How Do You Compare With Your Colleagues?

June 1, 2004
First on our agenda was asking our board members to introduce themselves and explain their responsibilities: Laurie Nauman: I am the supply chain coordinator

First on our agenda was asking our board members to introduce themselves and explain their responsibilities:

Laurie Nauman: I am the supply chain coordinator for Ace Hardware Corporation. I am based at our Princeton, Illinois, Retail Support Center. We have an inbound program called Quick Response, and I monitor all the inbound shipments from our vendors coming into our 15 centers. I work with those vendors to improve how their shipments come into our facilities, and I also work with vendor and merchandising issues.

Ted Augustine: I am the director of logistics and products supply at Goodyear Tire & Rubber in Akron, Ohio. I have been with Goodyear for about 18 months, and, essentially, my charge has been to re-engineer the supply chain, converting it to an integrated order-to-cash model.

Roger Huff: I’m the plant operations manager for material planning and logistics at Ford’s Vehicle Operations, primarily the Truck Operations. That includes 11 different vehicle operation sites. My responsibility involves all aspects of material flow for all these sites, both internal and external logistics, supply chain management and supporting the material managers.

Gregg Schwerdt: I am logistics manager for Procter & Gamble. I am in charge of the master plan design for Beauty Care and Health Care, setting up our logistics plans for the next five to 10 years. The physical side of that coincides with our go-to-market strategy in terms of how we sell to customers and make sure we are meeting their emerging needs and on-time requirements. I also work with our other global business units, including paper, laundry and food and beverage groups.

Brian O’Donnell: I am responsible for the engineering and distribution functions out of Liz Claiborne’s Tempe Springs, Arizona, facility. I also work with our quality control group in our distribution centers. The engineering part goes into design of the distribution systems, warehouses and business networks in the U.S. and in Europe.

Top challenges

ANDEL: If you read any business newspaper every day, you are bound to read something about each of your companies on a regular basis. You all represent some of the leading companies in the industry verticals this magazine reaches. Just this morning, as a matter of fact, there was a story on P&G’s restructuring at the vice chairman levels. Gregg, is there a connection between this restructuring and your job?

SCHWERDT: We are going to vertical units, which will affect how we manage our go-to-market strategy along with our other product divisions. The real drivers are not internal; they are more reaction to the changing needs of the marketplace. In particular, it is the driving cost of the consumer, and that’s consistent all the way through our systems. Driving inventory out of the system and the speed to shelf are the two critical factors facing Procter & Gamble and pretty much any other retailer. The structural changes from the management standpoint have always been designed to make sure we have product on the shelf, not necessarily establish speed to the shelf. And I think those two requirements have merged. There is truly a much greater link between us and the retailers in getting product to the consumer.

ANDEL: Roger, address some of that with what’s been happening at Ford.

HUFF: Our challenge in the material end of the business is to support Ford’s efforts to win in the marketplace by flawlessly introducing new product. We have the new F150 vehicle spread across three different vehicle operation assembly plants. We also have the new Ford Escape and Ford 500, which is a passenger vehicle for which we anticipate good acceptance in the marketplace. The new Mustang also is a very exciting product for us. These launches require all elements of our business to execute flawlessly. We at Ford look at optimizing several different distinct areas: safety, quality, delivery, cost, morale and environment. I link all of that to our strategy in supply chain management and material flow engineering. That means making sure you have safe equipment and safe processes; from the standpoint of quality, making sure we have the systems and processes to deliver the right parts at the right time to our operations. From the standpoint of morale, we need to consistently ensure our human resources are trained and developed appropriately, and that we have a good influx of new employees coming from our colleges and universities that support us.

ANDEL: Brian, tell us about your channel.

O’DONNELL: Some of the big challenges we are facing here at Liz are on two different fronts. On one front, we have been in the acquisition mode over the last several years. So with new acquisitions comes a new way to ship to some of our customers. We used to have launch groups that went out to main department stores. Now you are seeing smaller groups dedicated to department stores and smaller networks of stores. The second real challenge is shrinking customer windows. In the past you would have a customer order in advance, trying to move that store distribution commitment up to the last possible point. This way they can guarantee that they have the right styles in the right stores and the right size and colors. On the design side, wanting to push the design up to the last possible second means you are really compressing the schedule on both sides. So our customers are giving us a smaller amount of time to react.

ANDEL: How does that translate into material handling challenges?

O’DONNELL: What you are doing is taking a four-week month and compressing it to three weeks with the same amount of volume or even increased volume. Our inventory levels are shrinking, but on the other side, you see more of an impact on our processing areas trying to keep up. We have had to go to multiple shifts, weekend shifts, running the distribution centers; in some cases two shifts seven days a week just to keep up with demand.

