Eddie Jordan burst onto the Formula One racing scene in 1991. The 42-year-old Irishman was a driver in the 1970s, but never in the glamorous yet grueling world of Formula One. Now, going up against big names like Ferrari and McLaren, Jordan assembled a smallish team of drivers and designers. Jordan Grand Prix enjoyed a rapid rise, taking fifth place in its first championship race, and finishing fourth and third in the 1998 and 1999 World Championships. Further victories seemed assured.
Then the team started to slip back. In 2000, it fell to sixth in the Championship. A year later, it wasn't finishing races because of mechanical failures. Eddie Jordan realized that his problems weren't originating on the racecourse. They were the result of a defective supply chain.
Jordan's revelation came from his ability to straddle two worlds, sports and business. As a veteran racer, he knew that 80 percent of a team's performance is the result of events happening off the track. His response was that of any CEO who seeks to close the communications gap with key suppliers. In fact, Jordan Grand Prix happens to be the most literal example of an emerging trend throughout the corporate world: businesses employing logistics as a competitive weapon.
Up to now, most major improvements in logistics processes, as well as the greater supply chain, have been internally focused. Companies have drastically cut costs, mostly through inventory reductions and more reliable delivery. Information technology has streamlined business processes and allowed for data sharing across the enterprise.
But making those improvements visible to the customer is another matter. Today, in order to fuel sales, "logistics has to move away from the opportunity to reduce costs and toward the creation of value," says Skip Grenoble, executive director of Penn State's Center for Supply Chain Research. A well-managed logistics program becomes the very reason for winning or retaining customers.
Or winning races. Formula One requires the tightest possible integration between a racing team and its suppliers. While the rules specify that teams must design and build their own cars, they are allowed to outsource components. A big, well-funded program like Ferrari fashions almost everything in-house. Jordan, on the other hand, whose staff of around 300 is a third that of Ferrari's, contracts out between 60 and 70 percent of its parts manufacturing. The strategy saves money and people, but it also creates the potential for error, delays and miscommunication with outside partners. It's the same equation that every business must calculate, in deciding whether to outsource.
At the races and a soccer match, Eddie Jordan crossed paths with Ian Clarkson, a management consultant whose business was similar to that of Jordan Grand Prix in its relative youth and size. Jordan hired Clarkson's Celerant Consulting, now based in Lexington, Mass., with an office in London, to address the problem.
Their priority was speed, both on and off the track. A 36-week Formula One season involves races all around the world, just two weeks apart. In that time, hundreds of modifications to a car might be made. Suppliers must respond quickly, with parts that are perfectly machined.
As it happened, defective parts were a big part of the problem. Those failures in the first half of the 2001 season were partly the result of a small, inexpensive component in the hydraulic system that kept breaking. Eventually, after repeated visual inspections revealed nothing wrong, the problem was traced to a series of tiny cracks, caused by a single individual who lacked the training to operate a particular machine. "It's all too easy to say this looks fine," says Mark Gallagher, director of marketing with Jordan Grand Prix. "We needed to dig a little deeper."
The successful diagnosis was just one result of an intensive supplier-management program, implemented by Celerant on behalf of Jordan. The team relies on some 400 suppliers, including a dozen or more major ones. They range from small specialty shops to large automotive and even aerospace parts makers. (A Formula One race car, says Gallagher, "is really an inverted aircraft. Only it's designed to fly into the ground.") To run its cars this year, Jordan will spend around $70m, of which $30m goes to suppliers.
One of Celerant's first moves was to address the issue of defective or improperly designed parts. A new program put the onus on suppliers for getting it right the first time. The goal was to eliminate rework, which was slowing down the supply chain.
A supplier management system, including detailed supplier evaluations, gave Jordan a formal audit process for the first time. A vendor-rating system helped determine the best supplier for a given task. Jordan followed up with diagnostic visits to the place of manufacture, in order to assess progress and head off errors. As a result, it saw a 60-percent reduction in defective components from suppliers, and 50 percent fewer design changes during manufacture. Best of all, says Dereck Clow, Celerant's head of operations for the U.K., there were no problems attributed to mechanical failures in the second half of the 2001 season. Last season, Jordan had the second most reliable car in Formula One, after Ferrari.
