Strategic Sourcing and Commodity Teams - Part 1 - A "Force Multiplier"

Much has been written lately about companies using Stategic Sourcing, and the term Commodity team is often thrown around as if every one understands the concept. So let's step back a minute and discuss Commodity Teams and how they can be an integral part of a Strategic Sourcing plan within a company. One term that I've often used to describe Commodity teams is a military term, "force multiplier."

According to wikipedia, "Force multiplication, refers to a combination of attributes or advantages which make a given force more effective than another force of comparable size. A force multiplier refers to a factor that dramatically increases (hence "multiplies") the effectiveness of an item or group." Let's face it, the analogy that business is war is apt, but we need to make sure that we take the fight to our competition, not on our suppliers or internal funtional silos.

In 1999, Motorola Network Infrastructure Group's Strategic Sourcing orgainization, then lead by Trevor Munden, instituted commodity teams across a wide range of commodities, and it paid handsome dividends. The teams typically consisted of a Commodity Manager (who had responsibility for the commercial aspects of the supplier relationship), Supplier Development Engineers (who owned the technical relationship with the suppliers), Development Engineers (both Mechanical and Electrical, who represented the interests of the programs that they were assigned to work on), Buyers (who placed purchase orders and expidited shipments), and Supplier Quality Engineers (who owned the quality portion of the supplier interface).

These teams usually brought dozens of years experience to bear, and discussed current suppliers, future technology needs, industry trends, etc. The 1-2 hours spent every two weeks acted as a force multiplier in the regard that it aligned the needs of cost, quality, delivery and technology, and ensured that the team was all rowing in the same direction. When these team meetings aligned the needs of engineering with the needs of the strategic sourcing organization, they discovered lead to two key benefits:

1. Buy-in from all departments involved - this eliminated the perception that "sourcing is forcing us to use XYZ supplier just to save a few bucks," as well as its counterpart, "the engineers just want to use this supplier because they always used them, and the sales rep takes them out to lunch a lot."

2. It presented a consistent message to the suppliers. No longer could a supplier work in secret with engineering to get designed in without being brought to the table at a commodity team meeting. Suppliers benefitted by getting consistent messages regarding schedule, price and design expectations.

More on this later....

Site Selection – Part 4 – Weighing the Intangibles

When retail giant Wal-Mart decided it needed a food distribution center to serve the U.S. Northwest, several site selection criteria had to be weighed before it eventually chose Grandview, Washington, as the location for its 800,000-square-foot facility. For instance, it was advantageous that the land had been zoned for light industrial use and environmental reviews had already been completed. Although the land had to be annexed into the city of Grandview, relatively few people lived in the area, so the vote went in Wal-Mart's favor.

Grandview is situated near an interstate highway, 1-82, and the land chosen was flat, which were important considerations for the retailer. The city is centrally located within 200 miles of three major cities: Seattle, Spokane, and Portland. More than 60 local trucking companies serve the outlying area, as well as two railroads and nine air freight operators. Nearby, the Port of Pasco, located at the convergence of the Yakima and Snake Rivers, offers barge service on the Columbia River to the Port of Portland for containerized cargo.

In Grandview, Wal-Mart (not exactly known for paying top wages) found a populace with the lowest median wage in the area for warehouse workers—$8.11 per hour, more than $2.00 lower than the $10.58 Seattle pays. What's more, the average hourly wage for truck drivers in Grand-view is $14.02, considerably lower than the $17.62 they earn in Seattle.

And then there were the intangibles that no index or study can accurately categorize, but that played a huge part in Wal-Mart ultimately opting to go with Grandview. One of those intangibles is that the community was anxious to attract Wal-Mart's business and the jobs that went with the new DC. Other companies that had chosen Grandview as a distribution site—notably retailer Ace Hardware, which operates a 500,000-square-foot DC there—spoke positively of the area's capabilities. Even the mayors of surrounding communities came forward to support Grandview as the best site for the DC.

Yakima County, where Grandview is located, offered hiring and training support, and hooked Wal-Mart up with the state employment services agency, WorkSource Washington. The agency screened more than 6,000 applicants for the 400 jobs at the DC, and then sent the best candidates to Wal-Mart for final interviews. Overall, while labor costs and logistics capabilities made Grandview an attractive site for a DC, Wal-Mart's site selection best practices demonstrated a willingness to explore the qualities of a community that aren't necessarily published in a government report.

QUALITY OVER QUANTITY

Sometimes, having just one DC is plenty, even when a company has gotten too big for its current facility. That describes The Container Store's situation, a retailer of storage and organization products. Thanks to a 20 percent annual growth rate, the Dallas-based company outgrew its 300,000-square-foot DC, so it added a 155,000-square-foot satellite facility nearby That still wasn't quite sufficient, though, so it also arranged for space for 5,000 pallets under a third-party contract.

