It's time to get plugged in

Even America's biggest shippers are missing out on the latest technological breakthroughs. Our survey looks at why so few companies are "cable ready."

By -- Logistics Management, 9/1/2000

Competitive advantage is a short-lived thing these days. Even the newest and most innovative products enjoy a brief period in the market spotlight before competitors catch up. When products become commodities and product life cycles get shorter, gaining a competitive edge depends on other factors, such as speed to market, delivery reliability, and an efficient supply chain. And those are the very things that are at the heart of modern logistics and supply chain management.

As a result, the nation's largest shippers more often than not see transportation as a strategic weapon, not merely a cost center. That, in fact, was a key finding of our ninth annual Giants of Shipping study. (See Figure 1 for a look at how the survey respondents as a whole said their organizations viewed transportation.) Maintaining this kind of strategic orientation, of course, depends on collaboration with logistics providers, suppliers, and customers. Consequently, these large shippers are far more likely than smaller businesses are to try to integrate their logistics, transportation, and other systems with those of their supply chain partners. Investment in those systems, when viewed strategically, offers rapid returns on investment, these businesses find.

Making similar investments may be tougher for smaller businesses that don't have the financial resources or in-house expertise of the Giants-defined for purposes of the study as corporations with revenues of $3 billion or more. But the emergence of application service providers (ASPs), logistics exchanges, and other models is making sophisticated planning, communications, and decision-support tools available to even small businesses-at least in theory. But are those businesses ready to take advantage of those opportunities? Dismayingly, the results of the survey suggest that many shippers, both large and small, are not.

The Giants of Shipping study is conducted jointly each year by the University of Tennessee (UT), Cap Gemini Ernst & Young's Supply Chain Consulting Practice, and Logistics Management & Distribution Report. The study is a comprehensive effort to track trends in the spending and logistics management practices of shippers throughout the United States in general, and the nation's largest shippers in particular.

Performance Gap

This year's results confirm that the largest shippers are well ahead of their smaller counterparts in integrating the systems that help ensure efficient supply chain management. "We're looking at two distinct groups," says Mary Collins Holcomb, associate professor in UT's Department of Marketing, Logistics, and Transportation. "The Giants are aware that it's not about product, that there's more commoditization. They realize that logistics and the supply chain can become a competitive advantage."

The divergence in the views of large and small shippers can be seen in the way they describe their corporations' non-Giant companies responded in such a way as to indicate a serious misalignment between their companies' purported strategies and their view of logistics. That is, Giants whose business strategy is based on customer service also see logistics as a strategic component of the business, while other companies are more likely to see it as a cost center even while basing business strategy on customer service. (See Figure 2 for a look at how the survey respondents as a whole described their organizations' strategies.)

The perception that logistics and supply chain management can provide a corporation with significant strategic advantages carries over into how well the businesses use technology to enhance performance. Again, the Giants appear to be ahead of the curve. According to Rich Thompson, vice president with Cap Gemini Ernst & Young's global supply chain consulting practice, "There's a much higher awareness [of the value of] integration among the Giants. Larger companies have historically been the only ones in a position to make the significant up-front investments in software, integration, and resources required to maintain them."

Even among the largest companies, however, believing and doing are not always the same. "One of the questions we asked was how well systems were integrated," says Karl Manrodt, who was executive director of UT's Office of Corporate Partnerships and leader of the Giants study. (Dr. Manrodt is now an assistant professor of logistics in the Department of Information Systems & Logistics at Georgia Southern University.) "The results were stunningly mediocre." Although 96.4 percent of the Giants say that integrating systems is important, only 41.0 percent have integrated their transportation management systems (TMS) or warehouse management systems (WMS) with their enterprise resource planning (ERP) systems. Among all the respondents, a full half of those whose companies have both enterprise resource planning and transportation or warehouse management systems in place describe the systems as being only somewhat or not at all integrated. "That's a significant opportunity," Manrodt says.

Integrating systems internally is only the first step in getting a company's operations fully wired. "It's one thing to internally link or integrate your TMS, WMS, and ERP systems," says Thompson, "but the tougher issue is how you connect with a vast array of suppliers, customers, partners, and outside service providers. Companies are not very far along."

