Benchmark Against the Best, part I

This is the first MHM roundtable involving leaders from some of the core industries we serve. This particular group of participants represents another first: MHM's first editorial advisory board. Each participant of this roundtable has agreed to work with

CHALLENGES

Let’s start by identifying some of the biggest challenges of our panelists’ jobs when it comes to material handling logistics and moving product throughout their supply chains.

SCHWERDT: I work for Procter & Gamble as the healthcare beauty care North American distribution system owner. My primary function is the design of the distribution systems and meeting customer needs. We have two major focus areas over the next year. One is to control costs; at the same time we must meet our changing customer deliverables. Radio Frequency Identification [RFID] comes to mind as the next major challenge within the consumer goods industry: how to manage the cost of implementing this change while maintaining customer service.

ROGERS: Rockwell makes industrial automation controls. As vice president of logistics, I am responsible for all our global logistics, which would include transportation, warehousing,distribution, customer service and export/import compliance. Our challenges vary from day to day. The biggest is driving logistics cost down in today’s marketplace. The most immediate challenge is the changing security requirements. Another is integrating various systems, not only our own, but also with suppliers and providers.

MOULTRY: I am vice president of field operations for CardinalHealth. I’m responsible for our pharmaceutical business operations, including facility network planning, all the way through the day to day operation of the distribution centers. I would have to say that returns is our biggest challenge.

HUFF: I’m plant operations manager with Ford Motor. I am responsible for all of material planning and logistics for our PowerTrain operations. My responsibilities include 14 different plants, including large V engine plants, small V engine plants, and casting and forging operations. My role is basically the link with material planning and the implementation of strategies within the framework of all our manufacturing sites. The biggest challenge for us is establishing good solid material flow, and to make sure we are implementing best in class benchmark practices to support our manufacturing operations in that journey to lean. We do that in an environment where there are competitive cost pressures throughout all our plants.

LEVINE: I am the senior vice president of operations with Pioneer Standard Electronics. We are a distributor of mid-range servers headquartered here in Cleveland. We are IBM’s tier one and two partners for mid-range servers. I’m responsible for all our transportation and distribution, warehousing and our integration facility, which is a facility that integrates products from our vendors, primarily HP, IBM and Oracle. These suppliers use manufacturing facilities around the world. We move these productsto all types of OEMs and solution providers in various vertical markets such as hospitals and financial institutions. Our transportation requirements are a major challenge. We are always moving custom solutions that are very expensive -- up to $600,000. In some cases we are required to move product into challenging environments such as the 55th floor of a Manhattan office building. Forecasting is also a major challenge. We’re both a one tier and two tier partner of these suppliers. What happens is everyone tries to deliver forecast input into the manufacturing environment by brand, and that has been very difficult because in some areas one plant supplies product for the entire world. How do we communicate as a channel into our vendor community so they get accurate forecasts, and how do they take that and manufacture enough products so they can deliver to all the geographies? That’s our biggest challenge.

MHM: You all share common challenges: communications and working with supply chain partners inside and outside your companies. How do you deal with these challenges?

SCHWERDT: Inventory reduction seems to be the big thing now for customers and ourselves. It is a cyclical thing within the industry, trying to find a tradeoff that is right for ourselves, customers and consumers while delivering a quality product at the right price. P&G tries to be the benchmark from a damage limitation standpoint, in both our transportation and distribution practices. There are always opportunities to improve there, but now we're focusing on driving cost out of the total supply chain.

MHM: Have the customers changed, or has the relationship with them changed in the last couple of years? Are they more demanding?

SCHWERDT: Everybody is more demanding. I mean, Wal-Mart obviously raised the bar many years ago for driving the costs out, and they have changed the scope of the way distribution occurs. I wouldn't say they are more demanding, but they are more specialized in their demands.

MHM: CardinalHealth is getting famous for customizing its services to customer specifications.

MOULTRY: One of our key drivers is customer focus. We try to make sure we never miss a delivery. If we do, it is because it is just impossible to make. We had an instance a couple years ago where a facility burned to the ground, but we still delivered. We moved the operation to another facility and filled those orders. They were late, but the customers got their orders that day. We have a whole department called business continuity that focuses on looking at our facilities. During Y2K we had plans for every distribution center. Whatever happened, we had some kind of plan to back the facility up. We have contingencies for weather, and just everything we can think of. After all, what we are delivering is pretty serious.

