Consumer Products Logistics: Driving Shoppers to the Mall

High volumes, low margins, fast turns,and ever-increasing service expectations make logistics and supply chain management more critical in the consumer products goods (CPG) industry than in many other industries.

In CPG logistics, “pennies can make a huge difference in a company’s profitability,” says Ralph W. Drayer, former chief logistics officer of Procter & Gamble and now chairman of Supply Chain Insights LLC, Cincinnati, Ohio.

CPG logisticians are experts at shaving and generating those pennies through innovations such as continuous replenishment, the perfect order, menu pricing, and Collaborative Planning, Forecasting, and Replenishment (CPFR).

But CPG logisticians can’t ever stop striving for improvement. Not only do retailers continue to push for better service and lower costs, but consumers are becoming savvier and more demanding.

“Consumers want to be able to get what they want when they want it, quickly and at the right price, and they want to be able to return the product when they don’t want it,” notes Sundi Aiyer, supply chain planning and operations capability leader, Capgemini Americas, Dallas.

Consumers demand low prices, high product availability, and very time-based offerings, Aiyer says. Mass customization, SKU proliferation, new products—many with short lifecycles—plus volatile demand and keen competition make logistics precision critical for CPG manufacturers.

In addition, CPG logisticians often have to work with an extended supply chain, long transit times, multiple offshore vendors, and lead time variations, notes Lalit Panda, vice president of supply chain and information systems for Harman Consumer Group, a division of Harman International Industries, Woodbury, N.Y.

“Consumer products, especially electronics, have a very short lifecycle. It’s very important to manage inventory and match the order pattern closely so that you don’t end up with obsolescent product and wipe out sales gains,” Lalit says.

While CPG logisticians have been tackling challenges similar to these for years, “the bar has definitely been raised,” Drayer says. “Consumers are much more demanding, much more in charge of their own destiny,” and retailers continue to push inventory and costs back to the manufacturer.

The degree of difficulty has changed dramatically. As a result, Drayer says, “things that used to be acceptable are no longer.” In addition, the CPG manufacturer’s role has changed.

“Manufacturers have transitioned from being adversarial trading partners to consulting with retailers on how to improve sales and profits within the categories they operate,” Drayer says.

To meet consumer and retailer requirements, logisticians in the consumer products industry often develop innovations and breakthroughs that are later adopted by other industries. Delivering more service, greater variety, and a lower price—that’s the challenge CPG logisticians strive to meet.

Here’s how they do it.

Harman Consumer Group: Turning Data into Knowledge

Harman International, which designs, manufactures, and markets high-fidelity audio products and electronic systems, has several important supply chain initiatives underway. “First, we’re working on improving visibility, which is very critical in the supply chain,” Lalit says.

A vendor extranet now in production will let carriers and vendors share information, enabling collaborative planning and providing event alerts. Information from Internet-based data collection screens is driven into Harman’s enterprise resource planning system, so customers can place orders and get immediate product availability feedback.

Through these information-sharing, collaborative programs, Harman drives demand back up the supply chain to its vendors. Having that kind of knowledge “optimizes the flow of product through the chain,” Lalit says.

On the outbound side, Harman is working with small package carriers and expediters to move product faster and more cost effectively while reducing handling. One approach involves moving product directly from vendors into retail stores, bypassing the distribution center and shortening the supply chain.

Product quality enables Harman to enjoy a remarkably low return rate compared to the eight to 10 percent that’s more typical for consumer electronics companies. Returns are processed at Harman’s distribution center rather than sent to a separate center for repair or refurbishment.

“We have a complete returns management program at the DC, with the people, testing processes, and equipment in place to check the products,” Lalit says.

This enables Harman to process returns right away so that resalable stock is immediately available for sale, and eliminates the cost of transporting returned product to a separate location.

Harman sells its consumer electronics to big box and specialty retailers, and sells refurbished products direct to the consumer. “We have separate web sites and separate products,” Lalit says.

Harman is also doing business on eBay, shipping to the consumer via UPS once an auction is completed. The company maintains a customized page on eBay, and finds that its e-commerce business “has been very successful, and will continue to grow,” says Lalit.

“Being successful in consumer electronics supply chain management involves keen attention to detail, laser-like focus on every element of cost and time, response flexibility, a global approach—plus stepping back to evaluate multiple tradeoffs,” he says.

Continued analysis reveals hidden opportunities that can be leveraged for further improvement.

LeapFrog Makes a Big Jump

LeapFrog Enterprises Inc., a maker of electronic and other educational toys based in Emeryville, Calif., works with contract manufacturers in China and third-party logistics providers in the United States and Europe.

