FOOL’S GOLD

Jun 01, 2001 9:30 PM  By

Dot-com fever unearthed some pockets of pure gold ore, but many prospectors were left with only a few shiny rocks. The Forty-niners just may have a few things to teach the Ninety-niners

The year is 1848. James W. Marshall discovers gold-colored flakes while building a water-powered sawmill for John A. Sutter in the Sierra Foothills. Sutter confirms that the flakes are gold, but tells his workers to keep quiet about it so the mill can be finished. Of course, someone leaks the news that gold has been found in the Sacramento area. People quit their jobs, pack their bags, and leave proven revenue-producing crops in the ground to rot. Sound familiar? ▪ To be sure, some people became rich, but others who thought that the gold rush would net them a fortune overnight and had no contingency plans ended up destitute. The tales of unbridled gold mania and the sad fate of those who lost their livelihoods — and sometimes their lives — in their manic pursuit of the precious metal should have taught us to be prepared to deal with the unforeseen, whether in our personal lives or in the workplace. If we learned just one lesson from the dazzling rise and dizzying nosedive of Web-based business models in the past 24 months, it is that change is inevitable. Understanding the unpredictable nature of business is the cornerstone of designing fulfillment operations capable of advanced performance. ▪ Perhaps at no other time in U.S. history has the effect of change been so profoundly in evidence. The venture capital-infused frenzy of 1998 caused a speed-of-light deployment of resources never before seen in so great a magnitude.

The shifting sands of the virtual desert reveal the skeletal remains of many hastily implemented distribution centers. Fundamentally flawed business plans caused many to fall to their knees and expire under the heat of investor scrutiny. Others simply could not meet the lofty service levels promised to their customers.

Pay dirt

The mad dash to settle the e-commerce frontier three years ago is much akin to the California gold rush of 1848. A few struck rich veins of gold-laden ore while most simply dug themselves a hole. Whether packing the covered wagon and pointing the horses toward San Francisco in 1848 or making a virtual migration to Silicon Valley in 1998, the point here is that economic change is nothing new. Those who survive change recognize it and react well to it. Those who profit from change are prepared for it before others can react to it.

If the design of your operation does not incorporate systems and procedures that adapt well to change (anticipated as well as unforeseen), it is likely that your days will be spent fire-fighting and retrofitting. When resources are focused on fighting the operational fire of the day and applying patches, it is difficult if not impossible to tend to your core goals and objectives: increasing productivity, reducing operating costs, and enhancing customer service levels.

Gold bug

To foresee change and prepare for it, all of the business units within a company must be on the same team. Departmental segregation, particularly among sales, marketing, purchasing, and operations can doom a company’s ability to meet the challenges of change.

For example, it is not uncommon for a distribution center manager to first hear of a new product promotion when 100,000 golf putters arrive on the receiving dock at 6:00 a.m. Prior to this, the largest-cube items the company carried were executive pen sets. “Nobody from sales or marketing mentioned anything about shipping a free putter with every Golfer Series pen set,” proclaims the DC manager.

A host of questions then arises. Is there an appropriate pick module for this new SKU? Can the existing conveyance system handle this new product? Do we have shipping cartons large enough for the putter? Will it ship in the same outer carton as the pen set or separately? These questions should all have been considered as part of the marketing/promotion strategy, since they will affect the customer experience significantly.

Divining rods

If your company finds it difficult to communicate internal change, it will be nearly impossible to disseminate information about customer- and market-driven change on the horizon. These kinds of disconnects between the front end and operations are a root cause of poorly designed fulfillment systems that are destined for failure. It is impossible to mine profits from ore carts filled with fool’s gold.

Designing a customer-responsive fulfillment operation requires data collection and analysis, concept development, design detailing, validation, and implementation planning. Data collection and analysis, the first step, is the foundation upon which the entire plan will be based. Although it is a time-consuming, if not frustrating, task, boiling down millions of historical transactions to produce movement and inventory summary information should yield accurate results.

History is easy to document. The future, however, requires a nasty little thing called a forecast, because most operations are designed to provide at least five years of service. The odds of a long-term business forecast being on the money are much lower than the odds of the local weatherman successfully predicting the likelihood of good golf weather for the upcoming weekend. The reason that weather and business forecasts are unreliable is directly related to the number of associated variables and the exponential growth of possible outcomes when one variable has a multitude of effects on the others. It’s like the popular bumper sticker says: “Stuff Happens” (well, something like that).

