After years of relying on a traditional, decentralized distribution system based on company-owned and employee-operated warehouses, consumer electronics company Audiovox Corp. found itself in the mid-1980s with 35 imperfect facilities, mountains of orders passing between them, and too many inventory discrepancies. To stay competitive, Audiovox knew things had to change.

"As the controller during that period, I could sit down and constantly review with management the wastes of having so many facilities," recalled Joseph A. Incalcatera, now vice president of operations. "At one point, we tracked the number of inter-company transactions and it was mind-boggling. Orders were not going complete to customers because the stock was spread all across the country, and inventory variances were a big problem."

	"If we were to staff for that big push, what are we doing with that staff during the first and second weeks each month?" - Joseph A. Incalcatera of Audiovox

Audiovox has two divisions: The Automotive Electronics division primarily sells sound and security systems for automobiles, while Audiovox Communications focuses on cellular phones and accounts for 70 percent of Audiovox sales. The company sources from manufacturers in Korea, Hong Kong, Taiwan, China, Japan and Singapore, importing nearly 95 percent of its products. It sells via distributors and joint ventures in worldwide markets, including Malaysia, Australia, China, South America, Europe and Canada as well as the U.S. Most of the company's $12m in annual freight charges are spent on less-than-truckload, parcel and air freight distribution, plus ocean transport via containership.

To help get better control of the inventory moving through this complex network, the company brought in Patrick E. Moffett as vice president of international logistics. Moffett arrived at Audivox after five years as manager of direct store imports for J.C.Penney Co. and three years as director of transportation for Lafayette Radio Electronic Corp. Experienced with the advantages of public warehousing, Moffett could see that the public option would far better suit the Audiovox operation, but top management was afraid that shifting from facility ownership would lead to a loss of security and control.

"It was a very hard sell to convince our sales departments to venture out into the realm of public warehousing," Moffett said. "They were extremely set in their ways; there was a lot of security in ownership." Sales executives also balked at centralizing distribution facilities.

However, in 1986 management finally agreed to give Moffett's proposal a try. After formulating a game plan, Audiovox initiated a relationship that year with Fritz Companies' public warehouse operation in Seattle. Fritz serviced Audiovox distributors and customers in the territory west of Memphis, enabling Audiovox to close company-owned facilities in several locations, including San Francisco, Seattle, Phoenix and Denver. Customers east of Memphis were served from the company's headquarters facility in Hauppauge, with inbound containers moving all-water from Asia. The efficiencies of land-bridge operations using doublestack intermodal trains were just beginning then to take hold in the transportation arena.

The arrangement at first looked promising - too promising. Attracted by the faster replenishment and earlier shipping dates of the public operation in Seattle, an increasing number of distributors in locations east of Memphis - Maine, New Hampshire and Maryland, for example - were shifted by sales executives to servicing from Seattle. However, the greater distances and the need to consolidate shipments to keep costs in line resulted in unacceptably long transit times.

Realizing it had not yet found the right solution, Audiovox terminated the Seattle operation in 1989. The company went back to servicing the western territory from a company-owned facility in Cerritos, Calif., though it continued using Fritz in brokerage capacities and for key warehouse operations overseas. Moffett and Incalcatera used the experience as a real-life tutorial. "Over the course of a couple of years, we learned, then refined, and then applied what we learned to our overall operation," said Incalcatera. Determined to make the public concept work for Audiovox, Moffett and Incalcatera initiated in-house studies on the logistics involved in servicing specific geographic markets: time in transit, freight costs and warehousing expenses.

"We managed to put pretty convincing studies together, and then we were tasked by top management with finding the locations," said Incalcatera. "Originally, the concept was to have four distribution points in the U.S., the first of which was going to be the southeast region."

Although the locations and service providers were yet to be finalized, management had firmly agreed on the plan's key point: Audiovox was not looking to own. "We didn't want to go through owning a facility and never having the right size facility, which is what I had seen at our 35 locations," said Incalcatera. "They either were too big or too small from day one." As with many manufacturers, Audiovox sales tended to run in cycles: The first week of the month was very slow, the second week picked up, and the last few days of the month were very high-volume as corporate customers and Audiovox salespeople tried to make their sales projections.

"If we were to staff for that big push, what are we doing with that staff during the first and second weeks each month?" asked Incalcatera. "That's why we decided to pursue public warehousing and rent the people and space as needed."

