Value Chain From IW Growing Companies

Dec. 21, 2004
Logistics management from here to there.

If there's one thing Rachel Carignan has learned over the last few years, it's that logistics management isn't just a concern of large corporations. The CEO for Winderosa Manufacturing & Distribution Co. USA Inc., a Peru, Maine, producer of gaskets, will tell you that managing inventory and controlling the flow of materials and goods is crucial to success. "We have to be ready for spikes and downturns in orders because we're a business that's extremely weather-dependent," says Carignan. "Good communication and efficient systems tied into suppliers and customers is absolutely essential." Winderosa -- which produces gaskets for small engines used in snowmobiles, hovercrafts, dirt bikes, personal watercraft, and lawn and garden equipment -- is ISO 9001 certified and was named Exporter of the Year by the Maine Small Business Administration. The company has tackled its logistics tasks by using continuous-flow production and manufacturing resource planning (MRP) software; thus, Carignan and 11 employees can carefully map out ordering and inventory to cut costs and boost the speed of production. The firm also has standardized packaging for outgoing orders so that it can provide suppliers with a predictable and efficient shipping system. In an era of instant electronic communication and high-speed global shipping systems, the words "logistics management" can send a chill down the spine of even the most efficient and agile manufacturer. For a small company, logistics management can spell the difference between drowning in a sea of red ink and swimming in greenbacks. Moreover, it can involve a complex array of components -- including transportation, warehousing, customer service, materials handling, exterior packaging, network analysis, IT management, and more. "Logistics management has always been important. It is crucial to customer satisfaction," says John Fontanella, research director, supply chain execution, at AMR Research Inc., Boston. "Unfortunately, it hasn't been at the forefront for many small companies. Too often, it's viewed as a cost center rather than a function that can grow market share or increase profitability." He adds that the logistics landscape is changing quickly -- particularly as a result of the Internet and emerging e-business -- and small firms must pay attention and react quickly. "Small companies tend to be vulnerable to disintermediation, so they have to use logistics and logistics technologies to become more valued in the supply chain of their larger customers or suppliers." To be sure, large automotive manufacturers such as Ford Motor Co. and General Motors Corp. now require small companies to adopt specific technologies and systems. Ditto for aircraft manufacturers such as Boeing Co. and PC builders such as Dell Computer Corp. Even industries or specific businesses that aren't at the whim of large and powerful customers are discovering that they must become more efficient. "It is almost impossible to sustain growth and retain competitive advantage without efficient supply-chain management," says John Coyle, professor of business administration and executive director of the Center for Logistics Research at Pennsylvania State University in University Park, Pa. Carignan knows that fact all too well. Two years ago, Winderosa moved its manufacturing facilities from Dixfield to nearby Peru, Maine. "That gave us an opportunity to set up production far more efficiently," she explains. After carefully mapping assembly processes, Carignan introduced bins and continuous-flow production, installed software that could track parts through the factory, moved to single-size shipping containers, and began using e-mail to share invoices and other records with trading partners. The firm's build-to-order model has thoroughly succeeded. Today, Winderosa is able to crank out gaskets more quickly, it has improved the accuracy of orders, and it is able to ensure adequate inventory for wildly fluctuating demand without over-ordering. The system has consistently satisfied the needs of customers in 39 countries, including Japan, Germany, Australia, and the U.S. "We have continually improved performance by paying attention to logistics issues," says Carignan. Logistics Drivers According to Coyle, improved logistics management has occurred because of a convergence of several factors. First, today's consumer is better educated about products and pricing -- thus forcing companies to respond. Second, a major shift in channel distribution has occurred because major retailers want shrink-wrapped product on pallets, scheduled delivery, customized pallet packs, co-managed inventory, continuous replenishment, and more. Third, there's the emergence of global competition, which has driven down prices. Fourth, there's the emergence of intermodal transportation systems, which now provide better service at a lower cost. Finally, there's technology and the emergence of the Internet. The Internet has evolved into an access point for customers, suppliers, and others. "One of the things that is often missed by small businesses is the fact that e-commerce represents only part of the story," says Coyle. "E-business, which involves business-to-business transactions, can represent huge potential. It allows a company to make information available about its inventory, procurement, transportation systems, invoicing, and more. It also can allow configuration and easy customization." Add in automation taking place in warehouses, on assembly lines, and within transportation systems and "a company has the opportunity to realize huge gains that can produce significant price and service advantages." For many small firms, says University of Wisconsin-Madison business professor Edward J. Marien, the elements are developing an effective Web site and looking for a way to tie into a consortium or online trading exchange. That can reduce IT costs -- particularly setting up the needed hardware and software -- and lead to new opportunities to buy and sell. Like Coyle, he believes that the biggest gains can come from automating business-to-business tasks. Yet companies that move into e-commerce must be thoroughly prepared and put all the necessary elements in place. "Eighty-five percent of e-commerce sites have problems filling their orders promptly and correctly -- and it's even more difficult for small firms," says Marien. "In the end, it almost all comes down to logistics -- getting materials in and product to the customer promptly." Outside Help Fortunately, companies that don't have the required expertise or IT resources in-house can outsource site hosting and turn to application service providers, which allow a user to rent software on a remote system and pay by use. Although an organization must examine the specific deal and thoroughly understand its own needs -- some systems are far too complex for the