Value-Chain Report -- Herman Miller Reinvents For Success

Dec. 21, 2004
New business design drives a sharp reduction in order-to-delivery cycle time, more reliable delivery, and a focus on responding to shifts in customer demand.

Customer demands on manufacturers and retailers are increasing relentlessly. Spurred by the Internet's "click it and get it" value proposition, a growing number of consumers and business buyers want customized products, convenient ordering, and rapid fulfillment. Delivering against these rising expectations is not easy, as both start-ups and traditional incumbents are discovering. But companies that have mastered the challenges of speed, convenience, and reliability are gaining competitive advantage. Firms that fail to meet rising customer expectations run the risk of being "Amazoned" into oblivion. In the office-furniture industry, Michigan-based Herman Miller Inc. has addressed these customer priorities through a new business design that elevates innovative supply-chain thinking to the heart of the company's strategy. This new business design has driven a sharp reduction in order-to-delivery cycle time, far more reliable delivery, and a focus on responding to shifts in customer demand. As a result, Herman Miller has experienced greater customer loyalty and sustained value growth -- all, paradoxically, with much less inventory. New Customers, Different Priorities Herman Miller, with $1.9 billion in FY2000 revenues, has long been a prominent office-furniture designer and manufacturer. In the early 1990s senior management recognized that its market was shifting in fundamental ways. In particular, small businesses represented the new wave of growth, but their priorities were very different than those of Herman Miller's traditional, large corporate clientele. Small enterprises favored affordable office furniture over endless choices of features, colors, and fabric, and they demanded fast, on-time delivery. Herman Miller has since learned that larger customers value this highly convenient process as well, creating yet another opportunity for differentiated service. This rapidly growing small-business segment could not be served effectively through the traditional supply chain. The typical order for a large corporate-office-furniture and cubicle system took six to eight weeks to fill. Delivery dates were chronically unreliable, creating downtime and frustration for customers. A decade ago, almost one-third of Herman Miller's orders were delivered incomplete or late, and competitors performed no better. Unreliable performance drove customers and furniture dealers crazy and cost the company dearly. Herman Miller had to spend time and money compensating for customer disappointments, and had to replace defectors with new customers who were unhappy with their own suppliers. Herman Miller found itself shackled by the traditional supply chain, and many firms remain in that predicament today. Classic supply operations are largely tactical. They offer standard, built-to-stock products and undifferentiated service. Being linear and sequential -- hand-offs among departments and suppliers -- bottlenecks, and buffer stocks are commonplace. Information moves erratically, and customers are seldom in the loop. Worst of all, traditional supply chains are driven by forecast demand, which virtually guarantees that inventories will build up at every link in the chain and that customers will receive only an approximation of the precise mix of features they want. Improvements typically aim only at incremental gains in cost efficiency. For Herman Miller, it became clear that the growing small-business and home-office market required a better delivery system. In 1995 the company created a new operating unit called SQA for Simple, Quick, Affordable. The entrepreneurial team leading SQA reinvented its supply chain around product simplicity, convenient ordering, mass customization, a very fast order-to-installation cycle, and extremely reliable delivery. To deliver on these promises to customers, SQA managers examined the entire set of activities involved:

  • Customer contact to order entry. This often consumed up to three months for traditional furniture makers, and in many cases involved several iterations of drawings or other representations.
  • Order entry to shipment. Traditional furniture making exploded every order into a bill-of-materials, then scheduled manufacturing and shipment. This part (generally four to eight weeks) represented only 20% of the time for the entire process, yet it was where much of the industry was focusing its efforts.