Even when the retailer reached the point where it had more than 30 stores throughout the United States, it still determined that one centrally located DC would be enough. "We looked into our whole network and asked whether it was time to do store replenishment out of our DC and direct customer fulfillment out of a different site," explains Amy Carobillano, The Container Store's vice president of logistics and distribution. The retailer decided that keeping to a single site worked to its advantage. For instance, all of the inventory is in one place, with corporate headquarters directly attached to the DC. That central location works well for the company's logistics network, which imports from Asia through the U.S. West Coast and from Europe through the Gulf of Mexico at the Port of Houston.

So the retailer opted to remain in Dallas, but to expand into a new 1.1-million-square-foot DC in another part of town. Not all of that square footage is currently being used, since The Container Store's master distribution plan calls for taking over the entire facility in stages. "If we're where we want to be, we'll need a conveyor in 2007 because that's when we'll have enough of our products conveyable to justify the expense," Carobillano says. In the meantime, the retailer focused its layout on its present needs. "Once you know what the vision is, you can buy part oi it now and develop the solution in phases." A lot of things will change before they take over the entire DC, she notes.

Even though The Container Store was staying in the Dallas area, it recognized that a move of any distance could affect some of its workers, so it sought their input throughout the site selection process. "We took out a map of the Dallas-Fort Worth metroplex and put a pin where every single employee lived," Carobillano explains. Then the retailer looked for a site that would allow it to retain its employee base. "We talked to the employees who lived farthest away and would have the longest commutes," Carobillano notes, and offered to help them find a different way to get to work or to hook up in carpools. As a result, the company didn't lose a single warehouse or office worker after it relocated. "Nobody knows your business or cares about your business like you do," she points out.

When moving day arrived, The Container Store shut down its old DC over a four-day weekend and opened the new facility, and then began moving the merchandise from the old DC to the new one. The entire process took about eight weeks, at which point the retailer began receiving inbound merchandise at the new DC.

Focusing on its employees is definitely a best practice for The Container Store, where the corporate philosophy of "one great employee is worth three good ones" has fostered an environment conducive to developing great people. That kind of thinking pays off, as the company is consistently listed on Fortune magazine's list of "Best Places to Work."

Site Selection – Part 3 – Match Your Network to Your Business Strategy

However, Gillette's theoretical analysis ended up taking a backseat to a practical consideration: The company was locked in to significant lease commitments with its current warehouses, which made it prohibitively expensive to just pack up and leave. So the question became: How can Gillette deliver much better customer service without changing its physical infrastructure?

"The goal was, at a minimum, to have a warehouse on the East Coast that carried all of our products," Knabe says. Ultimately, Gillette ended up keeping both its Massachusetts and Tennessee DCs, but what changed was how they functioned in terms of what products they carried and who they shipped to. Both warehouses now stock all Gillette products.

So far, so good. Gillette discovered it could improve its customer service without having to invest in new infrastructure. However, as Knabe discovered, carrying all products in both warehouses would have significantly increased inventory levels, which was a no-no. To get past this potential sticking point, the company conducted a statistical safety stock analysis to optimize its distribution network. Gillette made some process changes to set its safety stock targets, which made it possible to hold inventory constant while improving customer service.

"Your distribution network should be a function of what your business strategy is," Knabe emphasizes. "If your business strategy is to be the low-cost provider, you set up one kind of a network. Wal-Mart, for example, sets up its distribution network to be as cost efficient as possible. If your business strategy is to be as responsive as possible, you set up a different network. For Boston Scientific, a maker of surgical equipment, it's not about the cost of its distribution network, it's about having the right product at the right place instantly."

In the end, by adhering to best practices in configuring its distribution network, Gillette was able to maximize its use of truckload shipments while improving its on-time deliveries to its customers. As a result, its goal of "excellent customer service at least cost" became a reality.

HOW MUCH IS TOO MUCH?

So how do you know if you're spending too much on your distribution network? Using the Site Selector index of the most logistics-friendly cities, location consulting firm The Boyd Company developed a comparative cost model that identifies how much it costs, on average, to operate a warehouse in the top 50 markets.10

Boyd's comparative model focuses on a hypothetical 350,000-square-foot warehouse employing 150 nonexempt workers. This hypothetical warehouse serves a national distribution network that delivers products to 10 destination cities. Not surprisingly, New York City is the most expensive city in which to own a warehouse, in terms of annual operating costs, which Boyd estimates to be $15.8 million. Of the cities studied, the least expensive is Mobile, Alabama, at $10.4 million.

