Improve operations before collaborating

During his 14th Annual "State of Logistics Report," presented recently at the National Press Club in Washington, DC, Bob Delaney made "The Case for Reconfiguration" his theme. Delaney, vice president of Cass Information Systems and consultant for ProLogis, noted that during the past three years, U.S. retail prices have declined by two percent annually. This deflation is forcing companies to lower operating costs, and that means inventory reduction.

"When prices are falling, earnings improvement must come from supply chain operating efficiencies," Delaney said. "This supports the case for reconfiguration of product lines, production and distribution networks and operating systems." Those are prerequisites for a successful supply chain collaboration, he argues.

He cited Unilever, the Anglo-Dutch consumer goods giant, to make his case. Its "Path to Growth" program calls for slashing the number of its brands from more than 1,600 down to 400 by 2004. By 2005, the disposal of lagging brands and the promotion of stronger brands, along with reconfiguration of its production and distribution network, are expected to increase annual revenues by five to six percent and help it achieve an operating profit margin of 16 percent.

Apparently Unilever's strategy is working. In February it reported a 16 percent increase in 2002 profit and an 18 percent increase on earnings per share on lower sales revenue because of the disposal of weaker brands. Fourth quarter sales of the company's leading brands grew 8.5 percent, with 9.8 percent growth coming from the home and personal care products and 7.3 percent from food.

Unilever has also reconfigured its distribution network from 15 warehouses into five "super-regional" distribution centers totaling 4.8 million square feet. This enables it to deliver to most U.S. customers in one day. That accounts for a 15 percent improvement in customer service and annual savings of seven percent in transportation, administration and facility cost.

"Let's reconfigure our businesses operationally as a first step before considering the benefits and risks of collaboration," Delaney advised. "In our experience, you should collaborate from a position of strength, not weakness."

For more on Bob Delaney's "State of Logistics Report," go to www.cassinfo.com and click on Delaney's Dugout.

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