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Larry Smith and Patrick Murphy are a powerful supply-chain team at West Marine, the country's largest retailer of recreational and commercial boating supplies, based in Watsonville, Calif. Smith is senior vice president of planning and replenishment and Murphy is senior vice president of distribution and logistics, titles that reflect the importance West Marine places on its supply-chain operations. Both executives already were retail veterans when they joined the company in the late '90s and they have worked closely together to transform West Marine's supply chain into a world-class, performance-driven operation that boasts 96 percent in-stock levels during peak season, 85 percent order forecast accuracy, 98 percent on-time delivery and $3 million in cost reductions at its distribution centers.
Q: When you both joined West Marine in the late '90s, what were the major challenges you each faced?
Murphy: The biggest challenge was just basic execution. We were not successful as a company in getting merchandise to our customers or our stores on time and in good condition. So our first order of business was to bring credibility to the process and really to fix our own house. As soon as we started to get that under control, we realized there also were a lot of integration issues between the logistics team and Larry's replenishment team. So we began working very closely together on database issues - particularly data quality and making sure there was a seamless handoff of information.
Essentially, Larry's group determines what products in what quantities to acquire and my job is to not only receive the products and man-handle them through the distribution centers, but to physically process the goods and get them shipped down to the stores and our various channel customers.
Smith: We truly are linked at the hip. Early on we established a weekly conference call that is very fact-based about current issues, particularly sharing forecast information, and that also provides the platform for us to discuss longer-term issues. We meet every Tuesday morning. This is a continual learning process, but we have come to understand our ramp ups and ramp downs with respect to that shared information, and critical logistics decisions are made based on that.
Murphy: The nature of our business at West Marine is perhaps even more seasonal that some retailers. As a result, the movement of our product and the breadth of our SKU assortment make forecasting anything but a perfect science. We have found that we can have a long-term forecast that is accurate at a macro level, but it is absolutely necessary for us to take a short-interval schedule process against that as well, which is how that weekly meeting came to be. We use it to look, basically, at a four- to six-week window, where we think we can be a lot more accurate than we can be looking out over the horizon.
Q: Do you share that outlook with your carrier base?
Murphy: Our director of transportation, Pat Foley, reports to me and he participates in that Tuesday morning meeting as well. He is integrally involved in that whole process and has such tenure and experience with the company that he knows how to ask the right questions, and then can turn around and figure out what that means to the delivery schedule, to the cubic utilization of the trailers, to on-time delivery expectations and so on. So we make sure all the players, both on the physical side as well as on the transportation side, along with Larry's team, are there every Tuesday morning to go through that whole analysis.
Smith: Also, it is important to add that we manage in excess of 85 percent of our inbound freight. We provide full transportation services to our suppliers as part of our negotiation and business approach. That, of course, gives us leverage to build truckloads and do all kinds of other analysis that takes costs out of the supply chain. And on the outbound side, to credit Pat Murphy and Pat Foley's group, we have the tightest possible delivery windows for our stores - plus or minus an hour, so the total window is only two hours. We hit that window in excess of 98 percent of the time. I think that is an incredible statistic for a retail group to sustain.
Murphy: And I would make sure we credited our carriers as well. We own a very, very small intra-California fleet and, certainly, you have more control with a fleet than you do with a common carrier network. But we have such a quality relationship with our common carriers and such long experience with them that they behave as though they are our fleet and help us hit those numbers.
Q: Who are your core common carriers?
Murphy: There are several I would cite that perform at an exemplary level for us: Piedmont Transportation, John Christner Transportation, Michael Davis Trucking and Houser Transportation.
Q: When did you start controlling most of your inbound transportation?
Murphy: Actually this has been under way for quite some time. We have always had a degree of control - a collect vs. a pre-paid program - but with Larry's help and with help of our Merchant Group, we have taken a very active and aggressive posture in terms of meeting with our vendors. We help them understand the advantages of a collect routing program and of using the routing guides that we distribute to them. So it is something that our transportation group has worked on for quite some time, but our control has grown to the 85 percent level in just the last three years. It was tough to convince some of our vendors. I think that Larry's team, particularly by helping them understand the advantages of working through that program, have really turned the dial up for us on that.
