Material Handling in Troubled Times: Will Logistics Save The Day?

Dec. 1, 2002
Our annual editorial roundtable reviews material handling in light of a very dark year -- 2002. It mixes dashes of optimism and pessimism with a big measure of realism. See if you agree with our assessments.

Roundtable panelists

Robert V. Delaney, Cass Information Systems and ProLogis; John B. Nofsinger, Chief Executive Officer, Material Handling Industry of America; Pat Panchak, Editor in Chief, IndustryWeek; Clyde Witt, Executive Editor, Material Handling Management, and Chief Editor, Transport Packaging; Dave Blanchard, Editor in Chief, Supply Chain Technology News; Tom Andel, Moderator for Roundtable Discussion, Chief Editor Material Handling Management; Perry Trunick, Chief Editor, Transportation & Distribution

MHM’s 2002 editorial roundtable takes a different approach from those of previous years. The effects of terrorism, security concerns and work stoppages at our ports call for a look at material handling from a supply chain perspective. That’s why we invited the chief editors of Transportation & Distribution, Supply Chain Technology News, IndustryWeek and our new publication, Transport Packaging, to join MHM in an analysis of where we are and where we’re headed. Joining us in this discussion are John Nofsinger, CEO of the Material Handling Industry of America, and Robert Delaney, vice president of Cass Information Systems and consultant to ProLogis. Both bring a valuable logistics grounding to the roundtable — Mr. Nofsinger on the systems side and Mr. Delaney on the services side.

ANDEL: Logistics on both our coasts has been in the news lately. The result is a dual perspective on information technology [IT]. On the West Coast, we had the dock workers union, which is afraid of what technology would mean to their jobs. On the East Coast, we have people who are hoping that technology will not only save our productivity from terrorism but also save our lives.

So with those events in mind, why don’t we talk about the state of inventory management and how events like these will affect logistics in the next few years, particularly with regard to inventory management. All our readers who are anticipating investment in IT or some kind of technology are worried about the timing of that investment. John, do you think these events will have a major impact on business for the members of MHIA?

NOFSINGER: There is the short-term phenomenon, adding pressure on industries to build inventories regionally and locally. This trend will pass. Economic globalization will allow things to move more freely. Once we have standard technology, it will enable continuous flow. This may change region to region, particularly in Asia or Europe, but at some point, we should be able to weather such difficulties

ANDEL: When things were boiling around the West Coast ports, the media were reporting that for every day that passed we were losing a billion dollars in business. Even now there could be severe supply chain implications for the holiday season.

DELANEY: I think the billion dollars is overstated by a factor of about five. That’s a number that one consultancy in Pennsylvania came up with for the Pacific Maritime Association. But other people who have looked at it, especially in investment banking, see it as much smaller.

The major threat of a situation like this is to auto parts. Organized labor told the White House to stay out of it and it would resolve itself. So I think this situation was over-reported and overblown. This has been coming for a long time, and anybody who didn’t recognize that this was going to happen deserves it.

TRUNICK: Have we seen inventory building in anticipation?

DELANEY: We kept taking inventories down throughout the third and fourth quarter and still have a record sales low. I speculated we might have a five percent increase in safety stock. It turned into a $20 billion hit on a $1 trillion budget. That’s not a big hit.

ANDEL: Did anything positive come out of this?

DELANEY: We didn’t realize it at the time, but when we invested so much money in fixing Y2K, rather than convert old systems, we bought new technology for visibility, connectivity, and for letting shippers know where their product is. We didn’t intend for it to deal with security, but it did. So right now the additional investment in security is, you hire some more guards, and keep after your people. They are your source for being informed and aware.

ANDEL: In your state of logistics report, you mentioned the study Ohio State did and talked about the differences between raw material, work in process, and finished goods inventory. The conclusion was that the management of finished goods inventory was really the least developed.

DELANEY: Correct. Ohio State University has an organization called the Supply Chain Management Research Group. Together with professors LaLonde and Ginter, my company, ProLogis,identified the global 1,000, the largest users of warehouse space.