ANDEL: So you had to hire more people?

O’DONNELL: We have hired more people and we’ve been putting technology into our warehouses. In our new Cincinnati distribution center we put in high-speed sorters. In California, we are trying to bring up a retrofitted distribution center that has more technology. We’re coming up with a new distribution strategy to handle the changing environment.

ANDEL: Laurie?

NAUMAN: We came up with supply chain initiatives in 2003 to operate our Retail Support centers more efficiently. We use our Ace crossdocks wherever possible for transporting freight.

ANDEL: Laurie, your company is structured differently from the other chains in that you deal with independently owned stores. Tell about the challenges that co-op structure presents for logistics and material handling.

NAUMAN: The stores order independently, so gauging the volume of what that order might be fluctuates week to week. In addition, if there would be bulletins or special orders that would be released for those stores, that would also increase what’s going out to that store. So there is always a weekly challenge at the Retail Support centers trying to determine whether some stores will be on the same route or a different route. That could change week to week.

AUGUSTINE: At Goodyear, I have had the challenge of trying to survive in a tremendously competitive industry within a company that is heavily debt ridden and is looking toward its supply chain as the source of working capital to help bail the company out. For example, we committed in the supply chain to improve our total finished goods inventory turns from six to eight within a two-year period. That’s no small challenge, especially in an industry where there is product complexity. We maintain almost 16,000 stock keeping units on a regular basis within North America and, quite frankly, we must restore the confidence of our customer base that we have a quality product and that we can deliver on that quality.

We have gone through a complete network analysis, and found that we treated all 16,000 SKUs equally, regardless of velocity. So we profiled our inventories by relative rank based on velocity and contribution as to what we schedule. The supply chain historically had been the guys with the warehouses and the trucks, and they were being held accountable for flow rate and service level. I challenged that thought process because you can’t necessarily be held accountable for something you don’t have responsibility for. That led to a complete re-engineering of the supply chain at Goodyear to not only include the fulfillment and the transportation activities, but also various functions that sat in other functional silos from the sales and marketing organization over to direct order entry.

From the manufacturing organization, we took over production scheduling based on what we were seeing in the customer’s order. We were in a better position to collaborate with them and refine forecast data and provide a more accurate order to the manufacturing sites so they could build the right stuff at the right time. This has been a significant and challenging year. We are into the fifth month of this year, and we have gotten nine-tenths of a turn. We planned for a turn this year, so we are doing a lot of the right things.

ANDEL: Have the customers noticed?

AUGUSTINE: Absolutely. We had a dealer conference in Orlando at which the leadership of our independent dealers throughout the United States have no reluctance letting you know what’s on their mind. One of the changes we told them about was that we had streamlined our third-party provider network.

Dealing with 3PLs

AUGUSTINE: Goodyear had 22 facilities in North America, 11 of which were run by Goodyear and 11 by five different 3PLs. When we looked at the complexity of trying to maintain relationships with five 3PLs, as well as running half a network ourselves, we were spending more time in administering contracts than paying attention to transactional fulfillment. So we essentially streamlined the number of locations run by Goodyear from 11 to seven. There are three locations in the U.S. that we have decided to maintain, and we have gone from five 3PLs to one. We did this over a three-month period in the third quarter of 2003, and we didn’t tell the customers. At the conference I said, you know, we did a lot of things and we challenge you to tell us whether there was any service interruption. A couple of the guys raised their hands and said, “Well, now that you talk about it, we did notice some changes in September and October. That’s when it started getting better.”

ANDEL: And if you work with a 3PL, you are also working with their material handling philosophies and systems, unless you dictate that. Is that the case with anybody here?

NAUMAN: We use a facility in Seattle for our inbound containers from overseas, and we actually have Ace personnel on site there. Like our inbound program for Quick Response, those requirements are applied as well at that facility. So the shipments coming into Ace’s Retail Support centers are meeting the criteria that we require.

HUFF: We leverage third-party providers for our business given the vastness of our supply chains and to ensure single-stream flow into our sites. We operate in collaboration with the 3PLs. We give the providers our ESOWs, or engineering statements of work, that they need to support. We try to leverage their competency because we don’t feel that a lot of the work they provide is a core competency for us. Like Laurie, we use third-party providers quite a bit to manage interfaces to our emerging market supply base. They add value by doing things like repackaging commodities prior to their delivery to our plants. In most cases, they operate as an extension of our plants. Our future vision — and we have made some progress toward this goal — is that those providers will be operating as an extension of our supply base.

