Your Business Is Only As Strong As Your Supply Chain

April 19, 2005 -- Kurt Kuehn, senior vice president, worldwide sales and marketing, spoke to attendees of the JDA Focus 2005 Conference in Orlando, FL. Kuehn examined the changing business model of satisfying customers through operating agile and responsive supply chains.


Today is an interesting day in history that fits in nicely with my discussion. April 19 is the feast day of St. Expeditus -- the patron saint of business executives.

Yes, it’s true -- there is a patron saint for business executives.

St. Expeditus’ aid is invoked to prevent procrastination.

If ever this patron saint’s help is needed, it is for those companies who have delayed integrating a synchronized supply chain strategy with their business strategy.
Let me tell you why procrastination in creating this synergy is unacceptable.
Retailers and consumer goods producers are operating in a complex world, where change is the order of the day.

Old business models, processes and strategies are being re-examined. A lot of the old rules no longer apply. New dynamics and challenges bombard us every day.
Major issues are top of mind for C-level executives in the retail industry.
They’re concerned with globalization and the China equation, supplier relationships, multi-channel marketing, technology tools, and risk management, just to name a few.
We’re operating in a world where companies are just as likely to have customers, partners, suppliers and employees in Bangalore and Beijing as in Baltimore and Boston.
Fashion lifecycles, product lifecycles and customer lifecycles move nearly as fast as those digital ones and zeroes passing through trillions of miles of fiber optic threads.
Your business is only as strong as your supply chain.

The JDA Focus agenda for this conference reflects many of these concerns. Discussions on technology applications, process improvements, the customer experience, merchandising and replenishment -- all of these are essential to keep commerce moving forward and attaining supply chain excellence.

I want to talk about enhancing the retail supply chain through synchronized commerce, focusing on three areas: retail supply chain trends; synchronization of the retail supply chain; and how UPS fits into the picture.

The latest data shows same-store sales grew 4.1 percent in March, according to the International Council of Shopping Centers.
Discount chains and drugstores did particularly well, while specialty apparel experienced only modest growth. Department stores fell by one percent.
Cold weather and higher gas prices influenced consumer spending habits, with lower-income households feeling the pressure more than higher-income households. So far, the growing economy is offsetting the gasoline price rise, muting its effect on retail sales.
That’s the short-term news; but what has been happening over the long run?
There are three major supply chain trends happening in the retail sector that are affecting players on all sides.
First, retailers are leveraging the supply chain in their business strategy.
Second, retailers are moving to more direct sourcing, taking direct importation versus through an intermediary.
Third, retailers are applying upstream pressure on producers to customize the supply chain process.
Forward-thinking retailers are competing on operational efficiency, not just on products and pricing.
They’re integrating their supply chain strategy with their business strategy, and looking holistically across the process for improvements. They’ve made this linkage “job one.”
It’s no wonder Wal-Mart has been called “a supply chain with retail outlets.”
Process improvement is the name of the game, and efficiency is the foundation for success.
We’re seeing an increasing number of retailers forgoing the traditional distribution model and engaging in direct sourcing of goods.
For example, a retailer that used to have goods sent to a stateside distribution center for kitting before distribution to stores now instructs his Chinese manufacturer to perform the kitting overseas for direct shipment to the store.
U.S. policy changes are also impacting the sourcing relationship. One needs to look no further than the most recent report on Chinese textile imports for proof. In the first quarter of 2005, U.S. imports of textile and apparel products from China rose more than 63 percent from a year ago.

