Ah, the good old days-25 years ago when uniform-maker Cintas bought fabric from a North Carolina mill, made the uniforms in Kentucky and distributed them to customers. In later years, the Carolina fabric was shipped to Mexico or the Caribbean for stitching, then sent back to the United States.
Now much of the fabric is spun in China, and the manufacturing is done in North Africa. Or Eastern Europe. Or other parts of Asia. All this, said CEO Scott Farmer, is “so that we can drive the cost out of it.” But those lower costs come with costs of their own, and headaches with logistics, supply chains and internal corporate structural issues. In short, said Farmer, “it’s getting a lot more complicated.”
Farooq Kathwari, chairman and CEO of Ethan Allen Interiors, knows this all too well. In the past four or five years, he said, the amount of furniture crafted overseas has burgeoned, with 35 percent now originating in Asia. “It changed our distribution network,” he said. “Our national distributions were set up where our manufacturing was in the U.S. Now, we have to change it because in good furniture, 50 percent is coming from overseas.” The company is now building a national distribution center on the West Coast and closing a major center in North Carolina because the products are not being made there anymore.
Not only are distances longer and supply nets more complicated, but U.S. customers have become more demanding. When they want a new couch, they want it now. “We used to deliver our products in three to four months and it was okay,” Kathwari said. “Now we are delivering 90 percent of our products within six weeks, and next year our objective is to deliver custom furniture in 30 days.”
All this effort requires fundamental change. “None of this can be done unless you really structurally change your business,” Kathwari said. “The rest is all Band-Aids.” And fundamental structural change, of course, is a job that must be overseen by a company’s CEO. This issue was discussed by a group of 25 CEOs and other top business leaders in a session called “Supply Chain Magic,” sponsored by supply chain software maker Manugistics.
Until the dot-com bust, many CEOs thought technology would be the major force driving structural change. It’s since become clear that strategy and structure come first, with technology as a servant. “I’m a true believer that sales and operations planning is 90 percent business process and management. It’s only about 10 percent technology,” said Ron Kubera, senior vice president at Manugistics. “We’re the technology providers so I hate to say it that way, but that’s the reality of it.”
Kubera spoke of a client who said its Manugistics software was running fine until the company started sourcing from China, when all hell broke loose. “They hadn’t compensated for the fact that they have to keep more inventory because of the uncertainty of that supply coming over from China,” he explained. “They just thought it was a per unit cost that was cheaper. They didn’t look at the whole business plan associated with that across all facets of their organization.”
Companies clearly could use better supply chain planners. But executives with those skills are hard to come by. Clarke Murphy, managing director at the executive search firm Russell Reynolds Associates, said recruiting supply chain talent at the senior staff level has become a whole new business for his company. “Eight or nine years ago, we had no one in our firm who did supply chain recruiting, and now for the fourth year in a row, it is the fastest growing family of our business,” he said. Because the job demands skills both in technology and, literally, international diplomacy, he said, “there’s a shortage of executives to meet demand.”
While many companies manage these executives through the chief operating officer, the role of the CEO is growing more crucial. “The supply chain issues really are a CEO, executive level set of decisions,” said Christopher Lofgren, CEO at trucking and logistics outfit Schneider National. “Supply chains are about managing the interfaces, so you’re managing the links between the dots, not the dots themselves.”
Another reason supply chains demand top-level attention is that lower-level executives are inclined to manage just one piece of the overall supply chain, causing unexpected impacts elsewhere, said Rob Carter, chief information officer at FedEx. “They only want to optimize the cost of one piece of the movement,” said Carter. “But CEO initiatives have to be very broad. If we’re going to reengineer this thing, we’re going to take it to the next level. We’re not just going to squeeze this particular supply chain leg and get a couple more cents out of it.”
Under Postmaster General John “Jack” Potter, the United States Postal Service has won high marks in management, partly through his partnerships with FedEx, which have brought greater efficiency to the entire door-to-door package delivery system.
Another major Potter initiative was to centralize purchasing from suppliers. “At the Postal Service, we buy some $14 billion worth of supplies and services,” Potter said. “At one point we thought that we would move purchasing, particularly small goods purchasing, out to the field units. We have some 38,000 units. Over the last four years, we’ve taken $2 billion out of our spending cumulatively. And the way we’ve done that is by leveraging size. We’re able to standardize our IT operations across the country and leverage our size. I mean, who else goes out and buys 150,000 PCs in one fell swoop?”
“Every business has to make structural changes like the Post Office did,” said Ethan Allen’s Kathwari. “Without them, you can’t operate.” Kathwari led supply-chain restructuring from the top while pushing greater responsibility and accountability deep into the organization. “We used to deliver our products, mostly [from where they were] made in the eastern United States. Our costs, our prices in the West Coast were about 15 percent higher than the East Coast.
“Forecasting was hard, and it was hard to know what the gross margin was going to be,” Kathwari explained. “So we decided to take over the logistics and the warehousing of products ourselves…deliver our products at one cost nationally and establish seven national distribution centers, and over the years a hundred retail service centers.
“This has reduced our distribution and logistics cost by 50 percent,” he said. “We had 300 stores at that time, and we still have 300 stores. But we are doing three times or four times the volume.” All of which speaks volumes about why global supply chain and logistics issues have become so important.