HUFF: In our business, we operate with our partners on a global front. We do a lot of business in Europe and the Asia-Pacific region, and we are moving into India. The real keys for us is good solid communications in that supply chain. One of the things we do in engineering is cause and effects analysis — what can go wrong in that supply chain? We do that up front when planning the chain. If you have a problem with Customs or quality issues, what are some of the contingencies? What do you do in terms of the partner relationships and what do your supply base and transportation providers need to do in cases of failure. Given the current geopolitical situation, there are a lot of things we need to do. We need to look at the lead times required. We need to make adjustments to inventory levels where we see the higher risk. We also constantly work on information visibility. We want to be able to, at any point in time, get information on border status, ocean status, Customs status, rail status—information that allows us to respond quickly. Getting information quickly is key in manufacturing because dollars are more pronounced there. Each lost minute is accumulated there because of the variable and fixed cost you are paying.

MHM: David, you probably have quite a variety of customers for what you do. What are the challenges you face in communicating with these customers and finding out what it is that they require and how do you meet those requirements?

ROGERS: Probably the greatest demand is what Roger referenced. Many of our customers, like Ford and Procter & Gamble, are moving to other locations throughout the world. The real challenge is to provide the same service in these locations that they are experiencing in North America or in the European Union. India is a good example. It can be difficult to get product into India. We have done a lot of work, and we can get product in in one-fifth of the time it used to take us several years ago. So our focus has been on cycle time reduction. We have 17,000 SKUs that we stock; we provide 350,000 SKUs in our product portfolio. Our real challenge is how you take paper out of the process, whether it is through freight forwarding, distribution or through clearing Customs. We must do those processes electronically. Our central distribution centers are basically paperless. We also are in the process of implementing electronic clearance through our broker to facilitate that process. So the real key is the information flow. For material flow, usually you can get down to pretty short cycle times, either by premium transportation or even normal.

TECHNOLOGY

MHM: RFID is one of those information flow enablers. Is that equally important to all of you when we are talking about information you get from either the plant floor or distribution center and how does that information get fed up into the organization?

HUFF: We are moving forward with bar coding for traceability, not only with our product but for racks. A real inhibitor for us is containers and rack. Because of our environmental push, we are transforming from packaging in expendable containers to returnable containers. We need to trace not only parts but containers, too. We need to treat containers like parts. The return route is just as important. For our industrial materials, the scanning process is used to relieve our inventory, charge a department and order from a supplier when we scan at the point of distribution inside of our four walls.

MHM: Jeff, are you pretty much in the same situation?

LEVINE: We have been for a while. If you think of all the components that we put into a system, each component has a serial number, and it is tracked from the time it leaves our supplier through our environment and into our RF system and into the custom solutions we provide. When that solution goes to an end user and they need warranty or maintenance, the IBM or HP engineer that goes out to do the service scans the serial numbers to make sure that unit is still under warranty. So one of our challenges is to manage all that information. If you look at the products that we sell in a given year, and all the components, it equates to hundreds of thousands of items that require services and maintenance. These also involve renewals and add-ons, so the information flow to other businesses within our organization is critical. It is our responsibility to manage all that data and convert it into information.

MHM: Jerry, in the pharmaceutical arena, that traceability is even more critical. In fact isn’t the FDA mandating certain standards when it comes to the use of automatic data collection technology?

MOULTRY: Well, there is a whole bunch of legislation out right now driving toward the ability to track right down to the patient, and we are trying to work as closely with our manufacturing partners as possible because there are a whole bunch of benefits for us if that product has RFID tags on it. Again, we focus on the quality of the order we ship out to our customer. The service level is real important to us, and because of the margins in our business, inventory management is key to our success. That gives us the visibility into product coming in, the product that is in our distribution centers as well as what’s going out the door. As it leaves our distribution centers, it either goes to a pharmacy or a hospital, and they need to track that product’s dating and lot number.

MHM: There was an interesting item in USA Today about fake drugs showing up in U.S. pharmacies.

MOULTRY: RFID would help because every time the product moved, you would know where it has been. That’s something we are interested in and are trying to be on the leading edge. See, I think the real expense is at Procter & Gamble’s end —our manufacturing partners, because it really needs to start with them. We just need to put the systems in to be able to track and manage information. But it is tagging every individual product and maybe, Gregg, you have different ideas, but that’s where the real cost is.

