Did Amazon Just Blink?

In the game of delivery chicken, it appears that Amazon is considering raising the price of one of its cornerstone delivery strategies, Amazon Prime from $79 to as high as $119 per year (see Amazon Considers Prime Price Hike). Prime has been a success for Amazon as it certainly helped drive product sales. However, the current price and relatively unrestricted delivery constraints also appear to have impacted margins. The lesson for all logistics-intensive companies is that, sooner or later, free or highly subsidized delivery-based growth strategies give way to the most fundamental economic theory – profit matters.

As much as anyone in the retail market, Amazon has been sacrificing margin for growth and achieved impressive numbers. I’m sure we all know people who are Prime members and buy “everything” they can on Amazon, knowing that they delivery charge is “free” once they paid their yearly Prime fee. And that success is now a problem for Amazon.

Many retail and distribution companies have been closely following Amazon’s and others’ rise and their forays into new supply chain and pricing models over the last 5+ years such as Prime. Here’s my take on what we could see in the next 5 years in delivery.

Is “free” dead? Free really isn’t the right term, it should be called “highly subsidized”. Supply chain leaders at major retailers I know have long wondered how long this level of delivery subsidy could go on. Amazon, Google, Walmart and others have been chasing this paradigm heavily for the last several years. I believe we are at an inflection point and can expect less “free” and more delivery segmentation pricing and service levels to help maintain or grow margins. FYI, increased delivery service segmentation pricing is also taking place in the B2B markets as they face similar delivery and profitability pressures.

Are burying delivery costs a good thing? Delivery is as much a value proposition for customers as the products that are getting delivered. Amazon simplified, but may have actually over-simplified, delivery pricing. When you read the reports of Amazon customers on the proposed Amazon Prime price increase, some say they don’t care if it goes up because they know that this is a ridiculous deal and others say they will leave because they think it is unfair. What is really at issue is that neither of them respects the value of delivery because it has been bundled away. Standalone delivery pricing and service levels will become more prominent again.

What do customers really want? It’s simple -  pricing and service choice. As I mentioned a year ago (Amazon Home Delivery: Its’ About Choice, not Same Day Delivery), when Amazon shared the results in a limited trial of same-day delivery they sold a lot more goods, but hardly anyone took the same-day option. Customers accept a simple and logical view of delivery pricing. During the buying cycle, customers need a simple way to understand their delivery options and the prices associated with them and then make their own choice. I believe that based upon the experience of other retail markets around the world, that there is way too much hype in the retail market over same-/next-day delivery versus choice. Retailers are in danger of blindly chasing an expensive delivery scenario that may or may not be true. The focus in Omni-channel will shift from selling to delivery to provide customers with more choices that are also profitable for retailers.

Amazon’s statements about changing Prime pricing presents retail- and distribution-intensive companies with an opportunity to step back on their own strategies. I believe that we will see folks like Amazon continue to be innovative with new delivery models that improve service, but keep a closer eye on their impact on bottom line performance. What is your company doing to provide greater delivery choice, but keep the profits? Let me know.

The 2-2-2 Syndrome

Recently, I was talking with an associate at a supply chain technology company who had just returned from an unhappy customer. The customer was complaining about the performance of the technology company’s system. Routes were no longer efficient; carrier selection didn’t seem to make sense to the users, etc. During the review, it became apparent that since the original implementation 3+ years ago, no one at the customer was regularly updating carrier contracts or customer data or evaluating any of the configuration parameters to address changes in the company’s operations. The system was making poor decisions based upon stale and inaccurate data.

Worse, no one using the system at this point knew how it was really supposed to work. The team that implemented it originally had left the company and current users were just that, users. They had little training, no knowledge of the configuration or the strategy employed when it was implemented. Manual overrides were now common place and there was little trust in the system’s ability to produce good results. As far as they were concerned, the software was “bad”.

Was the software really bad? No. The customer – and it wasn’t a small company, had fallen victim to what I call the “2-2-2” syndrome. The first person gets 2 weeks of training, their replacement gets 2 hours of training and their replacements gets 2 screens of training. The life expectancy in any job is not more than a few years. So without some way to adequately train the users, the use of the system falls to the lowest common denominator – people pushing buttons, but not really understanding what is going on behind the scenes.

