Logistics to the rescue

By Toby B. Gooley, Senior Editor -- Logistics Management, 5/1/2000

Canyon fires-that's how Ed Hoskinson describes some of the issues that faced National Linen Service (NLS) in the mid-1990s. The Atlanta, Ga.-based provider of institutional linen services was plagued with problems that "spread fast and destroyed everything," says the company's vice president of materials management.

A series of acquisitions in the 1980s had created a large, diversified company that no longer had good information on its costs. Service suffered, profits were eroding, and customer turnover was climbing.

It was time for action, and in 1997, NLS embarked on a turnaround strategy that focused on restructuring its product lines, customer base, service standards, and operating costs. Today, says Hoskinson, National Linen Service is a smaller but much more profitable organization-thanks in no small part to logistics, which played a leading role in making that strategy a success.

An Unhealthy Picture

National Linen Service is in the business of supplying textile products to institutional users on a short- or long-term basis. It provides such items as table linens, bed and bath linens, and cleaning supplies like mops and towels to about 56,000 customers in the food service, hospitality, and manufacturing industries and to the military, mostly in the Southeastern United States. (Until 1997, the company also supplied industrial uniforms but has since sold that business.) In its 1999 fiscal year, NLS, a subsidiary of National Service Industries, reported profits of $42.9 million on sales of $309.1 million.

The picture wasn't always so healthy. In FY 1996, National Linen reported profits of $42.2 million on sales of $530.6 million-half a million less in profits than it achieved in 1992, even though sales had increased by $90 million and assets had grown by nearly one-third during that period. The company's return on assets (ROA) had dropped from 13 percent to just 10 percent over those four years. Those assets included 90 linen processing plants, 26 distribution centers, and one textile manufacturing plant, as well as a large private fleet.

At the same time, NLS was serving about 200,000 customers but was losing them at an average rate of 15 percent per year. That represented about $75 million in lost revenue annually-and customers were walking out faster than new business was coming in. Price erosion was widespread: New customers typically paid lower prices than the customers they replaced had paid.

Service was not up to par, either. The percentage of orders delivered complete was below 90 percent, and there was little or no inventory control for the company's 25,000 products. "It was thought to be too expensive to track 1.3 billion pieces of merchandise. Rental merchandise was recirculating, but we never knew if we got all of the items back," Hoskinson recalls. As a result, he says, the number of emergency deliveries grew, and some customers were overstocked while others were understocked. Distribution costs continued to climb, and by 1996, logistics-related expenditures, including transportation, distribution, and materials management, represented approximately 40 percent of the company's total costs.

Five-Part Strategy

In 1997, National Linen Service embarked on a program aimed at improving operations, reducing costs, and boosting profits and return on assets. That kind of change is especially tricky for a service organization like NLS because "the company is the product," says Hoskinson. "The front-line staff controls contact with the customer." Another issue for service firms is that injudicious cost cutting can lead to service deterioration.

With those two principles in mind, National Linen developed the following five-part turnaround strategy that relied on logistics management to carry out many of its individual objectives:

Restructure the portfolio. One of the first decisions was to get out of the uniform supply business. That was a risky move, because it was a fast-growing and profitable business segment, Hoskinson says, but it proved to be the right decision. For one thing, there was too much competition in that arena, and industry consolidation appeared to be inevitable. Divesting that business, he explains, allowed management to focus more attention on linen rentals and created a "stable operating platform" for improving the performance of its main business.

NLS also sold or closed a number of operating facilities. Although that was a difficult decision to make, Hoskinson says, plant consolidation was unavoidable. Much of the company's growth had come through acquiring small, local firms. As a result, manufacturing and service centers that performed essentially the same functions and had duplicate management structures often were located near each other. Costly equipment and infrastructure were underutilized, and delivery routes were inefficient. Today, NLS owns 39 processing locations and 20 distribution facilities, down from 90 and 26 facilities respectively.

Communicate a sense of urgency. It was important that employees understand the dangerous position the company was in and why management chose to make certain changes. The key to gaining employees' support, Hoskinson says, was in communicating simple, straightforward messages whose content was both credible and consistent.

Reduce the right costs. National Linen's cost-reduction strategy focused on four areas: merchandise, inventory, delivery, and general and administrative costs. A guiding principle when deciding which costs to cut, says Hoskinson, was "what would the front line and the ultimate customer see?" One area that was ripe for reconsideration was purchasing. "Our sourcing strategy changed from primarily domestic to primarily offshore," Hoskinson notes. Today, NLS imports about 65 percent of its merchandise, mostly from India, Pakistan, Sri Lanka, the Philippines, Bangladesh, and China. "That increased our logistics costs, but not nearly as much as we saved in production costs," he says. To ensure product quality remained high and to keep costs under control, NLS consolidated its domestic and overseas supplier lists, offering volume to selected suppliers in return for pricing incentives, and established a network of agents to monitor overseas production.