“We’re the third-largest toy business in the world,” says John Casella, the company’s chief information officer. LeapFrog’s primary retail channel concentrates on the Big 4 retailers—Wal-Mart, Target, Toys R Us, and Kmart. The company also sells to specialty toy retailers. A separate division sells directly to schools.

LeapFrog works closely with its major customers. “We assign account teams to each customer,” Casella says. “The teams work closely with the buyers to make sure supply and demand are in alignment. As a result, LeapFrog has a tighter connection with buyers regarding forecasts.”

The company sells approximately 500 stockkeeping units (SKUs); 30 percent of those are new each year, according to Casella. To help ensure that those products are in stock, “we put increasing emphasis on our sales forecasting process,” Casella notes.

The company factors in forecasts from sales, and information from marketing. The executive team reviews this data, then develops a consensus forecast that the company buys to.

LeapFrog recently revamped its approach to supply chain planning, moving from spreadsheet planning to a sophisticated planning system.

“A core team of sales service, operations, and information technology people worked together to define the process flows that ran from the forecast and origination of demand through the tail of the supply chain,” Casella explains. The team developed a new process vision, then implemented a common process flow.

Two new technological tools are enabling the business-driven initiative. A supply planning tool from Manugistics builds on LeapFrog’s sales forecast, factoring in lead times and making recommendations that are reviewed and adjusted by supply planners, resulting in a 26-week rolling forecast of expected production.

While LeapFrog will realize some benefits from the planning tool this year, Casella expects to see greater results in 2005. “We’re in this year’s peak manufacturing and shipping season, which doesn’t give us much time to tune the planning system,” he explains. “A lot of the decisions have already been made for the current year.”

To enable the company to better manage a tight manufacturing schedule across an extended supply chain, LeapFrog is adding to the Manugistics tool—an application from Valdero Corporation that provides available to promise dates and supply/demand matching.

The Valdero tool aligns the supply plan with customer orders and forecasts. Because LeapFrog has a number of customers on a replenishment cycle, with orders coming in weekly, Leapfrog issues what it calls “forecast orders,” or proxy orders.

“We align the forecast orders with actual orders, and begin the match process of assigning schedule dates to orders, running scenarios around the best supply/demand match,” Casella says. The Valdero tool enables LeapFrog to run multiple scenarios, change ranking strategies, and determine which has the best outcome. Available to promise scenarios can be run in minutes, not days.

LeapFrog expects multiple benefits from its new supply/demand tools. In addition to better communications with customers, the company will be able to more effectively manage through exceptions, such as an existing product with higher-than-anticipated sales or a product shortage.

In addition, Casella notes, “we’ll be more efficient in our analysis. Instead of someone having to crawl through five spreadsheets when we have an issue, the system automates the analysis process,” producing better and more timely data and making the sales team more productive.

LeapFrog is also making changes in its distribution strategy, consolidating multiple warehouse operations in California to a single, larger facility in Fontana that will be operated by third-party logistics provider Commodity Logistics Inc., Columbus, Ohio. A new warehouse management system from HighJump is being implemented in the new distribution center.

Together, LeapFrog’s changes are expected to produce “lower inventory, higher fill rates, better customer service, and increased productivity,” Casella says, all of which will ultimately translate into lower costs and greater availability for consumers.

Remington Takes Aim at Consolidation

Remington Arms Company Inc., Madison, N.C., sells firearms, ammunition, and accessories for hunting and sporting applications. Retail channels include national chains such as Wal-Mart and Kmart, regional chains such as BassPro, Gander Mountain, and Dick’s, and a wholesaler network.

Remington traditionally operated four regional contract distribution centers, which meant that customers sometimes received shipments from multiple locations to fill one order.

Following an extensive logistics analysis and network study, “we slowly but surely and methodically closed down our logistics operations and centralized into one facility,” explains Rick Kilts, warehouse and international logistics manager for Remington.

Customers now get one order from the centralized DC, which is managed and staffed by Ozburn-Hessey Logistics (OHL), a third-party logistics provider based in Nashville, Tenn.

Remington holds the lease for the facility, which runs customized warehouse and transportation management systems. The facility uses RF technology; voice-directed order picking technology is being implemented this summer.

The facility is positioned to meet customers’ evolving requirements. For example, Remington is in the second tier of Wal-Mart’s suppliers, and is due to be in compliance with Wal-Mart’s RFID requirements by January 2006. “We’ve already started laying the groundwork for that,” Kilts notes.

Retailers are continuing to drive distribution costs back to the vendor, and placing smaller and more frequent orders. They also are continuing the trend toward crossdocking.

