December 2001 | Feature Stories

2001: Year-End Roundup

Terrorist attacks. War. An uncertain economy. Despite these challenges, 2001 also will be remembered for innovative logistics strategies, significant gains in logistics collaboration, and a new respect for the critical role supply chain management plays in U.S. competitiveness.

Terrorist attacks, war, an uncertain economy and the resultant retrenching have been in our hearts and on our minds during the last quarter of 2001. Yet this year has also seen the implementation of innovative logistics strategies, significant strides in supply chain collaboration, and increased awareness of the critical nature of the supply chain.

“The year has been like the downside of a roller- coaster,” observes William C. Copacino, global managing partner of Accenture’s Supply Chain Management practice. The economy’s long, steady ride up was followed by a swift, steep descent.

“We had been in an up economy for an unprecedented 10 years. So our supply chain functions were designed to support an expanding business base,” notes Robert E. Murray, president of REM Associates, a logistics and operations consulting firm based in Princeton, N.J.

That all changed when the U.S. economy softened, then tilted into recession. “When the economy turned around, many of our supply chain activities had to respond to a retracting business base,” Murray says. Companies began to rethink the way they did business. “The corporate mindset went from planning and expanding—from moving more products into more markets—to a mindset of fewer markets, fewer products, and eliminating divisions rather than adding them.”

“When the economy was roaring and sales were easy, there wasn’t as much emphasis on improving effectiveness and efficiency as there is today,” says Joseph C. Andraski, senior vice president of OMI International, Neshanic Station, N.J. “Companies’ sales growth overshadowed their inefficiencies. Now that sales have dropped, supply chain inefficiencies have become glaring.”

As a result, companies are re-examining their entire supply chains with an urgency that hasn’t been seen in some time. “There has been a retrenchment in terms of service levels as well as supply chain assets, such as distribution facilities,” says Murray.

Cost pressures have led companies to reorient their thinking, emphasizing cost at the expense of service. “In the past year, a very important focus for most supply chain managers has been transactional or ABC costing,” Murray says.

New Rules, New Methods

Logistics innovations all but stopped after Sept. 11, when suddenly the focus was on survival, not supply chain efficiencies. “After the terrorist attacks, everybody just hibernated for a month or so, going back to the methods with which they were most comfortable,” notes Jim Davidson, president, NTE Inc., Downers Grove, Ill.

But the uncertain economy “has forced people to look for new ways to do business,” exploring collaborative initiatives and new ways of using technology.

Some of the initiatives that companies are working on today include:

Collaborative karma. In the past year, “the idea of collaboration commerce has come on strong,” notes Andraski, a long-time active participant in the food industry’s collaborative initiatives. He serves today as a board member of the Voluntary Inter-Industry Commerce Standards (VICS) committee and vice chair of the CPFR committee of VICS.

“As companies realize that doing business through confrontation has resulted in impediments, they are thinking about doing business in a more collaborative way,” Andraski says.

The efforts are paying off. “Every pilot program has seen an increase in sales for both trading partners, and every trading relationship that has grown out of a pilot program has seen an improvement in profitability as well a inventory reduction,” he says.

As a result, “we’re moving further down the path of collaborative commerce, which includes CPFR, collaborative transportation management, planning, and engineering,” he says. In fact, the number of companies that are engaged in collaborative commerce is substantially greater today than it was at the beginning of the year, according to Andraski.

Shifts in modes of transportation. Pressure to reduce costs has led “a number of large-volume customers to take a new look at modal conversion,” says Richard M. Rogan, executive vice president of sales and marketing for The Hub Group, Lombard, Ill. “These companies have established formal conversion programs and set formal goals on migrating from over-the-road to intermodal transportation.”

The Hub Group is providing some very large shippers with intermodal transportation. Some of these companies, Rogan says, “are literally starting their maiden voyage into the use of intermodal transportation.”

Use of e-transportation tools. While some of the shine may have rubbed off transportation exchanges, NTE’s Davidson reports that companies are increasingly looking to e-transportation tools as a “low-risk, low-impact” way of harnessing the power of the Internet.

“Companies looking for ways to gain incremental advantage are considering opportunities such as private communities and trading exchanges,” he says. Many companies are easing their way into e-business, however, beginning with “lower-cost ways of getting results that have low human impact and fairly fast implementation,” Davidson reports.

Tapping Existing Technology

At the beginning of 2001, it seemed as if “a new supply chain software company was starting up virtually every week; funding was still plentiful,” Bill Copacino recalls. “Stocks of B2B companies had been holding up reasonably well, and the whole area was still fairly robust. But, around February, there was a fairly significant shift.”

