These days, everyone’s looking to be in bondage — with a marvelous business partner, that is. And where better to look for the ties that bind than your logistics network? For companies squeezed by the economic downturn, running lean operations successfully comes down to integrating as many functions as possible and taking maximum advantage of the services that partnerships can offer.
Logistics executives have accomplished these tasks in different ways. For many, the Internet has represented incredible potential but also incredible challenges. Although Web commerce is still a small percentage of total sales for most brick-and-mortar merchants, and the dot-com debacle has smashed many a dream of setting up billion-dollar empires, the online channel remains a source of healthy growth. To maintain that growth, however, you may need new and improved logistics infrastructure — and that’s where a little collaboration comes in handy.
Booked solid
For books and music retailer Borders Group Inc., based in Ann Arbor, MI, the helping hand came from Amazon.com. Last August, Borders, which posted revenue of $3.3 billion in 2000, began using Amazon.com’s fulfillment center to handle Internet commerce. “About 99% of our sales are from U.S. and international retail locations, and 1% from the Web,” says Steve McAlexander, Borders Group’s vice president of logistics. “The Web is a growing channel for us, and we are trying to establish retail convergence with the Web for fulfillment. Integration is progressing and evolving. One issue that we are looking at is what options the customer has when reserving our merchandise.”
Since 1997, Borders has handled fulfillment for customer-direct sales from a 200,000-sq.-ft. warehouse, which it is now converting to support store functions, according to McAlexander.
Prior to its partnership with Amazon.com last year, Borders had a stand-alone facility for retail and Web orders. Unlike retail orders, Web orders are piece-pick, low unit count, RF frequency, and more automated logistically. For orders placed online, value-added services such as gift-wrap or greeting cards attached to the orders require more preparation. “Borders requires a higher level of quality for direct-to-customer orders, because there is only one chance to make an impression,” McAlexander says. “With retail orders there is a buffer zone.”
In the past two years, Borders has automated its sorting and labeling processes, enabling the operation to handle more volume and save manpower. McAlexander finds it “quite a challenge” to fulfill Web orders and integrate the process with store operations. “In striving to achieve our goals, we find that commitment to service times is demanding because there is a very finite time frame for order fulfillment,” he says. “Operations such as shift scheduling must be done around the customer commitment.”
Online orders cost three to four times as much as store transactions in terms of logistics, according to McAlexander, and keeping fulfillment efficient is problematic because of fluctuating workloads and peak averages, specialized shipping and packaging, shipping lanes geared for higher volumes, and bottlenecks. Since 35% of Borders’ Internet sales occur between Thanksgiving and Christmas, the uneven flow makes scheduling difficult.
The next logistics puzzle that Borders will need to tackle is its international business, still in its fledgling stages. If overseas market conditions are any indication, the company will have much to grapple with. “Integration is more complex for international orders because there are cultural, legal, and other issues involved,” says Tom Guschke, a principal at Keogh Consulting Inc., based in Palm Beach Gardens, FL. “Transportation is the most difficult logistics component to integrate internationally, due to the need for a different set of carriers as well as advanced shipment notices. Although EDI is well accepted domestically, for international shipments there is a whole new set of standards.”
Something to chew on
When you enter a line of business that you’ve never handled before, the logical thing to do is enlist expert help. That’s what Wrigley Inc., which sells chewing gum worldwide, did in October 2000 when it decided to break into the healthcare arena by producing chewing gums that deliver medicine. Understanding that the new product line would entail dealing with totally different buyers, purchasing departments, and operations, the Chicago-based merchant turned to UPS Logistics Group to handle a portion of its distribution operations.
According to Lynette McIntire, director of marketing at UPS Logistics Group in Atlanta, partnerships with third-party logistics providers (3PLs) can take many forms. For instance, companies with newer businesses may outsource their logistics to a single provider for multiple channels. Firms with a well-established channel infrastructure may be reluctant to invest in additional equipment for a new channel, and may look to a 3PL to help them ramp up their operations quickly.
McIntire recommends that merchants consider integrating different distribution channels with one logistics provider. This strategy often brings significant cost savings by freeing up capital from infrastructure investments to use for other initiatives. Forming an alliance with one provider also offers the benefit of scalability in the event of market shifts.