The company also centralized the purchasing function, together with distribution, fleet management, and inventory control, under Hoskinson's materials-management group. Previously, these functions were managed either by business segment (linens, uniforms, or combined operations) or on the local level. Centralizing those functions allowed National Linen for the first time to get a clear picture of its costs and respond quickly to the problems that became apparent, Hoskinson says. But he sees that as a transitional structure. "It was important that we centralize during the course of the turnaround," he says, "... [but] we know that it can be stifling and does not necessarily promote entrepreneurship. We think decentralization is the next step."

A big part of the company's cost-control program involved taking a hard look at inventory control. NLS implemented a Vendor-Managed Inventory (VMI) program that asked vendors to supply inventory at the company's warehouses and adjust production schedules based on weekly product-withdrawal updates. That eliminated the "push" selling of products and end-of-year inventory emergencies.

With a better picture of product costs in hand, NLS could re-examine its long-held belief that it was too expensive to track inventory. "The point had always been made that it was too costly to count compared with the risk of loss," Hoskinson says. "Our new model determined that that wasn't the case." The company was able to design an automated counting system called "N-Trak" that combined automated materials-handling systems with its traditional sorting operation. With N-Trak, National Linen can keep accurate count of customers' inventory and replenish stock based on actual usage. Hoskinson reports that automated counting has produced millions of dollars in savings to date.

Another innovation that allowed NLS to control inventory better was its adoption of the "open to buy" concept from the retail world. Before, buyers made their purchases based solely on sales forecasts. Under the "open to buy" concept, buyers had to take into account both sales forecasts and current inventory levels. If inventory for a particular product category remained high, then the amount of money available to the buyer for purchasing those items was reduced accordingly, thus preventing the accumulation of excess inventory.

Finally, NLS invested in new technology to help it route its private fleet more efficiently. Corporate logistics teams in various regions examined the company's delivery operations using routing optimization software. The teams also determined that by redesigning the cargo area of many of its trucks to increase cubic capacity, the fleet could serve more customers with fewer vehicles. The combination of software and vehicle redesign allowed NLS to reduce its fleet by 15 percent and its fleet capital budget by 50 percent, without compromising service.

Revitalize the product. National Linen's product lines were complicated and costly to maintain-by 1996, the company was tracking 25,000 stock-keeping units (SKUs). A product usage analysis found that NLS was stocking thousands of unnecessary items. For example, it offered 224 different types of napkins, but just 16 of those napkins accounted for 86 percent of the napkin revenues. By focusing on items that were in high demand and eliminating products that were rarely requested, the company was able to reduce its purchasing, inventory, storage, and handling costs. Today, the total number of SKUs is down to about 9,000.

Early on in the turnaround plan, the company found that its pricing rarely reflected its actual cost to serve customers. Analysts found that in many cases, delivery costs ate up whatever profits might have been made on a particular customer. As a result, NLS individualized its pricing to reflect those and other costs. The company also looked at the cost to serve customers in specific industry segments, such as restaurants and hospitals, and how it could tailor service to meet those industries' specific needs while making a reasonable profit.

Reinforce the focus on customer service. Hoskinson's group has been working to increase the order completion rate, which is based on delivery of the total required piece count and is not tracked by SKU. The complete order rate, once well below 90 percent, is now consistently at 94 percent. Hoskinson credits the simplification of the product line and better forecasting for that improvement.

Centralized purchasing, improved inventory control, and more efficient distribution have helped to improve National Linen's customer-retention rate. Where once it hovered around 85 percent, it is now just under 90 percent. Changes in pricing policies, particularly for unprofitable customers, have necessarily led some customers to seek another supplier, but as relationships settle down, Hoskinson expects to make progress in customer retention over the next couple of years.

The Big Payoff

All of National Linen's carefully calculated moves have paid off. The numbers have improved in every category, and logistics/materials-management costs as a percentage of total costs have dropped from 40 percent to 34 percent. At the same time, return on assets climbed from 10 percent in FY 1996 to 15 percent in FY 98, and now is at 21 percent.

There's certainly more work to be done, Hoskinson says, but National Linen Service continues to make steady progress in its drive to become more efficient, control costs, improve service to customers, and be more profitable. There's no doubt in his mind that the company's logistics operations will continue to play a major role in making that happen.