Executive Briefings

Logistics in Europe: Tear Up the Old Maps

With economic unification and the debut of the euro, the continent has a whole new look. Shippers are turning to third parties to cope with the changes.

Geographically, the European landscape today looks much the same as it did 10 years ago. But from a logistics standpoint, everything has changed.

The European Union has come together as a single market. The euro is poised to take hold as the common currency for a market of more than 320 million consumers. The Soviet Union and Eastern Europe have splintered into a collection of ethnic enclaves. And companies are frantically reengineering their supply chains to adjust.

The trend in Europe is toward fewer distribution points serving larger territories. Some divisions are geographically obvious, such as Kodak's establishment of a separate supply chain for the Scandinavian and Baltic countries. Others are based on the ability of a logistics provider to cross multiple borders and essentially make them disappear. In all cases, shippers are looking to serve the European market with the least number of warehouses and smallest possible inventories.

That's not always possible. For most companies, the notion of a single distribution point for all of Europe is but a dream. No logistics provider can cover the continent, let alone the world, with uniformly excellent service. Numerous infrastructure obstacles, in particular the fractured nature of Europe's railroads, still exist.

But partnerships are helping to fill in those gaps. The result, companies hope, will be a seamless supply chain throughout Europe. And for many, that dream already has become a reality.

Case Corporation Goes Against the Grain
Case Corp. is accustomed to breaking the rules of third-party logistics. In 1995, it chose three different vendors to manage its domestic and international supply chain - without naming any as lead logistics provider. So it should come as no surprise that Case, when it needed someone to coordinate trucking and materials flow in Europe, hired an American company with no prior experience in that area.

The anointed party was Green Bay, Wis.-based Schneider Logistics Inc., an offshoot of Schneider National Inc., the nation's largest truckload carrier. Schneider Logistics was already one of the triumvirate of companies chosen to oversee the U.S. supply chain of Case, a producer of agricultural and construction equipment with headquarters in Racine, Wis. Case had named Schneider to manage domestic trucking; GATX Logistics domestic warehousing, and Fritz Companies Inc. international freight forwarding.

"The earlier we can get visibility into the supply chain, the better we can manage the freight."
- Tom Wosepka of Schneider Logistics

That relationship has had its ups and downs since inception. But Schneider must have been doing something right. Having decided to revamp its trucking network in Europe, Case surveyed the field of local candidates and pronounced it wanting.

"We felt that nobody in Europe was offering the kind of tools and processes that Schneider has already demonstrated in North America," said Isabelle Dupeux, Case's manager of logistics for Europe. "Something needed to be built in Europe. Why not start with a company we knew?"

One might call it ironic that Case was dragging an American third-party logistics provider to the continent where the 3PL concept supposedly was born. But most European-based 3PLs operate as truck brokers with pricing by lane, said Tom Wosepka, director of European operations for Schneider. His company was prepared to act as the client's traffic department, managing freight with full visibility of costs.

Case pays all carrier invoices, which Schneider audits and codes by account before submission. That is different from Case's arrangement in the U.S., where it allows third parties to handle the treasury function. According to Wosepka, it made little sense for Schneider to invest in a payment system in multiple currencies when the euro is on the verge of acceptance throughout the European Union. Once the new currency takes hold, Dupeux said, Schneider may be given payment responsibility in Europe.

Schneider's current menu of services includes contract preparation, bidding, negotiation, carrier selection and load tendering. By granting Schneider the right to handle contracts from beginning to end, Case shuts off direct appeals by carriers for higher rates or volumes, Dupeux said.

Case receives regular status reports on all shipments ordered or executed. At month's end, it knows exactly what has been committed in transportation costs. Schneider also is expected to identify ways of improving the flow of product within Europe, either through the use of dedicated equipment or more direct routings.

Schneider's reach extends to all imported shipments, as well as inbound and outbound lots for Case manufacturing sites, and direct delivery to European dealers and distributors. It supports a distribution network that consists of six final assembly plants, three in the United Kingdom and one each in France, Austria, and Germany; three subassembly plants, and two spare parts depots for aftermarket sales.

The depots are the only place where significant amounts of inventory are held; a warehousing entity like GATX isn't needed in Europe because Case discourages product coming to rest before final delivery. Shipments from the plants range beyond the European Union, with the longest supply line extending into Uzbekistan.

Schneider is gearing up to play an even greater role in Case's European network. At the plant in Neustadt, Germany, it has begun handling parts inside the facility. It receives incoming shipments, removes finished goods from the assembly line, and loads outbound trucks. "The earlier we can get visibility into the supply chain, the better we can manage the freight," said Wosepka.

Dupeux is leery of the notion of a third party that can support Case's entire supply chain, which is currently undergoing another bout of reengineering. But she said Schneider has done a good job of providing integrated logistics services to Case in Europe. Any working arrangement, she said, must be built on "strong and trustful relationships."

Dupeux and Wosepka stress the importance of securing a commitment to the logistics partnership by top management. Otherwise, the project is likely to run into roadblocks created by employees who fear radical change in the organization. And long-time relationships with inefficient carriers may prove tough to dissolve. "Without question, someone is going to be threatened by the new partner," Wosepka said.

It is equally crucial that the client have some kind of centralized logistics function firmly in place. When decision-making is dispersed, companies find it harder to make rational decisions on the best use of equipment and the siting of distribution facilities. "The benefits really come in with the ability to take the whole, and manage it as a whole," he said.

Nike's New Approach For a New Division
For Menlo Logistics, it was a question of being in the right place at the right time. Nike Inc., the giant producer of footwear and apparel, had vowed to take a fresh approach to European logistics for its newly formed equipment division. And Menlo just happened to have a prior contract with the same entity in the United States.

Redwood City, Calif.-based Menlo had no logistics network of its own in Europe. But it wasn't without connections in the region. Emery Worldwide, a sister company under the CNF Transportation Inc. banner, was well established there. It proved instrumental, not only in helping Menlo to win the European contract, but in building the necessary infrastructure.

With new lines of business, perhaps, come new ways of thinking. The Nike equipment division, selling sports balls, visionware, watches and other types of sports gear, was formed in 1996. Its decision to outsource logistics was a sharp departure from Nike's usual insistence on hands-on control of that function.

Menlo wasn't a shoo-in for the business, not even with the Emery affiliation and a fully operational warehouse in Atlanta on behalf of the fledgling equipment division. Nike undertook an exhaustive review of potential candidates - 16 in all - whom it eventually winnowed down to four before selecting Menlo.

A logistics steering committee, consisting
of representatives of both Menlo and Nike, oversees the entire operation.

The final choice arose partly from Nike's sense of a good cultural fit, said Gerhard Supper, then director of operations for the equipment division. "We needed someone with a competitive edge who was driving forward," he said. "That culture is very strong in Nike."

The company also was impressed by Menlo's information systems, particularly its warehouse management package, which could easily be extended from the Atlanta facility into Europe. Nor did it hurt that Menlo had achieved a 99.9-percent inventory accuracy rate in Atlanta for the Nike equipment and visual merchandising groups.

Menlo participated in selection of the ideal site from which Nike could serve all of Europe, along with the Middle East and Africa - a total market of some 4,000 retail customers. The winner was the town of Eersel in the Netherlands, about 10 kilometers west of Eindhoven. Within that 14,000-square-meter facility, which is operated by Emery, Menlo's business on behalf of the Nike equipment division takes up about 6,000 square meters. The warehouse was built from the ground up and designed to Nike specifications by Menlo's own logistics engineering group.

