The Wheels of Change: Questions & Answers with Ed Melching

The Wheels of Change: Questions & Answers with Ed Melching<br />

When Navistar sought to position itself for worldwide growth across all divisions by recasting its supply chain operations, it wiped the slate completely clean and put an engineer with zero logistics experience in charge. Here’s the story of how Ed Melching led Navistar to global growth—and significant supply chain gains.


Project Update

Sometimes the pathway to significant supply chain improvement is a road less travelled. For truck and engine manufacturer Navistar International Corporation’s Ed Melching, director, Global Logistics, the journey started with a blank sheet of paper. Without any significant logistics experience, Melching took the lead on a five-year project to achieve global supply chain gain and build a scalable logistics platform that would position Navistar for global growth across all its divisions.

This was no small feat for the Warrenville, Ill.-based company, whose subsidiaries and affiliates produce International commercial and military trucks; MaxxForce diesel engines; IC school and commercial buses; Workhorse motor home and step van chassis; private-label diesel engines for the pickup truck, van, and SUV markets; and truck and diesel engine parts and service.

In 2008, after undergoing a grueling third-party logistics provider (3PL) selection process, Navistar chose San Mateo, Calif.-based Menlo Worldwide Logistics, the global supply chain management subsidiary of Con-way Inc., to support it in improving its global logistics network, including managing global transportation providers and regional warehouses, planning lead times, and modeling net landed costs.

Inbound Logistics recently sat down with Melching to get the details on this compelling supply chain saga.

Q: You’ve achieved significant supply chain gains for Navistar during the past two years, yet you had no logistics or supply chain experience. How did you get involved with the project?

A: My 20 years of experience at Navistar had all been in tractor and truck product development engineering. I had no clue what logistics was, and had never heard the term 3PL. In engineering, we don’t think about logistics, other than to obtain a product’s freight rate to include in cost-tracking models.

About three years ago, I was asked to take over Navistar’s logistics group and develop a strategy across the enterprise that would help support our growth.

Q: How did Navistar’s supply chain operate before this project, and what were the key drivers that led the company to overhaul its supply chain?

A: The supply chain was regionally based, with independent logistics networks for each principal division— truck manufacturing, engine manufacturing, and service parts. Key drivers for change focused on cost and growth. We needed to reduce overall supply chain costs, and put in place a new strategy and structure that would make cost reduction a continuous process while providing supply chain knowledge resources, structural flexibility, and capabilities to support our global growth initiatives.

Q: How did you approach the first phase of the project?

A: I attended conferences, talked to our management and key partners, and built a team to assess the state of our supply chain. We determined that the company was too siloed, with independent networks across divisions, across our truck and engine networks, and across our service partner’s network. We needed to combine all three networks into one enterprise-wide network, then expand it globally.

After the evaluation, I concluded the job was too big for the 12 people comprising our corporate logistics group, and we could not tackle it internally.

It took about six months to put together what we called our five-year strategy, and pitch it to Navistar executives. Then we began an objective partner-selection process involving all the well-known 3PL players.

Q: What were the top characteristics you were looking for in a partner?

A: Prior to the 3PL selection process, we conducted a capability assessment of internal and external logistics operations, including what we thought our system encompassed and what we wanted it to eventually look like. There were 10 criteria, including planning, procuring, executing, compliance, culture, and program management. We used that assessment to score each candidate.

Q: How did you determine the criteria?

A: Previously, we created our own internal maturity levels as part of our logistics assessment. We measured our data points against theoretical metrics, not against the competition or anything else. We used that information to develop the criteria.

Q: How did you present your needs to the 3PL provider candidates?

A: We invited nine candidates to our office for a one-day presentation and had them all in the room at the same time. We explained how much we wanted to save, and the capabilities we wanted to have at the end of the five-year plan. We asked them to come back in 30 days with a plan. We then held weekly conference calls to field questions, with all the providers on the phone at the same time so every 3PL worked with identical information.