The same can be said for key data such as customer and product information, contracts and process configurations. All of this is constantly changing and SOMEONE needs to maintain it. Which gets me to point of this note – you need a competency team to maintain and improve the investments you make in technology. This is a supply chain operations issue, not an IT organization responsibility as we are talking about the potential to negatively impact supply chain performance.

For some of you, the terms competency team or competency organization is not new and there are lots of proven ways to create them. But it appears that cost cutting over the 5 years and the latest wave of technology hype has removed the concept from far too many organizations. Given that the reliance on supply chain technology is heavier than ever, the notion of a competency team needs to be built into the business plan for any major system you have or are contemplating.

There is upside to competency teams as they can help get more from the system than was originally anticipated. No organization ever fully utilizes the supply chain technology they deploy. All organizations go through a learning curve during the implementation and realize that they could do more than they originally envisioned. Any competent technology provider is constantly enhancing their solution’s capabilities. All of this adds up to an opportunity to improve the productivity and performance of the original investment for a fraction of the costs of the original implementation. Without a competency team, no one will know that these opportunities exist or how to execute them.

There are 3 factors that make competency teams a success.

1. The need to be led by your “best and brightest”. The competency team should not be seen as the last stop in someone’s career. Instead, it should be positioned as a place for up- and-coming talent to show what they can do to advance your supply chain performance. Two years in the lead position is a great way for someone to demonstrate their competence and learn a lot about the business.
2. There needs to be performance metrics. Using metrics to know the value that is being delivered every day will quickly tell if you are keeping your supply chain systems running their best. Setting yearly improvement targets will keep the focus on getting more from the investment you have made and the incremental business benefits typically outweigh the incremental costs.
3. There need to be ongoing training programs. It’s one thing to have folks sit in a class room or go on-line for training. It’s another to aggressively test their knowledge and make them accountable for problem solving. Build training programs that make them show what they know or how to find out what they don’t. The most powerful way to make this stick is through the compensation process. Whether it takes money, time off or some other meaningful incentive, if you want to get the best from your people and technology investments, aligning compensation with knowledge and action is critical.

Supply chain systems are not a one-time investment. Instead, they should be viewed as a way to continually improve business performance and need to have a team of knowledgeable people assigned to them to maintain and enhance them. If you do make this continual investment, not only will your supply chain organization deliver results more reliably every day, but you will more easily find new ways to improve your performance. How has your company successfully (or not) implemented competency teams? Let me know

Logistics Excellence Predictions for 2014

Hopefully, you will get some down time during the holidays to enjoy your family and let your mind ease from what was most likely a busy 2013. It looks like 2014 will be an even more transformative year. What will next year look like and what will the supply chain “winners” be doing to beat their competition? Here are some thoughts to consider when you have some free time over the holidays.

Omni-modal versus multi-modal distribution. The term “Omni” is hot in the retail market as retailers look to optimize and create a unified selling front to consumers whether they are in store, on line, or on their smart phone. The notion of multi-modal distribution – the optimization of deliveries across the delivery modes - has been around for a long time, but for most distribution-intensive companies it has been limited to simple mode selection (e.g. size and weight). Instead, omni-modal takes the process a step deeper looking for the counter-intuitive delivery combinations to squeeze out more efficiency and great customer service. For example, a retailer has a customer who orders a large item for delivery next Wednesday, but the same customer buys smaller items this weekend. The traditional multi-modal approach would have two deliveries, one on the “white glove” service and the other through a small package carrier. Why not merge the 2 together and eliminate the parcel delivery cost? That’s the approach omni-modal distribution takes.

Execution, execution, execution. The push for next and same day delivery will drive many markets in 2014. This pressure will dictate that supply chains be much more streamlined and responsive. Hence the focus will be on execution-based processes and technologies that reduce supply chain cycle times. The real innovators in 2014 will drag their supply chain partners into this exercise as much of the critical path for increased supply chain speed and responsiveness is related to partner performance and integration. That brings me to the next point.

