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Yak Pak's trendy bags and packs are in great demand by the young urbanites that shop at such hip retailers as Pacific Sunwear, Sam Ash, Tilly's and Urban Outfitters as well as at Yak Pak's web store. In addition to its own brand, the company designs, produces and markets bags under exclusive licensing agreements with a number of other well-known names. All products are designed at headquarters in New York and manufactured at a wholly owned factory in El Salvador with material largely imported from Asia. Distribution is handled through a modern warehouse facility in Houston. The company's growing business, including its global supply chain, runs on SAP Business One-the American Express Edition, which is designed specifically for mid-market businesses.
Q: Yak Pak was founded in 1989 and has grown rapidly. How has its supply chain evolved to handle this growth?
Haugen: We used to have a very simple supply chain. When I first joined the company, we ordered everything from China. We put it on a boat and brought it to New York. Then, as time went on, we moved our factory to El Salvador. We put raw materials on a boat from China to El Salvador and flew everything from El Salvador to New York. Now, we have moved our warehouse to Houston, so raw materials go from China to El Salvador and then we use a vessel from El Salvador to Houston and distribute from there. It has just evolved and grown over time. Since most of the raw materials for our factory are sourced out of Asia, we have a weekly stream of containers and some air shipments going into the factory. More and more, we are starting to source raw materials and pieces and parts locally in El Salvador, but that does not yet represent a substantial portion of the finished product-maybe 35 percent.
We do just-in-time manufacturing, which means that everything produced at the factory this week will be put in a container and is scheduled to arrive just-in-time to be shipped out to the customers. That makes our supply chain a little tighter than many others. We are not producing now for three months out, we are producing now to ship in a week and a half.
We have historically had some problems getting enough space for all of our shipments in air carriers out of El Salvador, so we have tried to shift more and more to containers, though we still use some airfreight. Being in Houston, we use the Great White Fleet and it works very well for us. We are able to get goods transported out of El Salvador and have it sitting in our warehouse in Houston in about 12 days.
Q: With a fashion product, is that type of short lead-time essential?
Haugen: It certainly enables us to be more responsive to the market. We don't have to take a big position in finished product.
Now, we do have to take the same position in raw materials. All the purchasing decisions for the factory-the fabric and other raw materials-are made here in New York. So our projections are really vital and this is where Business One has helped out a lot. It enables us to more accurately predict what we are going to need and to more accurately trend how many stores are buying a particular color or fabric. We are not going to shortcut the trip between Shanghai and El Salvador-that takes at least 60 days-so we have to be able to predict 60 to 90 days out.
Normally all that raw material is put on a containership that stops at El Salvador on its route-I think it's NYK Line-but if for some reason we have to fly the fabric, that will cost us about $18,000 more in freight. Clearly, that's not something we want to do very often. Little mistakes in the supply chain can have huge cost impacts.
Q: Why did you decide to manufacture in El Salvador instead of China?
Haugen: We do source some finished material out of China and China is cheaper, but the factory there cannot at this time produce enough product for us. We are starting to do that more and more, especially for larger-run programs. Chinese factories like big production runs.
The factory in El Salvador gives us a lot of flexibility because we can do much smaller runs. So if a store comes to us and wants a customized product and they don't want a huge 20,000-piece run, we can do that. It also gives us a great deal of flexibility in private-label production because we can work with units that maybe a larger factory wouldn't. We can do a style that is cutting edge even if we know it is just going to come and go. We can produce that item and get it to market very quickly, but not with the huge run that would be required by a Chinese factory.
Also the time-to-market is much faster. We have our own designers in-house and a full sampling facility in El Salvador. And it is a captive audience for us. We don't have to worry about someone else coming in with an order for 150,000 pieces and all of a sudden we go to the back of the line.
If you were to look at it simply on the basis of cost, yes it would be cheaper out of China, but for a small company that needs to be agile and very flexible and very responsive to the market you cannot achieve in China the flexibility and responsiveness that we achieve with our factory in El Salvador.