In some categories -- like cotton trousers and cotton knit shirts -- the increases were as high as 2,000 percent.
These increases would happen anyway, but they are also being fueled by the direct sourcing trend.
This move to direct sourcing is noticeable with larger retailers who can leverage scale. It is also beginning to show up in smaller retail companies as the cost advantages have become too large to ignore.
By going direct -- versus using a U.S.-based distributor -- more money can go straight to the bottom line.
That’s not to say it’s an easy road. Direct sourcing also creates its own set of challenges.
Direct sourcing means retailers have to be more sophisticated in planning and managing product flows from the point of production.
On one hand, you’re now in the product specification business, directly working with your sources to ensure goods meet your design criteria.
Direct sourcing also means you’re increasing the complexity of your supply chain, which impacts the amount of time spent on this process. That could slow you down as you move away from your core competencies.
Retailers are also driving change in the supply chain due to pressures put on them by their customers. This is resulting in greater pressure applied back upstream to producers.
A major consumer goods producer dealing with two completely different supply chain requirements provides a good example of what is happening.
On one hand, the producer is sending pallet loads to a major discount chain. On the other hand, the producer is required to provide store-specific, aisle-specific, pre-labeled, tote-bin size shipments to a drugstore chain.
Talk about a challenge. It’s clear that deeper collaboration is required to ensure supply chain efficiencies are realized.
In effect, we’re seeing a shift as retailers move from being masters of demand to masters of supply.
Retailers know demand, but they’re not just placing orders with producers.
Today, they’re partnering upstream, actively managing suppliers and other players in the front end of the supply chain.
Today, retailers are basically operating under three models.
The first is the traditional B2B model, where producers fill up large truckloads for retailers. This method moves pallets quickly and directly from producer to store.
Home Depot practices this approach, where suppliers ship directly to their stores.
A variation is the Wal-Mart model, where goods are shipped to distribution centers and then broken down for individual store delivery.
A second model in the B2B channel involves adding value to the shipment process.
We’re seeing increased upstream channel pressure from retailers as they tailor the supply chain to meet their customers’ needs.
For example, Wal-Mart may request that specific goods are bundled on skids, destined for shipment to specific store numbers.
Cross-docking is also gaining momentum, and for some retailers may approach 50 percent of volumes.
At UPS, we know of two office supply companies who are taking radically different approaches to cross-docking. One cross-docks 20 percent of its goods, and the other cross-docks 80 percent -- opting to bypass distribution centers almost altogether.
This strategy dramatically lowers handling costs and can help reduce inventories and improve performance. However, it requires significant redefinition of business processes and reconfiguration of distribution centers to accommodate flows.
Third, there is the B2C model.
Now that the dust has settled on the “dot.bomb” era, we’re seeing a reinvigorated approach to this direct channel.
One big box chain, for example, has seen 30 percent year-over-year growth in its online channel.
Many companies are looking to multi-channel marketing, and they’re looking for consistency in the customer experience across all channels.
For instance, a company like Best Buy wants the web experience to equal the brick-and-mortar experience -- with interchangeable transactions and seamless purchases and returns.
At UPS, we spend a lot of time working with the retail industry on distribution, supply chain and customer-service issues
Considering that post-sales customer service is crucial to maintaining a competitive edge in the intense battle for home-based shoppers, UPS has taken the lead in this area with a new initiative.
Two weeks ago UPS announced it is the first carrier to accept return ground packages at its 40,000 drop boxes. Our authorized return service improves efficiencies for retailers and convenience for their customers.
In addition to being a distribution and supply chain partner, UPS is now a fellow retailer -- thanks to our acquisition of Mail Boxes Etc.® a couple of years ago.
Today, our 3,800 The UPS Store® locations in the U.S. and 1,500 Mail Boxes, Etc.® locations around the world give us a significant retail presence and a strategic platform to better serve you and your customers in the future.
The UPS Store® is part of a retail strategy guided by many of the same forces driving your business including e-commerce and consumer pull, growing ranks of entrepreneurs, home offices, and mobile corporate workers -- and increasingly, global supply chains.
The stores are an important link in our overall vision of synchronizing global commerce.
Synchronized commerce is about coordinating the movement of goods, information and funds up and down your supply chains -- so that you can better optimize your demand and supply cycles.
It’s also a way to help forge stronger connections with your suppliers, extend your reach, get to market faster, differentiate your service offerings, serve your customers better, and of course, operate your businesses more efficiently.
We think synchronized commerce is more than just a supply chain play. It’s also about synchronizing every aspect of the order management cycle with the customer in mind.
It helps speed cycles so that customers can get popular items sooner and you can get paid quicker.