Smith: Fundamentally for most vendors, the bedrock issue is just execution. When they need the truck are they going to get the truck or is their dock going to be held up for any reasons because they participate in a collect freight program? Pat's group has worked very hard to make sure that any bumps in the road in that regard are worked out and that high standards are sustained. In fact, the statistics of the West Marine program - 98 percent on-time pickup - are exceptional. We have re-negotiated product costs if it was previously pre-paid freight. And we have had the opportunity to manage our inbound freight in the least-cost manner, which principally means - though not always - consolidating trailers.
Murphy: The biggest advantage that program brings to us is the fact that we have access to our own merchandise and can further improve the whole supply-chain network by taking control of it.
Q: Give us a profile of your supply-chain operations.
Smith: West Marine has a complex supply chain. We actively replenish into an average DC somewhere in the neighborhood of 25,000 to 30,000 items. The stocking ownership is well above that because there are items in the DC that are not being replenished, so the total number is in the 50,000-plus range per facility. We operate three distribution centers and we do almost every kind of fulfillment from all three of those. So we are doing high-speed, pick-to-belt fulfillment and even pallet fulfillment as well as each-pick fulfillment within the same four-wall space. Of course, there are segregated areas committed to those activities, but it makes Pat's job very different than an environment that is very specialized and only handles case packs. And then we have the high seasonality of the business. Most of our stores in the North have a fairly compressed season. Stores in the Deep South have a longer season, but the mix is still quite seasonal and that puts all kinds of pressures on the supply chain.
We have done a number of things to address that total mix. In the first place, when Pat and I got here, most items in our network were being picked by the "each," outbound to stores. The cost associated with that was huge and not well understood by the organization, so we placed a common priority on using standard-pack and inner-pack, and even multiples of less than an inner-pack where appropriate, in order to make sure that our touch costs and handling costs both at the DC and at the store were reduced. That has been a huge win over the four years we have been working together.
And the second thing we learned was that there are all kinds of reasons to smooth the curves of the seasonal sales bulge that we face, and so we purposely do that in replenishment. We buy forward in the beginning of the second quarter so that we reduce volume that otherwise would happen in June and bring it forward into April and May. That allows staffing levels to be more consistent; the training that new associates have to go through as you do very steep ramp-ups causes huge inefficiencies. So by working together and understanding the big picture about all of these decisions, we have had an opportunity to continue reducing costs in the supply chain.
Murphy: We have attacked this from as many different angles as we can. On Larry's side we have improved the quality of the relationship we have with our vendors, making sure we communicate to them our forecasting information. We work with them to help them become as successful a supplier to West Marine as possible so they can be on time and 100 percent complete in their deliveries. We also use good mechanics and methodology to provide feedback to them on how they are doing. And we also attack it from the actual physical side, both at the carrier level as in the distribution center. With the DCs, a recent development that we've really put a lot of time, money and effort into is an engineered standards programs which we expect will ultimately lead to a pay-for-performance type of program.
An industrial engineering group studied each function within the DC and the physical space the function is performed in to determine how long it should take to pick a particular line of merchandise based on its size, weight and complexity. And then, based on the variability of the pick for each individual store, there is an assigned time limit, so we know before a picker goes out on the floor how long it should take him to pick that order, or receive the order, or ship the order. It gives us a better front-end insight. If you start people out of the box with a goal, they are more likely to perform against that goal.
Q: I believe you have an active CPFR program. Larry, can you describe that for us?
Smith: The impetus really came out of the intense passion of West Marine to maintain high in-stock levels. That actually contributed to the decision, well before I came to the company, to invest in the replenishment software products from JDA, which are the most robust forecasting engines offered in the replenishment space. We focused on providing management for those systems and development of those systems that ensured we could have the most accurate point-of-sale forecasting possible, but where we really wanted to move was to have accurate order forecasting. We could then use that to drive our logistics decisions. And, ultimately, we wanted to use it as an opportunity to increase vendor fulfillment, as Pat mentioned before.
