment.”
McAlexander offers another example of the value-add logistics brings to the business.
“We are always working toward continuous improvement and saw an opportunity to make our inventory more efficient. In this case, we had too many titles in our backrooms, and we weren’t getting them out on the floor fast enough to meet customer demand and to sell.”
McAlexander’s team suggested streamlining backroom processes to improve product availability. Engineers studied how the backrooms work, and the logistics team analyzed fill rates and sales numbers. “We then developed a truck-to-floor process that enables product to be out on store shelves within 24 hours of receipt at the store,” he says.
“The investment made in reengineering the supply chain illustrates clearly that our company’s management understands the importance of logistics and the role it plays in our ability to grow and succeed as a leading specialty retailer,” McAlexander says.
Bombardier Aerospace: An Airtight Aftermarket System
Service parts logistics is a strategic issue for Bombardier Aerospace, a world leader in the design and manufacture of innovative aviation products and services for the business, regional, and amphibious aircraft markets.
“Service parts logistics attracts the level of senior executive attention it deserves because it affects our ability to sell new aircraft,” says Desmond Bell, vice president, parts logistics for Bombardier Aerospace. “If we can’t support new aircraft, we can’t sell them. That, and the relationship to profitable growth, is clearly understood.”
Bombardier Aerospace is part of Bombardier Inc., a global corporation headquartered in Canada. Revenues for the fiscal year ended Jan. 31, 2005, were US $15.8 billion. Bombardier Aerospace employs approximately 26,500 people worldwide.
An unprecedented new product development program—the company has introduced 15 new aircraft programs since 1989—placed tremendous demands on service parts support capabilities. Each product comprised a mix of common and new parts. Customers needed to know they could rely on Bombardier for rapid, high-quality parts support service.
The service parts business contributes significantly to Bombardier Aerospace’s overall profit margins. But the business was fragmented; each aircraft division had a separate parts support group.
“Two years ago, we realized we needed to overhaul our parts operations,” says Bell. “We conducted a fundamental assessment of strategy and organizational structure—looking at problems we knew we had, and analyzing their root cause. We developed a strategy proposal, which was presented to Pierre Beaudoin, our president and COO.”
Beaudoin agreed there should be one team focused on the service parts supply chain. So a single professional Parts Logistics organization responsible for aftermarket operations was created.
“This group sits within the broader Engineering and Supply Chain organization, which is responsible for all of Bombardier Aerospace’s supply chain management,” Bell says. “The Strategic Sourcing group sits within this same organization. We are peers at the management table, so we can ensure that appropriate attention gets focused on the aftermarket business.”
Bell recruited some experienced logisticians to be part of his team, and partnered with Caterpillar Logistics Services (CLS), a third-party logistics provider based in Morton, Ill., to outsource warehouse operations and provide inventory management services. The company also decided to consolidate parts distribution facilities into central locations in Europe and North America.
At the same time, the company is implementing an SAP ERP system and integrating it with CLS’s planning and warehouse management systems.
Under the direction of corporate management, Bombardier Aerospace’s supply chain efforts are starting to show results:
- Parts supply chain reliability with off-the-shelf availability improved from 80 percent to as high as 95 percent (consistently more than 90 percent).
- Shipping cycle times have been collapsed.
- Emergency shipment parts are available for pickup in less than two hours, down from six hours.
- It now takes an average of less than 12 hours from order placement to arrival of the part at the destination address. That’s down from 24 hours, and is a new standard for the aerospace industry.
- Inventory accuracy has improved significantly.
These supply chain efforts also have improved the way Bombardier Aerospace manages customer interactions on key accounts.
“On material logistics, we had an unacceptably high level of vendor delinquencies,” Bell notes. “So we’ve placed enormous emphasis on reducing these delinquencies and improving our supplier performance.”
The team also works closely with engineering on configuration management issues.
“In the past, when engineering made changes and issued service bulletins, we sometimes struggled to have the parts available to support those changes,” says Bell. “That hurt us because customers couldn’t get the right parts when they needed them. We’ve worked to get better alignment around the engineering change process so we can proactively plan for and respond to change.
“While there is more to do, we are pleased with the progress we’ve made,” he adds. “More importantly, our customers are beginning to recognize the difference, and satisfaction is improving. Our internal metrics tell us that we are making progress with our initiatives, and direct feedback from our customers corroborates that data.”
Limited Brands: Fashioning a Fast Supply Chain
“What are you doing to help build our brands? What are you doing to create world-class logistics and supply chain capabilities?”
These are the questions that Les Wexner, chairman and CEO of Limited Brands, asks often of Rick Jackson, executive vice president of logistics.
Founded in 1963 with one women’s apparel store in Columbus, Ohio, Limited Brands—through Victoria’s Secret, Bath & Body Works, Express, Express Men’s, Limited Stores, White Barn Candle Co., and Henri Bendel—currently operates 3,691 specialty stores. In 2004, net sales exceeded $9 billion.
Speed to market is top of mind for all C-level executives at Limited Brands.
