the official magazine of the logistics institute lq learning · the official magazine of the...

Learning Across

Disciplines:What CEOs and

Logisticians Need to Know to Discover

New Ways to Success

LQ™

Ideas for Leadership in Logistics

LQ™

LogisticsQuarterly.com

The Official Magazine of The Logistics Institute

Volume 10, Issue 2, Summer 2004

page 16

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LQ'S LEARNING ACROSS DISCIPLINES FORUM:John T (Tom) Mentzer, Ph.D.,University of TennesseeRobert MartichenkoTransfreight, LLCJames Stock, Ph.D.University of South FloridaJim Davidson iWheels Dedicated Logistics

PLUS - Perspectives and ideas for transforming business through logistics and supply chain management fromAmerican and Canadian leaders in the field:Kathleen HedlandDirector of Education and Roundtable ServicesThe Council of Logistics ManagementDavid Closs Ph.DJohn H. McConnell Chair Professor of the Eli Broad College of BusinessUniversity of MichiganAlan Law Ph.DAssociate Professor of SociologyUniversity of TrentVictor DeyglioPresidentThe Logistics Institute (CPLI)Tom NightingaleVice PresidentSchneider NationalWayne FisherPresidentPlexus 360

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Our virtual classrooms, for instance, give you the opportunity to upgradeyour logistics and business skills in a growing number of subject areas(Integrated Logistics Networks or Team Dynamics, to name two) withoutleaving your keyboard.

Or, you can register online for our full Certification Program, with its mixof session and virtual modules leading to your P.Log. (ProfessionalLogistician) designation. The session modules are held regularly in majorcities across Canada, so they’re easy to attend no matter where you live.

The Logistics Gateway is also a virtual career centre, with links to potential new hires, employment opportunities, training resources and

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To find out how we can put our ingenuity to work for you, visit www.cpls.ca/save.

13 Global Logistics: The Benefits and ChallengesCentralizing global production to a limited numberof plants can lower the cost of goods and consolidateproduction with fewer plants. While conventionalsupply chain and logistics practices still apply, there

are increased complexities that require a strategy for success.

17 What “the Chiefs”, CIOs, CFOs and COOs Need To Know About LogisticsHow can logisticians’ traditional focus on operational improvements be translated into a language that CEOs understand? Here’s how to create

a bridge between these two perspectives, and how improvements inlogistics at one company enhanced shareholder value.

19 Mastering Cash Flow: The Need for CFOs toFocus on LogisticsMany of the costs associated with business are hidden from CEOs and senior management. Here’s a look at how to root them out through disciplined

look at logistics and supply chain management practices.

22 Processing Product Returns in YourWarehouse/DCAfter languishing for years as a back room activityin many companies, this article shows how reverselogistics has become an opportunity to improve

customer service levels, reduce costs, and, in a few instances, asource of competitive advantage.

26 Canadian Logistics Practitioners’ Type andLevel of Formal EducationA recently conducted survey by the CanadianProfessional Logistics Institute (CPLI) and TrentApplied Social Research (TASR) survey on the linkage

between education and careers has important implications for thoselooking at professional development and education in this field.

28 Visiting ShanghaiA personalized account by the Toronto-basedLogistics Institute’s president of an exciting sojourn to Shanghai, and the lessons learnedin business and cultural protocol.

32 Supply Chain: A CEO’s Competitive AdvantageToo often executives and managers outside the discipline of logistics and supply chain managementhave an uninformed view of what these practicesencompass. Sometimes this can be disastrous.

In most cases, a broadened understanding of supply chain management can make their companies a lot more competitive.

35 What Cross-Border Shippers Need to KnowAbout Driver ShortagesThe largest driver shortage in history and healthyeconomic growth has created an unprecedented problem in transborder trade. Here’s a view of

how shippers can help to mitigate the problems converging on this sector.

38 A Case Study:A fictional account of the travails of software manufacturer, FaireWare, which has excellent products, but is failing in the marketplace because of its logistics and supply chain practices. LQ’s panel

reviews this case study, and offers solutions and direction for thecompany’s new CEO.

42 Building a Bridge Between Logistics andCustomer Relationship ManagementCompanies spend millions of dollars on customerrelationship management. Even though the promiseof CRM is outstanding, in practice many times it

fails to deliver. Here’s an exemplary illustration of the applicationof CRM mapped out for the health care market, that could beapplied in any industry sector that has promotional materials todistribute.

CONTENTSLQ™

6 Letters 6 Editorial 8 Contributors 10 Announcements

LogisticsQuarterly.com6 LQ™ summer 2004

While searching to learn about

Canada's new Hours of Service (HOS)

regulations, I read Tom Nightingale’s

excellent article (LQ,Volume 9, Issue 4).

As a professional driver, maximum

productivity is the target I endeavor to

achieve.This means my equipment and

my valuable time is utilized as efficient-

ly as possible.

My career began in 1979 and I have

seen many changes in the transporta-

tion industry during that time.The tech-

nological advances in today’s equip-

ment make trucks safer and more effi-

cient than ever. Clean-burning fuel effi-

cient engines, better roads with higher

speed limits and bigger trailers, not to

mention driver comfort, all add up to a

level of efficient utilization unimagin-

able 25 years ago.

The new HOS regulations are not an

impediment to productivity and neither

were the old regulations. It is abundant-

ly clear that if drivers logged their time

at a shipper or consignee legally

–which means in most all cases, “on

duty-not driving”–the old 15-hour rule

would have meant no measurable dif-

ference compared to the new 14-hour

rule. Under either set of regulations the

ultimate limit to equipment utilization

is driver fatigue. Until technology cre-

ates trucks that drive themselves, the

human link will be the weakest.

Mr.Nightingale hit the proverbial nail

on the head at the end of his article.

“Those who have been using the dri-

ver’s time to offset internal inefficien-

cies...” are the words that Tom used to

describe what is in truth, one of the

biggest stumbling blocks to productivity

in the transportation

industry. For all the

improvements in

equipment and driv-

er education, that is

one area that has

changed very little.

Many drivers are needlessly delayed

waiting to load,unload and/or in one of

the worst displays of exploitation,

forced to re-stack palletized or slip-

sheeted freight. By choosing to log any

or all of this time as “off duty” or “sleep-

er berth” the driver gave up any chance

there was for regulating this abuse.

