New Challenges for Material Handling
This year’s roundtable covers all of MHM’s areas of specialty, but in a new light — that emanating from the explosions of the World Trade Center. Companies should periodically revisit their material handling strategies in good times and in bad, but this tragedy is causing many to look at new strategies and procedures for the first time. We’re going to discuss these here, but first let’s look at the economy going forward.
MHM asked Robert Shenosky, managing director, equity research at Merrill Lynch, to give his assessment of the measures needed to spur productivity in a down economy:
The necessary measures/costs could prove too daunting for some smaller companies or those already facing difficult financial pressures. Bankruptcies may be seen even as the economy begins to improve. I think most would agree that there will be additional costs; the only questions being the amount and which companies in the pipeline will incur the costs.
Technology has been an obvious positive for logistics in recent years. One only needs to look at the increase in business for companies such as Grainger that the Internet has been able to offer. We expect that trend to continue. Grainger is in the midst of finding the optimum balance between Internet (central shipping), local supply and regional supply. This is key to the process of cutting inventory costs and best managing the bottom line.
However, recent events may again alter the structure for some parts of the industrial chain. An increase in inventories may become an issue. Many public, and I am sure private, companies are focusing on cutting working capital (a substantial component being inventory) to improve results and in some cases appease shareholders.
If the potential increase becomes an issue, then the question arises whether companies can force others in the chain to maintain the inventory positions, and thus incur carrying cost. General Motors has in the past looked at ways to better manage steel inventories; for example, either in-house, by each steel company, or finally with all the steel producers housing product at a central GM warehouse maintaining the cost until GM needs the product.
Whatever the outcome, a rethinking in locating inventories closer to the consumer of the goods may be needed to ensure delivery. This could lead to additional warehouse space in the future, or at least reallocating existing properties.
Andel: George, how are manufacturers going to change their material handling practices to be more competitive in this new business environment? Must they reassess their approach to automation? Do you think it might be more labor intensive?
Weimer: I think most manufacturers are confident unless something like this attack on the World Trade Center happens again — in which case it would pull the trap door on business confidence and our normal way of life in the United States. Surveys have shown that the nation’s interest in new cars, new houses, and all kinds of other products has not declined significantly any more than it would have if that recession curve had been normal.
Andel: But in the industrial sector up to September 11, those that were planning on automation, robotics, how have their plans changed?
Weimer: I have not noticed or heard of any massive cancellations. Things in the pipeline, as far as I have seen, are still in the pipeline, and building plans remain the same. I think procedures are up in the air. How safety and security are handled in a plant, the priority that function has assumed now, obviously have gone way up. But I haven’t heard anybody at General Motors, International Harvester or any other large manufacturer say, “Well, we are going to cancel our plans,” which is what people were expecting for the first week or so after that.
Andel: Do you think this new atmosphere of terrorism might even increase the drive toward automation?
Weimer: It could. A whole new industry will be created. In this country, it takes one sleepless night to develop a business reaction to a crisis. I can guarantee that every company that can afford it will be hiring new safety and security experts — a whole new profession for manufacturing. Security is bound to happen, similar to the quality priesthood of, say, 15 years ago, if you recall. It was a monster the way every company became obsessed with official quality experts. But I think you are definitely going to have in manufacturing and business a generally large increase in professionalization — consultant activity in terms of safety and security throughout the manufacturing process itself — and that has been done before in manufacturing, but nothing as hysterical as this.
So I think we will have a whole new title in industry, a ratcheting up of the authority of safety experts — security experts in manufacturing.
Andel: Certainly, material handling is going to play a major role in terms of a company’s plan to get product to market. But how we look for the technology to help us execute that is changing. With the different players and intermediaries involved these days, we have to pay more attention to contracts: what we are expecting of a project, the scope of the project and how long it will last. There’s a need to break these projects into doable pieces, as opposed to taking on too much at one time, so you can establish small successes and build on those successes. That’s how you can get buy-in from upper management and from workers.
If they see good things are starting to happen and affecting the bottom line, then they will say we will go the next step with the next approach. Contracts have to be written with that in mind, with clear dates as to when things are going to be done and who is going to be responsible for those things.
Dan, dealers also are going to play a key role in terms of the services that they offer. Do you have a feel for the way things are changing for material handling distributors in this new environment?
Reilly: I mailed out a survey on September 10. We have forgotten the word “recession” because it has been overshadowed by the tragic events of September 11. Before September 10, the customers weren’t buying. The distributors weren’t selling, and the manufacturers were backing up inventory.
