Supply Chain CEOs
Execs who built reputations on smart sourcing face their biggest challenge yet.
January 1 2002 by Jane Hodges
Michael Dell, Phil Knight, and Mackey MacDonald run some of the hottest household-name companies, but not just because consumers love their brands. Behind the scenes these CEOs who lead Dell, Nike, and VF Corp., which makes apparel brands such as Vanity Fair, Lee, and Wrangler, have turned custom forecasting, smart sourcing, and rapid delivery of goods into strategic moves that impact the bottom line.
“Supply chain initiatives help companies get costs down, get revenue up, and differentiate themselves,” explains Daniel Naor, co-leader of McKinsey & Co.’s supply management practice in Dallas. Supply chain expenses can account for up to 15 percent of a company’s total cost of sales.
As the Internet bust and changes in accounting methodology have illuminated areas where companies have over-spent to sell, improving the supply chain has become crucial. Over the past five years, supply chain management has quietly become one of the top skills sought in executive searches, according to Peter Crist, vice chairman at Chicago executive recruiting firm Korn/Ferry International.
“Clients want executives who understand that the flow of business is interchangeable,” says Crist, who cites both Cardinal Health and 3M’s success with supply chain efficiency championed by their CEOs. He sees more top officers climbing the ranks via supply chain-related jobs.
MacDonald, chairman and CEO of VF, the $5 billion Greensboro, NC-based clothing maker, says supply chain restructuring became a major priority when a promotion installed him in VF’s top post in 1996. He faced two business challenges. First, selling seasons for many VF clothing brands shortened-shrinking, in some cases, from two years to one season. Second, the number and variety of retailers, including e-tailers, that wanted to stock the company’s styles had grown significantly. “We wanted to increase our reaction times to fashion trends among our consumers and reduce our inventory costs, which were becoming a more serious problem,” MacDonald recalls.
VF research showed consumers wouldn’t pay more for products that were brought to market faster. So VF had to adjust-or watch margins shrink. “We had to revamp our entire supply chain process,” says MacDonald.
Customized Merchandising at VF Corp.
MacDonald created a 200-person team to analyze and reorganize VF’s supply chain structure. Manufacturers had become accustomed to culling day-by-day sales data from retailers, such as mega-store Wal-Mart, using electronic data interchange (EDI) and logistics systems that could track sales and restocking needs among the 600,000 different styles of jeans, swimsuits, knits, and daypacks in its portfolio.
But to navigate the changing retail world, the company needed more data. During Mackey’s first years in office, VF used technology from SAP and i2 Technologies to create an apparel-specific forecast that blends EDI data, store-specific demographics, and data about shopper motivations. By doing this, VF can anticipate demand for particular styles and use the data to inform product development.
This custom software program has worked well in stores like JCPenney. During the first six months, the program boosted VF women’s brand sales, improved gross margins by 2 percent, and reduced inventory by 14 percent. MacDonald expects to use supply chain technology to shave $100 million from inventory costs in 2001.
Already, supply chain infrastructure has become so deeply ingrained in the company’s fabric that it guides VF’s acquisitions. “We’re able to find strong brands that haven’t been able to invest in the kind of supply chain technology that’s required today,” MacDonald says, citing the turnaround at The North Face, maker of outdoor gear, as evidence that his company can create efficiency. “During the year before we bought them, they shipped on time only 45 percent of the time. Today they ship 95 percent on time.”
Centralized Purchasing at The Home Depot
Bob Nardelli also quickly focused on supply chains when he took the top spot at Atlanta-based The Home Depot in December 2000. Last summer Nardelli announced a plan to reorganize his company’s merchandising operation, which would centralize all purchasing through Home Depot’s Atlanta base. Designed to make selling to Home Depot easier for suppliers, the shift would also make mass deployment of merchandising efforts easier.
The move resulted in three new supply chain-related promotions, all of whom report to Nardelli. Jerry Edwards, the new executive vice president of merchandising, says that under the restructuring, one umbrella merchandising unit now combines the responsibilities previously pursued by nine regional merchandising groups, which should simplify manufacturers’ dealings with Home Depot.
Home Depot also plans to let its new supplier strategy aid local stores’ efforts to create neighborhood-specific marketing plans. With purchasing and merchandising centralized, the program gives local merchants more time to analyze sales and forecast appropriate marketing programs by removing administrative burdens.
But if establishing an efficient supply chain organization had already become a priority for many CEOs, enforcing it during the weeks following the September 11 attacks became a test of logistical acumen. Though airports were opened fairly quickly, heightened customs security continues to create delays. Trucks transporting goods from Mexican maquiladoras, or assembly plants, and major Canadian manufacturing centers spend entire days at U.S. borders waiting to pass through checkpoints.
At VF, where speed-to-market and the latest fashions drive sales, delayed delivery threatens disaster. VF’s main trouble had been air freight from Pakistani contractors, according to MacDonald. But in November, VF announced it had to cut costs further and would be closing 30 to 35 facilities stateside and moving much of its production to lower-cost manufacturing facilities outside the U.S. The plan, which is expected to save the company about $115 million annually, leverages VF’s large layer of outsourced contractors around the globe. “This will give us a lot more flexibility in terms of sourcing,” a company spokesperson predicts.
Time is Money at BAX Global
Not all companies have that many options-specifically those that make time-sensitive drugs, chemicals, and parts, or that use just-in-time manufacturing as a competitive advantage. BAX Global, a shipping and logistics consulting firm with 27,000 clients, has also run into financial trouble as a result of border waits.
“Charges are passed on to us,” explains BAX President Joseph Carnes. “Given the low margin [in the industry] we have no choice but to pass those along.” Because BAX owns truck and air fleets, but also partners with other carriers depending on the needs of a particular client, it doesn’t always control the whole shipping route. For instance, grounded commercial jets-which can carry up to 20 percent of the industry’s commercial cargo alongside passenger baggage-can create costly complications.
MacDonald says VF has yet to face added charges from shipping partners. If that happens, he plans to seek alternative distribution or new partners. “I don’t think there is room in this market to pass costs along,” he says.
That’s easy to say for a giant like VF, but for smaller companies that lack the supply chain muscle even in good times, the new landscape looks more daunting than ever.