It’s about helping businesses break down internal and external silos and turning all those customer touch points into moments of truth and platforms for increased relationships.
I was encouraged to see many of these issues highlighted in the International Mass Retailer Association’s Logistics Study. Forty-two percent said that collaborative relationship and market differentiation strategies were the biggest business challenges. Nearly 40 percent mentioned that the greatest challenge was creating a more customer-focused supply chain.
These same areas were also cited on the supplier side -- which speaks volumes about the need for greater collaboration across the US$1 trillion mass retail industry.
It’s been 21 years now since Booz Allen Hamilton coined the term “supply chain management” and industry leaders first started recognizing it as a holistic business process.
Certainly, significant gains have been made over the years. Across all industries, there has been a 34 percent reduction in inventory to sales, resulting in a nearly US$5 trillion savings in inventory costs.
In just the last five years alone, there has been a 10 percent improvement in order-to-cash cycle times.
There have been productivity gains from IT investments, industry and market deregulation, improved visibility, and greater Just-in-Time and collaboration practices.
The surface has just been scratched -- even in the retail industry which has long been on the vanguard of the supply chain movement. Challenges such as information accuracy, inventory management consistency and application of strategic supply chain strategies, still remain.
My second discussion point is the imperative for synchronized supply chains.
I would like to suggest that a synchronized retail supply chain must not only be a central part of your business strategy, it must also be the foundation for achieving your business plan goals.
This alignment should extend across your enterprise and throughout your network -- from strategy and operations to suppliers and customers.
Your business plan should mirror your supply chain plan and vice versa, because supply chain strategy is crucial to achieving corporate strategic objectives.
Operational alignment is crucial due to the many hand-offs from the loading dock to the store shelf. This requires an ability to globally integrate processes, from supplier management to returns. Alignment results in a reduction in shrinkage and improved cost control.
Supplier management is critical to eliminate the bullwhip effect -- those peaks and valleys where supply is mismatched with demand. Alignment enables you to effectively balance demand and supply.
Alignment affects how you position your product for service excellence with your customers.
Given this complex world of change and supply chain shifts, retailers’ ability to adapt is critical. The differentiating factor is management of the supply chain.
At UPS, we believe retailers should focus on the fundamentals of their business, such as buying, marketing and the customer experience, because they know their customers best.
Our role is to help manage the supply chain to provide for greater competitive advantage.
Certainly, cost is a huge factor in supply chain management. But there’s more to supply chain strategy than managing direct costs. There are also indirect costs to consider and that’s where supply chain professionals can really make their impact felt.
It’s what’s known as attacking the “soft three dollars.”
Let’s say you produce a bottle of water for one dollar and sell it for four dollars. There’s not a whole lot more you can do to reduce the direct costs of producing the product -- perhaps a nickel here or there.
By attacking the other 75 percent of the cost of getting a product from producer to consumer -- those soft three dollars -- you can drive real savings in your organization. That means focusing on the indirect supply chain costs that include transportation, in-store delivery, duties, shrinkage and insurance overhead.
By managing those indirect costs, retailers can avoid lost sales due to lack of inventory and markdowns due to excessive inventory.

I’d like to highlight five areas that are critical to your business plan objectives, and show you how synchronized commerce can help drive real results by attacking those “soft three dollars.”
These five strategic imperatives, of course, are not limited to the retail industry. These are universal challenges:
- improving financial metrics;
- driving growth through new geographies, new channels, and new business conditions;
- differentiating yourselves in a world of increased parity;
- enhancing customer service; and
- increasing productivity.

Let’s start with improving financial metrics -- shrinking order-to-cash cycles, reducing inventory costs and freeing up working capital.
Inventory costs, of course, are not just sitting on the warehouse shelf. They are also going down the highway, sitting on the dock, or clogged up in customs lines.
Pushing costs back to suppliers through stringent performance requirements and levying compliance fines is not always the answer. You pay eventually.
One example of an innovative cash-flow solution from the retail product supplier and distribution side is evident with a company in Montreal, Malis-Henderson, that makes bridal veils and headpieces and sells them to bridal shops across Canada and the U.S.
This has been a success story, with the exception of one significant problem: C.O.D. payments from U.S. customers typically take 30 days to land back in the company’s hands.
Malis-Henderson found a solution to its problem: It involves a combination of customs clearance, warehousing, fulfillment, distribution and C.O.D. direct payments -- all bundled into one solution.
First, Malis-Henderson ships its goods from Montreal to a customs-clearance warehouse facility in New York.
By consolidating shipments, the warehouse is able to clear customs faster and expedite the movement of those goods into the U.S.
Once the veils and headpieces reach the bridal shops, C.O.D. checks are given directly to a delivery driver who uploads the transaction into a wireless electronic notebook that is connected directly to the delivery company’s financial services unit.
Funds are then transferred directly into Malis-Henderson’s bank account.
The result: A 30-day cash cycle that is flattened to about three days. Managers have more time to focus on the business, and customers are more comfortable giving a check to Malis-Henderson than a third-party broker. Malis-Henderson gets the holistic financial and shipping visibility it needs to run a growing multinational business successfully.
Goods, information and funds -- synchronized for better results.