There will be sales in nine different cities this week and next week for $250 million worth of equipment, and it is all lift trucks, conveyors, racks, and a lot of nearly new and used equipment. It’s the assets from the bankrupt California-based WebVan Group. That’s tons of equipment hitting the used equipment market at one time!
Andel: Chris wrote an article [November issue, page 39] about the used material handling equipment market.
Trunk: I interviewed some systems integrators who are brokering used material handling equipment from now-bankrupt dot-com retailers. These former dot-coms’ warehouses are filled with brand-new equipment and systems for which top dollar was paid without it ever being switched on. Integrators say these and many other failed warehouses are a fantastic opportunity for companies looking to better position themselves by replacing, improving or expanding their material handling operations — at half price — during this economic lull.
Andel: Look what happened with eToys [See MHM News]. They had a great model. They invested in great systems, and they were doing everything right except the timing. What happened in the previous year just corrupted eToys’ business. So they went out of business, and they had all these material handling assets. Then KB Toys bought those assets, and now they are attempting to use those assets to meet this season’s Christmas demand. So it is going to be an interesting year for them, to see if they are able to meet all those needs with such a quickly put-together plan.
But let’s get back to material handling dealers, Dan.
Reilly: Paul Schulz, president of First Access, which is a large distributorship in the Chicago area, is a survey respondent. Paul wrote “The September 11 attack proved to me how vulnerable each of us is to any future plot involving terrorism. Certainly, the tragedy will negatively affect my business as we face a possible recession; however, I believe my business will rebound right along with its strong and dedicated customer base. I do not believe business will turn off overnight, and, therefore, I will make daily adjustments when the problems do occur.”
Much as you were saying, it is a day-to-day thing now. We have no scenario in the past to handle this. We surveyed 10 people, in the heart of the business. The majority that responded thought business for this year will be down 10 percent to 15 percent over the previous year. One respondent said sales declined 20 percent to 27 percent. Another one anticipates a 30 percent decline in business this year vis-a-vis last year. One expected a 12 percent increase because he is in the systems business, and that’s the area that seems to have the most promise. In a lift truck distributorship, the areas that produce the most favorable financial results — in descending order — are service, rentals, parts, used equipment and new equipment. So that indicates distributors have to be particularly strong in those first three areas. And engineered systems continue to be a most attractive area for growth and profitability.
Andel: So it sounds like the role of the distributor is stronger than in the past as we were talking about before. Why the increase in systems activity?
Reilly: Well, as we mentioned, new lift trucks are not the most profitable business to be in. There’s plenty of competition with slight margins.
Andel: So are we seeing diversification among the dealers?
Reilly: Right. We have preached that for 15 years. You can’t just sell new lift trucks. You have to be into other things, and the heart of it is service, rentals and parts. Distributors should consider broadening their businesses into storage and handling systems.
Andel: But are these dealerships ready for that, to take on that responsibility?
Reilly: No, not unless they have the financial resources and people who know the intricacies of the systems business. They are now dealing with technicians, not people experienced in sophisticated design, engineering and installations.
Andel: So what are the implications of that? Does that mean they have to go out and find the right people to staff up?
Andel: And what’s the challenge there? Is there a labor pool sufficient to meet that challenge? They will be competing for those people with their manufacturers.
Reilly: Right, as they competed for the technicians.
Andel: How are users who need to repair, upgrade or expand their material handling systems tackling these things in today’s economy?
Trunk: Retrofitting is a booming business right now. Systems integrators are taking advantage of the economic slump by retrofitting and relocating equipment from liquidated warehouses. Integrators want to be right there when somebody says, “I have a warehouse to sell.” Opportunistic integrators are working hand-in-hand with real estate agents, helping them figure out what this “warehouse stuff” is and how to price it. Both buyers and sellers of used equipment need the expert service these integrators offer to determine whether used equipment is worth relocating. Integrators can find willing buyers, perform needed repairs, component redesigns, controls and software upgrades. It just so happens that systems integrators have customers with laundry lists of equipment, but not much cash. These buyers are ready to jump when the right equipment is put under the gavel.
Knill: Are these established material handling systems? Vendors?