Supply chain injection. In the quest for greater speed and responsiveness, tiers in the supply chain will be skipped in 2014. The challenge for many distribution-intensive companies is that their supply chains were optimized for lower cost and not necessarily responsiveness. Leading supply chain operators will fully engage their supply chain partners, evaluate more dynamic transportation strategies, information sharing and labeling that makes suppliers REALLY look as if they are a natural part of the supply chain, not a “bolt on”. LSPs offering related services will have to up their integration competency with their shippers in 2014 to meet this challenge.

Fleet is back. After years of eliminating them, shippers will turn to fleets (private or dedicated) in 2014 to improve their customer service performance and as a hedge against the increasing commercial driver shortage. Supply chain innovators will take this a step further, focusing on driver training and delivery service competency. Don’t be surprised to see these innovators pay their drivers MORE and use routing and mobile technology to get the level of service and competency that they need to compete. Similarly, leading specialist carriers will adopt many of the same tactics to improve their service levels and productivity in an effort to differentiate.

Android apps with smart real-time back-end systems. Sorry promoters of iOS and Microsoft, the debate is over. While 2013 was a tipping point for the use of consumer grade devices, 2014 will see many more commercial grade solutions appear. Consumer devices proved that as an operating system, Android could handle logistics problems, but not necessarily provide the reliability and battery life. Android device pricing will continue to decline, spurring greater adoption. While mobile devices will be more prevalent, there will also be an increase in sophisticated “back end” applications that create real-time closed loop control systems for mobile workers. Same-day delivery will be a great example of where there will be an explosion of smart applications to maximize driver productivity and customer service.

Data Security. The increasing adoption of cloud-based solutions, the NSA surveillance and now Target’s highly publicized breach will accelerate the focus on securing the supply chain data in 2104. Data is the life blood of modern supply chains and ensuring that it cannot be compromised is critical business operations. However, data security will be a balancing act for enterprises as they continue the trend to integrate supply chain partners. The knee-jerk reaction will be to severely restrict access, but leading supply chains operators and related cloud solution providers will focus on technologies that drive deeper levels of security (e.g. encryption), but still facilitate collaboration.

The trend in supply chain for reinvention and reassessment of traditional practices accelerates in 2014. Not since the late 1990s has supply chain performance as a competitive weapon been addressed at the board level in so many companies. What important or break-through trends do you see for 2014? Let me know.

Happy Holidays

Turds of Wisdom

Recently, I was reading a blog post that sent my blood pressure skyrocketing and reminded me that “best practices” are like bananas – they ripen and then stink in short order. What bothered me most was that the “expert” advice in the post was dated and anyone who heeded it would end up being just slightly better than today’s average fool. My conclusion is that best practices should be thought of as temporal. New business processes and technological changes are continually obsoleting what was once considered “best”. The lesson for supply chain and logistics professionals is that resting on the merits of your last “best practice” success may have already or shortly put you behind the competition.

Let me explain. In the case of the blog post I mentioned above, the “expert” was proposing that a best practice was making sure that trucks are sent out fully loaded with as little empty space as possible. When logistics technology was simple, this was as good advice as any. The problem with this “best practice” is that it is focused on a single metric, capacity utilization which is an indirect measure of business performance. If you focus on utilization, you could end up spending all of your full truck load savings and then some, driving all over the place to unload that full truck. Today’s better practice is lowest total delivered cost which is based upon the direct business metric. Lowest total delivered cost balances utilization with the cost to deliver all of the deliveries that could go in the truck. A lowest total delivered cost focus can be counter intuitive. For example, in the case of a fleet owner, it may be more cost effective to park a truck and use a contract carrier than incur high costs to drive to some remote customer location.

Geoffrey Moore, the technology marketing guru wrote a book called “Living On the Fault Line” that does a great job of summing up the challenge for supply chain and technology professionals. The basic context behind the book is the advances in technology diminish capabilities that were previously considered differentiating. You need to understand this march and continually obsolete what you have done before someone else does. The same can be said for supply chain or logistics business processes. Look at what happened to Dell. It dominated the PC market with its superior build-to-order supply chain model. Eventually, the competition found other ways to compete, while Dell largely stood pat. Over the last number of years, Dell has struggled and recently went private for a fraction of the value it had during its hay days.