SCHWERDT: I wholeheartedly agree. Driving the paper out and driving the time out of the system is really huge. You hear that as an underlying theme. The information technology and the speed we get enables the entire distribution system and supply chain to change dramatically. Right now the inhibitor for RFID is the cost of the ID tag itself, but this is the next generation of bar coding. If you have a lot of volume, the cost goes down. If you don't have a lot of volume, the cost stays high as I'm sure Ford can understand with their parts. So it's really a Catch-22, and right now I would say both Procter & Gamble and probably all of our competitors are clearly looking at how we can move RFID into consumer goods. The problem is the cost versus the benefit. They are just not equal right now.

MHM: A lot of the discussion has been about the cost of the tags and the cost of the underlying technologies. What about on the data collection side? And I think maybe more in your area, Gregg, the switch to RFID tags will require new readers, where you have a large installed base. Is that part of the cost barrier that you guys are seeing?

SCHWERDT: Let me address that in two phases. I think there is still the misconception of where RFID is and what it should be at this point. We hear multiple things. "I want an RFID." So we clearly aren't clear from a definition standpoint what we are supposed to RFID. We are thinking, as you go along, it will migrate all the way to the unit. The actual cost of implementation, from a distribution standpoint, is huge. The fact that it sends out a signal versus me having to take the signal from it is a huge gain to make sure we have 100 percent accuracy, to make sure what went on the truck is what gets delivered. We would like to have it today. The cost of moving to this technology is a one-time capital cost, but the benefit to the overall supply chain is huge. It's already at the consumer end. Go to Kroger, watch how many people use that customer loyalty card. That tells the store everything, including their name, address, how often they purchase that item, and you see that growth in the industry. That is a huge step, and I expect you will see it come en masse and beyond. You also see it in Target and Costco credit cards. People seem to be fairly comfortable with this because they believe it gets them a lower price, and I would agree, it does. But it requires the entire supply chain to be integrated to take cost out of the system.

TRACKING & RETURNS

MHM: How much impact does the ID aspect have on helping you all with returns?

HUFF: For us, it has very much enhanced our ability to problem solve, and from a responsiveness standpoint, when something goes wrong in the system, you are able to get the nonconforming load or part back for problem resolution identification. That’s critical. That’s really the reason we want that kind of link with respect to our product, to be able to identify very quickly the scope and the range of where our quality issues are between the front and back doors— being able to contain and confine it, and get it back to where we can clean the system. So traceability for us and the ability to track to the component level is critical in terms of the return of nonconforming material. That’s why we want to do it. MHM: Jeff, to expand on that, are you able then to track back to source, which of the vendors, which of the subcontractors or contract manufacturers produce the product?

LEVINE: Yes. It is really two areas. The stand alone components that come back, typically, they will come back because they are just not working, and we would process those back through a warranty process. Where it becomes a little more complex for us is when we integrate a system. Typically, those units don’t come back because the vendors do on-site analysis. Where we sometimes get into issues is when we make custom solutions, and we are buying products from various manufacturers. When that system comes back and it is not working or has failed, typically, it is because of some type of transportation-related damage. That’s when traceability is very important, so we know which vendor we bought product from. Sometimes we buy memory from multiple vendors. We need to be able to ship that back to the right person.

ROGERS: The biggest issue we have is controlling the country of origin data because we do move production from location to location. Our challenge is to keep track of the country of origin. It is becoming more and more of an issue when you are complying with a trade agreement. So that’s the ongoing challenge. And that’s where the RFID comes in by providing the additional information that all of us will be adding to our tracking systems. I think it is going to be the next major leap in terms of supply chain.

PARTNERSHIPS

MHM: The problem in supply chain partnerships traditionally is they’re not equal partnerships. Somebody is usually left holding the bag in terms of cost. Benefits are rarely distributed evenly. Somebody has to pay the lion’s portion of that in order to keep someone as a customer.

SCHWERDT: At some point one of us will have to take the lead and go forward with it. It is no different than with advance ship notices. There was a huge cost to make that transition. Although the benefits are there, until you actually do it and take the dive off the board, you just don’t know what you’ll get out of it.

MHM: David, you’re with a high-tech company. You would think that your partners are on board with this stuff. Do you have challenges there when it comes to adopting technology?