As the economy worsened, companies “stopped spending money on technology, and shifted emphasis to harvesting and getting more out of technology they already had in place,” he says. For example, a number of companies tried to leverage investments in supply chain planning software that wasn’t implemented properly—or is still sitting on the shelf.

In addition, Copacino says, ” now, we’re seeing less emphasis on software itself, and more emphasis on making sure that processes are well thought out, that a company’s core capabilities create enduring competitive advantage.”

“People are investing more wisely in technology today,” reports Susan Rider, vice president of eastern region sales for Manhattan Associates Inc., Atlanta. “They’re looking for supply chain execution systems, for solutions that will give them visibility, and real-time business intelligence.”

In addition, she says, “technology buyers have become much more educated,” recognizing the need to carefully check out the financial stability of software vendors—some of whom are just barely hanging on.

Living in the Aftermath

Until the events of Sept. 11, companies didn’t realize just how quickly their supply chains could be disrupted, says Rider. “People that didn’t have visibility were lost because they didn’t know where their in-transit items were.”

She cites the case of a medical supply company that, pre-Sept. 11, guaranteed its customers 24-hour service by air. The grounding of air traffic forced the company to scramble to find alternate modes of shipping. The events of Sept. 11 vividly illustrated the fact that many companies did not have adequate contingency plans for warehousing and distribution, and were not prepared.

“In a lot of industries, people have to rethink their operating models post-Sept. 11,” says Copacino. “We built our supply chains and designed operating models with the idea of fast and efficient flow of goods, particularly across borders. It will take supply chains some time to adjust to that. Operating models may need to be adjusted, perhaps not run as tightly, or companies may need to rethink their sourcing options.”

The events of Sept. 11 have caused companies “to put an entire new emphasis on supply chain security and protectionism,” notes Bob Murray. Companies are looking over their shoulders, evaluating how secure their operations are and how to prevent them from being compromised in the future.

Take the food industry, for example. “Food packaging will change. Food companies will have to provide more security in their production process, and build another level of security around inbound products coming into the food chain,” Murray says.

On the outbound side, companies will have to move product in and out of warehouses and through transportation in a controlled environment to ensure that product has not been tainted before delivery to the customer. “These steps will require permanent changes in the supply chain, not a change that is made once and then goes away,” Murray says.

Opportunities for Logisticians

For many companies, “service at any cost isn’t an option any more,” Murray says. In fact, he notes, a number of companies are pruning unprofitable customers and offering different levels of service to customers based on their profitability or revenue.

Be smart in how you cut costs and reduce service—and be alert to what your competitors are doing. Deteriorating or diminishing service creates some real opportunities for logisticians, says Terry Harris, managing partner, Chicago Consulting, Chicago. “If you are very alert, you can watch where your competitors are headed—see who is cutting their service—then move in to capture some business.”

Operating in a Mature Marketplace

This is particularly important for companies that operate in a mature marketplace, Harris says. “If your organization is in a mature marketplace, the only way it can grow is by capturing your competitors’ customers. In a diminishing market, if you’re nimble and alert, you can see such opportunities clearly, then act.”

Doing so requires knowing what kind of service improvement will cause your competitor’s customer to switch, such as a day’s shorter lead time or a fill rate that’s five percentage points higher.

“It’s a rare organization that looks for and acts on opportunities such as these,” Harris says. Most are focused intensely on cutting costs, or are hampered by layoffs that have thinned the ranks of logistics professionals.

“Many logistics people are going to the office today with more work to do and fewer people to do it,” he notes. “They hunker down, and don’t pursue new and creative initiatives.”

“The average or below-average companies and laggards are missing a lot of opportunities as they manage for minimizing functional costs as opposed to developing an operating model that creates a distinctive, differentiated supply chain,” warns Bill Copacino.

The gap is widening between leading companies and average and laggard companies, Copacino says, as innovative, bold organizations capitalize on growth opportunities despite a down economy.

Strength Through Adversity

Yes, 2001 has been a tough year—but from the pain will come some gain, Bob Murray predicts. “2002 and beyond will produce a much healthier environment,” he says. “The economy will rebound as it has in the past, and we’ll be in a much stronger position when it does. We are building a stronger supply chain, a stronger security base, and more rational inventory levels. We’ve put in place rules that will improve inventory for the long-term.”

Continuing to expand partnerships and collaborate with other organizations “will make the whole supply chain that much better,” Murray says.

To be successful in a world of collaborative commerce, “logisticians have to embrace collaboration, and gain the knowledge and education they need to operate in this new world,” Andraski says. Mobilizing for change and building a new business model are not easy tasks, he adds.

Businesses would do well to add increased collaboration and improved change management to their list of resolutions for the new year.

Georgia-Pacific Comes Together

When Georgia-Pacific Corporation, Atlanta, acquired Fort James Corp. and its consumer brands Brawny, Quilted Northern and Dixie in 2000, it became the world’s leading manufacturer of tissue products. Merging the two organizations was one of GP’s top priorities for 2001.