So what is your “second act”? How are you continually challenging the best practices of your organization? Do you know if any of your best practices are in fact leading edge or current? Here are a couple of examples of ways to know where you stand. First, how many of the operational metrics you use to make decisions are indirect indicators of business performance? Second, what do your customers say about your supply chain or logistics performance? Is it the reason they buy or buy more from your company?  Third, how long have you been operating the way you are today? If your business practices are based on decisions made in the 1990s or earlier you stand a good chance of being a supply chain laggard.

The term “best practice” can be like the siren song, an alluring qualifier that is as likely not be true and certainly not permanent. What are you doing to better your current best practices? How do you know if you have achieved “best” status? Let me know.

Don’t Wait for the Inevitable in Omni-Channel Retailing

It’s amazing how many macro trends such as changes in demographics shape and impact the future of supply chains and supply chain performance. Equally amazing is that many of these macro trends are right in front of us. But, we don’t respond to them until the pain from these shifts is woefully obvious and there is less ability to make a difference. Omni-channel retailing is one of those macro trends.

Last week we hosted a conference in London on Omni-channel retailing where LCP Consulting presented some of the findings of a study of over 150 retail executives in the US and UK. One of the most poignant points was that, as more retailers adopt Omni-channel retailing and move to a greater percentage of online business, their margins will actually decline. At the same time, they also stated that “bricks and clicks” retailers really had no choice. It’s the proverbial “in between a rock and hard place”.

LCP: Omni-channel Margin Analysis Example:

Source: LCP Consulting (www.lcpconsulting.com)

The implicit implication behind this analysis is that retail supply chains are optimized for the store and out of balance driving costs. They must dramatically change to protect operating margins and help avoid the commoditization that on-line shopping can bring. This “perfect storm” in retailing is an excellent opportunity to raise the level of discussion to the C-level of the importance of the supply chain to a retailer’s overall health and success. Most importantly, it points to the sense of urgency that must be put into investing in supply chain capability now, not when the balance of revenue has shifted. Let’s face it, most retail executives don’t come out of the supply chain world and struggle with understanding supply chain investment, costs and complexities. However, they do get margin erosion and especially that the inevitable shift to more on-line sales that they are pushing will drive lower margins. Here’s the chance to tie the supply chain cause to one of the most important macro level issues facing retailers.

The challenge in having the Omni-channel and margin discussion is not to turn it into cost reduction only exercise. Yes, you need to get your supply chain costs down, but you cannot forget the need to improve service and more importantly use service to drive product sales and generate incremental services-based revenues. The supply chain is one of the few places in an online business where you can make a measurable difference to the customer. There are enough examples now to show that purchase price has become “table stakes” and customers will pay for additional value-added services and increase their loyalty to those retailers that deliver with excellence.

For the manufacturers and distributors that supply retailers, the Omni-channel phenomena should also be a wake-up call. The pressure on retailer margins will get more intense as they sell more on-line. The goal is not to get in the same cost reduction trap (e.g. product pricing).  Instead the opportunity is to look at your own supply chain to see how you can lower the cost of the retailer’s supply chain, improve their service and help value-added services.

Supply chain flexibility, speed, retail ready product and information visibility are key enablers for retailers as less of their sales will be delivered through traditional store channels. The ability to inject your product further into the retailers supply chain and directly to the customer will help retailers cut out network costs and delivery times. For example, next day and same day will put tremendous pressure on retailers to be more reactive, but carry as little inventory as possible. Retail ready labeling will be critical to streamline goods through the network at any point and information visibility critical to ensuring reliable operations and greater flexibility.

Omni-channel retailing is a global trend that is changing how retailers and their supply chains operate. Its impact on margins provides an excellent platform for taking the importance of the supply to the highest levels within a retailer and a competitive advantage for the manufacturers and distributors that can help make their retailers perform better.

 

Integration is a Core Competency for High Performing Supply Chains

We have all heard the saying that it takes people, process and technology to deliver great supply chain results. However, after seeing too many companies have challenges getting their desired results despite having all three elements, I have come to the conclusion that there is a fourth element – integration. Instead of integration being a “necessary evil”, it needs to be viewed as a core competency, especially for companies who compete on supply chain performance.