In Eersel, Menlo provides coordination of inbound transportation, from port to receiving dock, including customs clearance. It performs a wide range of warehousing operations, such as receiving, storing, picking and packing. Value-added services include ticketing, labeling, barcoding and inflation of sports balls, a seemingly simple task that must account for factors such as humidity, pressure and final packaging.

Menlo supplies special documents needed to conform to the requirements of each country of destination. For outbound transportation, it negotiates with carriers, determines the best routings, and builds up the shipper's regular carrier base. It monitors the progress of shipments and reports back to Nike on carrier performance, measured against established benchmarks. As a result, Menlo is able to provide floor-ready merchandise within a two-hour delivery window to many Nike customers, even the smallest sporting goods shops, said James McAdam, Menlo's director of international operations.

The warehouse management system (WMS) at Eersel is a proprietary tool developed in conjunction with Germany's Haushaun Engineering. It is the same WMS that operates at Menlo facilities throughout North America, Latin America and Australia. It is fully integrated with Menlo's internal order management system, which fulfills orders and prioritizes shipments, and is tied into Nike's global sales and customer service departments. Together, the Menlo systems give Nike precise, instantaneous updates on inventory on hand and in transit.

Even in its infant stages, the outsourcing experiment has proved a success. "We get somebody whose core competency is providing logistics services," said Supper. "There's a constant leveraging and sharing of best practices among Menlo's other clients." And Nike isn't forced to carry physical assets on its books.

Supper cites trust as the most important factor in any supply-chain partnership. In the beginning, he said, Nike had a representative on site to instruct Menlo in the details of its business. That individual was supposed to remain for one to two years, but completed his task in six months. Now, the Nike Equipment operation at Eersel is staffed entirely by Menlo personnel.

Nike doesn't need to have staff in the warehouse in order to keep tabs on Menlo in Europe. Nor is it out of the loop on higher-level decision-making. A logistics steering committee, consisting of representatives of both Menlo and Nike, oversees the entire operation, said McAdam.

Now that it is firmly established on the continent, Menlo will continue to expand its European network in line with customer requirements, said Tim Feemster, currently serving as director of distribution services in Dallas. In particular, the company could see additional business arising from Nike's newfound affinity for outsourcing. Said Feemster: "We'll go with whatever Nike comes up with."

Kodak's Case of the Vanishing Warehouses
Creating one supply chain for all of Scandinavia isn't as easy as it looks. Granted, there is a strong cultural kinship among Denmark, Norway, Sweden and Finland. But as Eastman Kodak Co. discovered, the act of tying them together logistically is full of challenges.

For one thing, Kodak needed a brand new warehousing and supply-chain system to link the four countries. Previously, each was treated as a separate market with its own warehouse for local distribution. Because Kodak does no manufacturing in the Nordic region, instead bringing in product from Germany and elsewhere, it had no prior need for an export program there.

All that changed with the formation in 1993 of Kodak Nordic, a corporate entity designed to serve Scandinavia from a single distribution point. The strategy was meant to address the growing complexity of Kodak's product line, and the company's inability to afford customer-support specialists in each country.

In all, Kodak sells 4,500 products, ranging from film to copy machines, to 18,000 customers in the Nordic region. Henceforth, everything would be shipped and serviced from Stockholm, except for certain emergency items for hospitals, such as X-ray film. (Sales are still handled on a country-by-country basis.) Kodak's warehouse system would have to account for four different languages and regional currencies, as well as the U.S. dollar. And it had to permit the rapid distribution of product across borders.

At first, the company considered upgrading its old software, said Lars Almendal, information systems manager of Kodak Nordic. But that promised to be too great of an investment in a system that would still fall short of state-of-the-art technology.

Many newer off-the-shelf packages simply cost too much, said Almendal. At last, Kodak found what it deemed the ideal balance between cost and utility - the System ESS product of Sweden's Industri-Matematik International (IMI).

IMI altered its basic software to reflect Kodak's unique situation, rather than offering a generic version and forcing costly add-ons with every upgrade.

System ESS runs on two servers, one for applications and the other for its database. Its functions include planning, purchasing, order management, warehousing, invoicing and financials. Moreover, it provides total visibility of inventory from any point in the Nordic region.

IMI agreed to modify its software to account for the dozen or so legal entities that Kodak Nordic stores in its logistics database, said Ulf Casten Carlberg, the vendor's director of product strategy at North American headquarters in Marlton, N.J. The changes have allowed Kodak easily to move product all around the Baltic region, including hard-to-serve countries such as Estonia.

In the Kodak distribution model, speed is of the essence. The company promises delivery of product to customers in major cities within 24 hours of order placement. Given the distances involved in shipping across the region, not to mention the brutal winters, that promise isn't always easy to keep.

System ESS is based on a sell-source-ship model that keeps inventory low, even non-existent. In place of physical goods, Kodak gets information about the status of product in motion.

Enterprise resource planning (ERP) systems, by contrast, are designed to push previously manufactured product out the door. Carlberg calls System ESS the "zero-to-100" model: zero percent inventory with 100-percent visibility.

Customers have scarcely noticed that Kodak eliminated its warehouses in Finland and Norway, IMI claims. Orders and inventory are just as visible as they were before. Customer service remains at high levels, and to the extent that buyers have access to a wider range of Kodak products, it is even better. In the six years since consolidation of the Scandinavian warehouses, stock availability for customer orders has risen from 94.3 percent to 95.8 percent, even as inventory value has fallen by 33 percent, Almendal said.

Meanwhile, Kodak's overhead in the Nordic region has plunged. The company has reduced its physical-distribution workforce by 30 percent, and boosted productivity at the Stockholm facility by 16 percent. Slow-moving inventory is down 31 percent. The number of product models has fallen by 32 percent, because Kodak combined models from different countries. Together those improvements have allowed it to recoup the new system's $2.7m price tag.

IMI hastened the payback cycle by undertaking an in-depth study of the customer's implementation process, Carlberg said. A spreadsheet nearly 1,200 lines long helped Kodak to determine just how fast it would see a return on its investment. IMI also includes a vendor scorecard that measures supply-chain performance after implementation.

No system can support a growing company's needs forever. IMI has since installed a new version of System ESS at Kodak, and Almendal admits to problems with cost overruns. At the same time, he praises IMI for its willingness to alter the basic software to reflect Kodak's unique situation, rather than offering a generic version and forcing costly add-ons with every upgrade.

"The vendor must be willing to listen to your requirements and put as much as possible into the standard package," Almendal said.
Carlberg said IMI pays attention not only to the customers buying its software but to their vendors as well. "They don't compete by themselves," he said. "It's the entire supply chain that competes."

GE Med, Penske Keep It Within the Family
It may seem like a typical case of nepotism. But General Electric Medical Systems (GEMS) didn't choose Penske Logistics Europe to manage its global supply chain just because the two share a corporate parent.

With GE Capital Services a 79-percent limited partner in Penske Truck Leasing Co., parent of Penske Logistics Europe, the relationship is very much within the family. And Penkse had a bit of an edge over outsiders because it shares with GEMS a culture and commitment to quality that extends throughout the General Electric organization, said Dan Rabideau, manager of transportation logistics for GEMS in Europe.

Still, GEMS didn't cut Penske any slack when it came to stating service expectations. The third-party logistics provider was asked to tender its bid alongside established competition, said Paul Carvell, vice president of sales and marketing with Penske Logistics Europe. "They treated us as they would any outside provider," he said. "The business case has to stand up on its own."

GEMS is one of Europe's largest manufacturers of diagnostic and medical imaging equipment. It distributes throughout Western and Eastern Europe, the Middle East and Africa from a plant in Buc, France, about 20 miles from Paris. Buc also ships X-ray products worldwide. The facility covers 5,000 square meters and consists of seven assembly lines, according to Francois Lacombe, Penske's general manager at the site.

