Making Dollars & Sense Out of Logistics
Treating logistics as a profit center can expand both revenue and profit, and build your leverage base. But this approach is still a brave new world.
“Most companies treat logistics as a cost center—they expect the logistics operation to continually reduce costs,” says Ralph Drayer, Procter & Gamble’s former chief logistics officer, now chairman and founder of Supply Chain Insights, Cincinnati, Ohio.
“Historically, supply chains grew up as cost centers, so everyone was trained to run them as cost centers,” explains David L. Anderson, managing partner, supply chain, for Accenture, Boston. Some companies have focused so sharply on reducing costs that they have gotten caught in what Anderson calls “the efficiency trap.” There are only so many dollars that can be wrung out of a supply chain, he says.
A growing number of organizations recognize that cost reduction is just a portion of logistics’ role today, Drayer explains. “They have seen the power that can come from treating logistics and supply chain management strategically,” he says.
Take industrial distributor W.W. Grainger, for example. The company’s new distribution network will improve asset utilization, reduce operating costs, strengthen the company’s multi-channel approach, and help drive faster sales growth, W.W. Grainger president and COO Wes Clark told an audience of financial analysts in February.
In fact, Clark said, enhanced capabilities will make the industrial distributor’s new network “a great growth driver for the company.” That’s a far different mission than minimizing dollars per hundredweight.
A New Way for Raytheon
“The profit center approach gives you an opportunity to expand both revenue and profit, as well as build your leverage base,” says Bill Jonas, director of supply chain management for the Strategic Systems unit of Raytheon Command, Control, Communication, and Information Systems, Falls Church, Va. “One way to do that is having customers come to you for your supply chain and logistics knowledge and experience.”
Raytheon’s Strategic Systems business unit actively embraced the profit center approach at the beginning of last year. “The entire business unit was looking at new, entrepreneurial ways to grow the business,” Jonas explains. “We offered supply chain expertise as a way of growing the company.”
Two-Pronged Approach to Generating Revenue
The Strategic Systems business unit supplies electronic warfare systems, classified and unclassified intelligence programs, and hardware such as radios and antennas to federal government and commercial customers. It is currently taking a two-pronged approach to generating revenue:
1) Providing third-party logistics services to customers that include the U.S. Army and Navy. For example, the Defense Supply Center of Philadelphia just awarded Raytheon a $9.3-million contract to continue managing spare parts at two depots that support major weapon systems. Raytheon is providing full inventory management services to the depots using its Real Time Logistics system, a web-based just-in-time system that reduces material investment, allows for order optimization, and improves supply availability.
2) Providing procurement services to new and existing customers via an e-commerce, totally web-enabled system. “Small businesses that do not have highly talented buyers are looking for a way to increase their strategic competitiveness,” Jonas explains. “If they lack procurement support, they have to find it somewhere—and we can provide that expertise to them.” Some of Raytheon’s small business customers are the company’s own suppliers.
Raytheon’s shift to the profit center approach “is in its infancy,” Jonas adds. Nonetheless, the initiative has already generated new business. “There are excellent possibilities here,” he says. “I think people will come to look to Raytheon Supply Chain as the leader in new, innovative thinking. We’ve moved beyond the label that says we just buy parts.”
The supply chain unit continues to perform its core responsibilities while looking for ways to wrap its entrepreneurial activities around the core. The new business model “takes different kinds of people, people who are more entrepreneurial”—in effect, those who have “small-company attitudes with large-company resources,” according to Jonas.
Being a profit contributor “is a great opportunity for growth” in the supply chain organization, he says. “This gives us an opportunity to stretch—to look at our skills and the business in a different light.”
Managing for Revenue
The days of focusing on logistics cost as x dollars per order are long gone, according to Dave Anderson. The focus on revenue and profitability is increasingly sharpening. In turn, this will require logistics managers to manage overall customer orders across multiple channels. Anderson anticipates that logistics and supply chain managers will one day analyze customer profitability, and track profitability of different customers and even of individual orders.
“Profitability of orders all the way through to delivery will be a critical new metric on which people will be measured,” Anderson predicts. “And that will lead to a very different view of how things are done.”
Transforming logistics/SCM from a cost center to a profit contributor won’t happen just through wishful thinking. “Managing for revenue requires much different skillsets, and, in many ways, a new business model, even a culture change,” Anderson says, calling it “a brave new world.”
To facilitate this change in thinking, businesses will need:
Leaders and managers who embrace the new mindset. “Logistics, in particular, is traditionally managed by manufacturing people who are very cost-focused. You need enlightened managers who can break out of the cost-focused leadership of logistics,” says Ralph Drayer.
A new structure. “You’ve got to manage your processes differently, and may need to go back to the well on how you design the organization,” Anderson says. Accenture often recommends that companies shift to a customer-focused organization.
concentrating on customers
One approach would be to have logistics managers concentrate on customers or classes of customers. “Look at putting the whole logistics organization model on its head,” Anderson suggests. “You still need people to manage the warehouse, but you don’t need five layers of people managing the warehouse—maybe you need five layers of people managing customers.”
