John A. Caltagirone
John A. Caltagirone is vice president of supply- chain strategy with the Revere Group, which is headquartered in Deerfield, Ill. Previously, he was senior vice president and chief logistics and operations officer for Peapod Inc. There, he was responsible for distribution services, inventory management, purchasing, transportation management, logistics engineering and customer service.
Q. What do you regard as your biggest supply-chain challenge in the coming year?
A. I'm concerned that supply-chain professionals are going to be waiting for things to happen, and not moving ahead and making positive things happen. For example, there's the issue of logistics costs. They have been on the rise over the last several years, and they continue to rise, to the point where we're almost in double figures as a percent of sales. The last time I took a look, which was a couple of months ago, they were anywhere from 9.5 to 10 percent of sales. This is one of the highest levels we've had in the last decade or so. I'm including things like inventory carrying costs, warehousing, transportation, customer service and order entry. The biggest challenge will be reducing those costs while maintaining customer service levels, and improving on them.
Q. Is there any particular element of logistics costs that is especially problematic, or most responsible for this increase?
A. I would say transportation. It is by far the biggest single component of logistics costs. At a level of 9.5 percent of sales, transportation would account for 3.5 to 4 percent of that. The next biggest component would be warehousing, then inventory carrying costs. But transportation is where I really think we can make some hay and improve our businesses by reducing cost - being more efficient, doing better load planning and building, doing improved routing, taking advantage of backhauls.
Q. Are there any other issues that pose a major challenge today?
A. With everybody talking about 9/11, which has impacted us all, I'm concerned that businesses are going to bury themselves and not do anything. They'll just slash jobs, rather than do what needs to be done to position themselves with the marketplace and customers. Successful companies will be those that move forward in a conservative way - with some initiative. A number of companies are in a foxhole right now. They're not willing to do anything. Sometimes not doing anything is worse than doing something wrong.
Q. What type of technological innovations do you see that could support a more efficient supply chain?
A. Number one would be a warehouse management system. After you have your people and processes intact, the first major system that needs to be in place is WMS. That's the cornerstone for moving, taking and fulfilling product all the way to the customer.
The other system I feel would be beneficial is a transportation management system. Then let's take a look at advance planning systems, and leverage those across the entire enterprise. Naturally, from a transaction standpoint, you need an ERP system. But I want to stress the importance of blocking and tackling - from a systems standpoint, that means WMS and TMS.
Q. Does this tie in with the need to control costs? Are these tools essential toward achieving that end?
A. Exactly. And that's my fear - that companies are not going to do anything. I've talked to a number of them that aren't spending anything for the rest of this year. And they're not planning to do much next year either, as far as spending money on technology. I think that's a mistake. They have to get off the dime and position themselves. The leading companies are not going to sit back and wait.
Q. Doesn't everybody already have a WMS package of some kind?
A. Of some kind - but I'll tell you, I am amazed. Every time I run across a known name that you think must have something great, they really don't. Or they're not using it fully. That ties into their processes. Take something as simple as picking. How should they be doing it properly? Through straight picking, batch picking, weigh picking? They have to figure that out, and then put those rules into the WMS. But companies aren't thinking correctly when it comes to the processes that will be most efficient and help them cut costs, be more productive, and meet customer service levels.
Q. Might they be burdened with internally crafted legacy systems? Is that a problem?
A. Pretty much so. There's still a lot of confusion among some people, especially if they haven't been in operations for awhile. They've got putaway and replenishment systems and a function where they can fill product, and they think that's everything. But a more robust WMS can help them take advantage of cube utilization in the warehouse, and track labor productivity. I don't know how many companies aren't tracking labor productivity.
That leads into the issue of accuracy. I had a conversation yesterday with a professor who teaches supply-chain management in the graduate school of business at the University of Chicago. She was telling me she's working on one project for a company, and it's a known name, and they can't tie errors to a picker! I'm flabbergasted about that. It's a Fortune 50 company, for crying out loud. And here's the interesting part. They're getting complaints from their customers when they're short, or when something's picked wrong. They're not hearing any complaints if they overship!
Q. What about people? What is the need today for training and expertise in the supply-chain expert of the future?
A. This one is near and dear to my heart. I've been involved in supply chain and logistics for 30 years, and I've always felt that it's the Rodney Dangerfield of business. Finally, though, we're starting to get some respect. I think back to the seventies and eighties, when the H.R. department was called Personnel. And Personnel would call me and say, "We've got a problem person here. Let's put him in the warehouse. Or in the traffic department." Back then they never looked at it as a job that could mean a competitive advantage for a company, or that could help profitability.
