Few of us can remember the number of times we’ve resolved to lose weight, or the number of times we’ve gone off a diet. For companies, however, the current recession offers no choice. All excess fat must come off — now.
Through the years, the strongest U.S. companies have honed their recession management skills to a fine edge. These survivors understand that thrift is a prelude to longevity. Schooled by hard knocks, they have learned how to skimp their way through economic downturns, and even more important, how to keep sound cost-cutting measures in force when business is booming.
“The difficult economy has not affected our basic processes in any significant way,” says Jerel Williams, director of logistics planning for Payless Shoesource Inc., in Topeka, KS. “So far, the measures in effect before the recession are still working pretty well. We are in the process of reviewing all areas of opportunity anyway, and are looking especially hard at the pipeline from the factory to the store. Lately this area of our business has acquired greater urgency because of the deteriorating economy.”
Total fitness
When hard times come calling, every aspect of an operation must be placed under intense scrutiny, from warehouse and facility maintenance to the logistics of picking, packing, and shipping. No stone should be left unturned if rolling it over steals a dollar or two from the cost of operation. Some managers are doing just that, and their efforts are paying off.
“At the warehouse level, we are actively searching for more creative ways to eliminate redundancy and increase efficiency,” says Gregory A. Linder, director of supply chain for True Value in Chicago. “Specifically, we’re looking at reducing returns and pinpointing all areas of operation where we can dump waste and all non-value-added expenses.”
As an example, Linder points to True Value’s bin resizing program, now in effect in each of the company’s warehouses. In the past, he says, the bins were too small and had to be replenished much too often. Now that the bins contain the correct volume, replenishment is less frequent and full picking has increased; as a result, fill rates are up and backorders down. “While no single measure results in huge cost savings, every little bit helps,” says Linder.
True Value has also placed its cost-cutting crosshairs on receiving, an area traditionally fraught with duplication and inefficiency. The company was far too tolerant of backorders, Linder says. The resulting bottlenecks slowed progress in receiving. Now suppliers are held to a set of performance standards falling under the auspices of a certified vendor program. Vendors receive a rating of A, B, or C depending on their level of compliance. The program makes it unnecessary to account for SKUs originating from certified vendors. Instead, the goods pretty much go from the truck to the bin, substantially reducing the company’s labor and safety stock investment.
“We prefer to work in tandem with our suppliers,” Linder says. “Through the Internet, our vendors are able to plan their own POs. We used to have EDI, but now vendors can actually see what items are in our warehouse, and we can see what’s in theirs. This is a step beyond vendor-managed inventory, and combined with the compliance program, it’s taken much of the nonsense out of replenishment. Nowadays, purchase order screw-ups, overstocks, and mis-shipments are all kept to a bare minimum.”
Go for the burn
Ironically, as the material handling industry cuts back, it is also spending. Many companies are investing in capital instead of retrenching, deploying expensive, high-tech solutions to make their operations more efficient. As American businesses become more sophisticated about managing recessions, they are learning that the merchant who anticipates the upturn by making intelligent capital investments now will be among those who benefit most when good times return. Furthermore, the marketplace for consumer products has become so competitive that no matter what the economic conditions are, cutting back on automation is difficult.
“We are seeing increasing deployment of highly sophisticated technology in material handling,” says Patrick Eidemiller, vice president of consulting and engineering services at SDI Industries, a Los Angeles-based designer and builder of distribution centers. “One of our clients is Citizen Watches. Right now the company operates a completely manual environment, but the new, fully automated facility we are building for them will reduce staffing by about one-third and give the company the ability to take orders until two in the afternoon and get them out before four o’clock.”
In the past the primary focus of technology investment was tangible ROI, an exclusive emphasis on bang for the buck. Now the onus is on tangible and intangible returns. Tangible returns on investment are the six job descriptions you delete from your current operation. Intangible returns are the six you never had to create because the system has programmed your operation around them.
Ultimately, the purpose of automation boils down to a single prime directive, to limit labor costs by minimizing touches either from the information standpoint or physically by reducing the number of times the merchandise comes into contact with human hands. Inventory management is another area of cost control well served by automation. Advanced software and hardware systems make it possible for material handling operations to become much more aggressive and surgical about how they manage stock. Not only do they identify movers and shakers, they raise the red flag on product that doesn’t sell.
