Slow Economy? Invest Now in Logistics IT
While some companies have frozen investments in logistics and supply chain technology, forward-thinking companies seize the opportunity to gain a competitive edge.
“Many logistics managers don’t proactively plan for logistics information technology,” notes Tom McAllister, executive partner for CMAC Inc., a logistics systems integrator and consulting firm located in Atlanta.
Logistics managers may not take a proactive role in such planning because they focus narrowly on operations, or because IT is not their core competence. In other organizations, such planning is seen as a systems rather than operations function.
“It’s tough for logistics managers today. Top management expects them to deliver great things, yet they don’t control IT,” says Dick Powers, co-founder, president, and CEO of Insight, a logistics technology and consulting company based in Bend, Ore. “Logisticians in some companies are not able to get the technological tools they need to accomplish their mission,” he notes. Instead, they work with existing systems or have systems forced on them that “turn their whole business upside down.”
Tough economic times make systems decisions particularly challenging for logistics managers, McAllister says. During economic downturns, IT and financial factors play a much larger role in system selection than do operational factors.
“The emphasis is on reducing costs, leveraging existing systems, and minimizing integration costs,” he explains.
While the slow economy has led some companies to put the lid on technology investments, other organizations are reaping a significant return on their investments in logistics and supply chain IT. Here’s a look at how investment in IT is reaping benefits, even in tough economic times.
Hayward Industries: Diving Into Technology
Hayward Industries Inc., the market share leader in fluid control equipment for residential swimming pools, uses a two-step distribution process. It sells through residential pool distributors that market to dealers and builders, and also to some retail outlets. The company’s business is highly seasonal, as the weather largely drives pool equipment sales. Weather patterns vary widely from year to year, which makes it challenging to forecast sales accurately.
To complicate the situation further, Hayward’s two major markets—the sunbelt and the frostbelt—have different weather patterns, thus varying demand patterns. “It’s a volatile business, particularly in the timing of orders,” explains Dave Caldwell, Hayward’s vice president of logistics. “Literally millions of dollars in sales can be made or lost depending upon your ability to promise.”
Hayward sought technology that would enable it to improve its ability to serve customers while minimizing inventory levels. In addition, Caldwell and Hayward’s IT vice president were looking for a technological tool that would support the lean manufacturing efforts the company implemented three years ago, broadening its internal focus.
IT Reports to Logistics
The logistics unit at Hayward is in a different position than those at other companies—IT reports to logistics. “My background and expertise is operations and IT, so having IT report to logistics was a good fit. And, it has given a much more focused user perspective on what IT is going after,” Caldwell notes.
Hayward faced an important technology constraint, according to Caldwell. “Our legacy ERP system had been around a long time, and we had heavily customized it. We knew the system was limited, and that we either had to come up with a holistic solution and install a new ERP across the whole corporation, or buy some time,” he says.
Deciding that the time was not right to implement a new ERP system, the company sought an interim solution that could bolt onto its legacy system. After attending several supply chain events hosted by IBM, the Hayward team identified a number of potential solutions, including profit margin planning software from SynQuest, a supply chain planning software provider located in Norcross, Ga.
SynQuest conducted a value opportunity assessment for Hayward and identified projected cost savings. “We calculated the benefits we would receive from that,” Caldwell says, then determined a projected return on investment.
Even after discounting the software vendor’s projections considerably, the potential return on investment was still significant. To validate their calculations, the system team asked SynQuest users during the due diligence process what types of results they were getting from the tool.
In addition, Caldwell explains, “we asked each of our department heads what would happen if we were able to improve their existing service levels by 15 to 20 percent.” The team then calculated the impact improved service would have on market share, and compounded that over several years, to develop a solid business case.
Hayward is phasing in implementation of the SynQuest tool, going live with the Tactical Planning Engine during the first part of the year. The software enables Hayward to allocate supply chain resources across its manufacturing and distribution network.
For example, actual demand was significantly higher than forecast for the past two quarters. The new tool provides a unified view of demand, including options for filling unplanned orders.
“It allowed us to determine the best way to capture the additional business while also keeping inventory flat,” Caldwell says. “Each quarter, the SynQuest software lets us generate new, enterprise-wide manufacturing and distribution plans in less than two days,” he notes. “The old planning process would have taken two to three weeks, and we would have missed the window of opportunity to serve our customers without incurring additional costs.”
Last spring, the company implemented SynQuest’s Virtual Production Engine (VPE) at its California plant. “We’ve seen the plant’s degree of lateness almost disappear,” Caldwell notes. Before the tool was implemented, “we had on-time levels of 70 to 75 percent, which was tolerable but not desirable.” Today, on-time performance is in the mid-90s.