I believe in educating and training people. I believe in having metrics that everybody understands - for example, these are how many picks we've got to get each day, and if we do that right, this is what it's going to lead to as far as profitability. I believe in investing big time with people. I can probably get a WMS system installed in one day. But will anybody use it? That's where change management comes in - in proper training and giving people the right skills. I've never seen a company go out of business for spending too much money on training. I'm a big believer in that, and in establishing rewards to let people know where they stand as individuals and as a team. I've been to a couple of companies that hang banners for some goal that either a worker or the team has achieved, such as 99.8-percent accuracy for the month.
Q. In addition to training, how do you address the natural human reluctance to accept big changes in the job and organization?
A. That's always going to be an issue to contend with. Most people want to do a good job. They want to learn and grow. We have to find those people, mentor them and help them to grow. If others don't want to be part of that, I'm not sure if there's room for them in the organization. Although some jobs are of lower grade than others, and maybe you do need those types of people. But I'm always looking for those who want to do better than they're doing today. In today's world, if training or education is offered to people, whether it's on-site or in a classroom, and they don't take advantage of it, shame on them.
Q. Have you seen any disruptions in the supply chain following the events of Sept. 11?
A. There have been disruptions with my clients. This was so big, it couldn't have been predicted. But they weren't doing an efficient job to begin with, as far as controlling inventories, and taking cost out of the supply chain. All Sept. 11 did was magnify everything. It put companies that weren't efficient and productive into a bigger hole. Now they're having to hunker down and cut this and cut that. It's a real shame.
Q. It took such a terrible event to get them to wake up?
A. Exactly. I was looking at some of the reports by Gartner and AMR. One was issued on Sept. 25 - a couple of weeks after [the terrorist attacks on the World Trade Center and the Pentagon]. They were projecting that supply-chain management [spend -ing] would continue to grow at the previously expected rate, which was 39 percent. And they go on to say that Sept. 11 changed the business landscape by justifying more planning and operational control to prevent disruptions in delivery. And that's fine. But what you need are these tools - like advanced planning systems, supply-chain optimization and execution systems. But they're still projecting growth in the supply chain, which is good to hear.
Q. What kind of changes do you see with respect to contingency planning and minimization of inventories? Do you believe companies will implement more emergency plans?
A. That's a good question. I always felt that most good IT departments had good contingency plans. At least I would like to believe that. On the operations side, it has been weak. People have had plans if the computer gets knocked out, but not as far as operations. That's going to wake some people up, at least to take some strides. If something happens, where do we produce? Where should we fulfill and ship from? I think we're going to see more companies come up with contingency or disaster recovery plans from an operations standpoint.
Part of it is getting back to the blocking and tackling of doing our best to substitute inventory with information. That really has to happen throughout the supply chain. Companies are having a hard enough time doing it within their own enterprise, let alone with their supplier's supplier and their customer's customer. That's one of the best ways we can have a contingency plan - just having better information.
Q. Do you think some companies might put a Band-Aid on the problem, in the form of additional inventories, thereby worsening the cost situation?
A. Yes. That's a fear. We're running around a little bit, saying the sky is falling. As I said, I'm concerned about people not doing anything. And I'm going to add to that - doing the wrong thing. It's a real shame the economy is in the state it is, and we've got all these damned inventories. If we can get rid of them, that means we've got to buy and produce more. And that means more jobs.
Q. How is internet technology being brought to bear on this problem?
A. Here's the thing about the internet. I have talked many times with IT people. They have done a great job in helping us. What we haven't done is align ourselves on the operations or supply-chain side. The internet is a 24-7 operation, as far as information, tracking product and demand. It's really without bounds, because of what we can do globally. And I've asked myself, what have we done in the supply chain? I don't think we've made any changes. And because of that, we're becoming to a certain extent even more inefficient.
Traditional distribution was built around pre-scheduled demand. You could predict the order flow; you had a weekly distribution cycle. Now that we have the internet, everything's real-time. The order flow isn't so predictable. In the case of WMS, it used to be batch interfacing. Now it's real-time, too. We used to have a small number of large orders; now we've got a large number of small orders.