Atlanta?
Armed with mileage, transit time and warehousing cost studies, they initially decided on Atlanta. Incalcatera and Moffett flew down and interviewed the three top public warehouse operators, and began regional distribution operations from the Southern Bonded Warehouse Corp. facility in 1991. Simultaneously, they closed down a handful of 5,000- to 15,000-square-foot company-operated facilities in Virginia, North Carolina, South Carolina, Florida, Georgia and Tennessee.

Atlanta initially worked out so well that Audiovox management decided they didn't need four locations, that two would work. Consequently, Moffett and Incalcatera realigned the parameters of the studies and went at it again, evaluating sites from New Jersey to North Carolina. Baltimore, Charleston, S.C., and Norfolk, Va. emerged as the top candidates.

In the end, they decided that New Jersey was too far north and Charleston too far south. Norfolk had good rail service, an all-water inbound-outbound capability and a pro-business attitude. Conversely, said Incalcatera, "Baltimore was getting a lot of bad press at the time with the union situation. It was an extra day on the boat just bringing it up the [Chesapeake] bay, and the turnaround time once the freight did hit the port was substantially slower than Norfolk."

No, Norfolk
"Norfolk gave us a range in the Southeast where we have a good, strong customer base, and it gave us great mini-landbridge rates coming across the country. We also needed to have a reach to Canada, because we supply Canada from that facility," said Moffett. "And we wanted an all-water capability into the East Coast. We don't necessarily use that capability every day, but there are times when products come up that are so large in cube, but have such low gross margins, that we have to cut every corner we can.

"Things can change," he added. "We started to look into the Suez [Canal] situation, and there are some possibilities there. Who knows, two or three years from now, that route could be very viable with the faster liners and different rates. It could be more cost-effective at no time disadvantage to bring it all-water right through the Suez to the East Coast and avoid the landbridge."

After Norfolk got the bid, the duo interviewed the top three local players in public warehousing there: Givens, Southgate and D.D. Jones. "We saw who some of their customers were, checked their references, and in the end it was a gut call: Who did we think could do the job for us?" said Incalcatera. "The can-do attitude of management and the energy displayed by the personnel within the facility caused us to lean toward Givens, and the compatibility in product and handling between Audiovox and other customers in the facility sealed the decision."

Givens also has a third-party logistics subsidiary, Givens Logistics LLC. All outbound carrier decisions are made by Givens Logistics except where a customer has specified a certain carrier. Primary carriers on the truckload side include Covenant Transport, Southeastern Freight Lines, Lake City Express, Burlington Motor Carriers and MCT; on the LTL side, American Freightways, Consolidated Freightways, Overnite Transportation, Red Star Express, Averitt Trucking, and Givens Trucking. Virtually all road tractors are equipped with two-way satellite communications systems.

Givens began administering the Audiovox account in 1992. Shortly thereafter, Incalcatera was assigned the title of vice president of operations, where he could keep a closer eye on the maturing distribution network.

Next Stop, West Coast
The next step was to centralize distribution for the western territory. Audiovox had been servicing its primary market - Southern California - from the Cerritos, Calif., facility. "Again, we looked at the available data to determine what state we should be in," said Incalcatera. "With tariff rates the way they were, it was actually cheaper to ship from Nevada to California than to ship from California to California. Also, there is no income tax or inventory tax in Nevada."

	"With tariff rates the way they were, it was actually cheaper to ship from Nevada to California than to ship from California to California." - Audiovox's Incalcatera

The closest point outside California was Las Vegas, but there was no public warehousing available. They then focused on the Reno-Sparks area, interviewed the key players, and eventually selected Owens Distribution in Sparks.

The attraction of the Sparks area included transit time from key markets and the ports, LTL and small-parcel tariffs, labor rates and tax rates. A big plus was attractive pricing - $350 per container - Owens had negotiated for movements from the Port of Oakland to Sparks, which was a minimum of $200 cheaper than prevailing rates. "We checked that box right away," said Moffett.

Another surprise came in the form of the Foreign Trade Zone utilized by Owens. "That was our first exposure to an FTZ , but we realized that it was something that would be good for the company," said Incalcatera.

Three fees get paid to Customs: the duty, the harbor maintenance fee and the merchandise processing fee. Customs brokers charge transaction fees to process and pay these levies.

Of particular interest was an unusual program whereby U.S. Customs administrators in Sparks allowed certain businesses operating under the terms of a pilot program to use a weekly, summary-filing process. "Instead of paying consumption entries and brokerage fees every time you took a product out of the zone, you could do it once a week, on Mondays," said Incalcatera.