I have great hope the new HOS regu-

lations will curb the unfortunate prac-

tices that have developed over the

years. My optimism is reserved as I see

the change as painfully slow.

If the new HOS regulations save just

one life, they will have paid a dividend

worth more than any amount of money.

That is, I believe, the primary objective.

As an added benefit to making the

roads safer, the new rules should have a

profoundly positive effect on productiv-

ity. It will, nonetheless, take time, as

many will be resistant to change.

Jim BillupsFergus Falls, MN

The Logistics Institute (Toronto) and LQThis noted is an excerpt of an Email

from John Hurst, Hewlett Packard, to

Victor Deyglio, president of the Toronto-

based Logistics Institute

Since I moved over to Compaq, and

now HP, I have had one of my key staff,

Paul Owens,obtain his P.Log and

now another key person, Jenny

Ho, start this program. In fact,

Jenny just attended your Ethics

module last week. My interest in

writing is to once again stress my

support for the program and its

influence on the people once they

come from the sessions.

Secondly, my boss, Thomas Day,

(Director, NA Logistics Operations

Hewlett-Packard Company) just in

from the USA was very impressed with

what you have developed and what we

have here in Canada, especially, in the

publication, Logistics Quarterly (LQ).

He was ready to take my copy of the

latest issue. However, I wouldn't let

him, but wondered if you could put

Tom on the distribution list for future

issues.Tom was impressed by the qual-

ity of the articles.

John HurstManager Transportation & Customs,

Hewlett Packard Canada. Co.

Kudos“LQ is the Harvard Business Review of

Logistics magazines.”

Suzanne BroadbentKuehne & Nagel

TALKING BACK

Making Sense of The New Hours of Service Regulations

Letters to the editor should be accompaniedby the writer’s full name, daytime phonenumber and address. Please mail your letters to: LQ, 2 Bloor St., W., Suite 100,Toronto, Ontario, Canada, M4W 3E2.

The most efficient way to reach us at LQ isvia email – [email protected]

7LQ™ summer 2004LogisticsQuarterly.com

CEOS ARE EMPLOYEES who work directly for shareholdersand report to the boards that represent shareholders of pub-licly-traded companies. Their ultimate goal is to increaseshareholder value.

Traditionally, a CEO’s objectives are not viewed as compli-mentary or even affiliated with the practices of logistics andsupply chain management (SCM). Not surprisingly, given theirdifferent points of view, the language chief executives speakand that of logisticians and supply chain management profes-sionals are often very different.

However, a CEO’s failure to understand the role of logisticsand SCM as interdisciplinary practices can result in disaster, asshown in Rebecca Jasper’s column, Inside Track. The insightfuladvice offered by this Column’s sage panel, comprised of Ms.Jasper, Christian Weidner and Richard Sherman, is bound tohelp others mitigate similar circumstances.

The high quality series of articles developed by LQ’s editori-al team related to the theme Learning Across Disciplines: WhatCEOs and Logisticians Need to Know to Discover New Ways to Success,collectively convey a clear and common message to chief exec-utives; business leaders need to include logistics and SCM ontheir agendas, instead letting shareholder value be the primaryguide that skews their practices. Conversely, logisticians andSCM practitioners need to learn the language of chief execu-tives to be more impactful and contribute to the success oftheir companies.

John Mentzer, University of Tennessee, who has written thisissue’s cover feature, shines a strong light on the fissure thatoften runs between these disciplines in companies; logisticianstend to focus on the operational elements of business and thechief executives on shareholder value. Professor Mentzer’s casestudy shows how to build a lasting bridge between these twopoints of view.

Robert Martichenko’s article Mastering Cash Flow: TheNeed for CFOs to Focus on Logistics aptly describes cash flow as theblood of a corporation. Cash management involves lookingacross all of the disciplines on the corporate map to seethe principal cash-f low drivers. Mr. Martichenko systemat-ically relates these elements to the discipline of logistics,making a compelling case for CFOs and CEOs to focusmore on logistics.

Demystifying logistics and supply chain management is alsoan underlying theme in Supply Chain: A CEO’s CompetitiveAdvantage, by iWheels’ Jim Davidson. Too often C-Level execu-tives make ad hoc decisions about the supply chain that con-fines their company’s business development. “Just as modernday automobile manufacturers have gotten their designers andengineers talking and working jointly to produce the most effi-cient and highest quality automobiles, so too should the sup-ply chain be a consideration long before a product is manufac-

tured.” Mr. Davidson emphasizes the importance of a strategicapproach to SCM that involves tearing down barriers andavoiding compartmentalization to get a leg up on competitors.

Reverse logistics has also languished as a backroom activity,rarely seen on a C-Level executive’s radar screen, acknowledgesProfessor James Stock, University of South Florida. ProfessorStock shows how higher recovery rates can signif icantlyimprove revenues, profits and a company’s standing in its cus-tomers' eyes.

In tandem with this theme, our editors and writers look atTrends in Global Logistics Practices. Companies trying to buildcultures that encourage ingenuity in learning across disci-plines also know that globalization is transforming theirbusinesses. Logistics managers are facing heightened chal-lenges and risks that seem to rise concomitantly with globalbusiness practices. While the conventional principles oflogistics and SCM still apply, Professor David Closs,Michigan State, and LQ’s U.S. Executive Editor, cautions it isvital to be mindful of the increased complexities that exist inthis environment.

Tom Nightingale, Schneider National, tackles a pressingelement of international trade when he defines the elementsthat continue to impact international transportation andshipping, and deciphers how logisticians can take steps tocreate a solution.

We’ve also continued to build on LQ’s Educational Forum(Volume 10 Issue 1) this issue features a personalized andinstructive account on business protocols in China. VictorDeyglio, president of the Toronto-based Logistics Institute, leftToronto to visit Shanghai in March this year. One month later,The Logistics Institute signed an agreement with the ShanghaiForeign Service Company to transfer skill standards, trainingresources and web-platforms to develop the competence of theShanghai supply chain logistics labor market. Also, ProfessorAlan Law, Trent University, analyzes a recently conducted sur-vey sponsored by the Institute and Trent University that showshow logistics education is related to the remuneration logisti-cians receive.