The GEMS plant isn't particularly large, nor does it turn out an unusually high number of SKUs - around 2,000, Lacombe said. The complexity of the supply chain lies in the huge number of differently configured orders. On-site inventory is virtually non-existent, everything is built to order, and "the sheer number of components that go into any one machine is quite fantastic," said Carvell.

In addition, the medical-imaging industry has recently come under increasing price pressure, while product life-cycles have been on the decline. All of those factors convinced GEMS that it needed to place its supply chain in the hands of a seasoned expert.

Penske got the job in May 1998. Today, its services on behalf of GEMS range across the supply chain. Penske synchronizes inbound flows of parts and raw materials to the plant in Buc. It provides suppliers with demand forecasts, and signals all order releases.

After manufacturing, it packages finished product, arranges for transport and ships to destination, mostly by air. The preferred freight forwarders for GEMS exports are Danzas Corp. for product traveling west, and Nippon Express going east. In all, said Carvell, Penske has 47 of its own employees on site in Buc, overseeing some 250 Tier 1 and Tier 2 suppliers as well as outbound carriers.

Any supply-chain relationship requires mutual understanding. "You can never communicate enough."
- Dan Rabideau of
General Electric Medical Systems

The five-year contract with GEMS is unusual in that Penske actually takes ownership of some inventory, then "sells" it to the assembly line. (Additional items are shipped direct from suppliers to the plant.) "There are not many logistics companies with the scale or financial support to be able to do that," said Carvell.

The strategy gives Penske total control over the flow of components into the plant. Benefits to the customer include the ability to keep unnecessary assets off the books, and reroute limited capital to more productive areas.
Depending on the location of parts, Penske has from minutes to a single day to respond to a call-off from the line. The system is tightly planned in order to minimize the possibility of obsolete inventory, a common problem in the volatile world of high-tech.

To sort out the complexities of a build-to-order environment, Penske and GEMS employ the advanced planning and scheduling software of i2 Technologies. Factory Planner, a module within the i2 set of applications known as Rhythm, gives the parties access to all relevant information, regardless of its source, and allows them to match orders to demand. Once again, they are able to minimize costly inventories, while avoiding production stalls caused by the unavailability of parts.

Penske supports GEMS and other clients in Europe with a centralized routing center in Maastricht, the Netherlands. The concept is a common one in the United States, but rare in Europe, said Carvell. It allows Penske to route truckload and less-than-truckload shipments anywhere in Europe, employing the most cost-effective lanes and carriers.

Another innovation, a Supply Chain Control Center, is located in France and operated jointly by Penske and GEMS. From there, the parties get full visibility of their European supply chain. They can apply sophisticated planning tools to boost shipment reliability, reduce late supplies, optimize inventory levels and cut manufacturing downtime.

Rabideau says the two sides in a partnership must carefully study each other's cultures and expectations before commencing actual operations. In that respect, the GE link probably gave Penske and GEMS a headstart. Yet any supply-chain relationship requires mutual understanding. "You can never communicate enough," he said.

Lucent Micro Searches For a Single Provider
Lucent Microelectronics isn't a believer in half measures. The company had 51 logistics partners servicing its worldwide supply chain. It was determined to get that number down to one.

With headquarters in Allentown, Pa., the microelectronics division of Lucent Technologies supplies integrated circuits and other components to some of the biggest names in the communications business - 3Com, Motorola, Ericsson, Nokia. It's an industry that is notoriously unforgiving of error. Any missed delivery- either too early or too late - can severely disrupt production levels.

Lucent's reengineering program was part of a larger effort to reduce cycle times within the company's Integrated Circuits Division. The company set out to address the apparent contradiction between customers' need for maximum flexibility and the delays inherent in a multi-stage manufacturing model. The solution lay in boosting service reliability.

The objective was clear enough: 98.5 percent of shipments delivered on time, within a window of no more than a day early and zero days late. To achieve that level of performance, Lucent realized, it would need to promise a maximum order-cycle time of 48 hours to anywhere in the world.

Lucent further realized that it couldn't hit that mark by itself. Outsourcing of the logistics function to a global partner was inevitable. And so, four years ago, it undertook an in-depth, 10-month search for a single provider.

Ten initial candidates were reduced to four, then to one: DHL Worldwide Express. Implementation of a new global logistics program began at the end of 1996, in a process that was to take another two years to complete.

DHL faced a significant challenge. Lucent's organization was global in name only, according to Gerald Engel, manager of logistics for Europe. In reality, it was highly fragmented, with the three regions - Europe, North America, and the Far East -handling logistics in its own way. With its business parceled out among 51 transportation vendors, Lucent wasn't reaping the economic benefits of its size and geographic scope.

Europe alone represented a huge amount of business for Lucent. Today the region accounts for up to 1,300 shipments a month, or 200,000 kilos of product. Within Europe, Lucent services more than 300 separate customers, mostly original equipment manufacturers.

The new relationship between Lucent and DHL began with what the partners termed a "global kickoff meeting," where senior managers spent a day simply trying to develop a set of shared service expectations. Having started out in separate rooms, the two sides finally came together, only to discover substantial areas of overlap, said Engel. Following the meeting, Lucent began integrating DHL into its supply chain.

DHL promises to resolve any logistical problem within two to four hours. "There is zero tolerance for shipping errors."
- Patty Hannigan of DHL

With the help of DHL, Lucent revamped the system to allow for door-to-door service, just-in-time fulfillment and direct delivery from the three manufacturing regions to end customers. Product handling was minimized all along the chain. Savings from the elimination of distribution hubs more than made up for the additional cost of direct shipments by express air, Engel said.

DHL speeded up the process in the European Union by adopting Frankfurt, Germany as its single point of entry for shipments into the region. (Products intended for Eastern Europe or other non-members of the EU still must be cleared in the destination country.) They now move through Frankfurt without relabeling or manifesting, shaving 24 hours off transit times, according to Patty Hannigan, DHL's high-technology industrial development manager for Europe and Africa. "The solution was effectively a new service," she said.

DHL manages even faster transit - from 18 to 24 hours - for prototype components flowing from Lucent's factory in Madrid, Spain to the U.S. The same level of priority is assigned when a customer's production line is down anywhere in the world for lack of parts. When a shipment becomes stalled in transit, DHL's tracking system immediately informs the customer so that remedial action can be taken.

Hannigan said DHL has personnel on call 24 hours a day, seven days a week, to fix snags in the supply chain. The company promises to resolve any logistical problem within two to four hours. "There is zero tolerance for shipping errors," she said.

The partners expect to draw even closer when Lucent ties DHL into its new ERP software from Oracle Corp. With access to Lucent's production and scheduling data, DHL will be able to forecast volumes and plan capacity accordingly, Engel said.

New services are in the planning stage as well. DHL will soon support a Lucent consignment program, under which product is kept close to the manufacturing plant until the moment of need, in order to reduce cycle times even further. Customers used to be content with a week's lead time on orders, Hannigan said. "Now they want immediate availability of product."

Managers from Lucent and DHL come together every three months on a regional basis, and every six months globally, to ensure their partnership is yielding the best possible results. Meetings at the board of directors' level occur quarterly as well.

Hannigan said team members are forever searching for ways to improve the Lucent Microelectronics supply chain. "What we implemented two years ago," she said, "is quickly becoming the old benchmark."

GATX, Schenker Extend Hands Across Atlantic
All that GATX Logistics and Schenker International need to cement their new trans-Atlantic service partnership is a major customer to take advantage of it.