Tremendous Fee Savings
"Joe was out there and he called me with that bit of information. And I said, 'give me that again?' That was just really off the wall, at that stage of my Customs life," Moffett recalled. "I asked him, 'so they have all this merchandise and they ship it every day and there's no delay, they just keep shipping? And you do a summary every day and on the fifth day one entry goes in?' And he says 'that's right.'

"I couldn't believe it. It turns out that it was a trial program, and they were the only port in the United States that had it. And nobody else knew about it. It was kind of like if you could find it, you could have it."

"That obviously had very good profitability potential for Audiovox," said Incalcatera. "We wouldn't be paying brokerage entries every time we brought product into the warehouse."

Saving on the brokerage fees was great, but the merchandise processing fee almost came as an added gift, said Moffett. "After we were saying 'this has all the things we really need to do business', we started thinking about the merchandise processing fee, which has a ceiling of $485 per entry. Now, with all the entries we have coming in, we could have been spending $200 every three or four hours during an eight-hour day. But with the summary filing, there's only one customs entry at the end, so it's only $485. That surpassed the savings on the broker fees."

"For the automotive division alone, that's $160,000 a year," added Incalcatera. "A lot of people look at this with the misconception that 'if my duty rate goes to zero, then there is no advantage to being in a foreign trade zone.' Not true. This merchandise processing fee is going to be there forever, and there's the administration of dealing with and paying a broker on every single entry versus paying once a week."

The ability to defer duty by itself was a valuable option, given the company's export activity to Canada and South America. Audiovox previously spent a lot of time and money pursuing duty drawbacks and never got back 100 cents on the dollar, said Incalcatera. "Plus, it takes the government six to eight months to get that money back to you, and the float value on all that adds up. But by being in a zone, exporting to Canada and South America zone-to-zone or exporting out of the country, the drawback hassle went away."

Needless to say, Audiovox shortly thereafter teamed with Owens to handle the company's distribution in the western states.

Another twist at the time focused on the cellular business. Once-hot cellular phone sales dropped off significantly within a three-month period. "However, we were already committed to contracts and had no choice but to accept the merchandise that had been ordered and was in the pipleline," said Moffett. "We directed all the inbound cellular traffic to Sparks, where we only had to pay duty when the goods were sold. This led to a dramatic improvement in cash flow for our company, as the duty rate at the time was 6 percent."

Meanwhile, Audiovox took the weekly summary discovery back East. "We approached the people in the Norfolk area with this concept, and they saw the advantage immediately," said Incalcetera. "The Port Authority and economic development people jumped all over it. Eventually we applied for a boundary modification to the zone already authorized down there, and six months later, we were in business." The boundary modification included the entire Givens facility.

Here's how it works
Inbound containers from the Asia Pacific region and destined for Sparks now arrive at the Port of Oakland and are trucked inland to Owens. Routing for containers bound for Norfolk is determined by the steamship line, which uses point-to-point pricing and mini-landbridge service to the Givens facility.

Both third-party providers have Audiovox computer terminals in their facilities. Audiovox for several years has used J.D. Edwards software on an AS 400. The company currently is upgrading computers and software to the latest version and has acquired a bundled software package to bring a wide range of other capabilities, including material resource planning, or MRP, to Audiovox.

Orders flow - via fax, 800-number, e-mail or EDI - into Audiovox headquarters in Hauppauge from experienced customers, a network of 40-plus distributors, and a 50-person sales force. After requisite credit and other administrative checks, the orders are transmitted to the appropriate third-party provider. There, orders are printed, picked and shipped.

Using the leverage and relationships Owens brings to the table, Audiovox has attractive contract rates with motor carriers for surface transport in the western states. Yellow Freight System and Consolidated Freightways are core carriers on the LTL side, while RPS is the small-package carrier of choice. The Sparks facility services customers and distributors west of a line from West Texas north to the Canadian border.

Except for some Canada-bound freight, all export shipments from the U.S. move from Norfolk; shipments to South America are routed through the Import Commodity Group, a customs broker in Miami.

Although Audiovox formerly used an array of steamship lines, Moffett decided several years ago to concentrate its volume. "We wanted to be a good account for one or two carriers instead of a lousy account for a bunch of carriers." Initially, the company went with Evergreen as primary carrier, but shifted to Hyundai in 1996.

"We now seem to get prioritized every place we go," he said. " For example, our chassis are always available to us at every port of discharge. We noticed that when we weren't a real strong account with any one carrier, there were shortages of chassis. But now, our needs really are being answered, the sales rep is always there and is accessible to the account." They presently move about 500 containers under contract a year.