In this issue we offer a platform for ideas and concepts thatare on the cusp of being part of the vernacular of enlightenedboardroom discussions. They show that realizing the value oflogistics and SCM as interdisciplinary disciplines can lead tosignificantly heightened value for shareholders. Don’t be sur-prised if this emerging interdisciplinary approach to logisticsand SCM soon becomes part of the nomenclature that is com-monplace in the executive suites of North America’s leadingcompanies.

You will also find other innovative ideas in this issue to helpyou discover new ways to think about customers, educationand employees.

EDITORIAL

Learning the Language ofCEOs in a Global Market


DAVID J. CLOSS, Executive Editor: Dr. Closs is the John H.McConnell Chaired Professor of the Eli Broad College ofBusiness, Department of Marketing and Supply ChainManagement, Michigan State University. He has consultedwith more than 100 of the world's Fortune 500 corpora-tions regarding logistics strategies and systems. He is anactive member of CLM.

JIM DAVIDSON, President, iWheels Dedicated Logistics,began his career in logistics at the Ford Motor Company in1963 working in all aspects of logistics for 17 years. Mr.Davidson joined TNT in 1983 and held various managementroles including roles in operations, administration and gen-eral management for a number of different divisions. Healso served as the TNT board member representing NorthAmerica at their European-based board meetings. He hasserved on the executive council of the Canadian GeneralMotors Supplier Council as well as Executive Vice Presidentof the ATA Council of Logistics located in Alexandria, Va.

VICTOR DEYGLIO, Executive Editor, is the president andCEO of the Toronto-based Canadian Professional LogisticsInstitute. Some of Mr. Deyglio's roles and responsibilities atthe Institute include strategic leadership, program andproject development and management, research design,training and organizational management. He is the formerExecutive Vice President and General Manager of theCanadian Institute of Traffic and Transportation, and theformer General Editor of Canadian Transportation LawReporter. Mr. Deyglio has taught at numerous universitiesand colleges in Canada. He has two Ph.Ds.

WAYNE FISHER is a Principal in Plexus 360, a companyheadquartered in Mississauga, Ontario. Mr. Fisher hasmore than 25 years experience in the North Americanhealthcare industry with leading multinational organiza-tions in the pharmaceutical, consumer health and healthtechnology markets. He has been President of a leadingconsumer health company and has held senior manage-ment positions in sales and marketing. He served on theboard of new technology companies and the NonPrescription Drug Manufacturers Association of Canada

(NDMAC) and was Chair in 1995-1996. He currently serveson the Board of the Council On Drug Abuse. Plexus 360develops marketing logistics solutions that help marketersbuild effective customer relationship management pro-grams.

REBECCA S. JASPER, CPIM, MBA, is currently President ofJASPERsolutions LLC, a supply chain consultancy firm. Shehas 13 years of management, consulting and supply chainexperience working in the steel, ferrous products, alu-minum, health, chemical, oil & gas, e-commerce, linen sup-ply, entertainment, fast food and utilities industries. Shehas consulted in the USA as well as in Japan, France and inthe Congo. Rebecca Jasper is fluent in Japanese and French.She has a BBA in International Business from St. Mary'sCollege and a second major in Japanese from the Universityof Notre Dame. She received her MBA in Supply ChainManagement at the University of Tennessee, Knoxville.

ALAN LAW is an Associate Professor of Sociology at TrentUniversity in Peterborough, Ontario. His on-going researchinterest in structural and cultural features of logistics andsupply chain labor markets stems from his years as anaccountant in the transport industry followed by subse-quent concerns to highlight the complexity, richness andpotential of logistics careers and their development. Thearticle appearing in this issue is one of several in a seriesusing data from the recent (2004) and on-going survey oflogistics practitioners.

ROBERT MARTICHENKO is the Vice President of LogisticsOperations for Transfreight LLC, headquartered inErlanger, Kentucky. In his corporate development role, Mr.Martichenko is responsible for Business Development,Contract Operations and Product Development. Mr.Martichenko is a student of Logistics, Lean and Six Sigma,has published in several industry journals and contributedthe chapter on “Lean Six Sigma Logistics” in MichaelGeorge’s book “Lean Six Sigma.” Mr. Martichenko holds aBachelor Degree in Mathematics from the University ofWindsor and an MBA in Finance from Baker College.Transfreight is a comprehensive Contract Logistics compa-

SUMMER CONTRIBUTORS

LQ's mandate to provide “Ideas for Leadership in Logistics,” is clearly evidenced thisissue with articles written by professionals and logisticians from America and Canada who are leading and transforming

business by creating new roadmaps and definitions for leadership in this exciting field.

OUR CONTRIBUTORS

9LQ™ summer 2004

ny who specializes in Lean Six SigmaLogistics techniques.

DR. JOHN T. (TOM) MENTZER is theHarry J. and Vivienne R. Bruce Chairof Excellence in Business in theDepartment of Marketing and Logis-tics at the University of Tennessee. Hehas written more than 180 papers andarticles, and seven books. Dr.Mentzer was recognized in 1996 asone of the five most prolific authorsin the Journal of the Academy ofMarketing Science, and in 1999 as themost prolific author in the Journal ofBusiness Logistics. He was awardedthe Academy of Marketing ScienceOutstanding Marketing TeacherAward in 2001. Professor Mentzerserves on the editorial review boardsof numerous journals, is a past presi-dent of the Council of LogisticsManagement, a past president of theBoard of Directors of the ShethFoundation, and served on the Boardof Directors of the AmericanMarketing Association Foundation.He was formerly President, and ispresently Chair of the Board ofGovernors, of the Academy ofMarketing Science, and is aDistinguished Fellow of the Academyof Marketing Science - a distinctiongranted to less than 40 scholarsworldwide. Professor Mentzer hasserved as a consultant for over 100corporations and government agen-cies, is on the boards of directors ofseveral corporations, and previouslyworked for General Motors Corpora-tion.

TOM NIGHTINGALE is the VicePresident, Corporate Marketing atSchneider National, Inc. Mr.Nightingale leads the enterprise-wide,global branding and marketing ofNorth America’s leading provider ofpremium truckload, intermodal, andlogistics solutions. Mr. Nightingaleand his team manage strategyprocess, market research, marketingcommunications, employment mar-keting, internal communications, andevent marketing. He holds and MBA

from Syracuse University with a con-centration in Organization andManagement and a BS in Internation-al Marketing/Management from SienaCollege.