Since announcing their innovative alliance last year, the pair of third-party logistics leaders have handled small amounts of business together. But they await a client that can test the effectiveness of what some experts believe is the future of logistics: collaboration between independent providers on behalf of a shared customer.

They may simply be ahead of the curve. Few seem to have heard the message delivered four years ago by Case Corp., the maker of agricultural equipment that brought together three initially reluctant providers - GATX, Schneider Logistics and Fritz Companies Inc. - to oversee its supply chain. Case's point was that no single 3PL, no matter how grandiose its claims, could manage everything on a global basis.

One way for a 3PL to bridge that gap is to broaden its service offering and geographical scope to meet the needs of global customers. But some providers are finding that path to be too costly and full of risk. Instead, they are considering alliances with unaffiliated vendors who possess complementary strengths.

While history contains plenty of examples of logistics providers crossing corporate lines - Yellow Freight and the Dutch forwarder Frans Maas come to mind - GATX and Schenker are among the first to present the idea as an alternative to the third-party "one-stop shop." The division of labor is a clear one: Jacksonville, Fla.-based GATX offers domestic transportation, warehousing and value-added logistics services - packaging, subassembly, inventory management - to a given customer in North America. Schenker, a division of Germany's Schenker-Rhenus Group, plays a similar role in Europe, in addition to performing freight forwarding for shipments crossing the ocean. Schenker also provides customs brokerage, cargo insurance, duty drawback and international project services. More than half of its sales are generated by business in Europe.

"We are not a freight forwarder and have no desire to be," said Brett Harper, vice president of sales with GATX. "And Schenker is one of the best ones out there. You've got to understand your core strengths."

Case Corp.'s point was that no single 3PL, no matter how grandiose its claims, could manage everything on a global basis.

An alliance customer would see only a single provider offering one point of contact, door-to-door rates and total visibility of product throughout the pipeline. It would deal directly with the party that generated the sales lead in the first place.
GATX and Schenker tout their fledgling arrangement as a means of widening their scope of supply-chain services, while guaranteeing that each region is served by the one that knows it better. The result is a "best-in-class" approach to logistics, as opposed to that of the fully integrated provider. It's the same debate that continues to rage within the worlds of supply-chain and enterprise-resource software. And it's equally unresolved in both arenas.

Joint marketing is a cornerstone of the GATX-Schenker strategy. When one of the vendors uncovers a suitable lead, it teams up with the other to make the sale. "We go in together to present a business case," said Harper.

For GATX, the deal with Schenker is just one of several possible solutions geared to the volume and complexity of its clients' business. For high-volume accounts with little variation in inventories, it prefers to develop its own network of facilities. In Mexico, for example, GATX maintains a 147,000-square-foot warehouse that is not shared with other 3PLs.

For customers with medium volumes, GATX tends to form joint ventures with local entities, such as Wackenhut in Chile. But when an account generates relatively low volumes and a high mix of inventory, the full-fledged alliance with a company like Schenker comes to the fore.

Central to any successful partnership is the linking of information systems, which has yet to be completed in the case of GATX and Schenker. The absence of a shared customer has slowed progress on that front, Harper said. He doesn't appear concerned about the lack of a solid customer base to support the alliance. It's not unusual for a 3PL to spend one or two years selling a major client, he says. Companies looking to outsource logistics might invite a dozen or more candidates to bid on the account, then go through a laborious process of narrowing down the field.

The two companies say they are jointly pursuing a number of promising leads. At the same time, they are talking about expanding their alliance to serve customers outside North America and Europe, with a wide variety of services. "It's the next logical step toward a true global partnership," said Bob Laird, vice president of logistics solutions with Schenker.

Getting the Global View From Geneva
RJR International is a believer in the "big bang" theory of organizational change. As part of a sweeping reengineering program, the Geneva-based international division of RJR Nabisco installed ERP and supply-chain management (SCM) software at the same time.

Either one of those packages can soak up a company's resources and keep its information-technology experts occupied for years. But RJR International was determined to achieve global visibility of customer demand, inventories and production.

Reengineering the RJR International supply chain was no small job. One of the world's largest makers of tobacco products, it had sales of $3.6bn last year and a profit of $550m. It employs a workforce of 17,000, makes 4,000 products at 22 manufacturing locations, and stores them in 90 warehouses, according to Thomas Bornemann, director of customer service.

RJR addressed its internal accounting and manufacturing requirements through an ERP system acquired from Denver, Co.-based J.D. Edwards & Co. On the SCM side, it needed a tool that could support forecast planning, inventory management and capacity utilization at four regional planning centers, newly created by the reengineering effort. They are Cologne, Germany for the European Union; Hong Kong for Asia; Winston-Salem, N. C. for the Americas (except the U.S.); and Geneva for the rest of the world, including Eastern Europe, Russia, the Middle East and Africa.

RJR's choice of SCM vendor was Manugistics Inc., whose product supports both supply- and demand-planning functions. In addition, Manugistics provides optimization and decision support derived from a single database and centralized server for the entire global network.

It is recommended that companies bring their software partners into reengineering programs early, and hire strong consultants to support them.

Manugistics allows RJR to exchange information on a real-time basis worldwide, Bornemann said. The company is better able to oversee a highly complex supply chain, in which raw materials and finished product flow freely between regions according to where they are needed the most. At the same time, RJR can minimize the stockpiling of obsolete or unneeded goods.

The system includes product information from 18 RJR forecasters located around the world, who report on the status of some 9,700 stockkeeping units. By keying in an SKU, planners can view the amount and location of inventory for that item throughout its supply chain.
The software took about five months to install, then showed quick results. Within a year, said Bornemann, RJR International's finished goods inventories were down by 45 percent, inventory turns had nearly doubled, forecasting accuracy was up by 15 percent, and raw-materials investment was down by 15 percent.

Manugistics has gained from the relationship as well, said Mary Lou Fox, senior vice president at headquarters in Rockville, Md. RJR International agreed to accept the software in the beta testing stage, speeding up the vendor's reengineering program and allowing it to fine-tune the product prior to general release.

The overhaul of RJR's supply chain is far from complete. Bornemann speaks of the dreaded "balloon effect," whereby inventories controlled at one point in the chain bubble up somewhere else. To avoid that problem, the company intends to obtain electronic point-of-sale data from retail customers. Only then can it get a handle on actual demand.

The ultimate in inventory control, such capability already exists at Wal-Mart and a handful of other big U.S. retailers, but is much more complicated to achieve on a global scale, said Bornemann. He's hoping to have a system in place at RJR International within two years.

Before that, he plans to tie transportation-management software into the Manugistics and J.D. Edwards systems. RJR's long-term goal, he said, is to involve every partner - raw materials suppliers, logistics providers, software vendors, end customers - in an extended supply chain that works as well as that of a single company.

Fox views partnerships as a crucial ingredient in any big software implementation. "A manufacturer picking a vendor for a large enterprise application is picking a partner for the next five to 10 years," she said.

Both sides must be open and honest about their capabilities and limitations, said Fox. Too often, companies attempt to skip the necessary groundwork in favor of a quick installation. "I've seen global implementations grind way down because people aren't paying attention to the fact it's not easy to get different cultures together," she said.

Bornemann recommends that companies bring their software partners into corporate reengineering programs early, and hire strong consultants to support them. He further stresses the importance of establishing clear performance measures to gauge the progress of an installation, as well as its aftermath.

Top management must be involved from the start, Bornemann said, but it needs to be encouraged by small successes along the way. "You have to keep them interested," he said. "It's a long, drawn-out process."