requirements of a small firm -- such an approach can allow an organization to flex its collective muscle and compete with much larger organizations. Likewise, some companies find that it makes sense to completely outsource out-going transportation logistics to companies such as United Parcel Service of America Inc. or FDX Corp. In some cases, these companies are now handling order processing, warehousing, and distribution. Order-fulfillment services can also prove useful, particularly in situations that require drop-shipping and end-to-end transaction management. When such a strategy is used effectively, it can allow an organization to focus on its core competencies, says Marien. Cross-Functional Coordination Nevertheless, logistics is more than the sum of technology and systems. In order to realize the enormous gains possible, a company must revamp business processes and its entire "organizational infrastructure," says Marien. That can mean sacking conventional departmental and functional hierarchies in favor of a cross-functional approach. It also means finding partners and forming strategic alliances. "These days, no company can succeed alone," he says. Finally, he emphasizes the importance of human resources in understanding how jobs are changing and paying employees appropriately. "Work is becoming more cross-functional, and effective logistics management requires finding the best solution for your own company and also your customers," he says. At USA Vacuum Industries, St. James, Mo., logistics management has become an important tool in improving operational efficiency. The producer of vacuum cleaners, sewing machines, and ceiling fans ships over 12,000 units per month to customers all over the world. Speed to market as well as fast response to the particular needs of a customer are essential -- particularly with only 40 employees. Time, language, and cultural barriers have in the past made close supplier relationships difficult, says Jim Fleming, chief operating officer. The company improved its logistics management by turning to an array of strategies and tools. The biggest change occurred a couple of years ago when the company decided to bring all assembly back in-house. Despite higher labor costs, USA Vacuum has been able to use a demand-flow process to streamline operations and lower overall manufacturing costs. While it still imports about 50% of parts, local suppliers are able to meet daily requirements on specialty parts within a few hours. Custom packaging allows quick turnaround and, ultimately, fewer trucks. "We are no longer filling up our factory with product that we don't need for a day or two," says Fleming. "We are able to make the most of our shipping dollars." In fact, using e-mail and fax, USA Vacuum is now able to share forecasts for up to 90 days. That allows suppliers to build components at whatever rate they deem necessary, but not ship to USA Vacuum until the company actually needs the parts. "It allows the entire supply chain to be prepared so that if a sudden flurry of orders come in for a particular model it's not a massive crisis," he explains. What's more, MRP software allows partners to view the firm's production forecasts and it provides reporting capabilities that allow the company to better understand production flow while optimizing inventory levels. Ultimately, the company has converted space previously used for storage to manufacturing. "That has allowed us to increase production without adding space," says Fleming. Together with lower freight costs and decreased inventory, USA Vacuum is pumping more money into research and development and increasing overall profitability. "We have become a better-run company and have fewer daily problems," concludes Fleming, who gained much of his knowledge by attending classes in demand-flow process at the University of Missouri. AMR's Fontanella believes that in today's world the key to effective logistics is the open exchange of accurate information -- usually through the use of specialized software and systems. And while the Internet and emerging trading exchanges offer remarkable opportunities that no company should overlook, solutions don't always have to be complex and expensive. As many small firms have discovered, e-mail, fax, and inexpensive software -- including programs like PC Anywhere and Laplink -- can provide a basic way to connect data from separate organizations. "The biggest challenge facing a small manufacturer is figuring out how to provide the various services that suppliers and customers expect and make money in the process," Fontanella observes. Penn State's Coyle says that the key to successful logistics management is focusing on a few primary business strategies and then building systems around them. One of the most critical requirements is improving cycle times and the replenishment path. This not only leads to faster and better customer service, it also allows everyone in the supply chain to reduce inventories. And, Coyle notes, "What's often overlooked by small companies is that the faster you respond the quicker you can bill and collect." He points out that some best-practice companies are now able to turn over inventory within 48 hours. The end result? A negative cash conversion cycle that allows these companies to get paid by customers before they have to shell out money to suppliers. All this can translate into a variety of approaches, he adds. While a few small companies have shifted the entire front end of the procurement process to distribution partners and thus lowered ongoing capital requirements, others find that such an approach doesn't work. While a few have eliminated purchase orders by letting suppliers and distributors view MRP forecasts and provide the necessary materials, others have concentrated on reengineering manufacturing processes to take advantage of key business concepts like JIT, demand management, and continuous-flow production. In the end, finding the right approach for a specific company is essential. Coyle says that it's important to think big -- even if a company is small. And it's crucial to have a solid commitment from top management, particularly the CEO. Without the cooperation of various cross-functional units inside an organization and tight integration among trading partners, even the best ideas and technology can fail. That's because logistics management isn't a monolithic concept, but a strategy that can ripple throughout an organization. When all the pieces come together, the results are often spectacular. "Although large companies enjoy pricing advantages, small firms need to recognize that they can be very successful because they aren't burdened with the traditional baggage -- a huge infrastructure, management layers, and deeply entrenched channels," concludes Coyle. "If a firm understands how to leverage supply-chain logistics, it can gain a huge competitive advantage."

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