JAMES STOCK holds BS and MBAdegrees from the University of Miami(Florida), and a Ph.D. from The OhioState University. He is Professor ofMarketing & Logistics at the Universi-ty of South Florida, Tampa. He hasheld faculty positions at several uni-versities including Notre Dame,Oklahoma, Air Force Institute ofTechnology, and Michigan State. Dr.Stock has been an invited speaker onreverse logistics, supply chain andcustomer service topics in Australia,Brazil, Denmark, Finland, Portugal,Republic of Georgia, Italy, Norway,North America, Sweden, and SouthAfrica. He is the author or co-authorof over ninety publications includingbooks, monographs, articles and pro-ceedings papers. He has served asEditor of the International Journal ofPhysical Distribution and LogisticsManagement (1990-2003) and Man-aging Editor of the Logistics Spec-trum. Dr. Stock is a member of theeditorial review boards of severalinternational journals in the areas ofmarketing, logistics and supply chainmanagement. Professor Stock is co-author of Strategic Logistics Manage-ment, 4th ed., and Fundamentals ofLogistics Management, first edition.He is also the author of Develop-ment and Implementation ofReverse Logistics Programs andReverse Logistics, published by theCouncil of Logistics Management,and Product Returns/Reverse Logis-tics in Warehousing: Strategies,Policies and Programs, published bythe Warehousing Education &Research Council. Dr. Stock hasreceived the Armitage Medal (1988)and the Eccles Medal (2003) fromSOLE-The International Society ofLogistics in recognition of his schol-arly and educational contributionsto the logistics discipline.

LQ™ ADVISORY BOARDDavid J. ClossDepartment of Marketing and Supply Chain Management,Michigan State UniversityExecutive Editor, LQJim DavidsonPresident,iWheels Dedicated LogisticsEric DeweyVice PresidentSchenker of Canada Ltd.Russ J. DoakDirector,Global Logistics, Creo Inc.Jim EllisSenior Manager, BearingPoint LP.David FaoroDirector, Business ImprovementUnisource Canada, Inc.John FergusonVice President, Sales and Marketing, PBBJohn FirminoVice President, Director Solutions andExecution Standards, Ryder CanadaSarah FriesenGeneral Manager, Share Healthcare Supply ServicesBenjamin GordonManaging Director, BG Strategic AdvisorsJoe GrubicSenior Manager, Alliance/Network Management, Nortel Networks Global LogisticsRob HamiltonPlanning, Timing & Control Manager,DaimlerChryslerGeorge KuhnExecutive Director,CIFFARobert MartichenkoVice President ,Transfreight LLCPierre MassicotteVice President Supply Chain,L’OréalMark Morrison, Senior Vice President of Business Development, TNT North AmericaTom NightingaleVice President, Corporate Marketing, Schneider National, Inc.Robert NovackAssociate Professor of Business Logistics, Department of Business Logistics, Penn State UniversityStuart PenmanPeruvemba S. RaviAssistant Professor,Wilfrid Laurier UniversityJason ReadPartner, 3PL Links Inc.Kurt M. RitceyPartner, Deloitte Consulting Larry RodoPresident, Brinks CanadaNicholas SeiersenSenior Manager, BearingPoint LP.Executive Editor, LQMichael SneddenManager of Distribution Operations, IBM-Canada Ltd.

Volume 10 Issue 2

CO-PUBLISHER & EDITORFred [email protected]

PUBLISHERMartin [email protected]

CPLI PRESIDENT & EDITORIAL DIRECTORVictor [email protected]

CREATIVE DIRECTORCraig [email protected]

SALES & MARKETINGDan GoodwillVice-President, [email protected]

CIRCULATION & WEBSITE DEVELOPMENTBill McCarvellLogistics Quarterly (ISSN 1488-3309)

ADVERTISING Fred Moody,

LQ™2 Bloor Street W., Suite 100, Box 473, Toronto, Ontario, M4W 3E2,Telephone: (416) 461-8355Toll Free: 1-800-843-1687Fax: (416) 465-7832 Email: [email protected]

THE LOGISTICS INSTITUTE

160 John Street, Suite 200 Toronto, Ontario M5E 2E5

Logistics Quarterly (LQ™) (ISSN 1488-3309) is published six times annually by Elefant Enterprise Communications Inc.™ (EECI) LQ™ is written for professionals in logistics. Subscription Services at: www.LogisticsQuarterly.comCanada Post Publications Mail Sales Agreement Number: 40032602. CANADIAN POSTMASTER: send subscription orders, address change notices and undeliverable copies to LQ™, 2 Bloor Street West, Suite 100, Box 473, Toronto, Ontario, Canada M4W 3E2

STATEMENT OF OWNERSHIP, MANAGEMENT AND CIRCULATION

EDITORIAL POLICYThe opinions expressed in this publication do not necessarily reflect the policy of The Logistics Institute or Elefant Enterprise Communications Inc.™ (EECI). The editors reserve the right to select and edit material submitted for publication. Not responsible for unsolicited material. EECI is a Toronto-based corporation and publisher. LQ™ is wholly owned and operated by EECI. All rights reserved © by Elefant Enterprise Communications Inc.™ 2004. Reproduction without written permission of the publisher is forbidden. LQ™ welcomes your comments, letters to the editor, or written submissions for consideration. (LQ™ is available on-line at: www.LogisticsQuarterly.com)

Ideas for Leadership in Logistics

LQ™

LogisticsQuarterly.com


LQ’s New Advisory Board MembersPERUVEMBA S. RAVI is an AssistantProfessor in the Operations and DecisionSciences area at the School of Business andEconomics, Wilfrid Laurier University,Ontario, Canada. He is a member of theSupply Chain Management faculty groupat Wilfrid Laurier University. Professor Raviholds a B.Tech. in Chemical Engineeringfrom the Indian Institute of Technology inDelhi, India, an MBA from the IndianInstitute of Management in Calcutta,India, an MS in Operations Research fromthe University of Rochester in Rochester,New York, and an MSBA and Ph.D. inO p e r a t i o n s M a n a ge m e n t f r o mWashington University in St. Louis,

Missouri. Prior to joining Wilfrid LaurierUniversity, Dr. Ravi was a visiting facultymember at the University of Missouri-Columbia. He has taught undergraduateand graduate-level courses in OperationsManagement and Supply Chain Manage-ment. Dr. Ravi’s research interests includelogistics and supply chain management,the marketing-manufacturing interface,and scheduling. He was awarded the Petro-Canada Young Innovator Award at WilfridLaurier University in 2001, an award that isgranted annually to only about twentyresearchers in Canada. He also holds aresearch grant from the Natural Sciencesand Engineering Research Council ofCanada. Dr. Ravi is a member of DSI,INFORMS, POMS and CORS.