Here’s the problem with poor integration. It can take a “Ferrari” of a new business process or application and turn it into a “Yugo” because of the lack of timely and accurate data. For example, you attempt to deploy a new event-based solution to improve your supply chain’s real-time visibility, but your batch-based flat file updates from your existing systems turn the new technology into a historical reporting tool.

How many times have you seen integration become the critical path for a supply chain project because the CIO doesn’t have enough skilled people to correctly connect your new solution with the existing ones? So, you compromise on the integration capabilities to speed up the project or decelerate the time-to-value to the business to get what you really need. To make matters worse, integration now spans the bounds of multiple enterprises to trading partners, carriers, etc. It’s no longer a case of connecting one system to another; it could be hundreds of systems. You cannot run away from the integration competency problem.

For supply chain leaders, time-to-value and differentiating capability are paramount. They are constantly executing a portfolio play of solutions AND integration to achieve their results. They know what ERP will and won’t do for them, and that integration tools make the job easier, but don’t eliminate it.

The biggest difference for high performers is that they recognize that integration is a key enabler and a core competency required for each advance in their supply chain capabilities, not a line item cost in the CIO’s budget. Here are 5 important points to consider for integration success.

1. You need domain expertise and design competency in-house. In many cases, the integration competes with “white spaces” in your business processes and is evolving as business processes evolve. Outsourcing integration strategy and design doesn’t give you the knowledge continuity you need to chart the next wave of changes, because it leaves when the project is done.
2. Maintain flexible execution capacity. If time-to-value and capability are paramount, it is highly unlikely that your organization will have the right integration resources when needed. Rather than slow or dumb-down projects because of IT budget constraints, partner with systems integrators to be able to flex capacity. The key is to find the right partner and stick with them so they can build expertise in your business and integration technologies.
3. Get the right integration tools for the right problem. There is no one kind of integration problem, so don’t take the “hammer” approach, especially if it is predicated on a complex integration technology. If the integration is simple, use simple tools to get a faster ROI, even if they are later deemed a throwaway. In addition, what works best within an enterprise doesn’t across multiple enterprises. In this case, integration via networks is a much better fit than point-to-point integration tools.
4. Design for support. Just because it can be done, doesn’t mean anyone supporting it will understand what has been done. Consider the skills of the people supporting the production environment and design the integration for diagnosis.
5. Integration is a shared problem. Fix your own issues and don’t put it all on the vendor’s shoulders. For example, if your current capabilities do not properly synchronize data and you leave that up to the vendor to address your “shot gun” approach to data, one of two scenarios will happen. The integration challenge will put the whole project at risk or the vendor will create a solution that clearly violates point #4.

High-performing supply chains view integration as an enabler of more agility and higher levels of business performance, not as a means to an end. Does your IT strategy and skill set support the business value of integration? Let me know.

Your Sales Folks Are Costing Your Company Money!

If you are a B2B company looking for new ways to improve your operating margins, then this issue is the proverbial “elephant in the room”. You see it every day when sales folks consistently inflate delivery requirements (“same day, next day, first delivery, rush”, etc.) when you know from experience that customers do not need that level of service. From a company perspective, you know that your company’s profit is impacted because delivery costs are higher than they need to be. As long as sales folks get evaluated on revenue, they will continue to act that way. Changing the sales compensation plan to accurately reflect their margin contribution is a long and possibly losing proposition. So what can you do to create better sales ordering behavior? Tackle the delivery promise during the ordering process.

You may already know where your current delivery promise policies and practices are killing your margins. If you don’t, “cost to serve” analysis is a great way to determine the impact of existing delivery promise practices to the “bottom line”. It is a real opportunity for “big data” applications and one of the reasons you need a TMS or fleet management solution to generate the granular data to determine where your company needs to change its customer service and order policy practices. While this will give you an excellent view of what you should do, it doesn’t necessarily turn into action with the sales force unless you have some way of enforcing it.