“At the beginning of the year, we were just getting to understand each other organizationally, and trying to align ourselves with each other,” recalls Mark Hackl. Based in Green Bay, Wisc., he is transportation manager for Georgia-Pacific, having served in a similar role for Fort James.

“It has been a long year, and we’re still not where we want to be,” Hackl says. For example, while much progress has been made in integrating the transportation departments of the two companies, there’s still some work to be done merging the two.

In addition, Georgia-Pacific made the decision to implement SAP corporate-wide, so “we spent the year redesigning our processes and systems to support where the company’s going to be,” Hackl says.

At the same time, GP’s transportation department during 2001 embraced a new, collaborative way of managing its transportation. “We’re looking outside the four walls of Georgia-Pacific, working with other shippers to create better solutions for GP as well as for the carriers we do business with,” Hackl says.

Georgia-Pacific modeled its freight, identifying several high-volume lanes that were well-suited for a collaborative dedicated fleet. Then Georgia-Pacific entered into a relationship with General Mills, linking complementary lanes of traffic and maximizing equipment utilization.

“We have 80 dedicated trucks that serve the two companies,” Hackl explains. General Mills and Georgia-Pacific share the management of the dedicated fleet, using Web-based collaborative tools from Nistevo. “We have visibility to the shared fleet, and visibility of the freight that’s moving on the shared fleet,” Hackl explains. In addition, “we have processes integrated into the system that allow us to effectively manage the operations of the fleet.”

The collaborative relationship has multiple benefits. The two shippers get a dedicated rate that’s much more attractive than a one-way rate, and get excellent service from the carrier. They, in turn, can deliver better service to their customers.

Carriers also benefit from the regular revenue stream generated by the fleet. Plus drivers prefer the regular schedule of a dedicated operation, which leads to lower driver turnover. Finally, the shared dedicated fleet creates a longer-term relationship between shipper and carrier. It’s a win-win for shippers and carriers alike.

“Collaboration is a large part of our transportation strategy,” Hackl says. Today, “approximately 16 percent of our freight is running in this environment; we expect to grow that to as much as 26 percent.” Georgia-Pacific is in the process of establishing additional relationships with other shippers who are members of the collaborative Nistevo community.

Hershey Hits a Home Run

All things considered, 2001 has been a great year for Hershey Foods Corporation, Hershey, Pa. The confectionery and grocery products manufacturer announced record sales and earnings for the third quarter ending Sept. 30. It was awarded first place in the 2001 SPARC (Supplier Performance Awards by Retail Category) in the candy and seasonal candy category by the industry’s top 100 retailers.

And, according to the company’s earnings release of Oct. 18, “Hershey achieved continued improvement in its gross margin as a result of lower logistics costs and improved supply chain efficiencies.”

“We’re doing very well,” says Kenneth D. Miesemer, general manager of eastern distribution operations for Hershey. “Hershey is really getting its distribution act together, improving fill rate and on-time delivery. This means we get customers what they want when they want it, without any hassle.”

Building on EDC’s Success
Hershey’s one-million-square-foot mega-facility, Eastern Distribution Center III, has been operating for more than a year and a half. It served as the model for a new 600,000-square-foot distribution center in Southern California, which has been up and running for three months. “We tried to build on the success of EDC III, rather than reinvent the wheel,” Miesemer explains. The new facility’s process manual, metrics, and much of its methodology are drawn from EDC III.

“Our goal is to have system-type processes across the country,” says Miesemer. “So teams are working on best practices, focusing on customers, the supply chain, cost containment, and productivity. We’re getting past simply moving cases around in the warehouse, and are looking at all the processes that create or hamper effectiveness in the facility.”

An internal distribution team is working with facilities around the country to standardize best practices across Hershey’s distribution network. “You can go into most of our distribution centers now and see the same metrics and the same financials,” Miesemer says. “Getting everyone on the same ABC costing model, using the same productivity and performance metrics and the same end-of-month financial reports helps identify improvement opportunities as well as best practices.”

Part of the standardization has been to roll out standard processes across the distribution network—the majority of Hershey’s distribution facilities are outsourced to third-party logistics providers. “We had a distribution symposium with all our 3PLs, and discussed standard metrics, financials, and processes,” Miesemer says. “It was very well received by our operators; we plan to make it an annual event.”

Hershey’s senior managers are true believers in the value of effective supply chain management. “Our senior management has an absolute focus on the supply chain,” Miesemer says.

All these developments have added up to “a real fun year,” Miesemer says. “We are obtaining concrete results, and are achieving success in the eyes of others—both within Hershey Foods and within the industry.”