Q. So, in one sense, the internet has actually made things worse?
A. It has made things worse, in my opinion, because supply- chain technology and marketing aren't talking to one another. Being a former chief logistics and operations officer at Peapod, I can attest to that. You set up a web site, making it real easy for everybody to order, and it's like that IBM commercial. You turn it on, and all of a sudden you get all these orders! Now what the hell do you do? That's the part they forgot about: you've got to ship the damned thing. You've got to get it to the right place, at the right time, in the right condition, for the right price. The old logistics still applies.
Another thing about the internet - when you're sharing information with your partners, especially with customers, you're opening up the kimono. And they're going to say, "Wait a minute. I placed my order on Nov. 2. Here it is Nov. 13. You mean to tell me you couldn't get the product?" "Well, we're out of the product." The good news is that the internet gives you visibility of what's happening with the order and the product. The bad news is, it gives you visibility of what's happening with the order and the product!
As a result, some companies are gun-shy about leveraging the internet, and becoming a real partner. That's a deterrent to supply-chain integration. You get into that trust factor. It's a real interesting dilemma some companies are in. They're going to have to get out of it, go on to the next stage and do a better job.
Q. Are the tools in place now to make that possible?
A. I have always felt that technology tools are out there. Whatever we want to do, somewhere out there is the technology to enable us to do it. What isn't in place, going back to an earlier question, are the training and education of people, and the processes that will help make this successful. If your processes are messed up, technology is only going to help you get messed up faster and bigger. If you've got the right people, training and processes in place, then technology can help you do it better.
Q. What about common performance standards?
A. I'm a big proponent of having the right standards and metrics in place. I am amazed at how many companies either don't have metrics in place or have 50 of them. What I keep telling them is, you need a handful of them. I don't know if it's three or six - but what are the right metrics and standards for you to measure what's happening? It's the old adage: you can't manage it if you can't measure it. That gets back to the human side. Let them know what the standards are, what we've got to hit, and why that ties into something even bigger and better - like profitability. I'm amazed and disappointed with many of our businesses that either don't have the right standards or have too many of them.
Q. How about communications standards - common protocols for maximizing use of the internet among supply-chain partners?
A. That, too, is missing. Companies are still figuring out where they want to be. Should they be using XML? What is the standard? I'm still amazed at the different camps on some of these things. I think we're getting there - we're making progress. But we still have a ways to go.
Q. How has the economic slowdown affected supply-chain reengineering efforts?
A. I feel the effects as far as companies not wanting to invest in technology. What they're looking at is the need to get their blocking and tackling done, from a process standpoint. I haven't seen a lot of companies purchasing expensive technology. I've seen a few kicking some tires, as far as doing a software evaluation for a WMS or TMS. But I haven't seen them spending the big bucks. One of the largest food companies in the country purchased a WMS a couple of months ago, but it had that in the works for some time. If companies were close to buying in September, maybe they went ahead with it. But if they were still thinking about it, they dropped it. People are being impacted because they had too much inventory. Hopefully now they're spending some time on reengineering processes. That doesn't cost them a lot if they're not going to spend it on technology.
Q. What are the most important things that companies need to be aiming at, with their limited IT dollars?
A. The simplest to me would be barcoding and scanning radio-frequency data collection that nine out of 10 companies can use that. And while this might not be the time to look at advanced planning systems, a simple TMS should help. A WMS should help as well.
Q. What is the weakest link in the supply chain today?
A. It's the lack of one common integrated system for everybody - the whole extended supply chain. For your partners to be able to look at the information and understand what is needed and when. We're disconnected as far as our partners being our customers and our suppliers' suppliers.
There, I feel, we need to get beyond WMS and TMS. We need to get more involved with systems for demand planning, e- procurement, and strategic sourcing - sharing that information between partners across enterprises. A lot of people talk about the integrated supply chain, but I'm not sure how many companies are really doing it. Everybody needs to take advantage of the information, and together take costs out of the supply chain. Not pass them on. If firm ABC takes cost out of its enterprise, yet puts the burden on its supplier, that's not fair. Together they need to find out what's best for everybody in that supply chain.
Q. So many companies seem reluctant to share critical information.
A. I don't think people are trusting one another. They're not willing to share. If they are, it's on a limited basis. I go back to the question: Is this true partnership? Are we in this together? You're going to see all my weaknesses and my strengths; you're going to get a pretty good idea of what my cost is and what I'm charging the customer. When you're willing to share all that stuff, you can come to the table and collaborate. Collaboration is critical.
Timely, incisive articles delivered directly to your inbox.