SCHWERDT: Overall, 3PLs do a good job. We leverage about four or five global suppliers, and it is truly a partnership. We constantly challenge them to get better, and we set goals for them in terms of cost reduction and customer service level.

ANDEL: Do you prescribe how they should reach those levels, or do you leave that to them?

SCHWERDT: We normally leave it to them. We do prescribe certain pieces, like asking for a change to the RF system. But you can’t say you want to use a different RF system. We do ask them to give us recommendations in terms of material handling equipment, and, in some cases, we have them buy it. It is all part of the contract. We basically lease our own warehouses, and we keep that separate from the 3PL. So the 3PL is an operation internal to our buildings. They run them for us.

AUGUSTINE: For years, Goodyear was trying to meet financial goals by cutting head count from the organization. It had got to the point within the supply chain where all that were left were transactional people. The analytical capability was stripped from the organization. So we entered into a separate arrangement with our 3PL, Exel, and we called it our supply chain management team. I have three or four people from my organization in the SCM team, and seven to 12 from my 3PL. They work in our building. They carry the same badges we do to get in and out of the building. As far as we are concerned, they are a Goodyear resource.

The charge of that group is to identify, define, scope, process, map and implement opportunities to drive costs out of the supply chain and improve service. In the last year, we’ve had more than $30 million worth of positive improvement, and as we realize the financial gain, I get compensated back 100 percent for the investment that I made in that labor group. After I’ve been repaid for that, there is a gain share arrangement for two years. The 3PL gets 50 percent of the performance improvement for those two years. Why two years? To keep them hungry and to keep them driving for more opportunities for change, improved service and lower cost. It has been a great way to bring intellectual property back into my business at the same level of focus and intensity that my internal folks have.

Adopting technology

ANDEL: There was research done by MHIA, Material Handling Industry of America, asking attendees of its NA2004 trade show to identify some of the barriers to investing in material handling technology. Some of the leading ones were lack of capital and just plain fear of the unknown. There is an unfamiliarity factor with some technology. Some think it is cutting edge or leading edge. And, obviously, your career is on the line. If you invest in something and it doesn’t pan out, it could turn into a high-visibility failure. So I would like each of you to talk about this challenge of implementing material handling or supply chain technology. Is there a barrier to its application? Is there a cultural issue? Is C-level buy-in necessary?

O’DONNELL: Several years ago we started reconfiguring our network, and our company had looked at distribution logistics as one of the key differentiators in our marketplace. We decided to invest in technology. We were fortunate that a lot of the investments we made over the years have paid back based on the performance we put out in front of management. That now makes it a lot easier when we want to make further investments in new distribution centers or warehouse management systems. We really have demonstrated that these technologies do pay off, that the company does achieve the ROI that we put in front of them.

ANDEL: Did you have some failures along the way and lessons learned?

O’DONNELL: Some of the initial projects didn’t come off as fast as we wanted them to. It was more of a learning curve on the distribution and the engineering sides, becoming familiar with the transition from managing a manual operation to working on an automated system. When putting plans in place, you also need recovery plans.

HUFF: At Ford, when we are challenged with evaluating technology, the bottom line is process improvement. Will technology generate good competitive results? Our material handling organization is counted on to make the appropriate assessment. However, we do have what we call a D-governance committee, meaning delivery governance, and it is at the director level. That’s where we introduce the technology and project our vision of the results of technology integration. We look at new technology we have integrated recently. An example is the IVEC system, which is the industrial vehicle electrical system that allows the vehicles to shut down when an operator outside of the normal operator is attempting to use that vehicle. We also have mobile radio transmitters on our lift trucks now, which allow us visibility of where the trucks are at any point in time.

We want to look at responsiveness. Prior to introducing MRTs, we had a card-driven triggering system for small parts, where operators responded to a card trigger that was mailed to them. They would then receive that card, pick material and then deliver the material to the point of use. Now, we can do that electrically, and we can communicate to our drivers at any location in the plant. So that reduces lead time and increases efficiency. The IVEC system and the MRTs sell themselves just based upon the business case and proven responsiveness. We share this type of technology information with the directors, then we get collective consensus that the applications support our business objectives.

ANDEL: How about some of the technologies that have been implemented at the revamped Ford engine plant in Brook Park, Ohio?

HUFF: Actually what we have done there is taken some best practices from throughout Ford and integrated them into one spot. The technology there allows us to be lean from the perspective of developing a robust material delivery strategy from the line side back.

ANDEL: Laurie, anything to add as far as the culture of technology acceptance?

NAUMAN: A couple years ago, we went to the automated order-filling process, and there was some resistance from the more veteran team members who were used to filling orders in a certain way. There was some doubt about the impact it would have on that particular team and their productivity rate. But all that has really been worked through. It was just fear of the unknown.