Q: That’s an interesting dynamic. Was there any interplay among competing 3PLs? For example, did any of them question the capabilities of their competitors?

A: No. During the phone calls, they asked clarifying questions of us. They weren’t tipping their hand to their competitors on how they would make our project work.

Q: What did you do after the 30 days were up and the 3PLs submitted their written proposals?

A: We conducted our decision analysis by creating a graph comparing all the 3PLs’ capabilities to our needs. At the end of the first round, four candidates fell out.

Q: Was that fall-off voluntary? Did any of the providers admit that they couldn’t meet your needs?

A: Yes, a few admitted they couldn’t do what we needed. Remember, we asked them to address everything we wanted to accomplish across all Navistar’s divisions, globally.

A: few providers dropped out because they didn’t have that breadth or capability. A few others just weren’t interested; they submitted canned presentations and weren’t really listening to us.

We invited the remaining five providers to our offices separately to spend a day working directly with us. This gave us a chance to ask for clarification on their proposals and talk about specific approaches. That’s when we learned that some of the 3PL finalists could not accomplish what they had pitched in writing.

Ultimately, we narrowed the candidates to two. Interestingly, out of the nine original candidates, Menlo was the only one with which we had no prior relationship.

Q: How did you choose Menlo?

A: To make the final choice, we toured the finalists’ facilities. Menlo took us to a 4PL operation it was running for security solutions company Diebold, which was going through a supply chain transformation. Then we toured its warehouse in Aurora, Ill.

Q: What was the deciding factor in Menlo’s favor?

A: There were several factors, such as its global coverage, cross-network planning, and optimization capabilities. Menlo offered effective IT systems and solutions that complemented our environment. We appreciated its culture founded on Lean methodologies and focus on sharing best practices across the enterprise.

Ultimately, Menlo’s experience and demonstrated success with Lean, and the culture fit with Navistar, gave it the edge. We felt we could build a team that would hit the ground running, and we did.

Once we decided to partner with Menlo, we started to talk about the contract. Up to that point, we had not talked about price with any of the candidates.

Q: That is fairly unusual. Most companies go into the partner-selection process with a rigid price structure.

A: It was unusual. When I pitched our strategy to Navistar executives, they said, “We want you to get all of this capability. We also want you to save 25 percent of current supply chain costs, and you can’t increase your staff. There will be no budget increase.”

When it came time to talk price and contract structure with Menlo, we came up with a creative approach together: Our infrastructure improvements are funded out of the savings. Our 25-percent supply chain reduction has to be a net reduction after paying Menlo, and after putting an infrastructure in place. It’s a significant challenge.

Q: What happened next?

A: We started to merge the two teams. The first hurdle was strategic alignment— getting the teams to agree on what we were going to do.

We went back to our five-year strategic plan, which is a unique approach in that it’s a theoretical goal. Instead of targets, the plan consists of descriptors of what we want. We think of it as a strategic house that has ‘rooms’— planning, sourcing, executing, invoicing and pay, performance monitoring, and compliance.

Having this plan helped us internally because our functional teams did not have to debate their approach. We painted a picture of where we were going, and aligned all the divisions to that. Then we could decide the right priorities and what to work on next.

We solicited input from every department— manufacturing, purchasing, supply chain, planning or ordering, logistics. Everybody was in the room to discuss the vision and strategy.

Q: How did ‘getting everybody in the same room’ work?

A: We held a two-day workshop, attended by 50 people from all Navistar business units and from Menlo, to review a draft of the plan with stakeholders. We communicated our intent, then broke into subgroups, each with a specific responsibility. We cleaned up the plan’s vision and mission, and examined all the rooms of the house and its descriptors.

Q: The process you have outlined is an unconventional approach. Would you say that your lack of logistics background gave you the freedom of not knowing what you shouldn’t do?

A: Because the project manager and I came from engineering, we had no ownership of the existing logistics system. For us, it was a simple approach; we just needed a blank piece of paper. It was okay for us to say that the existing system was not ideal and start working on something else.