For global implementations, companies should allocate extra time and money for training in the added complexities of that sector. But few of them do. "Everyone underestimates the necessary investment," Bornemann said.

Geographically, the European landscape today looks much the same as it did 10 years ago. But from a logistics standpoint, everything has changed.

The European Union has come together as a single market. The euro is poised to take hold as the common currency for a market of more than 320 million consumers. The Soviet Union and Eastern Europe have splintered into a collection of ethnic enclaves. And companies are frantically reengineering their supply chains to adjust.

The trend in Europe is toward fewer distribution points serving larger territories. Some divisions are geographically obvious, such as Kodak's establishment of a separate supply chain for the Scandinavian and Baltic countries. Others are based on the ability of a logistics provider to cross multiple borders and essentially make them disappear. In all cases, shippers are looking to serve the European market with the least number of warehouses and smallest possible inventories.

That's not always possible. For most companies, the notion of a single distribution point for all of Europe is but a dream. No logistics provider can cover the continent, let alone the world, with uniformly excellent service. Numerous infrastructure obstacles, in particular the fractured nature of Europe's railroads, still exist.

But partnerships are helping to fill in those gaps. The result, companies hope, will be a seamless supply chain throughout Europe. And for many, that dream already has become a reality.

Case Corporation Goes Against the Grain
Case Corp. is accustomed to breaking the rules of third-party logistics. In 1995, it chose three different vendors to manage its domestic and international supply chain - without naming any as lead logistics provider. So it should come as no surprise that Case, when it needed someone to coordinate trucking and materials flow in Europe, hired an American company with no prior experience in that area.

The anointed party was Green Bay, Wis.-based Schneider Logistics Inc., an offshoot of Schneider National Inc., the nation's largest truckload carrier. Schneider Logistics was already one of the triumvirate of companies chosen to oversee the U.S. supply chain of Case, a producer of agricultural and construction equipment with headquarters in Racine, Wis. Case had named Schneider to manage domestic trucking; GATX Logistics domestic warehousing, and Fritz Companies Inc. international freight forwarding.

"The earlier we can get visibility into the supply chain, the better we can manage the freight."
- Tom Wosepka of Schneider Logistics

That relationship has had its ups and downs since inception. But Schneider must have been doing something right. Having decided to revamp its trucking network in Europe, Case surveyed the field of local candidates and pronounced it wanting.

"We felt that nobody in Europe was offering the kind of tools and processes that Schneider has already demonstrated in North America," said Isabelle Dupeux, Case's manager of logistics for Europe. "Something needed to be built in Europe. Why not start with a company we knew?"

One might call it ironic that Case was dragging an American third-party logistics provider to the continent where the 3PL concept supposedly was born. But most European-based 3PLs operate as truck brokers with pricing by lane, said Tom Wosepka, director of European operations for Schneider. His company was prepared to act as the client's traffic department, managing freight with full visibility of costs.

Case pays all carrier invoices, which Schneider audits and codes by account before submission. That is different from Case's arrangement in the U.S., where it allows third parties to handle the treasury function. According to Wosepka, it made little sense for Schneider to invest in a payment system in multiple currencies when the euro is on the verge of acceptance throughout the European Union. Once the new currency takes hold, Dupeux said, Schneider may be given payment responsibility in Europe.

Schneider's current menu of services includes contract preparation, bidding, negotiation, carrier selection and load tendering. By granting Schneider the right to handle contracts from beginning to end, Case shuts off direct appeals by carriers for higher rates or volumes, Dupeux said.

Case receives regular status reports on all shipments ordered or executed. At month's end, it knows exactly what has been committed in transportation costs. Schneider also is expected to identify ways of improving the flow of product within Europe, either through the use of dedicated equipment or more direct routings.

Schneider's reach extends to all imported shipments, as well as inbound and outbound lots for Case manufacturing sites, and direct delivery to European dealers and distributors. It supports a distribution network that consists of six final assembly plants, three in the United Kingdom and one each in France, Austria, and Germany; three subassembly plants, and two spare parts depots for aftermarket sales.

The depots are the only place where significant amounts of inventory are held; a warehousing entity like GATX isn't needed in Europe because Case discourages product coming to rest before final delivery. Shipments from the plants range beyond the European Union, with the longest supply line extending into Uzbekistan.

Schneider is gearing up to play an even greater role in Case's European network. At the plant in Neustadt, Germany, it has begun handling parts inside the facility. It receives incoming shipments, removes finished goods from the assembly line, and loads outbound trucks. "The earlier we can get visibility into the supply chain, the better we can manage the freight," said Wosepka.

Dupeux is leery of the notion of a third party that can support Case's entire supply chain, which is currently undergoing another bout of reengineering. But she said Schneider has done a good job of providing integrated logistics services to Case in Europe. Any working arrangement, she said, must be built on "strong and trustful relationships."

Dupeux and Wosepka stress the importance of securing a commitment to the logistics partnership by top management. Otherwise, the project is likely to run into roadblocks created by employees who fear radical change in the organization. And long-time relationships with inefficient carriers may prove tough to dissolve. "Without question, someone is going to be threatened by the new partner," Wosepka said.

It is equally crucial that the client have some kind of centralized logistics function firmly in place. When decision-making is dispersed, companies find it harder to make rational decisions on the best use of equipment and the siting of distribution facilities. "The benefits really come in with the ability to take the whole, and manage it as a whole," he said.

Nike's New Approach For a New Division
For Menlo Logistics, it was a question of being in the right place at the right time. Nike Inc., the giant producer of footwear and apparel, had vowed to take a fresh approach to European logistics for its newly formed equipment division. And Menlo just happened to have a prior contract with the same entity in the United States.

Redwood City, Calif.-based Menlo had no logistics network of its own in Europe. But it wasn't without connections in the region. Emery Worldwide, a sister company under the CNF Transportation Inc. banner, was well established there. It proved instrumental, not only in helping Menlo to win the European contract, but in building the necessary infrastructure.

With new lines of business, perhaps, come new ways of thinking. The Nike equipment division, selling sports balls, visionware, watches and other types of sports gear, was formed in 1996. Its decision to outsource logistics was a sharp departure from Nike's usual insistence on hands-on control of that function.

Menlo wasn't a shoo-in for the business, not even with the Emery affiliation and a fully operational warehouse in Atlanta on behalf of the fledgling equipment division. Nike undertook an exhaustive review of potential candidates - 16 in all - whom it eventually winnowed down to four before selecting Menlo.

A logistics steering committee, consisting
of representatives of both Menlo and Nike, oversees the entire operation.

The final choice arose partly from Nike's sense of a good cultural fit, said Gerhard Supper, then director of operations for the equipment division. "We needed someone with a competitive edge who was driving forward," he said. "That culture is very strong in Nike."

The company also was impressed by Menlo's information systems, particularly its warehouse management package, which could easily be extended from the Atlanta facility into Europe. Nor did it hurt that Menlo had achieved a 99.9-percent inventory accuracy rate in Atlanta for the Nike equipment and visual merchandising groups.

Menlo participated in selection of the ideal site from which Nike could serve all of Europe, along with the Middle East and Africa - a total market of some 4,000 retail customers. The winner was the town of Eersel in the Netherlands, about 10 kilometers west of Eindhoven. Within that 14,000-square-meter facility, which is operated by Emery, Menlo's business on behalf of the Nike equipment division takes up about 6,000 square meters. The warehouse was built from the ground up and designed to Nike specifications by Menlo's own logistics engineering group.

In Eersel, Menlo provides coordination of inbound transportation, from port to receiving dock, including customs clearance. It performs a wide range of warehousing operations, such as receiving, storing, picking and packing. Value-added services include ticketing, labeling, barcoding and inflation of sports balls, a seemingly simple task that must account for factors such as humidity, pressure and final packaging.