The traditional approach is to create order policies that allow your distribution network to optimize the delivery of orders that come. These policies usually have standard lead times and assessorial charges that are intended to get control of the situation. The challenge with the “standard” approach is that it does not necessarily reflect the capabilities or costs of your distribution network at any given time. Maybe you can cost-effectively deliver in half the time that your policy states or that your “expedited charge” doesn’t come close to covering the actual delivery costs.

The big opportunity to reduce delivery costs and improve margins is to take a proactive approach to delivery promising. Instead of taking the order and determining afterward how it will get delivered, your organization needs to offer delivery options to the sales person, and ultimately the customer, that are consistent with the delivery costs and margins your company wants to maintain. Yes, there will be times when you legitimately need to violate that approach, but it should become the exception, not the rule. However, you will be amazed how many customers will take your options if you present them and this can include assessorial-based expedited options. In addition, you will improve your on-time delivery accuracy because the only times you will offer will be ones you know you can do. I have seen this work in retail where one retailer reduced the miles per delivery by 13% by offering delivery choices that helped contain costs. This approach is also evolving in distribution- and service-based organizations where logistics costs are such a high percentage of overall costs.

To make this approach work, distribution needs to go from being a “back office” function to customer facing. Delivery promising needs to be integrated into the sales processing systems to, in real-time, providing viable and cost-effective delivery options based upon the customer’s location and desired product mix. To successfully sell this approach to your company, you need to start with the folks that own the P&L, the CFO and president. Sales does need to “buy in”, but it is unlikely that they will jump at a solution that they feel constrains their ability to close business – at least in the beginning. From a technology perspective, this approach may cause you to rethink some of your distribution solutions. If they are not able to provide an integrated view of capacity and costs in real-time, it’s time for them to change.

Distribution costs are set during the order process. If you want to squeeze more margin out of your business you need to change your reactive approach to delivery promising. By shaping the delivery options provided to sales and customers during the ordering process you can reduce your distribution costs. The key is to provide delivery options that strike the balance between what sales wants and distribution can cost-effectively do. How is your company proactively managing its delivery promises? Let me know.

When the Organization is the Problem

There are so many aspects of supply chain management and logistics, such as transportation management, that lend themselves to enterprise-wide deployment strategies. Certainly, there is enough evidence that says, the transportation costs can be lowered AND service can be improved when the entire organization takes advantage of the leverage that exists.  Yet an alarmingly high number of companies fail to get there or they find that the chosen solution doesn’t deliver the anticipated results. Is it a product problem or a lack of organizational alignment?

Here are some thoughts to consider before diving into a well-intended, but potentially career-limiting, enterprise-wide TMS deployment.

Horizontal versus vertical control. Is your enterprise organized by line of business with the business unit leaders in charge of their operations? These are typically conglomerate or holding companies. Without the ability to strip out control of transportation, no GM is going to give up control of any part of his or her operation. Do you think they want some “corporate guy” to be able control part of their destiny? You can bet that their own transportation folks won’t be pitching for enterprise-wide rollout because they know they will most likely lose their jobs. The defining test will be when one of the business units shows how their current TMS implementation is better than the proposed standard – they exist in every organization, BTW. I have seen one company, for instance, where their third-largest spend was transportation, only get through a fraction of the rollout and only achieved partial potential results because there was no organizational alignment. I don’t care if you have the president or CEO saying the company needs to do it, if you can’t get to a shared-services operating model, the project will be protracted and either doomed to failure or mediocrity.

The myth of the 80% “standard” solution. The basic naive assumption here is that the first 80% of the functional requirements are the hard part. It’s actually the last 20% that is tough, varies by business unit and is significantly worse as the number of distinct business units grow. This is because all of the standard stuff is not what differentiates or addresses the unique operating conditions of the individual organizations. In addition, the last 20% is never 20% because you repeat it in every business unit. It’s almost a multiplying effect on the work required. If you can’t get most of the last 20% standardized and harmonized, every business unit will be an adventure. If you are a multi-billion dollar organization, you can expect this situation to result in a many-year rollout with significant budget overruns.