Such supply chain connectivity may become available through some of the public or private Internet logistics and supply chain exchanges now attempting to establish themselves in the market. Should those models succeed, businesses that want to participate might need to do no more than "plug in"-if they are prepared. "I equate it to connecting your house to cable," Thompson says. "You just have to be cable ready. Once 'connected,' you have the ability to decide which products and/or services you want to pay for."

The evidence from the Giants study suggests that many businesses are not "cable ready." "The numbers from the study are coming in very high for manual processes," Thompson says. "A large number of respondents indicate they are still using spreadsheets and home-grown software. It does not appear many companies are enabled for this type of connectivity." (See Figure 3.)

Why aren't more businesses implementing systems that have the potential to radically improve logistics efficiency? The systems are expensive, true. "But it's not cost alone," says Thompson. "They don't understand the value proposition. The ROI is so compelling it's hard to say that they're not doing it because of the dollars."

Holcomb suspects that the problem lies with senior management. "The people who desperately need these tools are not high enough in the organization to go out and purchase them," she says. "They are not able to convince senior management of the value proposition."

An additional difficulty, says Thompson, may lie in finding and retaining people with the requisite technical skills. "I don't think companies are going to go out and implement a $2 million TMS package without knowing they can maintain the system with trained resources," he says. "People with these scarce skill sets typically move up or move out." Thompson adds that the largest companies-the Giants-have an additional advantage over smaller companies in their ability to attract and retain talented technical professionals.

That's one reason why he believes companies will turn increasingly to application service providers. "ASPs not only allow companies to limit their up-front investments in the software, but they also maintain the talent to keep up with new releases."

Inventory and Uncertainty

Technological sophistication aside, another key indicator of logistics and supply chain efficiency is the amount of inventory in the pipeline and its velocity through it. By those measures, businesses still have a great deal of room for improvement, according to the results of the Giants survey.

Not surprisingly, uncertainty and inventory both increase the farther from the final customer an operation lies in the supply chain. (See Figure 4.) For instance, some retailers report having an average of 33.4 days' worth of inventory on hand; others have as little as 12.9 days' worth. By contrast, inventory stacks up at central warehouses, with an average of 55.3 days' worth on hand, with the minimum reported at 36.4 and the maximum at 93.3. That is, the leanest central warehouse in the study has more days' worth of inventory than the average retail facility. Interestingly, vendor-managed inventory appears to be the most efficient. Overall, survey respondents' businesses averaged 41.2 days of inventory on hand during the previous year and 42.2 days' sales outstanding (essentially accounts receivable).

Efforts to reduce inventory may have hit a roadblock. Only 21.2 percent of those surveyed say stocks are decreasing, while 44.1 percent say they are staying the same and 34.7 percent say they are rising.

On the transportation spending side, trends that have developed during the nine-year course of the study continue on track. Overall transportation spending continues to rise: 68.0 percent of those responding say that absolute spending on domestic transportation is rising, while only 10.0 percent say it is falling. But even with the recent surge in transportation costs resulting from higher fuel prices, a driver shortage in the truckload sector, and tight capacity, the majority of respondents still report that transportation costs as a percentage of sales are either dropping or staying the same. (See Figure 5.) This could be a result of better management of the transportation dollar and a move to make larger shipments to their customers. However, Manrodt says, given the rise in inventories being held, it could very well be that more companies are holding more inventory and offsetting transportation spending with higher inventory levels.

A further indication that companies are making an effort to manage transportation costs is the dominance of truckload shipping by those responding to the survey. (See Figure 6.) Even with the demands in many industries for smaller, more frequent shipments, logistics professionals are finding ways to consolidate shipments to keep transportation costs in line.

The connection between the apparent difficulty companies are having in reducing inventory and the apparent gaps in supply chain connectivity are hard to gauge. But it appears likely that the connection is real enough. For all the gains in logistics efficiency made over the last two decades, ample opportunity for further improvement remains. "This is good news for new-technology service providers, who believe that their solutions will help companies become more efficient and effective," says Manrodt. "It is good news for shippers who are reviewing these types of offerings, as they can only help [these shippers] become more effective. Information is [what will enable companies to] reduce waste in the supply chain."

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