Q: Was there ever a time when you thought the project was too big?

A: No. Although my team came from another world, it was one with billion-dollar, multi-year projects. We knew that rebuilding the supply chain was a journey; we didn’t expect it to happen overnight. We were comfortable that if we built a plan, we could execute and tune it over multiple years.

Another interesting point: Navistar is primarily manufacturing-based. The leadership leaves logistics to the logistics team. They don’t pick on us unless our numbers are bad. Overall, we had free reign.

It’s important to clarify: when we selected Menlo, we chose a strategic partner. We were not outsourcing logistics.

Q: What role did management buy-in play in getting your plan in place?

A: When we were ready to choose our partner, we had to get approval from our executives, who had already approved the strategy. In the process, we realized the relationship with Menlo could encompass more than just transportation and logistics. So we put in place a daily/weekly governance process with the Navistar and Menlo teams.

Q: Was that your idea, or did it come from the top?

A: That was our idea. In addition to that group, we have a steering team that includes me; Navistar’s chief procurement officer, CIO, CFO, and senior manufacturing staff; and the vice presidents of manufacturing, parts, and service parts of other divisions. It also includes senior Menlo staff. This team meets monthly to gauge progress and get guidance.

Also, Navistar CEO Daniel Ustian felt that there were synergies between Con-way/Menlo and Navistar. So there is a third level of communication: Ustian meets quarterly with Con-way CEO Doug Stotlar to oversee our activities and discuss progress.

Q: What specific programs and changes have been implemented since Navistar began working with Menlo?

A: In 2010 alone, we identified and implemented 19 separate transformation or cost-saving projects, each attacking a specific area of the supply chain with a set of metrics that would define success. When we started the partnership, our most important accomplishment was defining our common vision and mission, and establishing a five-year strategy for what Navistar’s supply chain would transform into, and how we would meet our cost reduction goals and support business growth. That was key.

Some noteworthy project successes so far have been rationalizing our transportation spend and adopting a new core carrier program; re-engineering our finished vehicle delivery process; implementing a new cross-enterprise transportation management platform; and successfully demonstrating a Lean material flow pilot project at one of our manufacturing plants.

At the end of the partnership’s second year, we will have achieved 11-percent cost savings, out of the 25-percent goal we set for the next five years.

Q: What are your future plans?

A: We just gained approval for our Material Flow Strategy, which outlines how containers, packaging, and external logistics centers and warehouses will operate.

Q: Suppose you get pulled off the supply chain initiative and put on another project? What would happen?

A: We talk about that a lot. Our 2011 strategic house focuses on Navistar’s organization and processes, because we want it to be sustainable. Part of our contract is that Navistar will be self-sustained at the end of the project. Our core competency will focus on analyzing and planning where we should be around the globe.

Our warehousing and transportation costs are greater than our direct labor costs. We’re a heavy manufacturer and we actually spent more moving material than we did assembling vehicles.

Today, hundreds of people support our transportation and logistics efforts, compared to the 12 people we started with on our internal logistics staff. As we grow, we’re only going to move more material— but we will be significantly more efficient and logistically scalable around the globe.

Project Update

Since IL conducted this interview in October 2010, Navistar and Menlo have continued improving the manufacturer’s supply chain. Ed Melching provides this update on the past three months’ efforts:

We are continuing to extend our Strategic Collaboration Model and Lean practices deeper into the supply chain to encompass more key suppliers and further support our manufacturing operations. In essence, we’re applying Lean efficiency tools and waste-reduction methods across a bigger footprint of the Navistar enterprise.

As part of our Lean Material Flow project, we are implementing a standardized container solution for delivering parts to the plants. We have moved to a common solution with standard, reusable containers for transporting parts, providing both cost and environmental sustainability benefits. We will also shift our warehousing to align with our Lean Material Flow strategy.

Overall, we’ve been given the green light to bring collaborative change to more areas of the business. It’s an exciting time to be in logistics at Navistar.

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