Trunk: These are experienced integrators and retrofitters, counted among which are major material handling equipment manufacturers. Some integrators bid and install jobs with a mix of both used and new equipment. There are also Web sites that specialize in selling all this used equipment like AS/RS, sortation conveyor, palletizers, lift trucks, carousels, etc. Keep in mind that while sale prices on used equipment itself are significant, sale prices don’t apply to the cost of retrofitting and upgrading services, or relocation and installation cost.
Andel: How are software vendors playing in this new economy?
Trunk: WMS vendors say many companies are relying too much on expensive ERP packages to keep SKUs and inventories low, and that ERP software alone may not be able to cope. For example, a 20 percent to 30 percent decline in sales can translate into an immediate 40 percent to 50 percent decline in inventory turnover — a lopsided and unexpected effect.
The typical knee-jerk reaction from folks in finance is to suggest across-the-board cuts in inventory and a clamp on all new purchases.
Material handling consultants suggest it’s much better to carefully adjust individual spending spigots in a company and solve inventory balancing problems one by one, rather than run the risk of institutionalizing a one-dimensional inventory policy within your ERP software code.
When it comes to advanced inventory management, software vendors report that virtual warehouses are on the horizon. This is a move away from the central distribution center model to multiple, small warehouses located around the country or a region. The warehouse software manages deliveries and inventory across these locations, allowing for the fastest fulfillment with opportunistic crossdocking while maintaining minimum stock.
Langnau: A lot of people are re-examining their ERP programs, wondering if that’s what they need to handle their inventory and all the integrated processes. There is still a huge problem of integrating ERP programs with a company’s front-end and back-end systems. Some have taken this year to make sure they are integrating systems appropriately; so they are not just rushing to buy the latest, greatest new product. Instead, they are taking a breather and fine-tuning what they really need to do to make these systems productively function.
Knill: A couple of factors aren’t discussed too much, and that is the fact that companies have had experience with Y2K. They are not as naive or unprepared as they might be.
Langnau: I agree. I’m hearing the same from IT departments. They are going back and saying we can retrench. But they’re not always able to get the rest of the warehouse or the distribution center on board. That’s the next step they need to take.
Knill: Also, if you were a multi-national company, a lot of these things are second nature to you as far as security is concerned. If you are dealing with Third World countries, you already have plans for earthquakes, floods and uprisings.
Andel: Are we seeing a freeze on global distribution, or will companies go ahead and build dealerships and distributorships as quickly as they have been?
Reilly: There are so many problems with distribution today. Take for example United Rentals’ coming into the rental markets and investing more than $3.6 billion in rental equipment. Distributors are fighting just to stay alive in their own territories.
Andel: Any comments about consolidation?
Reilly: We recently saw a merger between two good-size distributorships on the East Coast, now called Alliance, and they will be operating in a three-state area. Today’s distributor has shrinking margins, along with profitability, cash flow, employee compensation and business succession problems. And manufacturing is another ball game completely. We are looking at factory-owned stores seeking a greater share of market. And we have some friends doing a lot of international business.
Andel: That means growth in global information networks as well.
Langnau: And that’s a big part of the problem now because most global distribution is managed manually. There is software to handle the customs regulations, financial exchange rates, routes, and so on, but a lot of companies are still trying to figure out these data manually.
Reilly: I think you have to look at what part of the world you are talking about. Germany, Denmark, Sweden and Japan know systems. But in Africa and South America, there are enough people to carry the boxes.
Andel: One speaker at CLM [Council of Logistics Management] talked about borders, and how we are going to concentrate on the flow of goods north and south more than east and west. Any comment?
Knill: Even the NAFTA participants say trade between United States and Canada is much slower than anybody wants. The only thing that is a saving quality right now is the fact that the economy is sluggish and they can afford to have a little slop in shipments.
If the economy were hot, that would be a serious problem, but it isn’t at this point. Ford Motor says it will put more float in its inventory, which means they are not giving up just-in-time, just making it a little sloppier. That’s all.
Andel: When we are talking about global transport, transport packaging is very crucial, both in terms of information and product protection. In many cases, the packaging carries the information and performs the function of the information supply chain as well as being part of the physical supply chain.
So with that in mind, a lot has happened in terms of automatic data collection and how we get these packages or unit loads to carry the information that everybody in the supply chain needs. Now, post September 11, that’s more important than ever.
Witt: There has been some activity within the small parcel delivery community. As far as parcel security goes, other than doing hand inspection on virtually every package that comes through, there’s not much they can do — unless they install tunnel scanning systems similar to what airports use. There are a couple good scanning systems now, where they can scan a package and check that package as it goes from the distribution center to t