So happy together
Another company that recognizes the benefits of channel integration for logistics is Hickory Farms Inc., a merchandiser of packaged gourmet foods with headquarters in Maumee, OH. Hickory Farms publishes a print catalog, and peddles its wares over the Web as well as in retail stores. There are differences between the catalog and Web channels: “Web customers are more affluent and have higher expectations than do the call-in customers,” says Joe Iagulli, vice president of supply chain management. “The Web is the fastest-growing channel, and grew between 20% and 30% last year. Our Web business is more level than the catalog business, which is more seasonal.”
In the fulfillment department, however, the two businesses work in tandem. “There are no differences between Web and catalog orders as far as logistics techniques go,” Iagulli says. For all orders, Hickory Farms uses Minneapolis-based R. R. Donnelley Logistics, a third-party sorter that contracts with the U.S. Postal Service. Hickory Farms delivers orders to R. R. Donnelley Logistics, which then sorts and delivers them to the respective regional post offices. R. R. Donnelley Logistics also works with Commerce, CA-based PFI, which sorts at the Destination Delivery Unit (DDU) level and delivers to local post offices as opposed to regional ones, thereby saving on logistics costs.
The trick to maintaining integrated channels, according to logistics consultant Guschke, is real-time inventory information. “Order tracking is an area where pure-play Web customers have raised the bar of expectation. Catalogs did not have that as a focus in the past — then, they had the responsibility for timely delivery, but now must also develop methods to provide order status for customers.”
Mission: control
Sometimes it may be best to buck the outsourcing trend and stay home, as Timberland Co. discovered. The Stratham, NH-based designer, wholesaler, and retailer of footwear, apparel, and accessories, which reported nearly $1.1 billion in sales in 2000, reevaluated its logistics approach when it began selling online in the past year. “We considered using a 3PL, but decided to handle Web fulfillment in-house for a couple of reasons,” says Jack Keating, vice president of distribution. “First, we utilize our inventory better if it is located in one place, and may switch between wholesale, retail, and Web more easily. Second, our experience with catalog processing could clear the bar for Web fulfillment.”
Timberland uses PkMS software, from Manhattan Associates, as the warehouse management system for its Danville, KY, fulfillment center. When its Internet business began, Timberland reapportioned existing space in its warehouse by opening up the mezzanine area instead of physically expanding the facility. The Danville distribution center fulfills 99.9% of all online orders received by 3 p.m. the same day. Currently, Web sales account for 1% to 2% of Timberland’s total business. Order processing differs for Web and wholesale orders, as do order profiles and packing requirements. For online orders, waves come down to the floor on an hourly basis, and are moved to specialized carts and racks, as well as special packing stations. Orders may involve gift-wrapping, and travel in a dedicated line to the express carriers’ trucks. Wholesale orders are processed on a daily basis.
Have faith
Whether you opt for internal or external partnerships, strong corporate support for the alliance is vital. “In order to truly integrate our customers’ various channels, we must first have buy-in and willingness, particularly at the senior management level, to outsource their operations,” says UPS’s McIntire. “That’s one of the biggest challenges that we face, as it’s very difficult to make sweeping changes and produce a truly integrated, streamlined supply chain if you’re only managing bits and pieces of it.”
Guschke adds that to make integration work, the company must be prepared to spend time on it. To consolidate the logistics of multiple channels, marketers must gain a clear understanding of the differences among the channels they operate, and should find the appropriate people to handle integration. By merging channels effectively, you can realize savings of 7%-10% on logistics costs.
Some companies are also examining just-in-time versus just-in-case inventory maintenance, following supply chain disruptions that they experienced after the Sept. 11 tragedy. The initial bottleneck of deliveries that resulted has created a push toward stockpiling inventory, notes McIntire. “We’ve seen the tendency to move away from the lean, just-in-time manufacturing processes that we’ve been advocating in recent years,” she says.
Anthony Coia specializes in international transportation and logistics. He has worked in logistics operations for U.S. government agencies and contractors in Washington, DC, and writes on logistics processes, technology, and infrastructure. He can be reached at [email protected].