  • Shipment to installation. Most shipments were made to dealer warehouses, where they were stored and handled at a high cost prior to reshipment and installation at the customer's site. While direct shipment from the manufacturer to the installation site was clearly preferable, unreliable delivery encouraged dealers to err on the side of caution. SQA set about redesigning each of these activities in order to raise speed and reliability to the extent that those features would create a sustainable lead over competitors. The main tool in slashing time from the first part of the activity chain was SQA's proprietary Z-Axis software, a rule-based tool to configure the product. Z-Axis features a user-friendly "choiceboard" that allows a customer to quickly see the furniture choice or a complete office arrangement in three dimensions and from any angle. Developed for Herman Miller by Seattle-based Lembersky/Chi Inc., the software makes it possible to design, specify, price, and place an order from a salesperson's laptop. Changes in panel heights, furniture models, fabric selections, and other variables are easy to make and their impacts on total package price are automatically calculated and displayed. More than three-quarters of SQA orders are now generated this way. Z-Axis software has helped reduce the ordering process from several months to a few days in most cases. Once the customer accepts a furniture package and commits to an order, Z-Axis automatically renders all customer choices into an accurate bill-of-materials and transmits it electronically to SQA's manufacturing facilities. Within two hours, the customer and dealer receive an order confirmation and firm delivery date. Each of SQA's supply-chain partners has access to actual customer demand and the bill-of-materials, as well as to information on shipment schedules and inventories. SQA managers also use digital technologies to improve the manufacturing process. Computer information systems now schedule the manufacturing of each order and even reserve space on a delivery truck. These systems make transparent the flow of material to the company's network of suppliers, because every participant sees the same real-time information. This makes it possible to reduce inventory throughout the supply chain. For example, SQA has shared real-time customer demand and inventory visibility with suppliers through the Internet (via SupplyNet) since 1997. SQA further improved manufacturing by creating a Production Metering Center located close to the company's main assembly plant. The PMC provides just-in-time holding areas for supplier-owned inventory to keep critical components at the ready. Before the PMC was built, almost one-third of SQA's production floor space, and an equal share of supplier space, was encumbered by materials inventory. These areas are now free for value-adding work. Finally, moving finished furniture and office systems from the shipping docks to customers has always been a time consuming and costly segment of the process. Given the industry's chronic unreliability, dealers typically hedge their risks by requesting delivery far in advance of the promised installation date. But as SQA has developed a reputation for reliability, the company has begun working with dealers to deliver direct to end customers. The goal is to have the delivery truck and the dealer's installation team arrive at the customer's site on the promised date. SQA's integrated, digitally linked, customer-to-supply network has produced breakthrough results. The order-to-delivery cycle dropped from as much as eight weeks to less than two weeks. The rate of on-time, complete shipments rose to 99.7%, earning SQA a first-place ranking by dealers. And the SQA workforce established a record of 74 days without shipping a single late or incomplete order (a total of about 22,000 consecutive complete on-time orders). By 1998, when the unit was integrated into the larger Herman Miller operation, it was generating annual sales growth of 25%, more than three times the industry average. Those sales represented 15% of the parent company's total revenues. The unit also enjoyed higher profit margins than its parent, and produced a remarkable 40 inventory turns per year, surpassing both its parent's 27 turns and the industry average of 20. Building a Value Net Though unique in its industry, the SQA business design has parallels in others. The best-known examples are Dell and Gateway, which have designed their entire businesses around digital networks that deliver complete, customized personal computers in about one week. Both companies operate with no finished goods inventory; since every product is built to order, it goes out the door the moment it is boxed. Both firms operate with negative cash-to-cash conversion, and both outperform traditional rivals on just about every measure. Dell, Gateway, SQA, and a growing group of other supply-chain innovators have built what we call a "value net" -- a dynamic network of customer/supplier partnerships and information flows. A value net is so-named because it creates value for all of its participants -- customers, company, and component suppliers -- and because all participants operate within a collaborative, digitally linked network. It is activated by real customer demand, not forecast guesswork, and can respond rapidly and reliably to shifts in customer preferences. Perhaps as important, a value net moves supply-chain issues off the factory floor and into the executive suite, where they assume strategic importance. During the last half of 1999, research by Mercer Management Consulting identified 30 companies in the Americas, Europe, and Asia as the best exemplars of supply-chain innovation. These value net pioneers share, to a greater or lesser degree, several characteristics. They are:
  • Customer aligned. The customer's priorities and choices are what set in motion the wheels of procurement, manufacturing, and delivery.
  • Collaborative. Suppliers and the company managing the value net are connected through long-term relationships, with each activity assigned to the partner best able to perform it.
  • Agile and scalable. Flexible production, distribution, and information flows make the companies more responsive to changes in the marketplace. They minimize brick and mortar assets and capital requirements, allowing firms to scale up easily to meet rapid surges in demand.