Investors are asking, if these companies can get more efficient with inventories, will there be a need for warehouses? For finished goods, the only industries that improved efficiency in the past 21 years has been computers and peripherals and auto parts. Computers and peripherals is because of, I think, the rapid obsolescence, and auto parts is because of the inbound side of the automobile industry. Everything else, textile, apparel, oddly enough foods, with all the discussion we have about collaboration, the food industry hasn’t made any progress at all. So that’s where the action has to be.

ANDEL: John, do you have any observations based on the end users you’ve spoken to at the shows or the kinds of traffic you’ve seen at the shows? Is there a pending mass investment in the types of technologies that could help businesses master their finished goods inventories?

NOFSINGER: Well, I think we started heading away from focusing on finished goods some time ago, and a lot of energy is now spent on continuous flow and movement. We don’t have as much of a need to depend on finished goods today. There was a time when everyone had giant buildings dedicated to producing red things or green things or blue things, and those have become less flexible. We went through 15, 20 years where warehousing and distribution automation got a bad rap. Even GM opted to go to smaller, more regional, distribution centers with much less technology. That’s run full circle, and people are now wisely applying technologies to solve particular problems. But they have much greater flexibility today.

ANDEL: There seems to be a trend toward mass customization or, at least, trying to meet more of one customer’s requirements for customization. So the idea of doing some assembly postponement and minimizing the finished goods SKUs as much as possible is proving valid for some.

BLANCHARD: Yes, the high-tech electronics industry is a lot further ahead in terms of finished goods than, say, the food industry. The supply chains are built that way, just to get it in the door and out because the next version of a PDA will be announced next week. Food and other process industries have less of a time sensitivity there.

ANDEL: Of course, you have the emergence of third-party logistics providers that can do a lot of postponement-type services for their clients.

DELANEY: That’s where the technology is going.

PANCHAK: Within the computer industry, you have differences between Dell and its competitors. Compaq tried to do the Dell model, but they just couldn’t. They could put in all the technology but you have to get the people, the culture, and the whole structure moving to the sound of that drummer.

ANDEL: Perry, how does such time sensitivity affect the need for expedited services? The idea seems to be to carry as little inventory as possible while paying to get goods through the supply chain quickly.

TRUNICK: We’ve seen a rise in overnight and next-day capabilities at a lesser price. The regional motor carriers can rival many of the expedited services, and many of the surface modes can rival air, so that domestic air cargo and heavy freight movement has begun to drop. Shippers now have the ability to shift modes from less than truck load to truck load, and from truck load to intermodal. They’re using the capabilities of the transportation system, which are so much better than in the past. What used to take five days now takes three-and-a-half.

ANDEL: One of the reasons we’re starting up a new publication, called Transport Packaging, is that these trends are affecting how people protect their products en route to market.

WITT: The growth of small parcel shipping has caused the ripple effect of people needing more kinds of packaging material. With more kinds of packaging material going to more destinations more often than ever, that has its effect throughout the supply chain. Things are being made and shipped in smaller units, meaning smaller parcel deliveries. In the end, if it is broken when it gets to the customer, or if seat belts are 15 minutes late getting to a factory because there were no returnable containers on site, there are problems. So the packaging at the end of the line can have the biggest effect on service quality.

ANDEL: As we get more efficient in the handling of goods, transportation costs aren’t as much of a factor any more, are they?

DELANEY: Last year transportation costs were at record lows, 5.9 percent of GDP.

ANDEL: Still, our readers, more than ever, have to be smart about what’s going on with regulations, especially in an environment where we have terrorism causing changes at ports and at Customs. They have to know everything about this particular component they are shipping. It could have multiple applications, one of which might classify it as a restricted item, thus delaying it at some point in the supply chain. That’s why vendors in the material handling industry have to be educators, as well. If they can help customers rationalize movement through their supply chain, it will make it easier for shippers to deal with their supply chain partners around the world. That has to be part of what vendors offer these days.

NOFSINGER: Yes. One of the classes of membership we’ve had for years is consulting and integrating. Many of the people dealing with logistics are advising on such topics, but this goes beyond our industry. The university infrastructure is now starting to graduate a class of skill sets to provide corporate America with people who understand such things. We support that through our Education Foundation and scholarship activities.

TRUNICK: The first tier of schools has generated professors who’ve gone on to other schools that created a second tier of logistics schools. Ohio State graduated professors who went to the University of Tennessee and developed a logistics school there. This country probably has more logistics education available than anywhere else.