ROGERS: Well, first of all, I do believe RFID will be lead by the consumer marketplace. We are working on RFID, both in terms of how our products will support it, and we also have an internal initiative. We have certain products that we serialize and plan to put RFID on in order to facilitate the tracking of these products. I think the challenge will be the systems development. I think the RFID unit cost will become trivial as well. But the real issue is I don’t think any of us really understands how big the IT investment will be to support RFID and get the benefit.

LEVINE: One of the issues that we see is this inconsistency of supply chain processes. You go to ten different people and ask them to define their supply chain, and they will give you ten different attributes. We try to find the commonality amongst them because we can’t afford to have ten different systems linking up. Then on the other end, the partners that we sell to have different systems. IT infrastructures have to migrate to a common definition. If they can’t do this, the cost will be prohibitive. That has been part of the problem with RFID — technology companies can’t afford to develop multiple systems.

HUFF: I guess from my perspective, the real key at the end of the day is what signals performance to the customer? In our business, we look at current state, but when we have failures in our current processes, those failures multiply into real dollars real quick when manufacturing shuts down. So if we can prove and validate, then we could build a good business case just based on the number of occurrences and spills we encounter. If we have proven technology that delivers to a customer in a more efficient manner, then we drive towards that. We constantly are looking at the robustness of solutions out there. I am mindful of the use of technology in this ongoing war with Iraq. One of the things I read was that the logistics planning was just outstanding because you could find out where the next supply of water was in the supply chain to support the troops. Obviously, you don’t want to be on the front line as a customer and run out of bullets. So you have a supply chain where they have traceability. They used bar coding. They were able to track and trace throughout the supply chain over there, and it was just an outstanding process. That’s what we would like to replicate. And the customer for us is manufacturing.

BENCHMARKING

MHM: Let’s get into benchmarking — comparing yourself against the best of anybody in any other industry.

HUFF: Absolutely, and that’s driving us to a Six Sigma resolution in meeting our customer requirements.

MHM: Does everybody here do benchmarking, and who do you benchmark against?

SCHWERDT: In our world, we would benchmark against our key competition so Colgate-Palmolive and Gillette.

MHM: But you stay in your industry pretty much?

SCHWERDT: Pretty much. We do benchmark with a couple outside industries, Duracell, Black and Decker and a few others, and we do sit on a few consumer boards, but pretty much within the industry.

ROGERS: We have done benchmarking with other industries comparing our internal performance with them and with 3PL capability.

MOULTRY: We look at other distribution companies in general, and most recently, we did some stuff with the Limited in Columbus just to understand what they are doing and how they manage their logistics. But we certainly always look at the competitors and compare ourselves, but we really try to focus on distribution companies.

THIRD PARTY LOGISTICS

MHM: Another major trend seems to be the use of third-party logistics and what you are willing to entrust them with. Are you willing to put your business in the hands of somebody outside your own company?

LEVINE: We are not willing to do that. I get probably ten calls a week from third-party providers. I struggle to really understand what value they deliver. Our supply chain is certainly not like CardinalHealth or Procter & Gamble. We do put our products into the hands of FedEx, UPS and freight forwarders, but as far as turning over our information to a third-party provider and letting them handle all of our logistics, we aren’t ready for that relationship. The problem we have is the customer ultimately comes back to us. You are better off in our end of the industry to make that a core competency.

HUFF: I guess in our position, it is a question of looking at optimizing the supply chain. For us, when you look at third-party providers, we are looking at them as full service providers. We are talking about warehousing. Currently, we are using a lot of valuable square footage for our storage, so we’re looking at third-party providers to do warehousing, container management, sequencing, re-packing, kitting, and in some cases delivery all the way to the line side. That’s really a full service provider. We are paying premium dollars — $30 per hour, plus all the benefits in terms of UAW wages. Most third-party providers can beat that. In the future, our vision is treating them as an extension of the supplier, and wrapping that all up in a business case.

MHM: Jerry, you are in a unique situation in that you provide third-party service.

MOULTRY: That is our core competency. In fact, we have a separate entity that does third-party logistics for some partners. We have taken a look at the returns part of it, but as Jeff said, I am having a difficult time finding how that’s going to add value because we still have to handle the product. The product still has to flow through our distribution center, and we would have to send it to the third-party logistics company, anyway.

