Collaboration Trumps Cost

July 10, 2008
Diebold reaches for high-level supply chain partnerships that support its strategic goals

“We want to be a partner for the long haul to our customers and help them create value for their customers,” says Frank Natali, vice president of operational excellence for Diebold Inc. “And we want to be compensated in accordance to the value that we provide them in achieving those goals,” he adds.

When it comes to relationships with suppliers, including logistics service providers, Natali is very clear, “We’re looking for that same sort of relationship with our supply base.”

Diebold’s business may be all about cash—it makes automatic teller machines, card readers and security systems—but its outsourced logistics relationships don’t focus only on cost. It’s not that cost isn’t important, and it is a metric for evaluating performance, but Natali lists a number of other factors driving Diebold’s supply chain strategy and decisions to outsource before reaching cost or cost reductions.

“If all you are going after is cost and you think that’s going to lead to a long-term competitive advantage, you’re wrong,” says Natali. “I want my business partners to understand my ‘end game.’ If all they understand is logistics and they can’t appreciate what I’m trying to achieve, that’s not helpful either.” That end game, as Natali describes it, is meeting customer needs, and Diebold’s core strategies are focused there. It wants partners who can appreciate and embrace its strategies.

Diebold has undergone some transformation recently, including a new CEO in 2005. Positioning operations for the new CEO was less about how logistics could perform better and more about “how does it intertwine with our core strategy,” Natali points out. “We’re focused on critical functional capabilities that are restraining our business strategy and correcting them, whether that is through an internal program or, in the case of logistics, an external partnership.”

Natali offers some factors he considers when making logistics outsourcing decisions:

  1. Fill a resource gap.
  2. Fill a knowledge gap.
  3. Satisfy systems needs.
  4. Speed of improvement.
  5. Gain procurement leverage.
  6. Redeploy key personnel to customer-facing tasks.

In assessing his needs, Natali asks, would any or all of these functional deficiencies inhibit the ability to achieve long-term business goals? And, if the answer is “yes” the decision to outsource is clear-cut.

In addition to aligning on strategic goals, Natali acknowledges the importance of connecting with the operations people who will be handling his business. “I need to meet the on-site leader from the 3PL,” says Natali. “That leader needs to be a doer and, more importantly, that leader needs to be a force of nature. They have to have this competence, energy and work ethic that is awe-inspiring to behold.”

He is also looking for a supplier who is tops in its area of expertise and, he’s not afraid to admit, “they need to be smarter than me.” And, he adds, sometimes they need to save him from himself. “They have to be able to challenge me effectively with data and say, ‘You’re gong to hurt yourself if you try to execute this.’”

“With a few exceptions, the days of the completely vertically integrated mega-corporation are over,” says Natali. “If you try to understand how to do everything yourself in-house, the level of execution that you need to have in every piece of your business to be competitive today is just so high that you will spend yourself into the ground trying to be the best there is in every functional element.”

That said, Natali adds, Diebold does have a global logistics and warehousing director with a small core group of people who manage critical pieces of the business and manage their logistics providers. And, he continues, there’s an internal sourcing exercise so that Diebold understands the capabilities of the logistics providers they use and their competitors, so if they should need to change resources, they know what is available.

Contracts are typically structured on a three- to fiveyear basis. The core contract covers terms and termination and a series of appendixes spell out specifics so that changes can be made during the contract period without the need to revise the whole contract.

Coming back to Natali’s listing of reasons to outsource, one of the first considerations he had was filling a resource gap. Posed as a question, Natali asks, “Do I have the resources I need internally?” He follows this with another question, “If not, do I have time to grow them?”

Faced with a small department and some knowledge gaps based on the growth and evolution of Diebold’s markets, Natali had to be realistic about spending to grow that expertise through training or additional staffing. The answer: “I have to bridge that resource gap with an outside partner.”

Outsourcing allowed those critical internal resources to be focused elsewhere. “Do I really want to have them focus on network design or are there other more critical projects in terms of how we serve our customers that I want them to focus on while I have an outside company that has a lot of competency focus on the execution piece?” Natali asks.

Another area to consider is information systems. Here, Natali asks a similar set of questions. “Do I have the systems I need?” Diebold’s enterprise resource planning (ERP) system couldn’t give them the detail needed to manage logistics and material flow effectively, providing another reason to partner, he explains.

A third consideration is speed of improvement. Even if there is sufficient need and critical mass to make it worthwhile to develop logistics capabilities internally, is there time to do it? “Am I going to get better enough fast enough to execute what I need to do?” asks Natali. If the answer is “no” then the solution is outsourcing.

Also in terms of scope and critical mass, Natali raises the question of purchasing leverage. Even with Diebold’s multi-million-dollar budget for transport and warehousing, does a thirdparty logistics company have more procurement leverage?

The bottom-line question on outsourcing for Diebold isn’t about logistics but it is about corporate strategy. “If I take a look at my three-year business plan and I don’t partner with an outsource logistics firm, will my strategic business plan be inhibited by those functional deficiencies? And if the answer is ‘yes’ you have to eliminate that functional deficiency,” explains Natali.

A central point of the conversation Natali and Diebold had with Menlo Worldwide Logistics was about Diebold’s strategic vision in terms of global supply chain, product offering and what Diebold’s customers’ needs were. Then, they talked about what Diebold needed in order to get to where it wanted to be.

“We spent a lot of time talking about what our in-house capability truly was,” says Natali. “We had a global logistics department for the manufacturing supply chain piece of the business that consisted of a grand total of three people. We had entrusted that movement to our carriers. There was a certain model they had for doing business, and it didn’t necessarily match with our strategic vision of where we wanted to go.”

“For Diebold, the focus is on turning their supply chain into a core competency and competing on the strength of the supply chain,” says Carl Fowler, director of account management for Menlo Worldwide Logistics. “As markets globalize,” he explains, “companies find their supply chains stretched beyond their capabilities to manage what they have with a meager group of supply chain resources.”

Fowler continues, “Whether it’s an ATM or an automobile, the cost of manufacturing is pretty consistent when you look at it region by region. And where the companies are competing today is on the strength of supply chain. You need something that’s more flexible. You need to be able to get the parts on the shelf a little faster and a little bit cheaper while shrinking the inventory footprint in the field.”

With Diebold, specifically, Fowler explains, the partnership between user and logistics provider focused on supply chain evolution and supply chain integration. It all came down to putting a common supply chain vision out and rolling the disparate operating divisions in to support that one vision, that one goal, says Fowler. It meant using the strength of the supply chain to compete more effectively in new and emerging markets.

“The best machines are the ones that don’t have that many moving parts,” Fowler says. “Looking at a global entity or global enterprise like Diebold, our focus has been on rationalization; simplification of the supply chain.” By definition, he adds, transportation and warehousing are waste. Eliminating the movement and warehousing of goods whenever and wherever possible using lean tools and techniques helps drive waste out of the supply chain. “As lead logistics provider (LLP) for Diebold globally, our job is to find out where that waste is.”

“This becomes more than doing the movement efficiently,” adds Natali. The focus becomes, “Why am I moving so much?” “Because,” says Natali, “moving material around doesn’t service our customers.” Diebold and Menlo started looking at how Diebold was using warehousing and transport, how they organized their outbound network and where Diebold adds value in that outbound network.

“I have no desire to have a logistics partner that simply executes what I tell them to do. I need them to be a partner in not only creating my logistics strategy but a leader in creating my logistics strategy and a partner in creating my business strategy,” says Natali.

In a strategic partnership explains Natali, it’s more than driving continual cost improvements, though that's important. In today’s competitive environment, you have to be getting better every day.