We operate in an industry that is historically weak logistically. We do business with a very large number of vendors - for stocking goods right now it is about 750 vendors - and when we started this process, for instance, we did not have a single EDI partner. We now have over 500 EDI partners. We were not sharing forecasting with anyone, POS or order forecasting. In fact, even though those mechanisms existed here, thanks to the JDA software, there was not a single individual within replenishment, much less merchandising or anywhere else in the company, who thought that output was at all useful. So we made a commitment to making this information highly accurate and we have progressively gotten buy-in from the internal organization and increasingly from our vendor community. And when I say internally, individual stores now understand that the way their products are ranked is based on forecast, and they are very comfortable that the right SKUs are being identified. So there is huge buy-in right down to the district manager and store manager level, and they get twice weekly reports of the in-stock level of their SKUs by rank, so it is a very high degree of focus within the organization.
Regarding vendors, we have 200 vendors that are actively involved in a full CPFR engagement that goes all the way from POS data collecting and forecasting to order forecasting. They get their order forecasts on a weekly basis and they get updated reports, exception reports, on late orders and in-stocks every Monday as well. And then once a month we also provide them a robust report of their shipping performance so that both our partners and we are looking at the same information. We have really made the effort to provide the validation report for our vendor community so they don't have to independently develop the same reports themselves.
Within the CPFR guidelines, we describe ourselves as a buyer-driven scenario. And that means that we take primary ownership for the forecast and invest in providing it to our vendors. Now, we know that when we change assortments or change promotions, that is the primary opportunity for us to upset the supply chain or crack the bullwhip, so we have actually committed ourselves to behavior that, to the degree that is at all possible, eradicates the bullwhip. And that means that with a long lead-time supplier, like an import supplier who is buying life vests off shore, we want them to know about every in-season promotion literally four months in advance. This information will be embedded in replenishment and embedded in the forecast and they can have the opportunity to buy from that with confidence.
Q: It sounds like this program has required a good deal of discipline throughout your organization.
Murphy: Without a doubt. I think both my and Larry's teams look at it that way. We believe that as supply-chain leaders within West Marine we have to be the religious preachers when it comes to that. We try to educate everyone we do business with that there is only one way to do business with West Marine and that is to plan and then to execute seamlessly.
Smith: Our marketing partners or category managers are completely signed on so that the whole process for developing key future promotions, for detailing the circulars - and we are a circular-driven company - are planned well in advance and embedded in replenishment. The minimum expectation is that every promotion will be in a supplier's forecast ten weeks in advance.
Murphy: One thing I would add is that the whole company has culturally undergone a big shift in terms of recognizing the value to the success of the organization of effective supply-chain management. And I think in that respect, all of our partners within the organization help us understand what their goals and business plans are. Every day the confidence level grows that the supply chain will perform just as it is expected to. So this has really been a culture shift on behalf of West Marine, and all of our executive team has participated very actively and aggressively in that.
Q: So they recognize this has created a competitive advantage for them?
Smith: One of the earmarks of competitive advantage would certainly have to be the opportunity to purchase your largest competitor and we, in fact, had that opportunity in the first quarter of this year when we purchased the Boat U.S. retail group and its 62 stores. And there is an interesting contrast between this story and our purchase some five years ago of a similar-sized competitor. In the earlier example, we almost destroyed West Marine. We drove it close to a non-profit state. The distribution center imploded during peak season and we literally chased away customers that it took us years to regain because of our supply-chain failure. This time, we accomplished the integration in stores and in DCs 30 days after the announcement of the merger.
Q: To what do you attribute that?
Smith: Technology has come a long way, but certainly from a supply-chain point of view, the way we had configured a bottom-up replenishment process made it easier to absorb a merger like that and understand exactly where you were on replenishment. Basically, once the system was plugged into those stores and polling off their POS, we had completed our forecasting and we had optimized the way we were going to pick items in that building as well because we had item histories. So from Day One it was pretty much an optimized logistics solution.