ROGERS: Regarding 3PL, we look at it as make versus buy, depending on the region of the world. Where we have critical mass, we tend to do it ourselves. Where we don’t, then we outsource. In today’s environment, it takes more management where you are dealing with 3PLs than in the past.

SCHWERDT: For Procter & Gamble, it is a value equation. There are pieces that are much more cost efficient for us to have a 3PL do. Do I envision us turning over our entire distribution system so if a Cardinal Health would call the 3PL would speak for Procter & Gamble? I don't think so. I think in the late 90s you saw everybody run to 3PLs, but now we are scaling back some, from complete outsourcing to looking for a balance. You do get a natural benchmark using 3PLs because they serve your competition and customers, and at least for most of the consumer commodities you get their expertise on what your competition is doing. They can't say exactly what they are doing, but we get some good feedback.

But again, it becomes a value equation for us. We pay fairly aggressive wages for P&G folks, and there are some levels within the warehouse where those wages just don't justify the value I get. So it is a tough choice, and it changes by site from a distribution standpoint. For the most part, I would say about half our warehouses will be 3PL and the others will maintain P&G ownership.

I see a greater move to contract manufacturing. There are challenges that go with that, but we are big on building partnerships from that standpoint. We don't just go with a contract manufacturer for a year. We try to make sure it is a long-term relationship and a win-win.

WAREHOUSING AND DISTRIBUTION

MHM: We talked about warehousing a little bit, does anybody have any advice on setting up your distribution center network—whether it’s best to consolidate or to expand that network?

ROGERS: We have over the years reduced the number of distribution centers globally. We just consolidated what was 24 warehouses throughout the EU into one distribution center, and seven years ago in the U.S., we consolidated three into one. So that has been our general direction, having one very efficient facility in our major market places. When you consolidate facilities, you are also consolidating cultures and technology. You must ask yourself, “should I try to keep the same technology, or throw that away and start from scratch with new material handling technology?” In our case, we did a complete do-over. We put in both material handling and information processing to leverage the volume concentration and to be more efficient.

MOULTRY: When we acquired Bindley, it drove our network up to 41 distribution centers. We have since brought that back down to 24, which is where we were when we originally made the acquisition. We just found that seems to work from a geography standpoint and from a facility size perspective. You have to consider business continuity. If one of those facilities goes down, how much of your customer base will that affect? We have to look at that from a technology standpoint, as well. We don’t put the same technology in every one of our facilities. It depends on the customer base.

HUFF: From our perspective, warehouses in the global outsourcing environment minimize the amount of inventory carried in the manufacturing sites. That’s valuable floor space, so to present material to them without carrying a lot of inventory, we use a manufacturing support center. This is a full-service facility that does a little bit more than just warehousing, especially when we get material from Europe, Asia, and India. This is inventory we don’t normally carry. Information sharing is critical, and they are strategically located to support several facilities. In the future these support centers will become an extension of the suppliers.

LEVINE: Our philosophy is, fewer warehouses are better. Today the costs of running a warehouse are on the rise because you need the right mix of technology and the right people. Plus, the cost of real estate in various areas is going up. We have consolidated a lot of little warehouses. Our products are not as time critical as Procter & Gamble’s or that of food distributors.

SCHWERDT: Fewer is better. But you have to look at your customer service levels. I will use a store shelf sale for an example. How long does it take for that shelf sale to get back to the home office, and for the home office to communicate the data to us, then for us to turn it into an order and deliver it? Going with fewer warehouses is just one component of many strategies. It is something we will have to look at as we gravitate towards replenishing the shelf versus replenishing warehouses.

MHM: Is that an example of what the customer is asking for besides price?

SCHWERDT: Some customers are looking for help with order cycle reduction from the time they give us the order, and some are looking for help on the shelf. That would be the big one right now — how do I stay in stock at the shelf and leverage technology to do that?

MOULTRY: Our customers want information. And they want you to figure out a way to pull out the information you need without infringing on their privacy.

ROGERS: The customer demand is for having local supply, no matter where they are located. Most of our products require application engineering, and many of our end customers are downsizing their internal capability and looking for more services to be provided by us in terms of application of the product. They are also looking for our products to be much easier to integrate.

HUFF: We adhere to a customer Bill of Rights, and that’s giving them the right parts at the right time, in the right quantity at the right place. So we are supporting their lean supply chain strategy.

Please go to Benchmark Against the Best, part II for the rest of the story.

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