“We’re absorbing a lot of the physical effort to pre-assign store locations to our customers’ shipments, enabling them to unload the truck, send product through a sortation conveyor device, and ship directly to the store,” Kilts says.

Remington has embarked on a collaborative logistics program with its customers. “We’ve strategically targeted the regional chains first,” Kilts says, proactively working with customers’ receiving, systems, and vendor compliance staff to smooth the fulfillment and order processing cycle.

“One of the most important lessons I’ve learned is to build a strong relationship with customers and vendors, so that the logistics and procurement functions are as smooth and efficient as they can be,” Kilts says.

Remington continually works with its 3PL to identify new ways of reducing costs and improving service, such as maximizing freight dollars. One option being considered is consolidating shipments with other OHL customers during the next 12 months.

KraftMaid Delivers the Last Mile

KraftMaid Cabinetry, a premium cabinet manufacturer located in Middlefield, Ohio, sells to Home Depot and Lowe’s home improvement stores nationwide, as well as to 1,600 dealers across the United States, shipping anywhere from a single kitchen a week to five truckloads. KraftMaid’s cabinets are all made to order.

“We don’t build any product until we actually have a delivery date with the dealer or consumer,” says Kreig Rugh, vice president of logistics for KraftMaid.

“The whole upfront process begins in logistics,” Rugh explains. “We start the manufacturing flow, one kitchen at a time. We build almost 14,000 cabinets a day in the reverse order of how we’ll load a truck. That starts each day’s scheduling process.”

KraftMaid may deliver to the stores or to consumers and job sites. Delivery windows are getting narrower, Rugh notes. Consumers’ expectations for home delivery used to be “whenever you can get here,” narrowing to a two-day window, then a single day, and now just a four-hour window. And each consumer gets a phone call from KraftMaid confirming the details of the order, such as order number, style, and cabinet finish.

Until a few years ago, KraftMaid made all its own deliveries. Then Rugh was tasked with reducing costs and improving customer service for the steadily-growing company. Rather than invest in the technology and infrastructure needed to optimize logistics, KraftMaid decided to outsource its delivery operation and leverage its third-party provider’s technology and capabilities.

The company initially outsourced its scheduling process and deliveries to a well-known 3PL. “But that wasn’t the right home delivery partner for us,” Rugh says. “Home delivery is dynamic, with maybe 1,000 different deliveries every day to different locations.”

So the company looked for a 3PL that specialized in home delivery and managing dedicated fleets.

After considering a handful of potential partners, KraftMaid changed providers earlier this year, bringing the scheduling process back in-house. KraftMaid selected Cardinal Logistics to provide dedicated delivery services from its manufacturing plant to Home Depot and Lowe’s stores nationwide, dealers, and consumers.

The 3PL also handles final mile deliveries of KraftMaid cabinets and dedicated delivery for a product line KraftMaid manufactures for a sister company. KraftMaid and Cardinal finished implementing their new delivery network at the end of June.

KraftMaid already sees improvement in its delivery operation, and Rugh expects more gains, thanks to new technology now being rolled out. Cardinal is using a Route Delivery Application solution that combines systems from Agentek, myLogistics, and Symbol Technologies to streamline end-to-end route visibility.

The new technology will enable drivers to scan items at the final point of delivery to ensure that the right product is delivered, and in perfect condition. “A truck might have 200 different bar codes on it—for example, 100 for cabinetry and 100 for accessories,” Rugh explains.

With each truck making seven or eight home deliveries in a day, there’s plenty of opportunity for error. The new technology won’t let drivers unload a product unless it’s scanned with a handheld device.

Reports will be sent instantaneously in an encrypted, compressed technology to KraftMaid’s customer service department using cell phones or satellite.

“If the driver is supposed to deliver 17 pieces but there are only 16 on the truck, we’ll get that information immediately and can start tracking down the missing piece. If we have to rebuild a cabinet, we can get it right into the next day’s production,” building the missing product the next day rather than the next week.

Once the delivery side of the equation is worked out, Rugh expects to begin optimizing the inbound side. “Working with Cardinal, we’ve improved internal backhauls with our dedicated fleet,” he says. “Revamping the inbound transportation network is next on our to-do list.”

Growth Clicks for HPshopping.com

Hewlett-Packard launched an online store to sell refurbished personal computers back in 1998.

“This grew out of a very small location that FedEx Supply Chain Services managed for us,” explains Michael Butler, supply chain and logistics program manager for the Sunnyvale, Calif.-based HP division now called hpshopping.com.