ANDEL: Describe the research process. How did you learn about the technology and how did you prove the ROI before investing?

NAUMAN: Our corporate office was involved in the determination, and when it was implemented, it was done at all 15 distribution centers. A team did all the research.

ANDEL: Ted, any comments on Goodyear’s approach?

AUGUSTINE: here is really not a lot of technology in tires. They are all hand touched. They can’t be palletized. It is probably one of the toughest commodities that I’ve ever had to deal with. The real key is to reduce the number of touches.

SCHWERDT: The way distribution works, you have to do a cost payout benefit analysis. You also have to think who the competition is. It is not like I have a set pot of money for distribution. I am competing against every other initiative going on in the company, and most of our initiatives are not physical changes but new products. Almost always new products win because they have the biggest bang for the buck. The way we pay out distribution projects in the short-term, there is that risk you will walk away or change technology, or the customer’s expectations will change, or your growth changes, and your distribution process becomes obsolete. At some point in time, we all had an AS/RS that we pulled out. That’s the one you remember. It’s hard to make a huge MPV in a distribution operation because you are talking about eliminating touches, which is eliminating people. When you go to a new site, it’s not that we don’t know or want to do these things. You now have the latitude to say: Now I have choices.

HUFF: Technology still has to pay for itself because at the end of the day the cost of the technology has to contribute to the elimination of waste and reducing the cost of the product.

The RFID opportunity

ANDEL: What we are seeing in surveys is that most technology spending, at least through this year and next year, seems to be for fixes, not for green-field startups. It’s a different story when it comes to information technology like RFID, where in some places implementation is a mandate. Do you people have any take on RFID and where you stand with the compliance issues?

O’DONNELL: I am involved in RFID here at Liz; it’s not actually mandated for our customers. We are not dealing with the Wal-Marts of the world right now.

ANDEL: What’s driving it then?

O’DONNELL: We are looking internally at how we can start making the technology work for us. Right now we are using some RFID in our Cincinnati facility for routing garment hangers throughout our facility. We can program for destinations anywhere in the warehouse. If you are just doing RFID for compliance, you are going to be paying for technology without reaping any of the benefits. We don’t do anything at the pallet level.

AUGUSTINE: At Goodyear, we are participating in the Wal-Mart project on a voluntary basis. We are not in the top 100 that had been mandated. And we are really doing it for informational purposes. We have a number of RFID initiatives internally for other reasons, primarily for the Tread Act and being able to monitor inflation factors on tires while they are on the road. From a compliance standpoint to Wal-Mart, we will probably just do a slap and stick and see how it unravels. We are sure there will be a number of iterations of RFID. We’ll see how the final state dovetails into our grand scheme of doing other things with a readable/writable chip we would embed into the sidewall construction of the tire.

NAUMAN: Ace is not currently requiring RFID. We do use bar code scanning to fill orders at our Retail Support centers.

AUGUSTINE: What’s important is the ability to ingest the information into your existing IT infrastructure and platform, and that’s the one thing that anybody who is embarking on RFID has to be cognizant of, because the capital investment for hardware is nothing compared to the integration requirement changes within your IT infrastructure. I was at a recent seminar, and the indications were that it is a million-dollar proposition for essential hardware to get up and running on a multi-site RFID project. But for an IT integration and systems change perspective, it was targeted anywhere between $5 million and $50 million to use the information in a workable fashion.

HUFF: At Ford, we use both bar code scanning — in the form of 2D bar coding — and we also have some RFID applications. With RF, the business case is centered around traceability from a quality standpoint, not only tracing product but tracing containers. Our Powertrain operations have RFID to be able to trace and track engines and transmissions into the vehicle plants. For most of our inbound purchased material, we have worked with our supply base in utilizing standard 2D bar code labels, both on our product side and the non-product side. From the industrial material standpoint, we use the labels to manage inventory. We are able to look at our inventory balances and reorder material.

ANDEL: Automotive was one of the first implementers of RFID years ago on the engine assembly line.

HUFF: Right. And we have level 1, 2 and 3 traceability all linked into the RF system. So we are in a position to see the obvious business gains of using the technology.

ANDEL: But I think the vision — and Goodyear is very much on the cusp of this — as far as the idea of supply chain traceability, is to start with a tire, with a chip embedded in it, and then the tire gets matched to the car and the car to the customer, through maintenance, all the way to the end of the tire’s useful life when it is returned through the reverse channel for recycling. That seems to be the supply chain model for this technology.

I want to thank everybody for participating. MHM’s readers are well served by our ability to bring them an advisory board with such experienced members representing such diverse interests. MHM