Next on the books for Hayward is implementation of VPE at the company’s flagship plant, then implementation of SynQuest’s Dynamic Sourcing Engine.
Ingersoll-Rand Poised for Payback
“We are looking to introduce information technology in areas where we’ll get a payback,” says Tony Bozzuto, director of global logistics for Ingersoll-Rand Company, Huntersville, N.C.
“Ingersoll-Rand is made up of dozens of independently operated companies that manufacture a diverse mix of products. Coming up with one solution will probably never happen,” he says. Instead, the company looks for “the right tools to help us achieve our goals.”
A high priority for Ingersoll-Rand this year has been to reduce the cost of goods sold and drive greater profitability by dramatically increasing the amount of material sourced in low-cost countries, Bozzuto explains.
“We were sourcing about five percent of our total from low-cost countries,” he says. “We wanted to increase that to about 30 percent.”
Doing so requires a deep understanding of all costs and tradeoffs, including impacts on inventory, cash flow, taxes, and administrative costs, in addition to material and transportation costs. The corporate logistics group had been looking at global sourcing decision support tools for several months before the high-level corporate initiative kicked off earlier this year.
“We had already reviewed about eight different products,” says Bozzuto, who served on the crossfunctional corporate team. “This preparation proved invaluable when the global sourcing initiative got underway.”
Taking IT for a Test Drive
Ingersoll-Rand worked with Xporta Inc., a provider of global resource planning software based in Santa Clara, Calif., test driving the company’s Global Strategic Sourcing application for several months.
“We ran some actual cases that we were looking at,” Bozzuto explains. “Where we compared an existing solution to a proposed solution, the tool helped us verify that there was perhaps a 20-percent average savings between the new solution and the proposed solution,” he says.
Systems requests at Ingersoll-Rand generally have to be accompanied by a business case and detailed ROI. In this instance, the team had to present the rationale for the entire sourcing initiative, of which the sourcing tool was one piece. The benefits were clearcut.
“When we compared the cost of the system and the necessary travel and other related costs to the expected level of savings, the cost was tiny and the payback appeared to be fast,” Bozzuto says. The sourcing initiative and the sourcing tool were readily approved.
Ingersoll-Rand is implementing the Xporta solution this fall to automate and optimize supplier selection. The manufacturer will run the solution off its own server, and will update internal information on suppliers, parts, and transportation. Xporta will update the global trade data remotely.
Maxtor Corporation: Excelling Through Technology
IT planning includes deciding whether you’re better off developing technology capabilities internally, or partnering with a third party who already has what you need.
Take Maxtor Corporation, a global manufacturer of hard disk drives. Maxtor wanted to improve its management of inventory, both in-transit and in its just-in-time warehouses. Maxtor sought to gain more control over product flow and increase inventory turns, reduce warehousing costs, and improve cycle times. To get the supply chain visibility it needed, the manufacturer, which is headquartered in Milpitas, Calif., turned to third-party logistics provider Exel.
Exel’s Supply Chain Integrator (SCI) is now interfaced with Maxtor’s ERP system and its own global transportation and warehouse management system. The system gives Maxtor visibility across its product flows, at consolidated and individual shipment level, through to detailed product code and line number.
The results are impressive. Improved pipeline visibility has led to a more than 30-percent reduction in regional transportation costs. Inventory turns have increased, inventory levels have gone down by more than 16 percent, and cycle time and product loss and damage levels have been cut as well.
Third-party logistics providers such as Exel face complex challenges when it comes to selecting and implementing logistics and supply chain IT. While some 3PL clients select a provider because of systems capability, others expect the provider to use the client’s system. Thus the ability to integrate and connect—quickly and cost-effectively—with a wide range of systems is critical for a 3PL.
For example, Worldwide Logistics Solutions Inc. (WLS), a unit of Roberson Transportation, Champaign, Ill., has “several customers that have different systems—one for inbound and one for outbound for each plant,” notes Paul McCreary, WLS vice president and general manager of logistics.
WLS, which was formed about two years ago, had the luxury of starting with a clean sheet of paper when assembling its system backbone. “We listened to what companies wanted,” McCreary explains. “They told us they wanted a quick launch, low cost of delivery, a high degree of visibility, and the ability to interact with others in the supply chain.”
To deliver that, the company knew it needed an Internet-based solution. The next step was to evaluate available optimization tools.
“We politely referred to some of them as Bob’s optimization technology,” he says. “They looked good and probably worked well, but I don’t know Bob.”
Worldwide Logistics Solutions felt it needed the credibility of a well-established and well-known systems vendor, so it decided to work with CAPS Logistics’ TransPro. CAPS Logistics is an Invensys company, located in Atlanta, Ga. To TransPro, WLS added a hosted visibility solution, which was developed by Science Applications International Corporation.