ANDEL: But once you are working in a real-world supply chain, education tends to get put on the back burner. If an end user goes into a capital improvement project or gets into some tricky contract situation, he or she could get into trouble. It seems to me that if material handling equipment vendors are going to break out of that commodity mindset at the customer level, they have to act more like consultants.

NOFSINGER: Clearly, when you see these companies exhibiting at events and shows around the world, they’re not demonstrating equipment so much as talking process. The rise of 3PL customers is a good example. If contracts with their customers are short, why should the 3PL take the risk of putting in some type of automation on a large scale? So pricing models and finding ways for industries to work together to take that risk off the table is looming.

TRUNICK: I heard some property developers talking about process and handling systems consulting. Part of the idea from the property developer’s standpoint is that the facility is designed with the capability to adjust to another tenant at the end of the contract.

ANDEL: That lends itself to the system modularity trend we’re seeing, with both hardware and software becoming more configurable. John, conveyor manufacturers are designing systems to be more modular, even incorporating modular controls and programming so the end user can take things apart and reconfigure them as needed. That was discussed at the last ProMat. Is this trend taking off?

NOFSINGER: Clearly, especially as you go global. Your system can be plugged together, operating under different environments. You may be operating in unique European environments and also here under national electric standards and codes. The same is true in robotics. Finally those producers are realizing that more of their business is going into material handling, not painting and welding.

BLANCHARD: Where is all the expertise among the material handling OEMs? Are they hiring their own experts or just outsourcing?

NOFSINGER: The half life of anybody coming into the business is so short that unless a company is able to continue supporting that discipline, it’s pretty hard to do. Looking at our little education foundation, of the scholarships we awarded, about 60 percent of those are with end users. The ones who came out of this program 25 years ago are at the senior most positions. We have got to turn up the heat to get more of these folks landing in this industry.

ANDEL: The trend among end users is for managers to wear a lot of different hats. Not only do you have to work at the warehouse level, but you also have to know about transportation. You have to know about regulations. So the multi-disciplinary approach has got to take hold among system suppliers, as well. That’s why the way contracts are written these days is so important. What are the client’s expectations and roles and what are the vendor’s expectations and roles? Another trend in regard to 3PL relationships is gain sharing. “Do I do something for a fixed price or do I get a piece of action?”

Even among supply chain partners, relationships need to be clearly spelled out. When we’re talking about technology implementation or adoption being pushed by some of these big gorillas onto their suppliers, the supplier wants to know what he gets out of the deal.

NOFSINGER: I wonder if we haven’t put enough emphasis on the accounting process.

PANCHAK: At the executive level, what the accountants see is a lot of unused space in the plant, and that’s just overhead. They say, “We have to get that plant going at 100 percent.” Well, a lean manufacturer doesn’t produce like that. They clear the floor and try to put in a new process. Until you get that new process in there, upper management just doesn’t see the benefits on the spreadsheets. John, you need to get some bean counters in your association and educate them.

ANDEL: Six Sigma and quality go hand in hand with lean manufacturing and logistics. At industrial trade shows, particularly material handling, IT is very heavily represented. In fact there’s almost as much IT capability exhibited as racks, and in some cases they share the presentations. You have intelligent storage; you have ways to use space more efficiently.

DELANEY: But it’s not strategic. It is presented as operationally competitive. If you don’t do it, you won’t survive.

NOFSINGER: That’s it. It is cost driven.

ANDEL: Plus the end users have a way to go internally before they can take full strategic advantage of the Internet and the public service exchange services that go along with it. Their private networks are still far from perfect. When we are talking about a company’s information supply chain, or enterprise, you still have these disconnects between what goes on in engineering and what goes on further down the chain at the inventory level. That was a big topic at the Automotive Industry Action Group conference a little while back — the ability to share CAD files at the engineering level, among OEMs and suppliers, regardless of the system. Well, that’s great, but what are the future inventory implications going to be for the people in the warehouse? By the time this design change filters down to them will they be ready to respond to the new orders coming through?

BLANCHARD: There have always been different silos within organizations. The question is, can you bypass those silos and just present the information that each one needs? The IT vendors are promoting these types of things; and adding new buzz phrases like product life cycle management. Today, the basic premise is, thanks to the Internet, you can train and share human resources across the enterprise.