The second business plan imperative is finding new growth opportunities through new geographies, channels and market conditions.
We’re seeing from our own experience in talking to customers that as the economy continues to turn for the better, more and more attention is shifting from survival mode to growth mode.
One area of dynamic growth is in the B2C channel, where we’re seeing some innovative approaches to mass retailing. For example, two discount big box retailers are taking quite different approaches to reach customers.
One retailer has learned that the more products it offers on its website, the greater the growth in the channel. By adding a broader array of SKUs than is offered in its brick-and-mortar stores, the company has managed to grow its online business by 30 percent.
Another retailer is leveraging its physical and virtual presence to grow the business. This retailer has discovered that nearly 40 percent of customers who used the company’s “ship to store” online option had never set foot in one of the stores before.
These online shoppers don’t go to the store to pick up their virtual purchase and then leave. Instead, they also spend time in the store and rack up additional purchases. So the online business is contributing to the brick-and-mortar business.
Two different approaches with similar results -- finding new growth opportunities through new channel approaches.

The third strategic imperative is competitive differentiation.
The question for a lot of us today is how do we distinguish ourselves when everyone else is carrying the same products?
For the retail industry, there are few issues more important than competitive differentiation.
We no longer compete solely on the strength of our products or the strength of our service.
Industry experts claim that companies no longer compete. Rather, their supply chains do.
Look, for instance, at what Nikon is doing to partner with retailers to differentiate their offerings. For its new lines of digital cameras, Nikon turned to a logistics provider to kit and configure their cameras according to individual retailers’ in-store requirements.
In some instances this meant kitting cameras with batteries and cases. In other instances it meant working with individual retailers to put their brands on packaging and adding free memory cards for special promotional periods, giving the retailer a unique offering for each customer.
The same third-party helped Nikon significantly shorten its supply chain from Asia to the U.S. and Latin America. Speed to market is enhanced, as well as their visibility up and down the supply chain, which helps reduce backorders and sales that could go to competitors -- all critical factors in the super-heated competitive world of digital cameras. The fourth strategic imperative is enhancing customer service. In the retail industry, the in-store experience is certainly the main moment of truth.
Much of that experience, however, is shaped at the front-end of the supply chain.

Customer service is both inside the store and beyond. Some of the most common bad experiences, like out-of-stock merchandise, painful returns, warranty services and long customer service lines -- are all supply chain issues.
We know when customers walk, they talk. They’ll tell eight friends about a satisfying experience and 20 about a negative one.
Here’s an example of service that benefits the customer, the retailer and the product manufacturer.
Deer Stags operates a global supply chain that stretches from Brazil to India and China to produce a broad range of comfortable, stylish shoes.
At the same time, it must also comply with very specific shipping, labeling and quality control requirements for 3,000 domestic retail outlets.
This challenge was made even more daunting because Deer Stags was using different vendors for each part of the supply chain process.
Deer Stags turned to a single provider to handle freight forwarding, brokerage and distribution.
This provider also handles the critical quality control check, which is done on 10 percent of the shipment. When that is complete, the emphasis turns to vendor compliance then to retailer requirements.
The provider also manages reverse logistics as merchandise moves back through the supply chain.
The end result is enhanced customer service, happy retailers, happy consumers, and a happy Deer Stags.
To top it off, the company was named Vendor of the Year by JCPenney, Mervyn’s and Bob’s Stores. At JCPenney, Deer Stags is one of the top-rated suppliers in terms of fill-in rate and on-time shipping and distribution.