“We have already exceeded our projected results,” Paul McCreary reports. The systems enable the quick startup customers require. “In the old days, it would take six to nine months and half a million dollars for system integration,” he says. “Now, we can be up and running in six weeks, with a relatively low cost of delivery.”
Another new 3PL, Marlin Logistics, built in technology from the ground up when it was founded to provide all-inclusive “click to ship” fulfillment services for small parcel shippers.
“I am a firm believer in automating as much of the process as we possibly can,” says Ron DiDonato, president and CEO of Marlin, based in Orlando, Fla. “I don’t like to piecemeal my capital expenditures.”
As a result, DiDonato developed an IT plan and budget that included a state-of-the-art warehouse management system and all supporting technology, including conveyors, pick-to-light systems, carousels, radio frequency devices, and sortation equipment.
In preparing his budget and plan, he developed an ROI for technology based on forecasts. The business case also included the cost of implementation.
“You have to look at the hardware and software costs, but you also have to look at your internal expenses—the resources you have to use internally on the distribution and IT side to get the system going,” DiDonato says.
Marlin selected RedPrairie’s warehouse management system to operate its 104,000-square-foot facility in Orlando, and plans to quickly roll it out to a much larger facility in Nevada. In addition, Marlin uses RedPrairie’s LENS visibility solution to provide real-time order status and inventory visibility over the web.
Marlin views the RedPrairie solutions as differentiators that help the 3PL win business.
IT As Enabler
As information technology becomes an increasingly integral enabler of supply chain efficiency, logisticians will have to become effective logistics/supply chain IT champions, notes Dick Powers.
“You have to stand up and fight for everything you want. Know what your needs are, dig in your heels, and insist that everything get done. Logistics people have to get involved in systems decisions, and understand what they need. Otherwise, other people will make systems decisions for you.”
The results may not be what you want; the potential risk is high. “Your systems are the backbone and infrastructure of your organization,” notes Ron DiDonato. “In today’s complex marketplace, it’s that backbone, the infrastructure of your system, that makes—and keeps—your company competitive.”
5 Steps to Systems Success
Companies budgeting for supply chain systems need to begin at the beginning by identifying their needs, according to Vishal Sharma, vice president-supply chain for Neoris USA, a global technology consulting and systems integration company based in Miami, Fla.
Sharma advises that logisticians determine:
- How can we leverage our existing assets?
- What supply chain issues need resolution? Is it visibility of inventory? Partner collaboration and enablement? Supply chain responsiveness and effectiveness?
- What type of cross-enterprise integration needs to take place in order to leverage events that affect supply chain effectiveness outside the four walls of the company?
Getting fast results from IT investments builds credibility and increases the likelihood that future systems will be approved. “Demonstrating quick ROI will lead to gaining the momentum required to integrate the end-to-end value chain,” Sharma says. He suggests basing systems deployment on an incremental approach, using an architecture that will support future growth and integration.
“The way we typically address the issue of budget allocations is to first identify and quantify the area of the supply chain that needs improvement and that can provide the necessary ROI over a relatively short time span—say, three to six months.”
Sharma outlines five steps that logisticians can follow to develop a sound justification for their investment in technological solutions:
1. Understand your existing business environment. Define your company’s overall objectives. Identify any variables (current or potential) that may prevent you from achieving these objectives.
Also identify industry trends and benchmarks. Don’t assume that you’ve got the high-level view right.
Logistics people don’t always have the complete long-range picture, Sharma says. For example, the logistics operation at one company, charged with optimizing its distribution network, was unaware that the company sought to build an entire new channel of distribution over the next three years, which would have tremendous implications for the distribution network and the systems that would support it.
That’s why it’s important to consult with sales and marketing and other key functions to ensure that you have a comprehensive understanding of corporate objectives before making systems decisions.
2. Make assumptions and analyze the business using key performance indicators. “Do some benchmarking of corporate performance against standard key performance indicators (KPIs) to see where you are right now,” Sharma advises. Then you can identify where you need to be, which will enable you to identify what types of systems will help you get there.
“You can then define whether a system is a mission-critical application, an infrastructure investment, or an opportunistic solution that may yield a larger return,” Sharma explains.
3. Tie the KPIs to a set of business objectives. “Start doing scenario planning, and identify potential areas of improvement,” Sharma says. “Break it down and classify whether the benefit will be cost reduction, improvement in revenue, or better quality of service.” Then quantify the projected results.
4. Develop a strategy and plan for resolving the problems via a set of business solutions. “Develop a road map of how the solutions will be deployed over the next months and years,” Sharma advises. “Once you develop the strategy and road map, you still need to define and categorize how you will roll out the solutions.”