Menlo supplies special documents needed to conform to the requirements of each country of destination. For outbound transportation, it negotiates with carriers, determines the best routings, and builds up the shipper's regular carrier base. It monitors the progress of shipments and reports back to Nike on carrier performance, measured against established benchmarks. As a result, Menlo is able to provide floor-ready merchandise within a two-hour delivery window to many Nike customers, even the smallest sporting goods shops, said James McAdam, Menlo's director of international operations.

The warehouse management system (WMS) at Eersel is a proprietary tool developed in conjunction with Germany's Haushaun Engineering. It is the same WMS that operates at Menlo facilities throughout North America, Latin America and Australia. It is fully integrated with Menlo's internal order management system, which fulfills orders and prioritizes shipments, and is tied into Nike's global sales and customer service departments. Together, the Menlo systems give Nike precise, instantaneous updates on inventory on hand and in transit.

Even in its infant stages, the outsourcing experiment has proved a success. "We get somebody whose core competency is providing logistics services," said Supper. "There's a constant leveraging and sharing of best practices among Menlo's other clients." And Nike isn't forced to carry physical assets on its books.

Supper cites trust as the most important factor in any supply-chain partnership. In the beginning, he said, Nike had a representative on site to instruct Menlo in the details of its business. That individual was supposed to remain for one to two years, but completed his task in six months. Now, the Nike Equipment operation at Eersel is staffed entirely by Menlo personnel.

Nike doesn't need to have staff in the warehouse in order to keep tabs on Menlo in Europe. Nor is it out of the loop on higher-level decision-making. A logistics steering committee, consisting of representatives of both Menlo and Nike, oversees the entire operation, said McAdam.

Now that it is firmly established on the continent, Menlo will continue to expand its European network in line with customer requirements, said Tim Feemster, currently serving as director of distribution services in Dallas. In particular, the company could see additional business arising from Nike's newfound affinity for outsourcing. Said Feemster: "We'll go with whatever Nike comes up with."

Kodak's Case of the Vanishing Warehouses
Creating one supply chain for all of Scandinavia isn't as easy as it looks. Granted, there is a strong cultural kinship among Denmark, Norway, Sweden and Finland. But as Eastman Kodak Co. discovered, the act of tying them together logistically is full of challenges.

For one thing, Kodak needed a brand new warehousing and supply-chain system to link the four countries. Previously, each was treated as a separate market with its own warehouse for local distribution. Because Kodak does no manufacturing in the Nordic region, instead bringing in product from Germany and elsewhere, it had no prior need for an export program there.

All that changed with the formation in 1993 of Kodak Nordic, a corporate entity designed to serve Scandinavia from a single distribution point. The strategy was meant to address the growing complexity of Kodak's product line, and the company's inability to afford customer-support specialists in each country.

In all, Kodak sells 4,500 products, ranging from film to copy machines, to 18,000 customers in the Nordic region. Henceforth, everything would be shipped and serviced from Stockholm, except for certain emergency items for hospitals, such as X-ray film. (Sales are still handled on a country-by-country basis.) Kodak's warehouse system would have to account for four different languages and regional currencies, as well as the U.S. dollar. And it had to permit the rapid distribution of product across borders.

At first, the company considered upgrading its old software, said Lars Almendal, information systems manager of Kodak Nordic. But that promised to be too great of an investment in a system that would still fall short of state-of-the-art technology.

Many newer off-the-shelf packages simply cost too much, said Almendal. At last, Kodak found what it deemed the ideal balance between cost and utility - the System ESS product of Sweden's Industri-Matematik International (IMI).

IMI altered its basic software to reflect Kodak's unique situation, rather than offering a generic version and forcing costly add-ons with every upgrade.

System ESS runs on two servers, one for applications and the other for its database. Its functions include planning, purchasing, order management, warehousing, invoicing and financials. Moreover, it provides total visibility of inventory from any point in the Nordic region.

IMI agreed to modify its software to account for the dozen or so legal entities that Kodak Nordic stores in its logistics database, said Ulf Casten Carlberg, the vendor's director of product strategy at North American headquarters in Marlton, N.J. The changes have allowed Kodak easily to move product all around the Baltic region, including hard-to-serve countries such as Estonia.

In the Kodak distribution model, speed is of the essence. The company promises delivery of product to customers in major cities within 24 hours of order placement. Given the distances involved in shipping across the region, not to mention the brutal winters, that promise isn't always easy to keep.

System ESS is based on a sell-source-ship model that keeps inventory low, even non-existent. In place of physical goods, Kodak gets information about the status of product in motion.

Enterprise resource planning (ERP) systems, by contrast, are designed to push previously manufactured product out the door. Carlberg calls System ESS the "zero-to-100" model: zero percent inventory with 100-percent visibility.

Customers have scarcely noticed that Kodak eliminated its warehouses in Finland and Norway, IMI claims. Orders and inventory are just as visible as they were before. Customer service remains at high levels, and to the extent that buyers have access to a wider range of Kodak products, it is even better. In the six years since consolidation of the Scandinavian warehouses, stock availability for customer orders has risen from 94.3 percent to 95.8 percent, even as inventory value has fallen by 33 percent, Almendal said.

Meanwhile, Kodak's overhead in the Nordic region has plunged. The company has reduced its physical-distribution workforce by 30 percent, and boosted productivity at the Stockholm facility by 16 percent. Slow-moving inventory is down 31 percent. The number of product models has fallen by 32 percent, because Kodak combined models from different countries. Together those improvements have allowed it to recoup the new system's $2.7m price tag.

IMI hastened the payback cycle by undertaking an in-depth study of the customer's implementation process, Carlberg said. A spreadsheet nearly 1,200 lines long helped Kodak to determine just how fast it would see a return on its investment. IMI also includes a vendor scorecard that measures supply-chain performance after implementation.

No system can support a growing company's needs forever. IMI has since installed a new version of System ESS at Kodak, and Almendal admits to problems with cost overruns. At the same time, he praises IMI for its willingness to alter the basic software to reflect Kodak's unique situation, rather than offering a generic version and forcing costly add-ons with every upgrade.

"The vendor must be willing to listen to your requirements and put as much as possible into the standard package," Almendal said.
Carlberg said IMI pays attention not only to the customers buying its software but to their vendors as well. "They don't compete by themselves," he said. "It's the entire supply chain that competes."

GE Med, Penske Keep It Within the Family
It may seem like a typical case of nepotism. But General Electric Medical Systems (GEMS) didn't choose Penske Logistics Europe to manage its global supply chain just because the two share a corporate parent.

With GE Capital Services a 79-percent limited partner in Penske Truck Leasing Co., parent of Penske Logistics Europe, the relationship is very much within the family. And Penkse had a bit of an edge over outsiders because it shares with GEMS a culture and commitment to quality that extends throughout the General Electric organization, said Dan Rabideau, manager of transportation logistics for GEMS in Europe.

Still, GEMS didn't cut Penske any slack when it came to stating service expectations. The third-party logistics provider was asked to tender its bid alongside established competition, said Paul Carvell, vice president of sales and marketing with Penske Logistics Europe. "They treated us as they would any outside provider," he said. "The business case has to stand up on its own."

GEMS is one of Europe's largest manufacturers of diagnostic and medical imaging equipment. It distributes throughout Western and Eastern Europe, the Middle East and Africa from a plant in Buc, France, about 20 miles from Paris. Buc also ships X-ray products worldwide. The facility covers 5,000 square meters and consists of seven assembly lines, according to Francois Lacombe, Penske's general manager at the site.