TRUNICK: John, is that a role that you see MHIA being called upon to fill more often at the post-graduate level, when people are on the job?

NOFSINGER: An awful lot more of what we do educationally is at those levels. E-lessons on facilities planning and operations planning are tailored, and a lot of business schools don’t provide that exposure. In 35 or 45 minutes someone can sit down at the computer and take part in a curriculum that in some cases might lead to a certification. But we have to show that those certificates bring skill sets to the job that are better today than in the past. One of the bigger issues is that material handling is not really seen as a career as it might once have been. That’s why we’re incorporating certification into the bigger picture, involving all the processes. Whether people are called material handlers is not the point.

ANDEL: Certainly, as we mentioned at the beginning of this conversation, the strategic importance of what material handlers do is more critical than ever. It is probably more high profile than it has ever been, thanks to our heightened sensitivity to security. We need to know what’s in this container load of material coming through the port. We need to know what’s in this shipment coming into my dock. So all our readers need a level of expertise over and above what they used to know only a few years ago.

PANCHAK: You know, when you start valuing these people, our country will be that much better off. There are a lot of brains out there. It’s the person running that machine who knows by its smell that it needs oiling.

ANDEL: And some of the most important education is being done in the trenches, day to day, learning by experience. We talked about the value of the vendors and how they impart education to the end users, but we can’t forget the value of the distributors. Clyde, you’re the editor of Material Handling Business, what’s the equipment distributor’s role in education and consulting?

WITT: A lot has to do with the OEMs. Some want the distributor to be closest to the customer, others have done away with their distributor network and taken on direct sales. Which way is best, I think, depends on the equipment.

PANCHAK: We did some research, and some of the people who wanted to get rid of the dealers discovered the dealers do a lot of stuff the OEMs don’t want to do.

NOFSINGER: The smart dealers have changed their business models, and are trying to add value.

ANDEL: We talked a lot about the issues, but let’s get down to the gear because that’s more fun. What are some of the more promising or exciting technologies on the horizon?

NOFSINGER: One that stands to revolutionize things is the concept of affordable radio frequency. The research being done today on passive RF, the ability to print tags that can essentially go on the unit transport packages and be read from 10 or 15 feet. These are portable data files, but unlike traditional bar coding, instead of it simply being linked to a database, imagine a tag on a TV dinner. You put it into the oven and it energizes the tag, making it spill its guts to the microwave about what it is and how to cook it. Then when you’re done, you throw away the package, and at the waste handling site the tag is read again, indicating that the container is made with a certain type of plastic and it is diverted automatically for the appropriate disposition.

WITT: In the real world of today, at the Frontline show this year, the theme was wireless. Things like what John mentioned are starting to show up. Take the Smart Shelf, for example. A person takes an item off the shelf, and an antenna in the shelf transmits the information that the item has been picked up. There also were wireless label printers on carts that could be taken any place in a distribution center to provide labels on an as-needed basis.

ANDEL: The idea of reading and writing data and monitoring products at the component level of detail throughout the supply chain will turn those chains into loops. Consumers will bring products back to the source for repair, recycling or disposal. Environmental and security needs, not to mention current events, are driving these trends.

With all this in mind, what’s the feeling around the table about the future of our economy?

DELANEY: I have been following Stephen Roach of Morgan Stanley for 15 years and never found him to be wrong. A little growth in the first quarter, little modification in the second, but by the third and fourth quarters, down significantly, especially with the threat of war looming.

ANDEL: John, you and I spoke a little while back about the numbers for the upcoming ProMat 2003, and you said exhibit space was filling up fast. Is that a positive economic indicator or are you in agreement with Bob?

NOFSINGER: Bookings in 2003 ramp up nicely going into 2004. Everyone will feel a lot better because they have orders booked for this year. So I guess any underlying enthusiasm will be gradual. People who have delayed those kinds of investments are still out there. So we are encouraged by ’03.

ANDEL: We did a reader survey about spending plans, and the readers who responded indicated they will spend about $6 billion in the next 18 months, which is significant. If you break that down, those are not huge projects but they are significant investments in technology.

We have run the gamut of supply chain topics here, and I really appreciate our guests joining us today. MHM

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