Audiovox uses two public facilities - one in Vancouver, one in Toronto - to service the Canadian market. Freight moves in-bond from Norfolk to Toronto and from Sparks to Vancouver. "We couldn't justify direct shipments from the suppliers to Canada," said Incalcatera. "When the sales grow fivefold from where they are today, then we can ship directly." Norfolk presently ships two or three full truckloads to Canada each month.

In the interim, Audiovox is trying to direct-ship as much as possible from Norfolk to Canadian customers to avoid duplicating warehouse charges in Virginia and Canada.

Improving Efficiencies
Once the fundamental system was in place, additional efficiencies gradually developed.

"In Norfolk, we started with basic warehousing and a half-page of charges that explained everything we needed to do: take a carton in and out, store it, re-label it, ship-confirm the order," said Incalcatera. "Now we're into a book that is probably 30 pages that has volume-sensitive pricing, product assembly - even quality control testing of products sourced overseas."

Lee Watkins, manager of warehousing for Givens, maintains a staff of technicians to service the needs of Givens clients.

"They've actually done circuit-board modifications for us," added Incalcatera. "We had received 15,000 alarm systems that needed a diode replaced on the circuit board, so we contacted Lee, Federal Expressed in the parts and the equipment - soldering irons, lens lights, testing equipment - and they got the job done in five working days. They had the flexibility and the attitude that they can do whatever we throw at them."

Being able to take a more comprehensive look at operations instead of being mired in the day-to-day administration of 35 separate facilities has yielded other benefits.

"One of the beauties of this warehousing system is that we have a cost-accounting system that we never had before," said Incalcatera. "We know every nut and screw our service providers move for us, because they charge for it. And that's the way we wanted it. We wanted to know where we were spending the dollars so we could go to the top offenders and change the process if possible."

For example, Audiovox has automated the ship-confirmation process on the East Coast and is in the process of doing it in Sparks. "In the old days, we were paying Givens to put labels on boxes and on ship-confirm orders," he explained. "The Givens people would be peeling RPS/UPS stickum labels and putting them on the original order." But if there was a problem that required tracing, "we had to go back to that original document or else have them keypunch into the system that 14-digit number for every carton."

Now, they have new systems installed, and all orders are bar-coded. "When the product is put on the scale, the order bar is scanned and the terminal at the shipping station identifies the order," said Incalcatera. "When you hit the enter key, a shipping label is produced with the bar-code tracking number, which is now in our system, and the system automatically ship-confirms the order. One label is put on the box."

Once the order has been ship-confirmed, they can call up on that number using any Audiovox terminal in North America and trace that package. "We have cut the cost of applying labels, reduced the cost of ship-confirming by a dollar an order, and the administration task for my people trying to trace things has been cut down substantially," said Incalcatera.

Audiovox several years ago had more than 50 people involved in inventory management. " Now, two people in my office manage the public warehouse network," he said.

Moreover, the carrying costs on Audiovox's $15m to $25m in inventory have been cut in half. "Total inventory variance write-offs from the inception of our shift to public warehousing is less than $50,000," he added. " When we had 35 locations, we had some serious variance problems: We were probably looking at inventory shrink numbers of $300,000 to $400,000 a year." Not all the inventory loss was necessarily pilferage - a considerable amount was simply misplaced or the result of faulty accounting and/or recordkeeping in the company-owned facilities.

The export side of the equation also benefited from the domestic overhaul. "We do a fair amount of export out of these facilities, and getting the functions automated helped the export area tremendously," explained Moffett. "When I first came here in 1980, Audiovox was a $100m company. Now it's over $600m, and I still have the same staff I had then. Being centralized in this facility gives you a lot more control and a much greater ability to fill containers."

"We don't have to get into the nuts and bolts of getting product out the door, so there's no need to micro-manage," said Incalcatera. "As members of CLM [Council of Logistics Management] and NAFTZ [National Association of Foreign Trade Zones)] we're always networking with other people and equipment vendors and trade magazines looking for ways to make things faster and cheaper. The margins are razor-thin in consumer electronics, so we need to maximize our cost-savings, turn the inventory quickly, and have as little inventory on hand as possible."

That's why Audiovox is determined to bring on line sophisticated resource planning software. "If we can increase the number of turns, reduce the value of inventory on hand, increase the order fill rate, it's all dollars and cents for the company. And I think there is still money on the table there."