Since the very accurate historical data will be compounded with some very questionable forecast information, the results are contaminated design year criteria. How flawed are they? Nobody knows for sure. Will your company acquire another organization? Will your market channels change? Will your customers place smaller orders more often? Will a new product category be added? Will your suppliers change their packaging? Will the number of SKUs increase? Will you be shipping more LTL or parcel?

Operations designers relying blindly on a forecast are like a prospector placing faith in his divining rod to guide him to the mother lode. Chances are that both will fail.

Sensitivity training

Understanding that the design criteria are fundamentally flawed is the first step toward pioneering a different approach. Furthermore, with each year of its life span, an operation will need to accommodate a compounded degree of forecast error. This simple concept is often overlooked or ignored, and can result in catastrophic system failures. Early warning signs of impending doom may manifest themselves as bottlenecks, over-utilized storage modules (such as selective pallet racks with higher than 90% utilization), insufficient or inappropriate pick facings (based on cube velocity), and so forth.

Does this mean that it is wise to overestimate each and every component of an operation to avoid possible repercussions years down the road? Certainly not. It would, however, be prudent to examine the portions of your operation that are particularly sensitive to change, evaluate the magnitude and likelihood of change, and test the sensitivity of the design to determine the potential for failure. The results must be weighed against the costs of preventing failure (insurance) versus the costs of the failure itself.

Wagon train essentials

It’s easy to get caught in the trap of mechanizing or automating fulfillment operations to extract as much gold as possible. It was not long after the word had spread to the east that gold flakes had been found in California that hydro-mining began to be employed. Hydro-miners spent vast amounts of money on land rights and equipment. They constructed large flumes to supply water pressure that funneled concentrated steams of water into the soft soil, eroding it and causing the heavier gold particles to gather as the slurry ran through sifters and troughs. If miners came up with less gold than they had forecast, they were often unable to survive the economic stress of moving to another site. When the forecast was accurate, production was amazing — far higher than with any manual method. By contrast, those who panned for gold benefited from the ease of their method. If a particular stream bank was unproductive, they simply moved on to another.

This inverse relationship between automation and flexibility still exists today. Automation is best applied to repetitive tasks where the variables do not often change. The down time in automation is in the system set-up. Each time a variable changes (new carton sizes, for example) the systems must be re-calibrated or re-engineered. Systems that rely heavily on automation are candidates for failure to the extent of their inability to meet the challenges of change. Often, it is prudent to apply pockets of automation to those tasks that warrant such equipment and support those cells with more traditional, and flexible, methodologies.

Before embarking upon the journey to the new frontier, be sure to define your goals. Understand that it is likely that more value-added services will be required in the future. Expect your fulfillment operation to include light assembly components. Assume that increased supply chain visibility and real-time information availability will be expected. Most important, test your operational design’s vulnerability to change and re-engineer those components that are unacceptably sensitive. Happy trails!

Lawrence Dean Shemesh is vice president/principal of Gross & Associates, a Woodbridge, NJ-based material handling firm. He can be reached by e-mail at LShemesh@GrossAssociates.com or by phone at (732) 636-2666, ext. 320.


A Cautionary Tale

Most of the dot-com prospectors mining for gold in Silicon Valley have come to grief, many in a matter of months following their IPOs. Expelled from the cavern of plenty, some of the outcasts have gone back to work at Old Economy companies; others have taken a year or two off to go backpacking. What went wrong? And can those who were spared the axe learn from the mistakes of the pioneers?

Doug Bley, a dot-com veteran and survivor, shares with Operations & Fulfillment his insights on why so many pure-plays self-destructed and how Internet companies can achieve long-term viability. As director of customer care solutions for now-defunct ClickShip Direct, Inc., an online subsidiary of Damark International (now Provell, Inc.), Bley was riding the wave of dot-com euphoria when his company folded and, in typical summary fashion, laid him off. He is now president of Leveraged Logistics Resources LLC in Minneapolis.

Why do you think the dot-coms collapsed? If there is such a thing as the crumbling of a “dot-com era,” the fault really lay with the lack of accountability on the part of investors and entrepreneurs. While not judging the viability of Amazon.com, I never bought stock in it and never would. My investing needs are far more conservative than those who invested in Amazon.com; I am willing to lower my return to ensure the safety of my return.