The final strategic imperative is improving the quality and productivity of our businesses through focus.
The complexity of today’s world is making more and more companies realize that they can’t afford to go it alone anymore. Instead, they know they’re more likely to succeed if they focus on their core competencies and partner in areas where they need expertise.
One company that realized it couldn’t go it alone anymore is National Semiconductor. The company manufactures four billion chips each year in plants throughout Southeast Asia. National Semiconductor also tried to manage the intricacies of sorting, storing, and distributing those chips to 3,800 customers around the world.
National Semiconductor realized, however, that its core competencies were in two areas: world-class design and manufacturing.
Managing complex warehousing, distribution and inventory flow systems would be better outsourced.
That’s what the company did. As a result, a global distribution center in Singapore was designed and operated specifically for National Semiconductor. Each worker has access to a computer terminal, a hand-held wireless computer, and a wearable barcode scanner so that information about each chip can be transmitted seamlessly and securely through the building.
This completely removes the need for paperwork as all the processes and transactions are documented electronically.
The facility design also streamlines shipment handling by reducing the distance workers must travel within the warehouse to complete an order.
The result is that orders which used to take weeks to fulfill are now completed within one or two days through air shipments to all points around the globe.
In the process, National Semiconductor has taken 20 percent of costs out of its supply chain while greatly enhancing its productivity and customer service.

We’ve discussed the state of the retail supply chain, and the strategic benefits of supply chain synchronization.

Now I’d like to spend a few minutes to tell you how UPS is positioned to better serve the retail industry.

The retail and consumer goods industries are important to UPS, and we’ve invested in a great deal of resources to address your specific needs.
We want you to take a closer look at UPS because we’re much more than a small package delivery company. We’re moving from services to solutions -- to create greater economic value for customers.

Supply chain management is not the core competency for most companies, and that’s where a company like UPS enters the picture. Let me share with you a few specific offerings that we’re seeing interest in because they drive economic value for customers.
The Trade Direct suite of services is symbolic of what UPS is trying to accomplish as an organization.

Trade Direct is a complete, integrated, multi-modal solution to move products across oceans and borders more efficiently and reach customers and retail stores more quickly and easily than ever before.

From ocean to air and ground, the suite offers businesses a warehouse in motion -- seamlessly handling shipments every step of the way from factory to consumers.
With Trade Direct Ocean, for example, retailers have a choice of pre-assigning goods to ship directly to retail stores, or they can use the vessel as a moving warehouse to keep goods flowing through the supply chain.
This process saves time and skips intermediary stops at regional distribution centers, shaving up to 20 days from the traditional process. Customers benefit from increased efficiency, improved resource allocation, reduced time to market, enhanced shipment visibility, and improved control.

We also recognize that doing business with suppliers in other countries not only opens up possibilities, it also creates challenges. Managing vendors and orders can be a daunting task when you factor in varying languages, cultures, time zones and distance.
UPS Supplier Management enables successful international commerce by bridging these challenges to create a seamless supply chain. It oversees a company’s supplier by following the purchase order through production, delivery and payment.
Features include vendor compliance and order management, global information management, global distribution management, regulatory compliance management and transportation management -- all to manage international suppliers with more accountability and better control, regardless of time or distance between parties.
In the milestone-driven retail industry, speed is critical. But speed is useless without access to reliable information.
The goal is to remove uncertainty from the supply chain and to gain proactive visibility of inbound flows with notification of changes and updates.
Information feeds this process and as uncertainty is reduced through the use of visibility tools, predictability is increased.
Advance information reduces cycle times by enabling problem solving and providing opportunities for more dynamic flows. The result is better flow management with more precise quantities that match true customer demand.
UPS has created a technology platform to support visibility.
We are supporting inbound and outbound movements through our small package operations and also giving a broader view across the supply chain.
With Flex Global View, customers have a “window” into UPS supply chain solutions operating systems: They can monitor the warehouse, orders, transportation, and inventory.
Users get an integrated view of their supply chain via a web-based information system. Specific views and analytical reports enable one to see -- in near real-time -- events in transit in the warehouse, on docks and airports, at customs, at supplier’s premises, and at customer locations.
UPS also provides visibility services to its small package customers through Quantum View. This portfolio gives customers automatic, proactive status information about UPS small package shipments.

Proactive notification allows UPS customers, and their customers, to identify potential problems and act before they become big problems.
One of the most powerful features of Quantum View is the ability to plan and manage inbound flows in a way you haven’t been able to do before. This satisfies a critical need for retailers.
Quantum View also speeds cash flow because the finance department can trigger invoices based on prompt delivery notification. It can also be used to assess charge-backs to internal departments.

Whether you’re in retail, consumer goods production or related industries, it’s clearly a brave new world out there.
It’s a world that calls on us to practice what we do best.
It’s a world that requires focus, and partnership, and trust.
It’s also a world of immense opportunity -- for all of us.

At UPS, we look forward to this future, and look forward to our continued partnership with the retail industry.