Transportation is also where fierce cost-cutting measures often come into play. Big players employ line hauls or zone-skipping strategies to keep the lid on expenses, or sequence orders to avoid shipping multiple packages. Technology factors in this equation as well. Many companies employ advanced traffic management systems to gain the visibility needed to manage shipping operations and trace trucking costs.
Sweat the small stuff
Minutiae matter at Distribution Fulfillment Services (DFS Inc.) in Columbus, OH. A subsidiary of Spiegel Inc., the company transacts all retail and direct distribution for Spiegel Catalog, Eddie Bauer, and Spiegel-Hermes General Services. According to vice president Brad Grimsley, DFS focuses on rolling back overhead, in good times or bad. The company has recently modified merchandise handling in its main facility. For example, while most SKUs are packaged as flats, some come on hangers. The hangers impede handling, so whenever possible they are removed and the products repacked in flat packages. This seemingly insignificant transition pays large dividends in efficiency and adds money to the bottom line.
“Our primary focus with regard to cost savings is in the area of labor efficiency,” says Grimsley. “Eddie Bauer and Spiegel keep us up to date on their marketing efforts and sales plans. This allows us to develop a staffing strategy that will allow for flexing up so that we can handle swings and volumes of 10% or more without having to pay overtime expenses.”
He adds that by maintaining a base staff, DFS avoids recruiting and other expenses associated with hiring new people. The company uses seasonal employees year-round.
DFS greases the wheels of labor productivity with a lucrative bonus system. All employees are expected to meet minimum engineered performance standards, and receive bonuses for exceeding those standards. The measures are determined by numerical equations based on time studies. Warehouse workers, for example, are graded based on the number of items they handle versus the number of hours they work. They can receive bonuses for every pay period, and according to Grimsley, many earn at least 30% more than their base pay every time they receive a check.
“Nothing is struck in stone,” he says. “If a person has an idea that proves to be more effective than the one in the rulebook, we let him run with it. When you pay people for using their heads, they work harder and make your operation run more smoothly. Both are absolutely necessary if your goal is to survive in a challenged economy.”
High energy
While brick-and-mortar trade is indisputably down in the dumps, e-tailing is enjoying a bit of a rally. This ironic turn of events is partly the result of industry maturation. Online retailers have pretty much figured out what sells on the Net and what doesn’t. In are CDs, electronics, smaller and more expensive toys, and certain types of apparel. Definitely out: pet food, groceries, and cheap cosmetics.
“The online guys are experiencing a boomlet at the moment,” says John Caltagirone, vice president of supply chain strategy for The Revere Group Inc., a retail consulting firm based in Deerfield, IL. “Some of their success is directly attributable to the events of Sept. 11. Since then many consumers are feeling uncomfortable about going to the mall. E-tailers are also getting better on making good with their promises. Until recently, many had been notoriously late with delivery.”
In the brick-and-mortar business, major players are moving slowly but steadily in the direction of multichannel selling, and in recent years have perfected many processes that eluded them early on. In the old days, traditional retailers operating online separated their Net-based establishments from their brick-and-mortar stores both physically and administratively. SKU numbers were not standardized between both venues, and products were available in the store that could not be purchased online. This made Web shopping a hassle for many customers. It was often impossible, for example, to return an online product in person because the store had no record of its SKU.
Huge advances in e-commerce software and hardware have changed all of that. These days most brick-and mortar and online stores are interoperable. Known in industry parlance as “clicks and bricks,” these retail entities configure their systems to share inventory and serve customers across all channels. Customer lists have merged along with inventory, which is a good thing because multichannel shoppers tend to buy eight times as much as those who use only one channel. All of this has helped buoy the embattled brick-and-mortar establishment, though wounded it remains.
“Industry outsourcers have followed a similar cycle,” observes Steven J. Poniatowksi, director of supply chain practice at PricewaterhouseCoopers. Poniatowski notes that in the early days of the dot-com frenzy, online companies that lacked infrastructure leaned heavily on outsourcers to warehouse and ship products. Meanwhile, traditional retailers used third-party facilities for a while but eventually bought or built their own. “So when the Reaper came for the dot-coms, the outsourcers suffered,” Poniatowski says. “I think the future looks bright for the survivors, though, and one of the best indicators of that may be the fact that Target is now using Amazon.com for its distribution. Retailers want to bring their online operations in house, but they are also beginning to realize how expensive that is. Competent outsourcers can only profit from this.”
D. Douglas Graham is a freelance writer based in Columbia, MO. His articles have been published in Warehousing Management, Textile Rental, and Country Business. He can be reached by e-mail at [email protected].