Jordan and Celerant were especially keen to improve the flow of information between the team and its many suppliers. "That, to me, is the key point of logistics," says Clow. Not only did suppliers get a clearer idea of Jordan's expectations of quality, they were able to deliver the parts faster. During the actual Formula One season, Clow says, suppliers of some critical components sped up the order-cycle time by a race or two. And Jordan reduced supplier lead times by 10 out of 29.5 days. Last winter, says Gallagher, the team was running four weeks ahead of its normal production cycle.
Jordan Grand Prix has its own fleet of delivery vehicles, along with three or four drivers, who visit key suppliers each week. In many cases, though, it has become the suppliers' responsibility to deliver the parts. And that loss of direct control hasn't hurt the team's efficiency. A car that was still in the design stage last August was due to be tested by mid-January of this year. Jordan's engineering group missed the deadline - by an hour and 20 minutes.
Changing Channels at Alcatel
For Alcatel, the big French maker of networking and telecommunications equipment, a revamping of sales channels opened the door to improvements in the greater supply chain. Alcatel's e-business networking division wanted to stop selling direct to customers and rely entirely upon resellers. Yet it was no less interested than before in enhancing the customer experience. Alcatel's reliance on multiple third-party logistics providers had resulted in high costs and low service levels. Change was in order.
The direct-distribution model, accounting for nearly a third of Alcatel's sales, had led to a plethora of staff and warehouses in every major country in which it did business. Now it wanted to eliminate all local stocks and centralize distribution to resellers - or "business partners," as Dominique Rives, global account manager with UPS Supply Chain Solutions, prefers to call them. At the same time, Alcatel hired UPS as its lead logistics provider (LLP) - sole manager of the company's logistics program for Europe, the Middle East and Africa.
"We are the single party responsible for everything that happens in the [Alcatel] supply chain," says Rives. "It was a joint decision to outsource the totality of it."
Simplicity, at least in the organizational sense, was the watchword. Some of Alcatel's competitors continue to support multi-channel distribution, says Gabriel Weissenbacher, supply-chain director of the e-business division. But that strategy can lead to confusion in the minds of end customers. Even worse, it can foster resentment among resellers, who see the supplier as competing for the customer's business.
A similar philosophy extends to logistics. UPS Logistics manages all of Alcatel's European warehousing and transportation, operating out of a distribution hub in Longueil Sainte Marie, north of Paris. The actual operator of that facility is an independent provider, FM Logistics, but everything is done under the supervision of UPS.
The LLP oversees inbound and outbound transportation, packaging materials, and the assembly of a wide variety of product, which comes from plants in France, Spain and Mexico, among other places. It handles between 600 and 800 orders, involving more than 3,000 item references, each day. On the delivery side, UPS manages a collection of carriers and integrators, including Danzas/DHL and UPS's own fleet of planes and trucks.
The results have been dramatic. In the last three years, says Weissenbacher, Alcatel's record of delivering to promise has risen from 60 percent to 95 percent. Before, he says, "customer satisfaction was ranked the number-one problem as seen by our business partners. Today, it's no longer number one." That's highly significant, in an industry that has been hit hard by the global economic downturn, and is looking for every possible competitive advantage.
Alcatel has benefited internally, too. Its total supply-chain expense has fallen from 6 percent of cost of sales three years ago, to its current level of between 3 and 3.5 percent. "We have brought value to our customers - and value to the company," says Weissenbacher.
Coors's Direct Solution
Coors Brewing Co. has long touted its location in Golden, Colo., as a major selling point. But geography has also proved to be a competitive disadvantage.
The main brewery, largest in the world, draws from the waters of the Rocky Mountains for its distinctive taste. The problem, says vice president of logistics Charles Stelmokas, is that Coors is farther from its consumer markets than most rival brewers. So the company has had to depart from the industry model of direct shipment from factory to distributor, in favor of a series of regional warehouses. As a result, Coors manages to ship only about 60 percent of its product direct, versus the industry average of 85 percent.
The extra step raises the cost of distribution while detracting from the freshness of the beer, says Stelmokas. Now, Coors is working to correct the problem. With the help of Exel, the warehousing and 3PL provider with North American operations based in Westerville, Ohio, the company has been gradually increasing direct shipments. It has gone from two distribution facilities on the West Coast to one, in Los Angeles, and is currently scouting locations for a centralized warehouse in the Midwest. At the same time, it is installing racks at the distribution facility in Golden, a mile from the main brewery, to make it more efficient. Similar reductions in the regional warehousing network are slated for Coors's business in the U.S. Northeast.