5. Develop a comprehensive business case. “Start accounting for all the components that go into the budgeting process, including software, hardware, internal and external resources,” he says. Then build a cash flow statement to demonstrate ROI.
To improve the likelihood that your systems request will be approved, “start working more with your upstream and downstream partners. Try to understand what their drivers are, what KPIs are being measured, and how your operation can help improve their KPIs,” he suggests. Then quantify the impact these changes can have, such as reducing inventory levels or increasing sales. The more closely you can tie results to corporate objectives, the better your chances of success.
“If you can clearly articulate what value you can deliver, the dollars will come,” Sharma says.
Techniques for System Success
Competing for systems dollars in a tough economic environment takes hard work, a clear vision, and a compelling business case. Here’s how to increase your chances of success.
Understand your logistics strategy and how it fits into your company’s strategic direction. Rather than addressing critical strategic questions, says Dick Powers, co-founder, president and CEO of Insight, logistics managers “tend to look for technological tools when they’re hurting somewhere.”
This approach can result in a patchwork of technological solutions with less than optimal results. “Your logistics information systems have to support your corporate objective and policies,” Powers notes. “So you have to define your information needs in terms of your mission and goals, identifying what you need to carry out that mission.”
Understand your existing systems. “You have to understand what systems you have now, and define the business architecture that you’re working with,” says Tom McAllister, executive partner, CMAC. “Do an inventory of the systems you have in place to get an idea of where you are today.”
Perform a gap analysis. Identify your performance weaknesses in strategic areas, and look for technological tools that can help you improve that performance. “Start with where you are today, and where you need to be. Then determine how you get from here to there,” Powers advises. Can you get the needed capability internally, or do you need to go outside?
Develop a logistics/supply chain I.T. plan. “You don’t have to be a technology guru to do this,” Powers notes. “It just requires being a good analyst and understanding logistics and your mission.”
Say you want to reduce transportation costs by 20 percent. Identify what information you need to accomplish that, and the various technological tools that will provide you with the necessary answers. Then sort through the options to determine which is best for you.
Develop a compelling business case. “Logistics executives have to get much sharper at developing the business case for technology,” McAllister says, “and at understanding the company’s hot buttons.”
If you’ve already achieved high levels of on-time delivery, inventory accuracy, and labor utilization, you may need to identify other, equally strong factors to help justify investing in a major new system. For example, McAllister says, the system that helps you achieve 98-percent inventory accuracy may not provide the supply chain visibility your customers demand.
Work with your financial department. “Your financial people generally know the protocol of how your business case should be presented,” says McAllister. They know about hurdle rates and carrying costs, and can guide you through calculating potential cost savings.
Establish a strong relationship with IT. “Work closely with your chief technology officer or chief information officer,” advises Ron DiDonato, president and CEO, Marlin Logistics. “Without their support, it’s a non-win situation. Get the CTO/CIO or their designee heavily involved in your technology effort. Without that support, it won’t work.”
But be aware of built-in biases that your IT people may have. For example, Powers says, “IT people are really not interested in best-of-breed systems. They tend to want one vendor, because it’s easier to manage.” Instead of best-of-breed solutions, IT may try to force a corporate solution, he says.
Have a vision and stick with it. “Every day, every week, I see a new twist, a new product, a new idea—they all sound good. There’s lots of sexy stuff out there that you can bolt on here, or you can bolt on there,” notes Paul McCreary, vice president and general manager of logistics, Worldwide Logistics Solutions. Respond to all the great system solutions that come across your desk, he warns, and “you’ll be in for a lot of money.”
Get logistics a seat at the table. “Lobby to get involved in your IT strategy/planning committee,” advises McAllister. “If you take a proactive stance, you’ll have a better chance of getting the solution you want as opposed to one that’s forced on you.”
Learn how to precisely quantify results. Many managers find it easier to justify a system that achieves readily quantifiable benefits—such as a warehouse management system—than it is to calculate the potential benefits of a supply chain visibility tool. Yet those are the tools likely to reap the greatest return.
In addition, tracking results that can be attributed to the new technology can present a real challenge. For example, how do you differentiate between inventory reduction that comes from lean manufacturing vs. inventory reduction achieved as a result of software implementation?
The ability to measure results accurately depends on establishing key performance indicators and measuring performance before you implement the new technology. Try to have a track record before you get into implementation so that you can measure results against it.
Be conservative when budgeting. “Build in at least 20 to 30 percent more than the cost of the software,” advises McAllister.
Budget for more than hardware and software. System implementation will often require integration, EDI development, and other professional services.
Also include enough money to cover testing and training. “These are critical to the success of your system,” McAllister says. “But they’re the first things to lose if your budget gets tight.”
Beware the risks of building a bare-bones budget—it may come back to haunt you during the implementation phase.