Announcing The New Cabinet ofToronto Roundtable of the Council ofLogistics Management (CLM)Don Cummer, CLM Director, Director ofPurchasing of Shared Healthcare SupplyServices; Russ Doak, CLM Director, Direc-tor of Global Logistics of Creo Inc; Jim Ellis,CLM Director, Senior Manager ofBearingPoint; David Faoro, CLM Directorand former president, Director of Trans-portation of Unisource Canada; ClaudeGermain, CLM Director, CEO of CubeRoute Inc.; Dan Goodwill, CLM Director,Partner of Danron Transportation Con-sultants Inc.; Joe Grubic, CLM Secretary &Membership Chair, Manager LogisticsIntegration of Nortel Networks GlobalLogistics; Martin Kelly, CLM Vice President,Director of Carrier Development, iWheelsInternational; Marcelo Morales, CLMTreasurer, Senior Manager of BearingPoint;Fred Moody, CLM Toronto President,Editor and Co-Publisher of LQ Magazine;Stuart Penman, CLM Director; CynthiaPryor, CLM Director, Partner of DTAServices Limited; Jason Read, CLM Direc-tor, Principal of 3PL Links; Kurt Ritcey,Former CLM President/Director, Partner ofDeloitte; Larry Rodo, CLM Director,President of Brinks Canada; Dr. Alan Saipe,CLM Director, President of Supply ChainSurveys Inc.; Nicholas Seiersen, FormerCLM President/Director, Senior Managerof BearingPoint; Mike Snedden, CLMProgram Chair, Manager of DistributionOperations of IBM; Dr. Donald Tham,CLM Education Chairman, Professor,Dept. of Mechanical, Aerospace & Engi-neering, Ryerson University.

CLM is the preeminent association forindividuals involved in logistics and supplychain management, offering educational,career development and networkingopportunities to its more than 10,000members and to the entire profession.

CLM Roundtables provide a forumoffered at the local level which sponsorseducational programs to raise the equalityof logistics practice while promoting thepersonal and professional development ofits participants.

How to Form a CLM RoundtableBy Kathleen HedlandCLM Director of Education & Roundtable ServicesThe Council of Logistics Managementroundtables were created to offer educa-

ANNOUNCEMENTS

LQ & Industry Announcements


tional programs, provide networkingopportunities, and to help people developboth personally and professionally.Throughout the year, roundtable meetingsare held to assure that there are opportuni-ties for logistics and supply chain profes-sionals to meet more frequently than on anannual conference basis.

A roundtable is formed when a group ofCouncil members and other business pro-fessionals, located in a region virtually any-where in the world, determine that theywould benefit from meeting periodically.Roundtables are neither chapters nor sepa-rate corporate entities and regardless of thelocation in the world, are an extension ofCLM and thus chartered in the State ofIllinois in the United States.

Due to the volunteer nature of the organ-ization, CLM bylaws make it easy for agroup of members to form a roundtable. Apetition with the signatures of a minimumof ten current Council members is requiredto be submitted to the executive committeefor review and approval, and if properly exe-cuted, the roundtable is given pending sta-tus for one year. At the end of that year,permanent status is granted if all provisionsand policies are met.

The first step in a roundtable’s develop-ment is organizing a core group of interest-ed individuals who, with CLM staff, willexplore if sufficient interest exists in thelocal community. A four-to-f ive personorganizing committee to assess the interestand proceed with its development is recom-mended.

Next, a survey is recommended to be dis-tributed to members and other profession-als in the region asking basic questions thatinclude specific interests, program topicsand event preferences as well as volunteersto serve on the committee.

If the survey results are positive, theorganizing committee will then develop aproject plan to establish the roundtable,maintaining contact with interested individ-uals by distributing the results and a planoutline.

If possible, an introductory meeting orevent is an extremely beneficial venue fordialogue and to provide the committee anopportunity for direct input on issues andto identify potential cabinet members.However, if conducting a meeting is notpossible, direct contact with the member-ship and logistics/supply chain communitywill be continued by the organizing commit-tee to expand support and proceed with thepetitioning process.

For more information on CLM’s roundta-bles, visit www.clm1.org – roundtable link –or contact Kathleen Hedland, director of education and roundtable services [email protected] or 630-645-3463. THE LOGISTICS INSTITUTE

Logistics.The driving force of human achievement.

www.loginstitute.ca

P.Log. Designation ProgramThe P.Log. (Professional Logistician) designation provides you with an

independent confirmation of your high level of ability and experience in thelogistics field.This confirmation is increasingly important as companies look tologistics professionals to provide new ways of responding to customer needs,and increasing the bottom line.

Our six P.Log. designation modules offer a comprehensive program fordeveloping the key skills you need to meet the increasing challenges in logistics.You will develop skills and capabilities you can apply immediately in your workplace to begin making a difference.

Register Now!Contact us at 1-877-363-3005

or go online

The Logistics Institute accepts all major credit cards, and will also issue an invoice.For details of the program, fees and member discounts, contact us.

Upcoming Modules

What’s next for yourlogistics career?

Executive P.Log. CERTIFICATION PROGRAMDesigned for senior logistics practitioners with 8 to 10 years of business experience. November 21 – 26, 2004 Banff,Alberta

Integrated Logistics Networks Anytime Online

Logistics Process Diagnostics August 23 - September 17 Online

Leading & Managing Change August 25 - 27 Toronto

Ethics & Leadership September 15 - 17 Calgary

Team Dynamics September 20 – October 15 Online

Supply Chain Strategies September 29 – October 1 Vancouver

Ethics & Leadership October 27 - 29 Toronto

They neverscored a touchdown.