Procter & Gamble “invested in putting experienced distribution and logistics people on key customer teams,” recalls Ralph Drayer. This was the beginning of P&G’s customer business development structure, which brings together representatives from sales, logistics, finance, marketing, and IT as one team to work with trade customers and find ways to deliver better value to the consumer, he says.
A new way of interacting with sales and marketing. “If I counsel supply chain people on anything today, it’s to know their internal customers a lot more than they do. Get over there, meet them, find out what they need,” Anderson urges. While sales and marketing will be very interested in customer profitability, they will most likely look to logistics and supply chain professionals to do the analysis and make recommendations, such as suggesting that unprofitable accounts be pushed to a distributor model.
Revenue-based performance measures. With profit contribution a priority, you’ll need to supplement traditional performance measures with top-line oriented ones. For example, “you can’t run a warehouse on cost per unit shipped,” Anderson notes. “You run it on maximizing the dollars shipped to customers out of that facility correctly and on time.”
Logistics managers who want to become profit contributors need to start thinking in different ways. While you can’t take a seminar or a university course on managing for revenue, you can start talking with some leading information technology vendors in the demand management space, Anderson says. “There are a lot of good solutions out there. Listen to what the vendors have to say, and what their software does,” he suggests. “It’s a great way to get educated quickly.”
Beyond the Big Companies
The shift from cost center to profit contributor, while still in its early stages, is starting to take hold beyond the traditional corporate giants such as Wal-Mart, Procter & Gamble, and Dell, who have done it well for a number of years. Thanks to new technological tools, it’s well within reach of companies large and small. In fact, Anderson points out, “smaller companies in some ways are better positioned to making the change. They’re not burdened by a huge, lumbering logistics operation with many assets, run by people who were trained to operate in a different manner.”
Making the change “is all about leadership,” Ralph Drayer says. “If the leaders of your company don’t see it, then you have to be a very strong leader within the logistics/supply chain function to help the CFO, CEO, and sales manager understand the potential profit contribution you can make.”
When logistics and supply chain professionals become experts at customer profitability, “that’s when they can finally get to that C-level/boardroom level, where they’ve always wanted to be,” Anderson says. By putting in place the tools, processes, and connectivity required to control customer profit, logistics and supply chain professionals can start to realize the kind of profit and margin that their leadership is seeking.
What will happen to logistics and supply chain costs? “Once you start using the supply chain as a strategic differentiator, and form close collaborative relationships with your supply chain partners, you not only deliver value to the consumer. In the process, you reduce the cost of your supply chain activities,” according to Drayer.
Your parents were wrong. You can have your cake and eat it too.
Show Me The Money
That logistics has become a vehicle for cost savings, as well as a profit driver, has changed the way logistics professionals navigate supply chain activities. In turn, companies are taking different approaches to generate hidden revenue and spur even greater profit growth through various logistics and supply chain activities.
Methods can range from having private fleets carry backhauls for other companies to subleasing unneeded space in a company warehouse.
Another method is to sell logistics-related systems. For example, Procter & Gamble worked with a Nashville, Tenn.-based software company, Moore and Associates, to develop case-picking and truck-loading software for its own operation. Those solutions are now sold via a P&G joint venture with Moore and Associates.
Other companies have discovered that they can leverage their existing supply chain networks by acting as third-party providers. Sanyo Logistics is one such company. It was formed in the 1980s when its parent company, Sanyo North America, decided that it should operate its own logistics company, explains John Mociulewski, vice president of warehouse operations and sales for Sanyo Logistics.
Over time, the company evolved into a third-party provider of logistics services, adding a transportation company and a freight brokerage group. Sanyo Logistics today has added a number of other customers while continuing to provide logistics and supply chain services to its parent company.
Sears, Roebuck and Company is also generating money through its three Central Return Centers. These centers, which GENCO Distribution Systems, Pittsburgh, Pa., operates for Sears, handle returns from Sears’ e-commerce channel and consolidate material from the retailer’s 2,900 stores, explains Clay Valstad, director of Central Return Center operations for Sears. It handles customer- returned merchandise, which may be sent back to the vendor, disposed of, sold for salvage, or liquidated.
Valstad defines liquidation as moving new merchandise that is surplus or inactive through alternative channels, rather than selling it to the consumer. In addition to recovering costs, liquidating merchandise helps clear the supply chain of excess inventory. The Internet has opened up several new avenues for liquidation, Valstad notes.
“A number of companies have B2C auction capabilities, and we’re testing these as a means of increasing the recovery on a liquidated item,” says Valstad.
While Sears and GENCO are still testing B2C auctions, “I can safely say that the B2C auction arena has very quickly proven that we can recover more money for this merchandise than through some of the more traditional liquidation options,” Valstad adds.
The centers generate revenue in other ways, too, including:
- Consolidating hangers from the stores, which are processed for recycling or sold to vendors for re-use.
- Recycling the plastic sheeting that all garments are shipped in. The sheeting is stripped off at the store, then shipped to the return center, where it is baled then sold as a raw material.
While Valstad is quick to note that Sears is not in the returns/reverse logistics business to make money, “we are able to recover the cost of running the program with all of the various options available to us.”
For retailers with the size and breadth of Sears, a penny saved is a penny earned. Efficient returns management is driving both.