Why did start-ups like e-Toys thnk they could quickly achieve the kind of profitability that would normally take several years? E-Toys thought that they could get scale and volume to be profitable in one year. They believed that they could use the business concept of selling toys that Toys ‘R’ Us had developed and translate it to the e-world. I look at business-building as having a kind of nuclear half-life; it really is 50%. If it took Toys ‘R’ Us 15 years, it would take e-Toys seven years. If it takes the brick-and-mortar retailer 20 years to build a brand, it will take the online retailer ten years. And I think the expectation was that e-Toys could build it in one to two years by throwing a lot of money at it. People’s expectations were that they could do it faster than what was realistic.

Why did Pets.com funnel so much money into advertising? I think that they tried combining a number of different tasks at the same time. They wanted to develop a brand, they wanted to develop name recognition for the sell in the capital markets, and I think they wanted to develop a stock success story purely by advertising. I think they tried to accomplish too many competing functions within that same advertising dollar. Not only was it poorly spent, they spent it on the wrong thing.

What happened to all the money? What happened is that venture capitalists and early IPO investors funded “ideas” without clear paths to deliverables. The risk they took was giving millions of dollars to people who often didn’t have the maturity to manage it wisely or effectively. They wanted so badly to believe in the dream that they lost sight of the basics. They were amused that the founders drove away with matching Porsches. They were excited to see the grand palaces and espresso machines. They were having fun gossiping about the newest IPO to hit the street. They were proud of the new words they popularized, like brand, bandwidth, and click-through. The venture capitalists weren’t managing their investments appropriately, and the organizations managing the investments weren’t managing them appropriately either. No one was holding anyone accountable — there was no covenant for business. Because no one watched the money, it just ran away in rivers.

What does it take to be successful? It goes back to being a good steward of your money. When Damark was a catalog operation, it took us 15 years to become as good as we were, but we took on those 15 years by automating very little. We just refined the processes and we didn’t rely on automation to make us cost competitive — we relied on our people and our processes.

What should you focus on if you’re a dot-com looking to stay alive? I think if you’re going to focus on anything, it’s ensuring that you’ve got the barest product mix you need. Don’t put up tens of thousands of SKUs on a Web site; put up 300 that you know you’re really going to be able to sell, that you can manage demand for, and for which you can effect a good business model. I think that the SKUs need to be higher in price point, and I think that there needs to be a compelling reason that a consumer would click on your Web site rather than go to a retail store. If you look at the good catalogers who have made money in the past, and still do today, you see that they don’t have a zillion SKUs. They focus on tried and true principles and products that people really accept buying through the mail.

How did ClickShip Direct get started? In the catalog days of Damark International, we understood catalog marketing and could transfer that knowledge to our Web efforts. And we realized that the concept worked, but our products were wrong. That realization also brought forward the fact that our days as a catalog marketer were over. The metrics we used for direct marketing covered the customer acquisition methods for direct mail and the Internet. So, we left the direct marketing arena and launched ClickShip Direct, Inc. We had 15 years of experience in fulfilling orders, answering calls, and up- and cross-selling. In January 2000, we made the announcements and started building our business in earnest. We had clients on board and a growing pipeline of prospects. We created a sales and marketing team, got our trade shows in line, and started delivering great service to our clients and their customers. As a subsidiary of Damark, we were expecting to be spun off as a separate, publicly traded company.

What happened? The Nasdaq crashed and the emperor realized he wasn’t wearing any clothes. All the capital and financial markets dried up overnight on us with no hints as to when they would reopen. We had the infrastructure in place for a business ten times the size we were. The clients we had recognized us publicly for the service we provided, but we made the same mistakes the venture capital and investing markets made — we thought it would never end. We had over 700,000 square feet of automated fulfillment capacity, over 600 seats in multiple call centers, best-in-class technology, world-class management talent, and a dwindling amount of cash left to survive with. We didn’t.

In December 2000, the Damark board of directors elected to use the cash we were going to use to spin out as funding for our sister division, Provell. We were given 30 days either to sell ourselves or merge with another company. Neither happened, and on Jan. 30, 2001, we were given warning notices that our positions would be eliminated on March 31. On February 26, we were handed notices at the door saying our positions had been eliminated effective the previous day. As what seems to be the norm these days, we were given no severance, outplacement, or consideration.

What was the hardest thing to accept in this is that only one of our clients was a pure e-commerce player. The rest were driven by catalog, direct response, or storefront retailing. But, by virtue of our name, we were lumped in with a group of companies that would never receive a second look at funding.

What is left are the lawsuits, lost dreams, and a sense of having an opportunity lost because of the actions of the venture capital and investing markets over the last three years.