The most expensive city in which to lease a warehouse is San Francisco ($14.5 million), while Mobile again ranks as the least expensive ($9 million). Overall trends play out pretty much as you'd expect: Cities in the Southeast tend to be the least expensive, those in the Northeast and on the West Coast are the most expensive, and the Midwest places in the middle.

Boyd also looks at a hypothetical outbound shipment model that assumes a volume of freight in 30,000-pound truckload shipments costing $1.46 per mile to move. This model indicates that it costs the most to serve a national market from Portland, Oregon ($4.1 million), while the most economical city for outbound shipments is St. Louis, Missouri ($2.4 million).

According to Jack Boyd, principal of The Boyd Company, companies now prefer to build their own warehouses rather than lease them. The trend today is also toward building fewer but larger facilities, often including nonwarehousing corporate functions within the buildings to save on costs. In effect, this involves moving white-collar workers into blue-collar locations. You're locating to a warehouse where real estate costs $5 per square foot versus the $20 or more per square foot you would pay in an office building, Boyd points out. "Staffing requirements for warehouses have been elevated over the years as companies become more information technology intensive," Boyd explains. "There are greater labor and skill set demands, and it does require more labor cost analysis as part of the mix in terms of where these warehouses should be located."

Site Selection – Part 2 - A Site for Sore Eyes

When you get right down to it, all logistics (like all politics) is local. HP maintains 88 distribution hubs throughout the world. IBM Corp. has at least one major logistics site on every continent in the world except for Africa, and 28 in all. The Gillette Co. has four distribution centers in the United States and 60 total worldwide. In the United States alone, retail behemoth Wal-Mart has 128 distribution centers strategically located in 38 states.

And yet, there's a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision).

For many years, Expansion Management, a magazine that specializes in site selection, has teamed up with Logistics Today to produce the Site Selector—a tool that offers an objective ranking of the 362 major U.S. cities (i.e., metropolitan statistical areas, as defined by the U.S. Office of Management and Budget).

FINDING THE RIGHT PLACE

The Site Selector was designed to help companies find the right city or region for their distribution needs. Because virtually every company uses motor carriers at some point in its distribution network, access to good roads is an important factor, but it's not the only factor. The city of Trenton, New Jersey, for instance, was ranked at number one (the highest rating) for road infrastructure in the 2005 study, which is not too surprising given the city's proximity to major highways and turnpikes. Trenton is also strategically sandwiched between two major metropolises—Philadelphia, Pennsylvania, and New York, New York.

However, the condition of its roads is not very good at all. Trenton's rank in that category was number 355 out of 362. Taking a look at some of the other categories, we find that Trenton placed well for taxes and fees (number 30), and fair-to-middling for rail access (number 151) and transportation and distribution industry (number 154). All things considered, Trenton finished nationally at number 68, which puts it just inside the top 20 percent.

But because most site selection decisions focus on a region of the United States rather than the entire country, it's also helpful to identify how well a city does compared to other cities within the same region. Trenton, for instance, ranks as the 15th most logistics-friendly city within the U.S. Northeast. The condition of its roads is far less of a factor for companies with supply chains in the Northeast because, frankly, none of the roads in that part of the country are in very good shape, relatively speaking. The one-two punch of congestion and Mother Nature accounts for the perpetual epidemic of orange cones on highways in the Northeast. As a result, road condition is almost a nonfactor for companies making site selection decisions centered on the Northeast.

Chicago Consulting undertook a study to determine the best warehouse networks in the United States, with best indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Bloomington, Indiana. The average distance to a customer would be 803 miles, with an average transit time of 2.28 days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Palmdale, California.

When The Gillette Co., a manufacturer of personal care products, batteries, and other consumer packaged goods, launched its North American Network Study in 2002, the goal was straightforward: Identify the best distribution network that would allow the company to deliver excellent customer service at the least cost. As solutions manager for the company, Louise Knabe's job was to figure out how many DCs Gillette should have and where they should be. Least cost was an important consideration, Knabe points out, because if Gillette's goal had been simply to provide the best possible customer service, the network study could well have suggested putting a distribution center in every state.

"From a logistics and distribution perspective, Gillette measures customer service by order cycle time (time from when the customer places the order until they receive the order) and on-time delivery performance (percentage ol shipments that arrive on time)," Knabe explains. "The strategic DC network design affects the order cycle time because the location of the DCs affects the transit time to the customer."

At the time of the network study, Gillette had two DCs located on the East Coast, one near Boston, Massachusetts, and the other near Chattanooga, Tennessee. The Tennessee warehouse stocked only Duracell batteries, while the Massachusetts warehouse stocked everything else. Neither warehouse carried all of Gillette's products.