“We are working with each brand’s C-levels to collapse the amount of time it takes to move an idea from concept to market,” says Jackson. “We are collaborating with Victoria’s Secret’s senior executives, for example, to provide product packed in store-ready cartons at the origin factory in Southeast Asia and sent directly to the stores. We can accelerate the time to market by taking a week out of the physical distribution.”
Limited Brands’ logistics team also looked at ways to help the stores become more efficient. The company had already determined the most cost-effective way to pack product and get it to stores, for example. But when a carton of merchandise was received, the store associates had to walk around the whole store to replenish merchandise from that carton. And that was expensive.
“We asked, ‘Is there a way to pack the box according to the way our stores are laid out, in four quadrants?’ To do this, we had to reconfigure the DC, which cost us some productivity. My budget went up, but the cost to the store went down and merchandise sold faster,” Jackson says.
C-level managers at Limited Brands also are involved in building supply chain capabilities. “Our organization depends on us to be very effective in transportation, distribution center management, and inventory management,” he notes.
To put these supply chain capabilities in place, Jackson works closely with the brands to understand their three-to-five-year plans, sourcing strategies, and customer needs.
As upper management increasingly realizes the value that effective supply chain management brings to the brands, Jackson’s team is getting invited earlier into conversations about major projects and initiatives.
“For example, we’re brought in early now on sourcing decisions,” he says. “Our sourcing origins change regularly, so we have to find air and ocean capacity from those origins. If logistics personnel are not part of these decisions, we could get caught in situations where we can’t get product into our stores.”
U.S. infrastructure constraints and congestion are also driving supply chain complexity, and have impaired Limited Brands’ ability to provide the level of service it did a few years ago, according to Jackson.
“We see delays now getting through ports on the West Coast, delays in intermodal, and linehaul capacity shortages. Even though ships are bigger and faster, we’ve still lost at least three days out of the service equation,” Jackson says. “Fashion is about speed and being able to make the call as late as you can. But because of these infrastructure issues, we tell merchants they need to put in their orders a week earlier. That makes the C-level sit up and pay attention.”
Schreiber Foods Inc.: Satisfying the Big Cheese
Supply chain management can be a cost reduction opportunity, but its real power is that it plays a significant role in driving revenue growth.
Consider Schreiber Foods, a $2-billion global dairy company. Schreiber, with more than 4,200 employees, provides products to the biggest names in fast food, and is the nation’s largest supplier of store-brand cheese products to grocery chains and wholesalers.
“When I joined Schreiber three and a half years ago, there was no senior supply chain executive,” recalls Rich Thompson, the company’s former senior vice president of supply chain, and currently a partner with Charter Consulting. “Schreiber hired me to fill a new role—vice president of supply chain management, reporting directly to the president and CEO. I sat on an eight-member executive committee that served as the president’s staff.”
The CEO, who had to be influenced in part by watching and learning from one of Schreiber’s larger customers, Wal-Mart, realized that the company needed to better understand supply chain management—what it was about, and how it could better service customers and help the company grow.
One of the first things Thompson did after joining the company was conduct a network optimization analysis. “Like many companies, Schreiber Foods had grown through acquisition,” he says. “As we looked at the entire supply chain network—suppliers, manufacturing plants, DCs, and customer demand points—we saw many opportunities for improvement.”
As part of the project work, Thompson and his team mapped Schreiber’s bigger customers against its own DC network, looking at all demand and supply points.
“At the time, we had three DCs,” Thompson says. “If we drew a 500-mile radius around each one—representing roughly a one-day transit time—we found we could only cover a small percentage of the country. As a result of the fact-based analysis, we quickly grew our distribution network from three to seven DCs. After completing this expansion, we could tout the fact that we were within one-day transit time to nearly all our customers.
“What started out as a way to rationalize our network and reduce cost turned out to be a revenue enhancement sales tool,” Thompson adds. “We can go to our largest customers and say, ‘Here’s what we’re doing to continue to get closer to you, to give you more reliable transit times and shorter lead times.’ Our larger customers understand and appreciate the value of an efficient and effective supply chain to their own operations and to their bottom line.
“That’s a great story for our sales team and CEO to tell.”
Catalyst International: CEO as change agent
As president and CEO of Catalyst International, a supply chain execution software and solutions provider, James Treleaven spends a lot of time discussing supply chain management with CEOs and presidents of major companies.
“When I had these discussions in years past, supply chain was not an afterthought, but it was not the first thing that came to their minds,” Treleaven notes. “Today, however, it’s right up there. Senior management understands the opportunity.”
Treleaven points to discount retailers as an example. “Discount retailers compete on cost—and they compete with Wal-Mart,” he notes. “Once they figure out where they want to locate stores—footprint, proximity to Wal-Mart—the next question is how effectively can they manage their supply chain? That is a strategic issue. Do they ship direct to store? Do they handle the logistics themselves? Where do they locate DCs?”
Treleaven recalls working with a large multi-channel retailer that operates stores and a direct-to-consumer business. On the retail side, the company was trying to minimize inventory.