17 of 20 top scorerslast season had

something in common

S P E C I A L • T E A M S

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D


WHILE MANY U.S. and Canadian firmshave demonstrated their ability tooperate international logistics pipe-lines for decades, particularly acrossour common border, extending suchsourcing and delivery pipelinesacross oceans substantially increasesboth the opportunities and chal-lenges. There are many firms that aretaking up these challenges as theyrecognize the benefits of lower costsourcing or increased market size.While the benefits are obvious tocomprehend, the issues and chal-lenges are not as well defined. Thisarticle reviews some of the opportuni-ties and discusses some of the relatedlogistics challenges.

Benefits Achievable ThroughGlobal Logistics

Effective operationalization of globallogistics opens up many opportunitiesto North American firms including lowcost sourcing, increased markets, and

increased economies of scale. Firmshaving effective global logistics opera-tions can take advantage of low costsourcing for components, labor, orexpertise. While low cost sourcing is anobjective of many firms, they want to go

global to increase revenue opportuni-ties. Since the growth rates for manyproducts have slowed in NorthAmerican markets, the only means toachieve organic growth is to extend to

other markets. Effective selling ininternational markets requireseither the creation of an interna-tional sales organization orextended relationships withinternational supply chain part-ners. In the first case, the firm

experiences substantial risk whilein the second,there is a loss of con-

trol. The final opportunity, which isbeing sought out by many firms today,isthe ability to achieve increasedeconomies of scale particularly in pro-duction by spreading the substantialcapital costs related to productionacross a global marketplace. By central-izing global production in a limitednumber of plants, the firm can signifi-cantly lower per unit cost and simulta-neously lower the asset base by havingfewer plants. While the opportunities toenhance firm value are significant andan increasing number of firms are seek-ing them out, some of the challengesare not being adequately considered.The following section describes someof these challenges.

Challenges to Global LogisticsAdapting the Council of Logistics

Management definition of logistics,“Global logistics plan, controls, andmanages the movement and storage ofgoods,services,and related informationas it moves across international bound-aries from raw material provider to con-sumer also considering the handling ofreturn goods and containers. While

EXECUTIVE’S CORNER

By David J. Closs

Global Logistics:The Benefits and ChallengesCentralizing global production to a limited number of plants can lower per-unit cost of goodsand simultaneously reduce a company’s asset base by having fewer plants. Here is a look at how to make this strategy pay off and avoid the pitfalls many have faced in the process.

Adapted from: Helferich, O.K. and R.L. Cook (2003). Securing the Supply Chain (Chicago: Council of Logistics Management)..

SUPPLY CHAIN NETWORK The Challenges


there are some that would argue thatthere is not much difference betweendomestic and international logistics,there are some substantial differenceswhich are often characterized as the“four Ds” –demand, distance, documen-tation, and diversity. The demand isgreater, the distances are longer, thedocumentation is more extensive, andthere is substantial diversity in require-ments and cultures.

Given these differences, there aresome specific challenges that globallogistics managers must consider.Figure 1, adapted from Helferich andCook, illustrates some of the genericglobal and domestic institutions criticalin supply chain logistics. These institu-tions are the organizations that mustcollaborate and coordinate to moveproduct and information from the rawmaterial stage to the ultimate con-sumer. To effectively achieve this objec-tive, global logistics managers mustmanage the “Five V’s” across the top ofthe figure. The first challenge is to pro-vide the consumer with better value inreturn for their dollar. While the firmmay see global sourcing as a means toreduce material or component costs,the only value that is relevant for con-sumers is a reduction in total landedcost while also considering such ele-ments as quality and post sales support.Manufacturers need to make sure thattheir decisions to reduce sourcing costsalso continue to provide the best over-all value to consumers.

Maintaining supply chain velocity isthe second challenge faced by thelinked partners of the typical supplychain today. While firms and supplychains are trying to increase productvelocity in the supply chain to lowercost by reducing product storage timeand damage, the transit times and bor-der delays characteristic of globallogistics constrain product velocity.Extended transit times and exposuresin-transit increases the product risk forintentional or unintentional damage aswell as reducing velocity and ultimateflexibility.

The third challenge is increased sup-ply chain variability. Domestic andglobal supply chains experience vari-ability in production and transit times.

However, global operations dramatical-ly increase the magnitude of the varia-tions in production and transit timeoften resulting in substantially largerinventory buffers or safety stocks.

The fourth challenge is to maintainadequate supply chain visibility. In adomestic operation,most shipments arehandled by a single carrier, which facil-itates the shipment tracking and ulti-mate visibility. In addition, domestictransit times are relatively fast soextended visibility is typically a majorissue. Many supply chain participantscan leverage visibility to resolve prob-lems caused by supply chain variation.Visibility regarding where a product isin the supply chain and positive track-ing to determine arrival gives manufac-turers,wholesalers,or retailers a chanceto expedite the product or obtain itfrom an alternative source. The extend-ed transit times characteristics of globaloperations and the involvement of mul-tiple carriers increase the need forproactive shipment tracking and thechallenge of actually doing it.

The final challenge is to managesupply chain vulnerability. Supplychain vulnerability exists in a varietyof forms particularly in a global opera-tion where product or transportationequipment can be inadvertently orpurposefully damaged or infected bya bio-chemical or nuclear agents or itscontents changed. An obvious form inthe food supply, for example, is prod-uct infection or infestation with a bio-chemical agent at any point within thesupply chain. Less obvious formsinclude damage or destruction of thesupply chain infrastructure or process-es used to move and store the productfrom the supplier to the customer.Extended and less controlled globallogistics flows increase the opportuni-ty for damage or inappropriate inter-vention. Examples include systematicdamage or destruction to criticalmaterial suppliers, transportationequipment, transport infrastructure,storage facilities, or information pro-cessing systems. These problems wereexperienced by firms, suppliers, cus-tomers, and carriers in the aftermathof September 11 when borders wereclosed, air transport shut down, and

inventories rapidly depleted. Whilethis situation resulting from these vul-nerabilities were faced by domesticoperators as well, the magnitude of thechallenges increased significantly forglobal logistics organization whenborders were shut or tightly restricted.

