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New Supply-chain Strategy Has Top Furniture Maker Sitting Pretty

The credo for this high-end office furniture designer and manufacturer is "good design is good business." That philosophy applies equally well to its supply-chain systems and logistics outsourcing strategy.

Over its 66-year history, Knoll has built a reputation as the world's leading designer and manufacturer of high-end office furniture and workplace furnishing. In fact, more than 30 Knoll products are included in the permanent design collection of the Museum of Modern Art in New York City. Now Knoll is building a global supply chain that equals the quality of its products.

The company, which began in the 1930s as a small, self-contained manufacturing operation in rural Pennsylvania led by "Bauhaus" designers that had fled from Nazi Germany, never dreamed of the supply-chain challenges that Knoll must deal with today. Knoll now ships to customers all over the world through a network of 400 dealerships and showrooms in North America, Europe, Asia and Latin America. It still has its headquarters in East Greenville, Pa., but it now has four company-owned, tightly integrated manufacturing facilities in North America, two plants in Italy, 15 contract manufacturers, and hundreds of suppliers in the U.S. and around the world.

Knoll experienced a major growth period when it was owned by Westinghouse, which increased the company's size through three other acquisitions of office furniture manufacturers. While these acquisitions grew the sales and manufacturing capabilities of Knoll, they created supply-chain problems that Westinghouse was never able to solve. The four facilities - in East Greenville, Pa.; Grand Rapids and Muskegon, Mich.; and Toronto, Ont. - each operated as separate entities. Each had legacy computer systems that lacked interoperability. Each plant planned operations and sourced materials from suppliers separately. Each plant made different product lines, so orders containing multiple products were sent as multiple shipments arriving at different times. Customers often received six or seven shipments to fill the entire order.

"This is not how our dealers want product to arrive at the end customer's location," says Rich Cirulli, who was brought into Knoll in 1996 as director of logistics to help fix the supply chain. "For customers, our process was like ordering a lawnmower and separately receiving the motor, reels, blade and wheels. It was not a customer-centric way to operate."

Cirulli was part of a new management team that arrived at Knoll in 1996 shortly after Westinghouse sold it to a private investment group. Sales, product development and other essential benchmarks were in good shape, but supply-chain efficiency, and thus, customer service, were clearly lacking.

"We had a number of strategic initiatives set up in stages to deal with every issue, but our highest priority was to improve customer service," says Cirulli.

The first major step in fixing the customer service problem, was to implement an company-wide J.D. Edwards enterprise resource planning system that included a variety of supply-chain capabilities. According to Cirulli, the implementation took nearly all of 1997 and 1998.

"We wanted a gradual roll out, not a big-bang approach," he says.
The lengthy implementation successfully dealt with the complexity of Knoll's build-to-order business. Each product in an order can be configured separately based on many different components and finishes. For example, a dealer working with a customer can configure a conference table online literally from the ground up selecting the exact legs, bases, tops, edging and finishes. The customer's design created by the online configurator essentially creates a bill of material and production plans in the JDE system for the custom product being ordered. Knoll has also added a warehouse management capability to the JDE system to handle the individual components from receipt at the plant or warehouse through the production process at each location.

Customer Service Crusade
With the systems issues under control, Cirulli says that the company went on a service crusade to solve the problem with multiple deliveries for each order. Customers clearly wanted one delivery of all items in an order, and they wanted that order on time, every time.

"We were not sure how to do it, what the costs would be and what ultimate benefits would result, but we knew we had to deal with this challenge before we addressed any other supply-chain issues," says Cirulli. He brought in a number of leading third-party logistics providers over six months to gain their insights.

"To be frank, I was turned off by most of them," says Cirulli. "These 3PLs had a solution to offer before they even tried to understand the scope and complexity of our business need."
Penske Logistics was the last 3PL that Cirulli brought in, and he says that the dialogue was different from the start.

"They were listeners as opposed to talkers," he says, adding that Penske wanted to understand Knoll's business in great detail before the 3PL could say if it had a solution. "That approach was a positive for us, because we know our business is far more complex than many 3PLs assume."

Penske undertook a 10-month engineering study to analyze Knoll's business processes and customer needs to include all costs and benefits. Central to the study was the feasibility of a "mixing center" concept that Cirulli had proposed. The idea was to somehow consolidate orders from the various production points at a mixing center for final shipment to the customer. A team consisting of both Knoll and Penske personnel gathered and analyzed thousands of records covering product volume, transportation rates, delivery points and freight combinations. Penske then designed a solution that greatly expanded on Cirulli's mixing center concept. The Penske plan proposed three facilities that would perform as mixing centers to consolidate orders. One was to be a new facility in Holland, Mich., near two plants. One was to be near the East Greenville plant and the third was to be in Southern California.