“But if you bring goods in from China, you can’t have a just-in-time system. You need to carry more inventory than if your product is manufactured in Kansas,” he says.
So Treleaven spent a lot of time with the retailer’s senior executives, looking at distribution strategically—how to structure it, where to locate DCs and how many to operate, and how to run them as efficiently as possible.
“For the direct-to-consumer side, the key challenge is competing on fulfillment—for example, offering same- or next-day delivery,” he says.
For the discount retailer, supply chain is so intertwined with merchandising that it’s hard to separate the two, Treleaven notes.
For large multi-channel retail CEOs, merchandising is still king, but supply chain is critical.
What Drives CEOs
CEOs have a lot on their minds, particularly revenue growth and responsiveness. Logistics can support both those goals, according to Communicating the Value of Supply Chain Management to Your CEO, a newly released report published by the Council of Supply Chain Management Professionals (CSCMP).
Logistics supports revenue growth by improving speed to market, reducing cost to market, and increasing customer service without adding cost. Companies can achieve revenue growth through differentiated supply chain processes, even when products are viewed as commodities, according to the report. Success in global markets and the ability to efficiently source materials or sell products globally depend largely on supply chain capabilities and processes.
Logistics supports responsiveness by affecting speed to market, increasing turns, accelerating the cash-to-cash cycle, increasing ROI, reducing the risk of inventory obsolescence, creating leaner supply chains, and enabling companies to enter and exit markets faster.
Senior managers today are more exposed to logistics and supply chain management terminology, the report notes, supporting a growing awareness that wasn’t there even five years ago.
“Leaders invest in their supply chains, but what’s scary is that some current market leaders won’t be leaders in three to five years,” says Karl Manrodt, associate professor, Georgia Southern University, and co-author of the CSCMP report, along with Brian Gibson of Auburn University and Stephen Rutner of Georgia Southern University.
“If my competitor is investing to be more efficient and build in greater flexibility and I am not, how long do you think I can run the race? I’ll be reduced to competing on price, and I will be overtaken,” he says. “Smart CEOs look at logistics and supply chain as a way to compete.”
CEOs have become more interested in supply chain management because they see it as a strategic advantage, agrees John T. (Tom) Mentzer, professor of marketing, logistics and transportation, University of Tennessee.
CEOs, however, are driven by Wall Street to perform this month, this quarter, Mentzer notes. Many advantages that come from effective supply chain management take several business cycles to accomplish and may actually hurt a company’s stock in the short term.
“If I form a strategic partnership with one of my retail customers for a vendor-managed inventory program that will take 40 percent of inventory out of the supply chain, for example, during the first quarter it will look like sales went down,” Mentzer says. “Wall Street will see this as a poor performance, and downgrade the stock.
“On the other hand, say I’m on the board of a clothing retailer whose stock was trading at $18 two years ago, but is trading at $40 today,” he continues. “This clothing company bought another profitable retailer, and in due diligence discovered it could cut $4 million in supply chain costs. These cuts mean the company, which earns $56 million annually, increased earnings by eight percent. That makes Wall Street analysts believers.”
Poor supply chain management can lead to huge global mistakes.
Take a company that moves production to Southeast Asia as an example, says Mentzer. It does this because it can save $1 million in labor costs. But, as a result of that decision, the supply chain is now five months long, so the company has to carry more inventory in the United States—a fact the management team forgot to account for.
“This costs the company $1.5 million more in inventory, plus another $1 million in transportation,” says Mentzer. “So the company spent $2.5 million to make $1 million.”
Mistakes of this magnitude certainly get the attention of CEOs.
Your CEO Doesn’t Get It? Avoid These Fatal Flaws
While some CEOs understand the value of the supply chain, the majority do not, according to Gene Tyndall, partner, Supply Chain Executive Advisors.
But are CEOs wholly to blame? Supply chain and logistics managers may be guilty of the following flaws, says Tyndall:
- Not communicating in C-level terms and language.
- Perpetuating the “complexity myth”—what they do is too complex for business leaders to understand.
- Not communicating well with peers—sales/marketing, finance, human resources—so that management positions are not in synch.
- Continuing to measure supply chains in logistics rather than financial terms.
- Not fully supporting growth initiatives or service innovations.
- Not completely embracing concerns such as risk management, security, and other business issues.
The combination of these flaws creates barriers between supply chain managers and their CEOs, which are manifested in the degree to which C-level executives show interest in and support for supply chain initiatives.
“The logistics profession is in danger of becoming what IT has become—too technical and specialized for executive support. It’s seen as a necessary cost center, but not a competitive weapon,” he says.
It is not too late, but supply chain and logistics leaders must learn quickly how to measure and communicate real value in executive terms, says Tyndall.
Logistics professionals must work even harder to define their function in business and value terms.
“It is not enough for the term ‘supply chain’ to be more present in executive suites. We must convey its meaning to the business, its alignment with corporate goals, and its ability to enable business goals through performance improvement,” Tyndall says.