The GEMS plant isn't particularly large, nor does it turn out an unusually high number of SKUs - around 2,000, Lacombe said. The complexity of the supply chain lies in the huge number of differently configured orders. On-site inventory is virtually non-existent, everything is built to order, and "the sheer number of components that go into any one machine is quite fantastic," said Carvell.

In addition, the medical-imaging industry has recently come under increasing price pressure, while product life-cycles have been on the decline. All of those factors convinced GEMS that it needed to place its supply chain in the hands of a seasoned expert.

Penske got the job in May 1998. Today, its services on behalf of GEMS range across the supply chain. Penske synchronizes inbound flows of parts and raw materials to the plant in Buc. It provides suppliers with demand forecasts, and signals all order releases.

After manufacturing, it packages finished product, arranges for transport and ships to destination, mostly by air. The preferred freight forwarders for GEMS exports are Danzas Corp. for product traveling west, and Nippon Express going east. In all, said Carvell, Penske has 47 of its own employees on site in Buc, overseeing some 250 Tier 1 and Tier 2 suppliers as well as outbound carriers.

Any supply-chain relationship requires mutual understanding. "You can never communicate enough."
- Dan Rabideau of
General Electric Medical Systems

The five-year contract with GEMS is unusual in that Penske actually takes ownership of some inventory, then "sells" it to the assembly line. (Additional items are shipped direct from suppliers to the plant.) "There are not many logistics companies with the scale or financial support to be able to do that," said Carvell.

The strategy gives Penske total control over the flow of components into the plant. Benefits to the customer include the ability to keep unnecessary assets off the books, and reroute limited capital to more productive areas.
Depending on the location of parts, Penske has from minutes to a single day to respond to a call-off from the line. The system is tightly planned in order to minimize the possibility of obsolete inventory, a common problem in the volatile world of high-tech.

To sort out the complexities of a build-to-order environment, Penske and GEMS employ the advanced planning and scheduling software of i2 Technologies. Factory Planner, a module within the i2 set of applications known as Rhythm, gives the parties access to all relevant information, regardless of its source, and allows them to match orders to demand. Once again, they are able to minimize costly inventories, while avoiding production stalls caused by the unavailability of parts.

Penske supports GEMS and other clients in Europe with a centralized routing center in Maastricht, the Netherlands. The concept is a common one in the United States, but rare in Europe, said Carvell. It allows Penske to route truckload and less-than-truckload shipments anywhere in Europe, employing the most cost-effective lanes and carriers.

Another innovation, a Supply Chain Control Center, is located in France and operated jointly by Penske and GEMS. From there, the parties get full visibility of their European supply chain. They can apply sophisticated planning tools to boost shipment reliability, reduce late supplies, optimize inventory levels and cut manufacturing downtime.

Rabideau says the two sides in a partnership must carefully study each other's cultures and expectations before commencing actual operations. In that respect, the GE link probably gave Penske and GEMS a headstart. Yet any supply-chain relationship requires mutual understanding. "You can never communicate enough," he said.

Lucent Micro Searches For a Single Provider
Lucent Microelectronics isn't a believer in half measures. The company had 51 logistics partners servicing its worldwide supply chain. It was determined to get that number down to one.

With headquarters in Allentown, Pa., the microelectronics division of Lucent Technologies supplies integrated circuits and other components to some of the biggest names in the communications business - 3Com, Motorola, Ericsson, Nokia. It's an industry that is notoriously unforgiving of error. Any missed delivery- either too early or too late - can severely disrupt production levels.

Lucent's reengineering program was part of a larger effort to reduce cycle times within the company's Integrated Circuits Division. The company set out to address the apparent contradiction between customers' need for maximum flexibility and the delays inherent in a multi-stage manufacturing model. The solution lay in boosting service reliability.

The objective was clear enough: 98.5 percent of shipments delivered on time, within a window of no more than a day early and zero days late. To achieve that level of performance, Lucent realized, it would need to promise a maximum order-cycle time of 48 hours to anywhere in the world.

Lucent further realized that it couldn't hit that mark by itself. Outsourcing of the logistics function to a global partner was inevitable. And so, four years ago, it undertook an in-depth, 10-month search for a single provider.

Ten initial candidates were reduced to four, then to one: DHL Worldwide Express. Implementation of a new global logistics program began at the end of 1996, in a process that was to take another two years to complete.

DHL faced a significant challenge. Lucent's organization was global in name only, according to Gerald Engel, manager of logistics for Europe. In reality, it was highly fragmented, with the three regions - Europe, North America, and the Far East -handling logistics in its own way. With its business parceled out among 51 transportation vendors, Lucent wasn't reaping the economic benefits of its size and geographic scope.

Europe alone represented a huge amount of business for Lucent. Today the region accounts for up to 1,300 shipments a month, or 200,000 kilos of product. Within Europe, Lucent services more than 300 separate customers, mostly original equipment manufacturers.

The new relationship between Lucent and DHL began with what the partners termed a "global kickoff meeting," where senior managers spent a day simply trying to develop a set of shared service expectations. Having started out in separate rooms, the two sides finally came together, only to discover substantial areas of overlap, said Engel. Following the meeting, Lucent began integrating DHL into its supply chain.

DHL promises to resolve any logistical problem within two to four hours. "There is zero tolerance for shipping errors."
- Patty Hannigan of DHL

With the help of DHL, Lucent revamped the system to allow for door-to-door service, just-in-time fulfillment and direct delivery from the three manufacturing regions to end customers. Product handling was minimized all along the chain. Savings from the elimination of distribution hubs more than made up for the additional cost of direct shipments by express air, Engel said.

DHL speeded up the process in the European Union by adopting Frankfurt, Germany as its single point of entry for shipments into the region. (Products intended for Eastern Europe or other non-members of the EU still must be cleared in the destination country.) They now move through Frankfurt without relabeling or manifesting, shaving 24 hours off transit times, according to Patty Hannigan, DHL's high-technology industrial development manager for Europe and Africa. "The solution was effectively a new service," she said.

DHL manages even faster transit - from 18 to 24 hours - for prototype components flowing from Lucent's factory in Madrid, Spain to the U.S. The same level of priority is assigned when a customer's production line is down anywhere in the world for lack of parts. When a shipment becomes stalled in transit, DHL's tracking system immediately informs the customer so that remedial action can be taken.

Hannigan said DHL has personnel on call 24 hours a day, seven days a week, to fix snags in the supply chain. The company promises to resolve any logistical problem within two to four hours. "There is zero tolerance for shipping errors," she said.

The partners expect to draw even closer when Lucent ties DHL into its new ERP software from Oracle Corp. With access to Lucent's production and scheduling data, DHL will be able to forecast volumes and plan capacity accordingly, Engel said.

New services are in the planning stage as well. DHL will soon support a Lucent consignment program, under which product is kept close to the manufacturing plant until the moment of need, in order to reduce cycle times even further. Customers used to be content with a week's lead time on orders, Hannigan said. "Now they want immediate availability of product."

Managers from Lucent and DHL come together every three months on a regional basis, and every six months globally, to ensure their partnership is yielding the best possible results. Meetings at the board of directors' level occur quarterly as well.

Hannigan said team members are forever searching for ways to improve the Lucent Microelectronics supply chain. "What we implemented two years ago," she said, "is quickly becoming the old benchmark."

GATX, Schenker Extend Hands Across Atlantic
All that GATX Logistics and Schenker International need to cement their new trans-Atlantic service partnership is a major customer to take advantage of it.