"We looked at the customer service benefits, as well as the ROI, and we accepted the Penske plan in 2000 for a 2001 launch," says Cirulli.

In the midst of the implementation, however, the economy faltered. The office furniture industry took an especially hard down turn. Industry-wide sales went from $15bn to about $8bn. Despite the economy, Cirulli says that the company moved forward with the mixing center implementation, but with two changes. Rather than have Knoll spend an estimated $1m leasing a new mixing center in Pennsylvania, Penske converted an under-utilized, three-building warehouse facility in East Greenville to one of the proposed mixing centers. Knoll also deferred the California facility and decided to serve the West from the proposed Holland mixing center, which remained as an additional facility that Penske leased on Knoll's behalf.

Beginning in August 2001, Penske began converting three Knoll buildings in East Greenville into the eastern mixing center (MCE). The Midwest mixing center in Holland (MCM), previously operated as a cross-docking facility, required considerable changes to the layout and material handling systems. During the aggressive 60-day transition schedule, Penske operators had shipped approximately 10,000 units to customers, enabling Knoll to maintain productivity levels and minimize the impact of the transition.

The mixing centers are uniquely designed to consolidate made-to-order items produced by the company's distributed manufacturing system and fulfill orders to meet highly demanding customer delivery requirements.

"We needed a way to efficiently consolidate the product in the mixing center as it is coming to us and not get bogged down in the excess handling and mass storage that traditional distribution centers entail," says Cirulli.

Detailed Load Plan
Penske delivered the consolidation efficiency by putting away items received at the mixing centers according to the load plan of the truckload that would ultimately make the customer delivery. While the items are being built in the factories, Penske planners produce a load plan 10 days before the ship date. The plan is uploaded into Penske's logistics software to determine how products should be racked and sequenced for expedited loading. This "footprint" is then set up to mirror the trailer load.

Items that arrive in the mixing center have barcodes that identify them not just by order, but also by load plan. Scanning the items at receiving tells the mixing center personnel where the load is going and what stop it is on the route. Based on this load information, items are moved to the footprint, which is a set of racks in the mixing center 25 feet high and 20 feet wide that is the equivalent of one truckload. As each item in order is received, it is pre-staged in the rack footprint according to how it will be loaded and unloaded on the delivery truck.

"This process may add a touch more labor on the receiving end to get it organized," says T.K. Horn, the manager of Penske's East Greenville mixing center. "This time is more than made up when the truck has to be loaded. The truck is loaded very quickly with the items loaded in reverse of the order of the stops the truck will make."

When Knoll receives an order, its JDE system determines where each item will be produced and which mixing center will consolidate it. A route code is assigned to the order, and while each item is being produced, a barcode containing the code is attached. After items are produced, they are scanned and loaded on the shuttle trucks going to the appropriate mixing center. The JDE system constantly collects data in segments and knows when a truck is filled and ready to be dispatched to MCM or MCE.

"We have 100 percent visibility of what is on the trailer," says Cirulli. "We know who put it on, when it was scanned on the truck. When the shuttle truck arrives, we do an unload function to fill the order. This is a built-in verification process. The barcode is more than just a SKU. It identifies the specific piece as well as the order and mixing center."

"These mixing centers are Penske's answer to our unique business processes and increasingly demanding customer delivery requirements," says Cirulli. "We could not meet these requirement with a typical distribution center or cross docking operation."

Before Knoll made the decision to implement the mixing center strategy - when the economy was robust - more than 70 percent of its business consisted of large projects involving multiple truckloads going to a single corporate headquarters or office park. From a logistics standpoint, Cirulli says, such projects are relatively easy to manage because everything is going to the same place.

Since the mixing centers have opened, Knoll's business profile has reversed, and 70 percent of projects are small orders that usually do not make a full truckload.

"If we hadn't made the move to the mixing centers, we would have been in serious trouble from a distribution standpoint," says Cirulli.

By the end of 2002, all products from Knoll's manufacturing plants were being routed to a specified mixing center. As a result, Knoll has reduced its overall distribution costs, including a 10 percent reduction in transportation and warehousing costs.

Penske's unique "footprint" method has also enabled Knoll to improve order accuracy and expedite outbound shipping. Because each product received during an inbound shipment is planned for in the "footprint," Penske can easily identify missing items and quickly load trailers. By streamlining its product flow, Knoll has realized a 45 percent increase in its customer satisfaction rating for shipping and transportation.