Murphy: It didn't hurt that we had some really quality folks that we inherited from the Boat U.S. organization in both the stores as well as the distribution centers. But the combination of good IT organization from our IT group, headed by David Schenk, great systems and forecasting from Larry's team, and good leadership at the stores and in the individual distribution centers, made this the smoothest transition I have had in my 25 years of doing this.
Q: I believe you import a significant amount, particularly for your private label program. What are the issues in this sector that you are dealing with?
Murphy: As it pertains to the physical movement of goods inbound, obviously the Homeland Security laws and regulations that have changed in the last couple of years have made that business a lot more complex. The restrictions and the expectations, the paperwork, the controls all have to be much more precise and much more front-end than they have ever had to be in the past. In addition to that, I would also include that we do some exporting not only to wholesale customers offshore, but also to four stores that we have in the western Canadian provinces. All this is complicated for us, both on the import as well as the export side, by the fact that a fair amount of goods within the West Marine organization are classified as hazardous materials. So we even have stricter rules than normal retail importers might have.
Smith: Our private-label volume total is in the range of about 26 percent of sales, so it is a very high penetration. Import isn't quite that large because there is some domestic origin in the private label, but from the point of view of my receiving services from Pat's group on the import side, he has a group that focuses just on the importation of product and I have great services from his group.
Q: Is the change in the hours-of-service regulations something that you all are concerned about?
Murphy: We are looking at it very closely right now. We don't think it is going to cause us any problems. The strategic location of our distribution centers makes the routes that we run mostly achievable within the prescribed hours of operation, though we do take that into consideration when we schedule our deliveries to stores. We think we are going to be OK, but we will keep a really close eye on it.
Q: What do you see as primary challenges over the next 12 to 18 months?
Smith: One project we have been working on for well over two years and that we are continuing to ramp up is to do more of our replenishment direct from vendor to store. We have the same robust forecasting exchange with vendors regardless of whether a vendor is shipping some product direct to store and some to DCs, or any mix of the above. And we see this as a key way for us to maintain the stability of our network and, in fact, to continue to potentially grow our store count while delaying the addition of another DC. And so it is a very important project to us. So we have been working with vendors and we have found real win/wins here that, frankly, we didn't anticipate when we first went into the program.
For example, for many of our vendors we are a pretty large purchaser, especially for our marine specific vendors. And actually a West Marine DC order is one of the biggest orders they see throughout the year and these large orders are very cumbersome for them to manage. To support these orders with good fill rates requires them to hold more safety stock than they otherwise would, and yet purchasing in a significant quantity is obviously efficient for us. I have many forward-looking, mid-sized vendors that are well engaged and well down the road in lean manufacturing techniques and they are the ones that have come forward and said we should be looking at vendor-to-store fulfillment. They understand how they can lower their cost by managing a more consistent flow of orders and even the forecast accuracy of those orders, which goes up when there is a consistent flow. So I have now just over 30 vendors in this program, and, more importantly, I have five or six really large companies coming on board this year. Many of these vendors are doing pick-and-pack for us without increasing our costs because they know they are still going to be ahead of the game when they consider the impact on their lean manufacturing.
Murphy: My main focus is figuring out how to leverage supply-chain expenses over West Marine's total expense structure and sales structure to keep them under control and actually reduce them on a percent-to-sales basis. So all of these different initiatives that we are working on collectively and collaboratively with all of our partners in the company are all geared toward making the operations side of the business a competitive weapon and making West Marine the lowest cost provider.
Q: What would you say is the most important thing you have learned in your career?
Murphy: I think that the supply-chain in retailing organizations is the tail of the dog as opposed to the nose of the dog, and I think in order to be successful in supply-chain management you need to try to understand the core intents of the business and make sure that you recognize the service components of the structure and solve those problems before you tackle anything else.
Smith: I think that in terms of the partnerships that we have within the organization and building those partnerships with our supplier base, developing trust and having high communication is key. Our collaborative programs with vendors have really been a function of the trust that we have been able to build both with their marketing groups and with the supply-chain groups.
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