Since announcing their innovative alliance last year, the pair of third-party logistics leaders have handled small amounts of business together. But they await a client that can test the effectiveness of what some experts believe is the future of logistics: collaboration between independent providers on behalf of a shared customer.

They may simply be ahead of the curve. Few seem to have heard the message delivered four years ago by Case Corp., the maker of agricultural equipment that brought together three initially reluctant providers - GATX, Schneider Logistics and Fritz Companies Inc. - to oversee its supply chain. Case's point was that no single 3PL, no matter how grandiose its claims, could manage everything on a global basis.

One way for a 3PL to bridge that gap is to broaden its service offering and geographical scope to meet the needs of global customers. But some providers are finding that path to be too costly and full of risk. Instead, they are considering alliances with unaffiliated vendors who possess complementary strengths.

While history contains plenty of examples of logistics providers crossing corporate lines - Yellow Freight and the Dutch forwarder Frans Maas come to mind - GATX and Schenker are among the first to present the idea as an alternative to the third-party "one-stop shop." The division of labor is a clear one: Jacksonville, Fla.-based GATX offers domestic transportation, warehousing and value-added logistics services - packaging, subassembly, inventory management - to a given customer in North America. Schenker, a division of Germany's Schenker-Rhenus Group, plays a similar role in Europe, in addition to performing freight forwarding for shipments crossing the ocean. Schenker also provides customs brokerage, cargo insurance, duty drawback and international project services. More than half of its sales are generated by business in Europe.

"We are not a freight forwarder and have no desire to be," said Brett Harper, vice president of sales with GATX. "And Schenker is one of the best ones out there. You've got to understand your core strengths."

Case Corp.'s point was that no single 3PL, no matter how grandiose its claims, could manage everything on a global basis.

An alliance customer would see only a single provider offering one point of contact, door-to-door rates and total visibility of product throughout the pipeline. It would deal directly with the party that generated the sales lead in the first place.
GATX and Schenker tout their fledgling arrangement as a means of widening their scope of supply-chain services, while guaranteeing that each region is served by the one that knows it better. The result is a "best-in-class" approach to logistics, as opposed to that of the fully integrated provider. It's the same debate that continues to rage within the worlds of supply-chain and enterprise-resource software. And it's equally unresolved in both arenas.

Joint marketing is a cornerstone of the GATX-Schenker strategy. When one of the vendors uncovers a suitable lead, it teams up with the other to make the sale. "We go in together to present a business case," said Harper.

For GATX, the deal with Schenker is just one of several possible solutions geared to the volume and complexity of its clients' business. For high-volume accounts with little variation in inventories, it prefers to develop its own network of facilities. In Mexico, for example, GATX maintains a 147,000-square-foot warehouse that is not shared with other 3PLs.

For customers with medium volumes, GATX tends to form joint ventures with local entities, such as Wackenhut in Chile. But when an account generates relatively low volumes and a high mix of inventory, the full-fledged alliance with a company like Schenker comes to the fore.

Central to any successful partnership is the linking of information systems, which has yet to be completed in the case of GATX and Schenker. The absence of a shared customer has slowed progress on that front, Harper said. He doesn't appear concerned about the lack of a solid customer base to support the alliance. It's not unusual for a 3PL to spend one or two years selling a major client, he says. Companies looking to outsource logistics might invite a dozen or more candidates to bid on the account, then go through a laborious process of narrowing down the field.

The two companies say they are jointly pursuing a number of promising leads. At the same time, they are talking about expanding their alliance to serve customers outside North America and Europe, with a wide variety of services. "It's the next logical step toward a true global partnership," said Bob Laird, vice president of logistics solutions with Schenker.

Getting the Global View From Geneva
RJR International is a believer in the "big bang" theory of organizational change. As part of a sweeping reengineering program, the Geneva-based international division of RJR Nabisco installed ERP and supply-chain management (SCM) software at the same time.

Either one of those packages can soak up a company's resources and keep its information-technology experts occupied for years. But RJR International was determined to achieve global visibility of customer demand, inventories and production.

Reengineering the RJR International supply chain was no small job. One of the world's largest makers of tobacco products, it had sales of $3.6bn last year and a profit of $550m. It employs a workforce of 17,000, makes 4,000 products at 22 manufacturing locations, and stores them in 90 warehouses, according to Thomas Bornemann, director of customer service.

RJR addressed its internal accounting and manufacturing requirements through an ERP system acquired from Denver, Co.-based J.D. Edwards & Co. On the SCM side, it needed a tool that could support forecast planning, inventory management and capacity utilization at four regional planning centers, newly created by the reengineering effort. They are Cologne, Germany for the European Union; Hong Kong for Asia; Winston-Salem, N. C. for the Americas (except the U.S.); and Geneva for the rest of the world, including Eastern Europe, Russia, the Middle East and Africa.

RJR's choice of SCM vendor was Manugistics Inc., whose product supports both supply- and demand-planning functions. In addition, Manugistics provides optimization and decision support derived from a single database and centralized server for the entire global network.

It is recommended that companies bring their software partners into reengineering programs early, and hire strong consultants to support them.

Manugistics allows RJR to exchange information on a real-time basis worldwide, Bornemann said. The company is better able to oversee a highly complex supply chain, in which raw materials and finished product flow freely between regions according to where they are needed the most. At the same time, RJR can minimize the stockpiling of obsolete or unneeded goods.

The system includes product information from 18 RJR forecasters located around the world, who report on the status of some 9,700 stockkeeping units. By keying in an SKU, planners can view the amount and location of inventory for that item throughout its supply chain.
The software took about five months to install, then showed quick results. Within a year, said Bornemann, RJR International's finished goods inventories were down by 45 percent, inventory turns had nearly doubled, forecasting accuracy was up by 15 percent, and raw-materials investment was down by 15 percent.

Manugistics has gained from the relationship as well, said Mary Lou Fox, senior vice president at headquarters in Rockville, Md. RJR International agreed to accept the software in the beta testing stage, speeding up the vendor's reengineering program and allowing it to fine-tune the product prior to general release.

The overhaul of RJR's supply chain is far from complete. Bornemann speaks of the dreaded "balloon effect," whereby inventories controlled at one point in the chain bubble up somewhere else. To avoid that problem, the company intends to obtain electronic point-of-sale data from retail customers. Only then can it get a handle on actual demand.

The ultimate in inventory control, such capability already exists at Wal-Mart and a handful of other big U.S. retailers, but is much more complicated to achieve on a global scale, said Bornemann. He's hoping to have a system in place at RJR International within two years.

Before that, he plans to tie transportation-management software into the Manugistics and J.D. Edwards systems. RJR's long-term goal, he said, is to involve every partner - raw materials suppliers, logistics providers, software vendors, end customers - in an extended supply chain that works as well as that of a single company.

Fox views partnerships as a crucial ingredient in any big software implementation. "A manufacturer picking a vendor for a large enterprise application is picking a partner for the next five to 10 years," she said.

Both sides must be open and honest about their capabilities and limitations, said Fox. Too often, companies attempt to skip the necessary groundwork in favor of a quick installation. "I've seen global implementations grind way down because people aren't paying attention to the fact it's not easy to get different cultures together," she said.

Bornemann recommends that companies bring their software partners into corporate reengineering programs early, and hire strong consultants to support them. He further stresses the importance of establishing clear performance measures to gauge the progress of an installation, as well as its aftermath.

Top management must be involved from the start, Bornemann said, but it needs to be encouraged by small successes along the way. "You have to keep them interested," he said. "It's a long, drawn-out process."

For global implementations, companies should allocate extra time and money for training in the added complexities of that sector. But few of them do. "Everyone underestimates the necessary investment," Bornemann said.