The “financial “back-door” play. This one starts with someone in your corporate financial organization saying that they could save millions if only the freight payment process could be standardized and consolidated. It’s an interesting intellectual exercise for the transportation novice, but there is one problem. The financial and operation sides of transportation can be highly linked. So the scope expands and your enterprise gets embroiled in an enterprise-wide rollout that the transportation operations weren’t organized to execute effectively. See the previous paragraphs for the expected results.

So what do you do if doesn’t look like you can rollout a common TMS solution across your enterprise, but you want to take advantage of the potential synergies that might exist? There are a number of areas to focus, such as rate management, carrier consolidation and shipment visibility.

Rate management and carrier consolidation is where the 80% principle works. By databasing all of the carrier rates and lanes at the corporate level in a TMS, enterprises can see where rates vary widely across business units, commonality of carriers and lanes exists and the opportunity to get lower rates through higher volumes running through a smaller number of carriers may make sense. Contracts can be executed at the corporate level, but the operational control that the business units seek is maintained.

Freight audit and payment as a corporate wide function do make a lot of sense. Just make sure that you can draw the line in the sand there. The business units still keep control of the operational processes. But once loads are built and shipped, there is no real value-add for individual business units to manage their own audit and payment processes. 

Shipment visibility at corporate level provides the opportunity to show business units the ability to collaborate to reduce freight costs and improve customer service. By placing all of the shipments and their statuses into a common visibility system, enterprises can evaluate the movement of shipments to determine if synergy and coordination opportunities exist and how carriers are actually performing. Visibility is essential for shipments that need to be coordinated across multiple business units.

I am not advocating that enterprises should not pursue concepts such as an enterprise-wide TMS solution. However, without organizational alignment, these types of projects are fraught with failure. There are ways to extract significant value from an enterprise-level TMS, but they all don’t translate into the need to execute shipment from a single platform.

A Different Approach to VMI

We’re all looking for ways to increase our productivity, but sometimes that means letting go of traditional thinking.  Vendor managed inventory (VMI) is one of those areas. VMI is well understood in the retail industry, but it applies to many other markets as well. In markets where the delivery quantities can easily be flexed, like bulk gasses for instance, there is an opportunity to improve profit by thinking about delivery dates differently. While we’ve all had it beaten into our heads that early or late deliveries are bad, they may in fact be good for the bottom line – as long as you don’t disrupt the customer. Here’s why.

One of the tenets of VMI is that the supplier monitors the customer’s consumption and determines when it is time to replenish the customer’s inventory. The target quantity and delivery date/time are usually determined by a combination of consumption and forecast data. Once the quantity and delivery time are set, they are seldom changed, but as most of us see in our businesses, changes occur. Instead of looking at this as a problem, it’s actually an opportunity if you can flex the delivery quantity and time. The key change in thinking is that the date and quantity are variable and can operate in a rolling period, as opposed to being fixed.

Let me give an example how this works. Let’s say you have your VMI deliveries optimally planned for next Wednesday and a new order comes in for delivery on Tuesday, right next door to the delivery that was planned for Wednesday. Wouldn’t you like to know if your profit could be greater if you delivered the Wednesday order on Tuesday even if you delivered a little less product than you might on Wednesday? The same goes for pushing the Wednesday order to a Thursday (or even Friday) delivery as long as the customer doesn’t run out of stock.

By taking a dynamic approach to delivery dates and quantities, the profit per delivery and resource utilization can increase significantly beyond traditional static delivery date VMI methods. Ferrell Gas, for example, uses the dynamic VMI approach and has been able to maximize the productivity of their delivery operations and maintain the highest gross profit per employee in their industry over the last 5 years. Another industrial gas company was able to increase their network productivity by 15% using this same concept.

Moving from a fixed delivery quantity and time to a flexible and rolling period approach for VMI is a great example of challenging traditional thinking and delivering significant results. How has your organization turned widely-held beliefs on their head for better performance? Let me know.  

 

Lessons from a Logistics Turnaround Artist

Recently, I had a conversation with Foster Finley, Managing Director at AlixPartners, about his firm’s approach to delivering value through logistics transformation efforts. AlixPartners has a little different angle than most consulting firms as their compensation is usually based on hard results actually delivered, not just “hours worked.” The company has a long history of working with companies that recognize the need to change and do it quickly. Here are some of thoughts that came from our conversation on transformation and getting results fast.