Problem Saving
In addition to reduced costs and increased customer satisfaction, Penske has provided Knoll with several more indirect benefits. Centralizing shipments has increased order visibility, providing Knoll with information that was not captured or unavailable in the past. Through Penske's open order report system, Knoll can measure the impact of production delays on shipping operations and customer service while tracking open order issues. This information is used to identify and correct problems during the order-to-fulfillment process, as well as keep customers informed on order status. By allowing Penske to manage open order issues, Knoll's sales force spends less time resolving problems and more time selling.

The mixing centers have been a major benefit to its network of dealers, who no longer need to receive partial multiple shipments at their own warehouses until an order is complete and can be moved to the end customer. Regardless of the size of the order, Knoll ships directly to the customer site, so the dealer does no physical transportation of the order.

"Our dealers are very happy not to incur these warehousing and handling costs any longer," says Cirulli.

As the mixing centers matured and stabilized, Cirulli shifted his focus to other logistics challenges, and he again turned to Penske. The 3PL began operating all of Knoll's yard management of hundreds of trailers and containers at the mixing centers and the plant locations. Also, it became clear to Penske that Knoll's private fleet of 15 tractors and trailers was significantly underutilized, so based on another Penske study, the 3PL reduced the fleet to four or five units and took over its operation. Penske uses the fleet for both outbound transportation to customers and inbound on local domestic inbound freight-shipments within 150 miles. The outbound and inbound moves on the dedicated fleet are now nearly balanced.

In terms of cost savings, the biggest challenge that Cirulli is now tackling is inbound material flow, both from domestic suppliers and the rapidly growing sourcing from offshore suppliers.

"We made a decision that to stay competitive we needed more offshore sourcing, especially from China," says Cirulli.

However, offshore sourcing introduced more complex transit cycle time planning, the need for real time supply-chain visibility and tracing, more logistics provider management and other challenges. Because the majority of Knoll's inbound consists of less than container load quantities, Cirulli decided that he definitely needed a logistics provider to handle the complexity of consolidations, along with the other international transportation tasks.

Cirulli asked Penske where they were in their China operations. Frank Hazeltine, Penske's vice president of freight management in its transportation management division, could only show Cirulli a business plan because the 3PL was just about to expand its international operations to China.

"It was just a plan then, but because of the excellent job Penske did on the outbound side, we were willing to take a leap of faith," says Cirulli. "We turned our whole international inbound operation over to them."

Hazeltine explains that Penske acts as Knoll's fourth-party logistics provider for all of its international inbound traffic

"We are focusing on China for now, but they also have a lot of international requirements, including New Zealand, Italy, Germany, the U.K., the Czech Republic and Canada," says Hazeltine. "The process is the same wherever they have a requirement."

Coordinates Inbound
As a 4PL, Penske coordinates the inbound transportation, but does not physically perform the functions. In the origin country, Penske selects and manages the trucking company, the port, the export customs broker and the forwarder. When the shipment arrives in the U.S., Penske manages the customs broker and the inland transportation right to Knoll's plants.

"The forwarder has the relationship with ocean and air carriers in the foreign countries, so they make these choices," says Hazeltine, "but we manage the information."

To make the selection of the foreign freight forwarders that it uses, Penske has developed a lane-based matrix for each shipment. The matrix is essentially a tariff within Penske's i2 transportation management system. It includes the rates and services for each forwarder by lane. For each shipment, the system recommends the forwarder, and Penske receives a notification from the foreign supplier via the internet, e-mail or even phone call. The notification tells Penske what items are to be shipped, along with their characteristics, and when the shipment will be ready for pick. Penske's TMS selects the appropriate service providers, including the forwarder. As soon as the forwarder has the shipment in its possession and has defined the carrier and mode, the forwarder communicates the information to Penske. That information is immediately available to Knoll through the Penske online system. The information is updated at key points such as pickup, export clearance, vessel embarkation, port delivery, etc.

Since most shipments are LCL, Penske marries them up with other customers' shipments, so Knoll receives full container load pricing. Because consolidated containers are now given extra security inspections that can create delays, Penske will recommend airfreight for shipments that have a critical time component.

Within the last six months, Knoll has begun to turn over its domestic inbound transportation to Penske. While Cirulli says that the inbound challenges vary from plant to plant, he points out that a challenge across the plants is the rapid increase in LTL shipments that can be costly and can clog up the receiving areas at the plants. The increase in LTL has resulted from Knoll's improvements in its just-in-time manufacturing processes that have been mandated by compressed order lead times.