Effective and efficient global supplychain logistics require considerationof the five “V”elements to provide con-sumer value while minimizing the costand threat vulnerability related toreduced visibility, variability, and veloc-ity. This balancing must incorporatethe multiple perspectives of con-sumers, firms, government, and thepublic. From an institutional perspec-tive, these include producers, materialsuppliers, manufacturers, wholesalers,distributors, retailers, and carriers.From a capability perspective, thisincludes individuals with skills insourcing, manufacturing, inventorymanagement, packaging, warehousing,transportation, and security as wellsupport sciences (e.g., bio-chemicalsciences). The combination of theseV’s and the institutional breadthincreasingly highlight two major con-cerns facing global logistics managers.These include the information andphysical infrastructure necessary tomove, track, and monitor global ship-ments. While the information infra-structure may be easier to grow andexpand,the current need is to establishstandards, consistency, and integrity.The larger concern is the physicalinfrastructure and the need to meetthe necessary capacity demands with-in the physical and organizationalcapabilities of existing relationshipsand capabilities. While increased phys-ical infrastructure capacity is receivingincreased focus, the difficulty in coor-dinating multiple public-private part-nerships and relationships still resultsin many challenges.

While the principles of supply chainlogistics still apply in a global environ-ment, the challenges are significantlymagnified and the risks are increased.As many firms attempt to take advan-tage of global sourcing and marketing,there is a growing need for awarenessregarding the challenges and infrastruc-ture changes.

IT ’S ALL A M ATTEROF LOGISTICS.

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THE “CHIEFS,” OR “C-LEVEL” EXECUTIVES (CIO, CEO,COO, CFO, etc.), often do not care about logistics. Afterall, logistics is about such tactical stuff as trucks and

trains, where to put the inventory, and how to manage theinformation about product movement and storage. So whyshould the Chiefs care?

The Vice President of Logistics at a $1 billion (sales) retail-er requested assistance on a project to update the operationsof their only distribution center (DC). All inbound productfrom vendors, and outbound to stores, went through this onefacility. We were surprised at how uninterested in this projectthe C-Level was. “After all, the total proposed impact of thisproject is to only lower the annual DC operating costs by $2million,” said the CFO in our presentation. “This is less thanone percent ($2 million divided by $1 billion) of what weworry about. It just does not come up on our radar screens.”It also was about such mundane (to the Chiefs) topics asAdvance Shipment Notice, Cross-Docking, and Pre-Packing –the Chiefs had more important things to think about, right?

“Wait a minute,”we said. “Your sales are $1 billion,but yourprofitability is $50 million. So reducing the annual operatingcosts of the DC from $5 million to $3 million will increaseprofitability by 4 percent (a $2 million increase to a base of$50 million).” Surprisingly,it was difficult to get the CFO to seewhy this was important.

The reason is logistics managers and the Chiefs do notspeak the same language. What the Chiefs care about is thedecision impact on shareholder value. Since logistics man-agers typically think, and talk, in terms of operationalimprovements, we often forget to put the impact of logisticsdecisions in the language of the CIO, the CEO, the COO, andthe CFO.

Take inventory as an example. Two of the main documentsthe Chiefs regularly watch are the Income Statement and theBalance Sheet (we are not going to deal with the third one,the Cash Flow Statement, in this paper). Logistics managerstend to think of inventory from what I call the “IncomeStatement mentality.” That is, inventory is a good thing and abad thing. It is a good thing because inventory affects avail-ability, which affects the top line of the Income Statement –Sales. Inventory is also a bad thing because it costs money –the cost of the money invested in inventory, to store theinventory, and insure the inventory against loss, damage, orobsolescence – which affects the middle lines, GeneralSelling and Administrative costs (GS&A) of the IncomeStatement. So logistics managers are constantly trying to find

the right balance of inventory to support sales and controlcosts. Part of the problem for the Chiefs, however, is there isno line on the income statement that specifically shows theimpact of inventory level on sales and GS&A, so inventoryremains a real issue for logistics managers and a somewhatabstract concept for the Chiefs.

This problem is heightened by the fact that inventory is agood thing on the Balance Sheet – i.e., it is an asset. Whathappens if we reduce inventory? That asset line goes downwithout a completely corresponding decrease in liabilities(money owed), so the asset decrease is partially matched onthe other side of the Balance Sheet with a decrease inRetained Earnings. Wait a minute, getting rid of inventoryhurts Retained Earnings, so the logistics manager loweringinventory is a bad thing, right?

If you think this does not happen in companies today, askyourself how much of the inventory listed on your companyBalance Sheet is actually obsolete inventory – inventory thatis costing us money to keep in storage but we have no hopeof actually selling (remember the income statement). Whyare the Chiefs reluctant to get rid of this inventory? Becauseit directly impacts (decreases) Retained Earnings.

Let’s look at a different way to analyze the impact of logis-tics to see if the Chiefs really should care – a model of theimpact of improved logistics on shareholder value. C-levelexecutives are not interested in investing corporate dollars toimprove logistics performance unless it can be translatedinto higher return for the shareholders. Remember, this iswhat the Chiefs ultimately care about and is the “language”they speak. We will also demonstrate how improvements inlogistics in one company improved its shareholder value.

The improvement in shareholder value resulting fromimprovements in logistics can be visualized with the help ofthe famous “du Pont model”of financial performance (Figure1). The du Pont Model is a framework for viewing the impactof changes in sales,capital,and operating expenses on returnon net assets. In this model, we start with sales revenue andsubtract from it all the costs of doing business. This is not agross margin calculation, where only the costs of goods soldare subtracted from sales revenue, but rather all costs (fixedand variable) are subtracted to give us the profitability of thebusiness unit.

In the lower right part of the model, we examine the totalinvestment by shareholders in capital,both working (primari-ly accounts receivable and inventory) and fixed. Ordinarily,to this is added retained earnings of the company to arrive at

What “the Chiefs” CIOs, CFOs and COOsNeed To Know About LogisticsHow can logisticians’ traditional focus on operational improvements be translated into language that CEOs understand in their pursuit ofhigher return for shareholders? Here’s how to create a bridge betweenthese two perspectives, and how improvements in logistics at onecompany improved its shareholder value. By John T. Mentzer, Ph.D. •


shareholder value. However, retained earnings is a financialdecision by the Board of Directors and the shareholderswhether to leave money not invested in capital in the compa-ny or take it out. Further, since we are solely concerned herewith the impact of logistics decisions on shareholder value,retained earnings is irrelevant and, thus, left out of the deci-sion model in Figure 1.

Dividing profit by shareholder value (capital investment)gives us a return on shareholder value, or the percent of cap-ital invested that is returned in the form of profits each year.This is a primary factor for any decision made by Chiefs.