Does senior management recognize that their operational performance needs to be much better? Notice that I didn’t cite the titles: head of transportation, head of logistics or even head of supply chain. We are talking CEO, President, COO or EVP with P&L responsibility. If you are going to change, you need the folks most empowered to do it and as you will find out later, logistics can impact the revenue line [as well as the cost line], so making changes there needs to come from the revenue owners (see Game Changing Supply Chain Strategies Involve the Revenue Guys). The counterpoint to this argument is that without a passion for change improvement will not happen quickly and the entrenched guys will find 1,000 reasons for not changing. If you really want to be in a hurry, the folks with the mandate and impatience for change need to buy-in and do it deeply.

It’s all about speed.
Time-to-value is paramount. Rather than take the traditional “hockey stick” approach, AlixPartners focus on delivering results quickly, building momentum and minimizing risk (see What is the Half-Life of Your Logistics Technology Investments?). If you are trying to make real change, you have to convert the “unbelievers” quickly and not let new priorities cloud the focus or results. AlixPartners prefer to get projects completed and results delivered in less than six months. They have a saying “Projects that go long, go wrong.” This also means that any technology used to sustain the changes must be able to go equally as quickly. Here the focus is on “good enough” solutions and “time-to-operational.”

There are lots of levers to drive benefits
Alix Partners targets five areas. Cost is important, but there are many others.

1. Cost-cutting through better “blocking and tackling” on the expense line. Simply put, how are the company’s transportation and 3PL contracts structured, and the client’s organization, carriers and 3PLs complying with them? You don’t have to change infrastructure here – organization or technology -- to quickly produce results.
2. Trimming the balance sheet. A lot of organizations have too much capital tied up in their assets. Do they really need all of the trucks, warehouses, containers, etc. to run their operations? After all, when it comes to a company’s investors, financial performance is as much measured by the company’s return on invested capital (ROIC) as it is by the P&L.
3. Customer service impacting financial performance. Better customer service saves money. Overs, shorts, damaged goods and returns all have big impacts on costs. Among other things, they usually result in excess or obsolescence inventory – a huge balance-sheet liability.
4. Revenue generation through logistics. A lot of companies have simplified delivery charges that leave “money on the table.” They need to get away from simple cost-to-deliver assumptions and transportation pricing for customer delivery. In fact, there may be more P&L impact here than anything you can do in the cost-savings department. This is all the more reason for having managers who own P&Ls involved, as the sales folks will want to “give money away” and the logistics folks are not empowered to change it.
5. Mitigating risk. Your drivers and carriers are both an asset and liability. Unfortunately, many companies don’t recognize the latter until an unfortunate accident costs them millions. If you have a fleet, how are you measuring and managing driver performance? For commercial carriers, how are you tracking their performance? Negligence is front and center in our legal system and the goal is to not get there.

Create a compelling business case quickly.
It’s all about the data, but it can’t be a multi-year study. If you are talking about significant changes to business performance, you are going to have some level of disruption and dissention in the rank and file. But, data trumps opinion. Equally important, you need to act quickly. There is no need to analyze the whole business in detail. Look at the macro data and get a slice of the micro level data. For instance, what are the trends in COGS or various supply chain costs as a percentage of revenue, and inventory and assets on the balance sheet? In addition, take representative parts of the organization and model the impact of changes to their business to size the opportunity or measure even simple things such as how many vehicles are idle over a month. Everyone claims his/her part of the business is different and unique. It may be, but probably not as much as believed – nor should it be all that unique.

The lessons learned here are: 1) Decisive change starts at the top. 2) Results quickly delivered build momentum and mitigate risk. 3) There are a lot of areas to quickly explore to improve both top- and bottom-line performance, and performance on the balance sheet. 4) Don’t let the organization get bogged down in the details. Before you decide to spend the next two to three years on some supply chain wide transformation program, consider what compelling things you can do quickly to put your organization on the right performance track.

How is your company moving decisively and quickly to transform itself - or not? Let me know.