Talk to Gus Pagonis, the Sears logistics chief, about the biggest issue in supply chain management, and you might well expect the retired general to tout some new laser-tracking system or radio-tagging device. But the man Norman Schwarzkopf called an Einstein of logistics isn’t so sure about the value of all those zippy new warehousing systems and optimization engines. What’s his secret weapon? People. Pagonis, like the three other logistics experts interviewed for this article, says it’s the management part of supply chain management that’s still the most crucial element of the supply chain — and possibly the hardest to get right.

We are totally inundated with information today and we are totally mesmerized with what people can do with software. What we forget is that it still takes human beings to work the final process.

There’s a tendency to think that an IT solution will be the best solution when maybe an IT solution should be an additive, and the main solution should, for instance, be training people to load the truck right in the first place. Even with the most sophisticated technology, it still takes a human being to take the boxes that are all different sizes, and load them on the truck properly so you don’t damage goods, so you don’t have heavy on light.

In the same way, a lot of people say the best strategies have to be really sophisticated and understood at that level. But who writes your strategy? Some guy with an MBA. Who implements your strategy? Some guy driving a truck or a forklift. It’s like night and day. There’s nothing wrong with that guy driving a truck or a forklift, but his objectives in life are a hell of a lot different than somebody making $150,000-$200,000 a year.

So the first thing you have to do is come up with a simple plan. Second, you’ve got to spend time training your subordinates to execute that plan. Training is what I consider the most important factor of anything I’ve done, both in the military and in Sears. I spend at least 35% of my time a week in training — the more you can train your subordinates and the better they can execute a plan, the better off you’re going to be.

It’s important to keep things clear and simple with outsourcing relationships as well. You really need to have your workers write the contracts, then have the attorneys look at it to make sure it’s all legal, so that people can read and understand the contract without having to get an attorney to interpret it. I make the lowest-ranking people write the contract in the words they need to be able to function with that third party — for example, if you have a third party running a distribution center and you have certain requirements, those requirements have to be understood and laid out. Then I let the lawyers look at it to make sure it’s legal, but still a readable contract.
William “Gus” Pagonis, executive vice president, logistics, Sears

Successful companies typically find something that they determine is going to be important to the way they do business, and they follow through with that. There’s got to be a mantra, there’s got to be something that companies are going to identify with if they’re going to try to be successful. I don’t see much of that today. I see many well-established and mature companies that don’t have that something that’s going to distinguish them.

This lack of a mantra translates into an overall lack of attention to detail and fundamentals. In the supply chain, for instance, many companies out there have a dearth of experience in key roles — important jobs are being held by inexperienced people who are looking for the next step. So you have that, coupled with the fact that sometimes they’ve decided, for instance, that they’re going to save money by not staying current with the maintenance contract that a software company’s offering. A few years go by and the software’s being supervised by another generation of inexperienced people who are also moving around, and the company doesn’t have the most recent releases. Over five to seven years, you can easily have a degradation of the company’s understanding of the technology that it’s using and complete ignorance about the latest advances.

I’m afraid this kind of sloppiness is pretty common. You still have some manufacturing organizations that are being compensated on the lowest unit cost for distribution, even though that target may have nothing to do with whether they’re meeting the overall goals and objectives of the company. I’m talking about established companies.

Even when the supply chain is being more solidly managed, it’s only as good as the marketing plan that’s given the marching orders — in other words, the marketing organization is at least as influential if not more so in a successful supply chain than people who manage the supply chain. This means that the only way to really be successful in the supply chain is to be able to collaborate with marketing and with every part of the firm, and with the firms’ suppliers and retailers as well.

Collaboration is a word that’s being bandied around substantially today, but unless that word becomes the very philosophy of the company, then it’s nothing more than a word. Unfortunately what often happens to companies that aren’t able to collaborate is a bit like that old game of telephone. When you go upstream to the suppliers of raw materials, only 5% of the information both partners require is communicated electronically. Five percent! So if we start looking at the way value chains are linked, going from the suppliers of raw materials and packaging supplies right down to retail, there are many potential gaps in communication. And all those gaps translate into lost sales, extra inventory, and redundant infrastructures.
Joe Andraski, senior VP, retail development, OMI International

Our primary role here is replenishing our 28 stores throughout the country, as well as our catalog store. One of our biggest challenges is trying to balance our freight costs versus what we collect in revenue from our customers, our goal being to break even. But that’s challenging if you’re shipping as much oversize product as we do. Since we are selling storage and organization, our product tends to be very bulky containers, clothes or shelving systems, laundry hampers, that kind of thing. It’s very lightweight product, very bulky, high-cubed, and relatively low-cost.

In the past year, we have been able to reduce cartons per order from 1.6 to 1.3. We did that in part by reducing the number of cartons we use from 52 to 30, as well as by analyzing slotting in our retail stores and typical orders.

Technology plays an important role at The Container Store, but it’s more on the retail side (we offer electronic storage planning and order customization) than in distribution. In distribution, communication is probably a more important factor. There is quite a bit of communication throughout The Container Store. All the daily sales information is shared with every employee throughout our company. And we have a lot of training programs — within the distribution and fulfillment operation as well as store operations — in which people exchange roles between the two operations so that they can better understand what we do for them and what we need to do to support their core business, which is serving the customer in their stores.

We feel that communication is leadership. Throughout the distribution center we’ve got huddles in each department before each shift begins. That’s an important part of making employees feel informed, along with our metrics program that we’ve put in place so that we understand our business.
Bill Baron, logistics director, The Container Store

My hottest burning issue, in the short term, is just keeping suppliers alive. Over the past year and a half we’ve consolidated down over a couple hundred suppliers just to keep volume in our best suppliers, but what nails me all the time is that the smaller companies that do the very intrinsic stuff for us get into trouble financially and sometimes we can’t find out quick enough. Then we’re scrambling, negotiating with the bank to get our tools out.

The challenge is teaching our supply base not to be afraid to approach us before they’re in trouble. What they’re afraid of is if they approach us and say, “Hey, gee, Drew, we’re kind of getting behind in our cash flow,” and I say, “Oh, OK,” and a week later I come in, take my tools, and go to a more stable supplier.

I’ve seen reverse auctions that have resulted in lower margins for suppliers that leads them to economic failure. I’m not a big fan of reverse auctions. I break away from some of my contemporaries who are driving their prices down through reverse auctions. In a way you can win in the short term with a reverse auction, but at the same time what you may be losing in the long term is the sanctity of the relationship and the survival of good suppliers. This kind of value-stream optimization is what we’re trying to do at Herman Miller. The idea is that you want to create a seamless integration between the two companies. But it’s hard to create enough trust between parties to make this work. Think about it: The sales person at the supplier has probably been there eight to ten years and has probably spent his or her entire life trying to determine how to extract the most dollars for the least amount of product. Now take a look at the folks on my side, they’ve spent their lives trying to obtain the most product with the least dollars. These relationships do not harbor trust really well, and we need to find ways to break this paradigm.

One of the larger roadblocks is that many suppliers don’t understand their cost structure. We’ve gone in sometimes and discovered that a supplier wasn’t really making money on something they were supplying to us. And not just small suppliers — a lot of the bigger ones lump everything into what I call peanut-butter-spread accounting methods. When you try to work with them to extract costs from the system, they don’t know what their true costs are. And ultimately, that’s not good for either of us.

At the end of the day, the hardest thing to do is to have a win-win relationship. Everyone talks about it. But it is extremely difficult to truly do it right. We say win-win, but it’s really “I win, but hopefully you don’t lose” or “I win just a little more than you.”
Drew Schramm, vice president, supply chain management, Herman Miller

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