  • Fast flow. With inventories and distribution echelons often eliminated, order-to-delivery cycles are fast and direct.
  • Digital. The Internet and other digital platforms have accelerated supply-chain innovation. Smart systems give the company and its suppliers a real-time window onto customer demand and activities throughout the value chain. The companies that have developed winning value net business designs span a variety of industries and geographies. They include longtime incumbents in low-tech sectors as well as high-tech start-ups. Zara, the Spanish apparel manufacturer and retailer, has learned to bring new fashions from the drawing board to store racks in two weeks, catching fashion trends while they're hot. Thanks to electronic linkage of its stores, headquarters, and concentrated production network, Zara can respond quickly and efficiently to fast-changing tastes of young urban consumers. Capital-intensive steps are executed in factories owned by Zara's parent company. Labor-intensive steps are outsourced to small workshops in the north of Spain with which Zara has collaborative, exclusive arrangements. Zara links these shops into its network with the necessary information technology and logistics capabilities. Similarly, the smart use of digital technology drives value growth for Cemex SA de CV, based in Mexico. This $5 billion cement company has turned the production and delivery of the quintessential commodity into one of the world's most sophisticated and innovative businesses. Like its competitors, Cemex is plagued by unpredictable demand; half of all orders are cancelled or rescheduled as construction companies encounter snafus in their own schedules. Thanks to the skillful adaptation of the latest information technology, which now includes satellite communications, a central production clearinghouse, and a fleet of trucks equipped with GPS locators, Cemex has reduced its traditional three-hour delivery window to 20 minutes, guaranteed, and is now working toward a goal of 10 minutes, all using one-third fewer trucks. No other cement supplier has come close to replicating Cemex's operation. Customers are willing to pay a premium for such service, and investors have been handsomely rewarded as well. Value net thinking also can revitalize moribund operations. At Weyerhaeuser, the forest products company, a door-building facility in Marshfield, Wis., was a "dead dog" plant until it reinvented itself around value-net concepts. The heart of its new supply operation is a homegrown computer system that links employees, suppliers, customers, and every aspect of production. Orders that formerly took three to four weeks to process and configure now take 15 minutes. Using their own PCs, customers have 2 million potential configurations at their fingertips, and can now specify and enter their own orders via the Internet. The new system has made it possible for the plant to double order volume, cut lead times, achieve 97% on-time delivery, and charge a premium for its service-enhanced product. Spreading the Message While the SQA model has not yet been replicated in the office-furniture industry, it has served as a blueprint for reinvention of the larger Herman Miller enterprise. Since 1999 major parts of SQA's value-net business design have been adopted by the more traditional part of the business, and key SQA managers have moved to corporate headquarters to spur a broader transformation. Supply-chain innovation is already paying off throughout the company. Herman Miller has reduced its order-to-delivery cycle by over a week. On-time shipments have improved from 75% to 98%, despite the parent company's far larger and more complex product mix. Herman Miller products such as the new Resolve furniture line are being added to the Z-axis system for on-screen ordering. Finally, features of the system are being transferred onto the Web, where customers can now self-configure their orders. Finding a place at the head table for supply-chain issues is not easy, to be sure. Typically, the supply chain is not top-of-mind for CEOs and other senior executives. Amidst many other strategy issues, the supply chain generally takes a back seat to issues of talent, new product development, acquisitions, and e-commerce initiatives, and thus is relegated to procurement and logistic specialists. Herman Miller historically had tied its competitive fortunes to advances in product design. The idea of reinventing the business around a system of fast, reliable, convenient delivery did not immediately resonate with some company officials. But the results produced by SQA, and performance improvements within the larger enterprise, have changed most minds. The notion of elevating supply-chain innovation to the heart of corporate strategy is starting to take hold in many industries. As the experiences of the value-net innovators shows, manufacturers, distributors, and retailers alike will have to find ways to deliver the goods to more sophisticated and demanding customers if they hope to generate sustained value growth. Brian Walker is president of Herman Miller North America. David Bovet is vice president of Mercer Management Consulting and coauthor of Value Nets (2000, John Wiley & Sons).
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