“From there, we started adding finished goods new inventory into the mix, and it has exploded, especially in the last 18 months.”

Indeed, hpshopping has enjoyed year-over-year revenue growth of nearly 60 percent. “It’s not a small business anymore,” Butler says. “We are a consumer direct business.”

To handle its growth, hpshopping is evaluating where to invest in infrastructure, technology (including RFID), and warehousing “to ensure we don’t stumble along the way,” Butler says.

HPshopping’s supply chain is completely separate from other HP supply chains. “We place orders on HP divisions, acting more as a retailer than as another HP division,” Butler explains.

Product is shipped to a 100,000-square-foot warehouse operated for hpshopping by FedEx Supply Chain Services. Ozburn-Hessey Logistics provides the labor and warehouse management team for the facility.

“Product received at the warehouse before noon is on our web site for sale before 5 p.m. CST that day,” Butler notes. Customers can order standard items up until 10 p.m. EST and receive their order by 10 a.m. the next day via the first scheduled FedEx delivery. This means that a customer who places an order for toner after Office Depot closes can receive the package before the retailer opens the next day.

New products play a large role in hpshopping operations. “Because the lifecycle of a PC is 28 days, we introduce new products weekly if not daily,” Butler says.

The hpshopping facility can easily ramp up to handle spikes in volume. “Within 11 days, I can triple our throughput in Memphis,” he says.

HPshopping also has a configure-to-order business for laptops and desktops, Butler says. These products are shipped from contract manufacturers in Mexico or China, depending upon the product.

The online store’s customer-friendly returns policy generates more revenue than cost, Butler notes. “We send FedEx to pick up the return, and issue the credit within seven days. If the customer doesn’t want FedEx coming to their house, they can print the label and use FedEx’s NetReturns program to send the product back,” he says.

Butler describes hpshopping as “an engine balanced on cost as well as customer service.” As part of his effort to contain costs, Butler challenges his logistics providers each quarter to implement a new cost initiative or increase overall effectiveness in some way. He uses a carrot-and-stick approach to manage the logistics providers.

For example, if cycle counts are off by more than $5,000 on a monthly basis, the warehousing providers pay half the cost of the discrepancy over $5,000. As a result, Butler says, “we’ve seen huge gains in their accuracy.” At the same time, he may offer a bonus to the management and labor levels if certain goals for a new product launch are met.

While hpshopping does not serve Wal-Mart, Butler expects to benefit from the retailer’s RFID initiative. “HP is one of Wal-Mart’s top 20 vendors,” he notes. As a result, by the end of the year, 20 percent of the SKUs in the hpshopping distribution center will be RFID-enabled at the carton level.

“Our challenge will be determining where the break-even is, when enough SKUs are RFID-enabled so that we can see the real efficiencies,” Butler says.

But the potential advantage is significant, as evidenced by the experience of another HP warehouse, where receiving of printers dropped from two minutes to six seconds through the use of RFID technology.

Innovating to Create Value

“While companies can make incremental improvements, many are taking a transformational approach to revamping their supply chains to leapfrog the competition and gain sustainable business benefits,” Aiyer says.

To be successful, such efforts must begin with the CPG manufacturer’s overall business strategy, then “drill down to how you want your supply chain to enable that strategy,” he says. Next, drill down further to the business process, organizational structures, and appropriate supporting applications and technology enablers.

These transformational programs typically involve several simultaneous initiatives across divisions and functions, and often extend beyond the company to suppliers, channels, and trading partners.

“Supply chain transformation is not just reducing costs—it involves changing the cost structure, or a new model, or a new way of doing business,” says Ralph Drayer.

Just as CPFR has done over the past several years, the Electronic Product Code and RFID are driving major changes in supply chain management, he suggests, leading to new models of doing business.

Other groundbreaking models are being developed by leading CPG companies. One such model is what Procter & Gamble calls the customer-driven supply network, and others refer to as the demand-driven supply network.

Whatever it’s called, “this next-generation integrated network will enable a new business model, providing an accurate demand signal with visibility across the network, with concurrent information that everyone in the supply chain can react to,” Drayer says.

While this type of network is not here yet, “we’re not more than five years away from it,” he predicts.

Consumer-driven replenishment will also drive significant change in the near future. “CPG companies are embracing more real-time, current consumer data coming from their retail partners and using that information for planning their entire supply chain,” Aiyer says.

He describes consumer-driven replenishment as “making consumers the center of the supply chain and using point-of-sale data from the retailer to plan the extended supply chain—taking the actual sales information all the way back to the manufacturing facility and making the whole supply chain more pull-based.”