Q: What were your primary distribution challenges before the Business One solution?
Haugen: We had a lot of issues in distribution. As a growing company, we had a lot more customers who were requiring us to be EDI compliant. We were doing EDI but not very well. Now I can say that we can do EDI very well. Business One-the American Express Edition has EDI fully integrated, so it is really transparent. Whether it is an EDI order or a regular order, we generate EDI-compliant documents at every level.
At the warehouse level, we can transmit an 856 EDI message (advanced ship notice) off any package that goes out. That's built in. So now, for example, we have a much stronger ability to be compliant with a customer like Mervyn's right out of the box. That doesn't guarantee that we are going to do everything perfectly, but from a technological standpoint, I don't have to worry about that anymore. It's a given.
Another issue was visibility. Previously, we did not have a warehouse management system at all so it was very difficult to answer questions about the status of an order. Now I have real-time access, as does every person in my company, to the status of every order in the system, literally down to how many boxes have been packed in the warehouse and what is packed in each box. And that visibility increases our ability to service our customers. We have reduced the number of missed shipments dramatically and we are able to respond to problems a lot quicker because we see them before they happen. Before, we were very much in a reactive mode. A big order would come in and it would be, 'oh my goodness, we have to pre-ticket this.' Now, we know at the time the order is placed that this order needs pre-ticketing. As a result, we are not doing as much pre-ticketing in Houston anymore; we are doing it at the factory. So when an order hits Houston, all we are doing is receiving the goods, applying landed costs, reallocating it, putting on a shipper's compliance label and out the door it goes. Our whole process is speeded up.
Also, because the information is in real time, there are no more surprises in production. It used to be, for example, that a sales rep would take a big order that pushed the edge of what we could deliver as far as lead time. But that sales rep would not always give a heads-up to the person in charge of purchasing fabric or even the person in production. This resulted quite often in our having to juggle our production schedules and sometimes in our having to fly goods in, which cost a lot of money as well as lost efficiency at the factory. Now, when an order is taken over a certain size, the production planner gets an automatic e-mail that shows him the order. He can then click on the e-mail and place the production order with the factory. He also gets updates on every order over a certain size for which we have yet to place production with an appropriate factory. Our head of design, who coordinates our fabric purchases, also gets an e-mail copy of that order showing her the quantity and how much fabric it is going to use. So it is the ability to just automatically push the information out to the people who need that information in a timely fashion that is important.
We used to spend all week crunching the numbers, trying to figure out how much fabric we needed to order, which items we needed to schedule for production in the factory and in which factory to place the production. Now almost all of that data is generated automatically, so you spend the morning on Monday generating the data and you update it a couple of times during the week. But then you spend the rest of the time analyzing the data. So we are making better purchasing decisions. We have less waste and less scrambling. In an ideal transportation system, the warehouse is quiet and boring. You should never have to scramble. We have dramatically reduced the scrambling, though there will always be some of that when a customer comes in and wants another 20,000 pieces right away. You will never get rid of it altogether, but you can reduce it to the point that it is a controllable event. The Business One solution has made us proactive. We are no longer reacting to events in our business, we are able to see and look for and control as much as possible. We can see our business and we can see when things are coming up. People see the data in a timely fashion, which allows them to make decisions before they are actually reacting to a problem. They can predict what is going to happen. You cannot actually predict fashion, but as much as possible you can respond to the market.
Q: How did you decide on Business One?
Haugen: We thought, 'I can use the same Microsoft Word as Fortune 500 companies, why can't I have the same ERP?' And they had good ideas. Their WMS is a wireless system, for example. I used to have to deal with an accounting package that required me to pretty much have my warehouse within a 30-minute drive, because I had to be able to get there. My warehouse now is in Houston and I could put another warehouse in Miami next week if I really had to. So all of a sudden, our geographical limitations were removed.
And it will scale. There is a direct upgrade path-I mean, we are talking about SAP. They have put in portals that enable me to transition my data from one package to another so I am not concerned about outgrowing this product.