So why was this a problem? "Our project analysis revealed that this situation made it difficult to deliver top-quality customer service," Knabe points out. "Let's say I was a customer based in Virginia. That meant I was getting a shipment from Tennessee of batteries and shipments from Massachusetts of everything else. So I've got two trucks showing up with Gillette products on it, which was a bit of a nuisance."

The bigger issue for Gillette, though, was that because neither warehouse had all of the company's products, many customer shipments had to be delivered by less-than-truckload (LTL) carriers, a more expensive transportation mode than truckload. The transit times were longer and the reliability was lower than it would have been if Gillette had been able to get all products loaded onto the same truck. Gillette concluded that in order to deliver top-quality service, it needed to find a way to convert as many of those LTL shipments into full truckload as possible.

That's when Gillette got to work on its site selection best practices, with the goal of developing a network that would locate the DCs close to the customer and make it possible to regularly ship by truckload.

COST VERSUS SERVICE

To answer the questions of how many warehouses it needed and where they should be, Gillette conducted a complete theoretical analysis to identify the best locations. The company factored in such considerations as the location of its manufacturing plants and its sourcing points. Equally important, Gillette looked at where its customers were located, and specifically at who ordered what, and in what volume. "You take those two things and then ask: How do I marry them up and how do I figure out where my warehouses should be?" Knabe says.

"In terms of distribution cost, we looked at the freight cost of going from the plant to the warehouse, and then we also looked at the freight cost of going from the warehouse to the customer," she explains. Using an optimization software tool to evaluate every possible scenario, Gillette asked questions such as: If we had three warehouses, where would they be to minimize our freight costs? The company looked at other distribution costs, including real estate, labor, and taxes, and utility costs, such as electricity ("That ruled out Manhattan pretty fast," Knabe notes). Inventory carrying costs were also factored into the plan.

On the service side, the question Gillette asked was: How can we impact customer service when we're designing our distribution network? According to Knabe, there were two ways. The first way was to set up the distribution network so that Gillette could maximize its use of truckload, which meant stocking all products in all warehouses.

The second part of the answer involves order cycle time. "The location of our warehouses affects transit time to the customer," Knabe says, "so we looked at how many warehouses we needed if we had to be able to get to every customer within 48 hours. And then we asked: How many warehouses would we need if we only had to get to 85 percent of our customers within 48 hours? We looked at our network from both of those angles—cost and service—and figured out what made the most sense."

Site Selection -Part 1 - Location, Location, Location

On-time delivery is a fundamental premise behind supply chain management, and it's a key benchmark on the road to achieving the perfect order. Although same-day delivery is available from several logistics providers, any company relying on the fastest and most expensive transportation options to fulfill its delivery obligations isn't going to be in business very long. The old adage, "Build a better mousetrap and the world will beat a path to your door," is now hopelessly out of date. It's no longer good enough to build that better mousetrap—you also have to build a better distribution network from which you can optimally service your customers. According to a study undertaken by consulting firm ProLogis Global Solutions, the number-one challenge for supply chain professionals is to create a distribution network that can deliver on customer demands while still keeping costs in line.

High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.

The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.

"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.

Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.

"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-

The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.

"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."

STRIKING THE PROPER BALANCE

A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.

"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."

Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.

A distribution network plan, Harmelink suggests, should answer the following questions:

How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?

Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.

Open your Mind

I just saw this quote by the Dalai Lama & thought I'd share...it is equally applicable to business & personal relationships, I think....

Training Review - Kevin Hogan 2008 Influence Bootcamp

What can I say besides - I am impressed.

Kevin Hogan, one of my favorite authors & researchers on the topic of persuasion and negotiation, has done it again. Every time Kevin releases a new book, I immediately order it from Amazon, as I know that it will contain at least one insight or piece of research that will help me either in my business career, at home, etc.

This Bootcamp was several days of Kevin, and several other world renowned speakers in the area of influence, persuasion, branding, marketing & sales. Now some people believe that if you are in strategic sourcing that it is the other guy who is doing the selling...I believe that we sell our position & ideas every day regardless of our title. How do we sell the supplier on the idea that it is in his/her best interest to provide excellent service, impeccable quality & a great price, so that both of our businesses can shine? How do we "sell" our senior management on the right course of action regarding supply chain planning? How do we influence and lead our employees toward a shared vision of success?

Influence, persuasion, negotiation...they are all components. And the bootcamp addressed many of those issues. One in particular that I found very interesting is the concept of influence vs. manipulation. Dave Lakhani, another well known author & speaker, draws the distinction based upon your intent. If you intend to mislead, betray or influence a person without their best interests in mind, then you are manipulating them. And he adds, manipulation will almost always be found out & resented.

More on this later...