"We no longer need to buy truckloads of material and store it in plant warehouses," says Cirulli. "We expect our vendors to meet our more demanding supply-chain requirements, but we have to manage the transportation better. That is why we are bringing Penske into the operation."

Penske is managing this inbound strategy using its huge portfolio of carriers under contract to pick up inbound orders in pool vans and shuttle trucks. The dedicated fleet that Penske operates is also part of this operation for pickups within 150 miles of the plants. As a major 3PL in the transportation management sector, Penske has hundreds of carriers under contract, so they have much more pricing leverage, flexibility and opportunities to coordinate the inbound flows from scores of suppliers around the country. "We need the materials just-in-time to meet our production schedules, but we also need to reduce our inbound cost structure," says Cirulli. "The expectation is that Penske will do both."

Knoll and Penske are early into this program. The goal is to eventually pass purchase order information electronically to Penske, which will have a profile of every supplier. The PO will list the number of cartons, pieces, weight, date required, exact point of use on the production line, etc.

"We want Penske to manage the supplier from a transportation perspective, not us," says Cirulli.

Another goal of the inbound transportation plan is to balance the inbound and outbound freight flows, so trucks calling at Knoll are used to capacity, and therefore Knoll receives the lowest possible rates.

"We have proven that we can do this with the dedicated fleet on local moves," says Horn. "We have a way to go before we achieve this balance with the longer haul traffic with the for-hire carriers, but we have reached the 20 to 30 percent mark already."

The next piece of Knoll's logistics that Penske is getting involved in is its vendor-managed inventory program. The two mixing centers are ideally situated near Knoll manufacturing plants to hold buffer inventories for selected suppliers. Since Penske manages the mixing centers, they are the logical parties to manage the process and help lower total supply-chain costs by sharing the overhead between inbound and outbound product flows.

Knoll pioneered the VMI program at the Holland facility with a key vendor. Now at the East Greenville mixing center, Penske is helping two vendors serving three product lines establish VMI programs.

"It is now a manual operation because the volume at this point is relatively small," says Horn, who adds that the cost and complexity of setting up a stand-alone WMS to handle the VMI program and tying it into Knoll's JDE system would be significant. "We want to grow the program until we really need new systems to handle the VMI."

Measuring Value
While Knoll has initiated a number of new logistics projects with Penske, it has also been very careful to make sure the company is receiving the benefits that were expected.
"If a program doesn't add measurable value to our customers, we don't want to do it," says Cirulli.

He has set up very strict measurements on performance of outbound shipments that go through the mixing centers. He calls it "correct, complete and on time." Correct means that if one order goes out with any defect - even just a missing fastener - that is a demerit for the whole order. Complete means that all orders planned to be shipped in the following week are actually shipped on time and including every item. Every Friday, the operational team decides which orders are planned to ship over the weekend. On Monday, there is a post mortem. If any order did not ship complete, someone has to explain what happened, why it happened and what is being done to prevent future occurrences. The last measurement requires measuring delivered on time, not just shipped on time. All outbound carriers send Knoll EDI messages indicating when a shipment is delivered.

"We had a 45 percent improvement in customer satisfaction as measured by a quarterly survey of dealers, " Cirulli says. "They rate the company on customer service, quality, delivery, etc. Last year, over a two-quarter period, we had a 45 percent increase. We are still far from satisfied. We have a customer-centric culture. We believe that service must continuously improve. The back end of the industry has historically been elusive in meeting customer expectations. We lead the industry, and we outpace the competition, we believe as we outpace the competition on the distribution performance, that will lead to competitive advantage that will bring in more business.

Knoll's plants are vertically integrated, so some make significant amounts of components and raw material for other plants, as well as finished goods. The same trailers that take finished goods from the plants to the mixing centers also are used to move the parts between plants as well. For example, a trailer carrying finished goods from the East Greenville plant to the Holland mixing center will also carry in-process materials. After the shuttle truck drops off the finished goods at the mixing center, it goes to the nearby Michigan plants to drop off materials, and vice versa.

"This is a paradigm shift for anyone in our industry," says Cirulli. "We told the customer that they do not have to tell us when you want us to ship. Tell us when you want it delivered. If we can provide a delivery date, that is a competitive advantage."

Cirulli says that this change forces Knoll to be more diligent in its scheduling process, so it can calculate exactly when the product needs to be produced. And as Knoll gets better at this scheduling, production will be leaner and the company will be able t to reduce work in process inventory.

"At the same time, the customer knows with reliability and dependability when he will receive the product," says Cirulli. "Ultimately, everything we do is to improve customer service."

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