The change has been made possible by an increase in the quality of North American intermodal service, Stelmokas says. With the dust from several big mergers having settled, the railroads are doing a better job of moving product on time and damage-free. And Exel, a large intermodal provider with ties to all major rail carriers, can secure favorable volume rates. Over the next five years, Coors plans to increase its intermodal moves from 100 a week to 500, boosting direct shipments from 60 percent to 80 percent. The result, says Stelmokas, will be a 25-percent increase in product freshness.
Coors and Exel are partnering outside the U.S. as well. Last year, the company acquired Carling Brewers, second-largest in the United Kingdom, from Bass Brewers, part of the Belgian conglomerate Interbrew S.A. The move shook up Coors's long-time domestic orientation, and signaled its determination to become a global player. In addition, Coors acquired Bass's 49.9-percent share in Tradeteam, a joint venture with Exel that provides integrated supply-chain services to the U.K. brewing and drinks industry.
Dan Dean, senior director of client development with Exel, says the 3PL's relationship with Coors has evolved over the past three years. "It has gone from a transactional one to a strategic partnership, based on our ability to support the initiatives that Coors is looking to deliver."
Wireless at Celanese
The search for a competitive edge through logistics and the supply chain is also occurring among makers of commodities and raw materials, a world where price has long been the dominant factor. Germany's Celanese AG sells a variety of chemical and acetate products for everything from paints to fashion apparel. It is deploying both wireless technology and a web portal to link its customers and sales force, according to Mary Haigis, managing partner of Durham, N.C.-based Clarkston Consulting. When completed, the project will allow both sides to view the movement of goods throughout the supply chain.
In the first phase of the program, Celanese equipped its sales force with handheld personal data assistants (PDAs). Right away, they could quote prices and make sales on the basis of confirmed availability. The second phase involves creation of the portal, allowing customers to check on the status of an order in real time.
With the help of Clarkston, Haigis says, Celanese has already managed to cut its customer-response time from eight hours to less than five minutes. That's a valuable tool, in a business where prices and product availability can change at a moment's notice.
Haigis says Celanese was the first in its industry to adopt wireless technology for that purpose. Lack of real-time information, she says, "is a common problem in the chemicals market. This has given Celanese a head start."
Business is rife with examples of companies waking up to the competitive power of logistics and distribution. Roger Dik, a Boston-based partner with Accenture, cites Dell Computer as a pioneer of the build-to-order model, which is predicated on reliable logistics and supply-chain management. Among the more recent cases, he says:
• Home Depot is selling a full range of products from General Electric Appliances, without carrying large amounts of stock. GE is responsible for actual distribution to the stores;
• Following the failure of several "e-tailers" to sell toys over the internet, Toys 'R' Us has partnered with Amazon.com, using the latter's extensive fulfillment capabilities to distribute web-purchased product;
• Cemex S.A. de C.V., the Mexican cement producer, uses satellite technology to improve on deliveries to construction sites. According to Dik, customers are willing to pay a premium for this price-sensitive commodity, in exchange for tighter delivery windows;
• Zara, the Spanish clothing retailer, has reduced to a matter of weeks the time it takes to get product designed, manufactured and on the shelves, in part because of a reliable logistics process. Zara lets stores capture on a daily basis exactly what's moving in the pipeline.
All of these examples stress the importance of speed, both in the movement of physical goods and the transmission of data. Equally important, says Dik, is collaboration, in light of the growing trend among manufacturers to outsource anything that isn't viewed as a core competency. For many companies, logistics falls easily into that category.
Dik says most businesses have a long way to go before engaging in the kind of collaboration that yields real benefits on the customer end of the supply chain. Lack of trust among partners, coupled with internally focused business processes, are major barriers.
Still, given the continued narrowing of margins and increasing demands by customers, companies will be motivated to alter their view of logistics' role in the organization. What was once a cost center has become an important tool for achieving internal efficiencies. Now, with managers having spent heavily on software systems for the enterprise, it might be time to look outward. "The easy stuff has been done already," says Grenoble. "Companies are starting to address the hard stuff."
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