And it is very easy to use and was very easy to get everyone trained and live. It is fully integrated, so the one package includes hardware for the warehouse, the server, software, EDI packages, the WMS system, document management as well as integrated credit-card processing. And it all integrates with our web site, yakpak.com. So we really have a whole enterprise system, fully integrated, and I don't have to worry about making everything work together. American Express takes care of that for me. For a small business, you can't over-estimate the importance of that because you do not want to maintain disparate systems. I used to do that and it was a mess. It just sucked all our time and effort. Now we can actually work on running our business better.
Just because we are a small business does not mean that we are necessarily less complex than some larger enterprises. This is a package that lets me compete with those larger companies. Mervyn's doesn't care how big I am. They just need me to be able to meet their requirements. I can do that and I think I might actually be able to do that better than some larger companies with legacy systems at this point.
Q: What was the implementation experience like?
Haugen: It was a lot of work-don't underestimate that. We took out every single process and system that we had and replaced it. But I never lost an order or a line of data on an order. The American Express team was very impressive. They bring in people who know the integration pieces, who know the software and they make it all work together. With SAP, you know the core product works. But how does it work with EDI? How does it work with document management? How does it work with the credit-card piece? If you were to try to assemble this yourself as individual pieces, it would be a much larger process and longer process because you would have to verify compatibility and do testing.
We had to move a lot of data off our old system onto the new system, and we had to review all our business processes, so it was hard work. But I think it went about as smoothly as it could.
Q: Have you quantified any benefits?
Haugen: We know our return on investment was about 11 months. Before we started we thought it would be about three years. We are going to save about $300,000 a year going forward. Here is one example. One of our production planners was looking at shipment schedules and production schedules and realized that if we shifted our quoted ship window by three days, we would probably never have to use airfreight again, unless we wanted to make a last minute change. When we moved to Houston we knew we could shift to ocean freight but we just never got ahead of the ball game. This person sat and looked and saw that all it would take was to just shift everything three days and we could move everything by ocean. That saves us about $2,200 a week now.
He was able to do that because he was not spending all week crunching numbers but actually had time to analyze the information and study the numbers. We also save from being able to operate out of Houston instead of running a warehouse in Brooklyn. We were in Brooklyn for years and we love Brooklyn, but almost every single cost in Houston is cheaper. Pick a cost, it is less in Houston.
Here are some other indicators. Our business was up last year but shipping costs were reduced $100,000. Although our business is up, we reduced our web-store customer cost by 60 percent. We have 20 percent fewer people in accounting. Our claims for mis-packed shipments are down 70 percent. Warehouse manpower is down 22 percent. Inventory turns are up, which helps us use capital a little better. Our ship complete ratio is up to 98 percent
Basically, our business is up and all of our back office is down, and this is one of the key things we want to achieve because, as a growing company, we face pressure on our ability to maintain margins. How do you grow a business and maintain margins at the same time? One of the things you need to do is break the relationship between growth in sales and the back office operations you need behind your company to process your orders. We have managed to reduce the back-end substantially. And the great thing is that we don't really feel there is a limit anymore. Used to be that we would take a big order and go, 'Oomph, this is going to tax us.' That is not the case anymore. I can take as many orders as my warehouse can process. Now it is up to us. We have taken the governor off the operational side of the business. We need sales and great designs and great marketing. But we can now refocus on looking at what our business is all about instead of spending all our time getting orders out the door.
Q: Are there lessons learned you want to share?
Haugen: Be very open minded to change. If you are looking at changing your system, put everything up for grabs. One of the really great things we had working with American Express is that they had people who were consultants and CPAs who reviewed our business processes. We have been growing fast and what happens is you end up with processes that don't always make sense. Maybe they did once, but you get down the road and you're still doing things the same way just because you always have. You need to ask if there is a better mousetrap. Just because something was always done one way, even if it works well, doesn't mean there isn't a way to do it even better.
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