Figure 1 illustrates an actual example of how improvedlogistics performance impacts shareholder value. Althoughthe numbers have been slightly altered to protect the identi-ty of the example company,this company originally had salesrevenue of $2,000,000,000 and total costs of $1,900,000,000(annual profit of $100,000,000), on a working capital base of$200,000,000. The fixed capital base (consisting primarily ofplant and equipment and three distribution centers) was$500,000,000. This resulted in a return on shareholder value(RSV) each year of 14.29 percent.

Based on an extensive logistics benchmarking project, werevealed to the company a number of areas for potentialimprovement. As a result,management authorized a series ofactions to implement recommended improvements to theselogistics processes.

From the start of this effort,we presented to upper manage-ment dollar measures of the impact of these changes uponlower logistics costs and increased sales from improved cus-tomer service. We quickly realized that the latter of these twocould not be fully and accurately measured,so we settled fordocumenting only the improvements in inventory availableto meet customer demand – in other words,when sales weremade because the inventory was available, as opposed to alost sale due to stockouts. Increased sales, as a result ofimproved in-stock situations, were $2,000,000, while the oper-ating costs of meeting total demand decreased by $7,000,000resulting in increased profit of $7,010,000.

The operating cost savingsfell into three main categories.First, inventory held by thecompany to meet demand wasreduced $45,000,000 (alsonote that the reduction ininventory resulted in lowerWorking Capital). This resultedin savings in the cost of moneyon those invested funds, lowerrisk costs on the inventory(obsolescence, shrinkage, anddamage), and lower facilitycosts. The total of these threecost components is typicallyreferred to as InventoryCarrying Cost, which wasreduced $5,000,000 per year.Second, improved warehousemanagement processes led toa reduction in warehousingcosts of $1,000,000. Finally,improved transportation man-

agement processes lowered annual transportation costs by$1,000,000 a year.

Although fixed capital was negligibly affected by thesechanges, working capital (money invested in inventory)decreased by $45,000,000. This resulted in a decrease in cap-ital invested in the company by the shareholders of$45,000,000. As we mentioned, whether this $45,000,000 ispaid out to the shareholders as a dividend or kept in retainedearnings for future investments is irrelevant to the financialimpact evaluated here.

The result of all these changes in logistics performancewas improvement in profit by $7,010,000 each year, the capi-tal investment base went down by $45,000,000 and return onshareholder value increased from 14.29 percent to 16.34 per-cent. The total cost of all the logistics process improvementswas less that $2,000,000, which means the Return onInvestment (something the CFO particularly watched) wasslightly over 350 percent! All this clearly shows that improve-ment in logistics can have a dramatic effect on corporateprofitability and shareholder value – precisely what theChiefs care about.

The most important lesson learned from this example is thatwe should estimate the potential impact on return on share-holder value (RSV) prior to making investments in logistics.We make a serious mistake in logistics management when wego to upper management with a proposal to spend money toimprove logistics performance,without indicating what impactit will have on shareholders. It is important to remember thatthere is nothing wrong with projecting operational improve-ments in logistics, but without carrying this to the final step –the ultimate impact on shareholder value – we are not provid-ing upper management with the information necessary tomake informed business decisions. We are not telling theChiefs what they need to know about logistics. The result of all these changes in logistics performance was improve-ment in profit by $7,010,000 each year, the capital investmentbase went down by $45,000,000 and return on shareholdervalue increased from 14.29 percent to 16.34 percent.

Figure 1 – An Example of Logistics Improvement Impact on Shareholder Value

SHAREHOLDERVALUE

(Return on SV increasedfrom 14.29%[$100,000,000 / $700,000,000]to 16.34%[$107,010,000 / $655,000,000])

PROFIT

(Profit increased from $100,000,000

to $107,010,000)

CAPITALINVESTED

(CI decreased from$700,000,000 to$655,000,000)

/

SALESREVENUE

(Sales Revenue increased from $2,000,000,000 to$2,002,000,000)

COSTS

(Inventory Carrying Costdecreasedby $5,000,000

Warehousing Cost decreased by $1,000,000Transportation Cost decreased by $1,000,000)

WORKING CAPITAL

(INVENTORY)

(Inventory Investment decreased by $45,000,000)

FIXEDCAPITAL

-

+


Leveraging Logistics Practices to Create Cash FlowIf ‘cash is king,’ then logistics represents ‘all the king’s horsesand all the king’s men.’

Viewed another way, if our companies were a humanbody, then cash is the blood. Positive cash flow permits acompany to operate, grow, invest and work towards organiza-tional potential. Without proper cash flows, companies willnot meet payroll, will default on payments to suppliers andoperations will cease.

How does this relate to logistics? To survive these days, allorganizations must focus on cash management. To focus oncash management means to understand your business from asystems point of view.That is, we need to understand in total-ity what the cash implications of decisions are across thefunctional areas of our organizations. This means we need tounderstand the drivers that affect cash flows inside our com-panies and we need to manage and control them.When webegin to manage these key cash drivers, we will quickly rec-ognize we are in fact managing the supply chain. And tomanage the supply chain, we have to be committedto sound and disciplined logistics processes.

Cash Flow DriversThere are seven main business activities that

affect cash flow.These are:1.Accounts Payable2.Accounts Receivable3. Revenue Growth4. Gross Margin5. Sales – General and Administration (Corporate Overhead)

6. Capital Expenditure7. InventoryTo fully understand the impact of logistics

on these key cash drivers, it is important tostudy them individually, and then build theminto a systems picture to articulate how theywork together.

Accounts Payable and CashNo business is an island,and therefore we rely on suppliers

and trade partners to supply goods and services in order that

we can serve our own customers.When we purchase goodsand services from our supply base, we typically buy onaccount with a pre-determined payment agreement. Whenpayment is due,we use cash to settle our debts.Consequently,the faster we can receive and transform purchases into ourown products, the faster we will have product to sell to ourcustomers which ultimately means cash in our till.

Note to CFO Regarding Account Payables: 1. Reduce supplier order to raw material (or service) con-

sumption lead-time.2.Reduce Work-in-Process inventories and focus on

inbound logistics in order to optimize use of credit terms withsuppliers.

Accounts Receivable and CashAccounts receivable are a significant driver of cash flow. In

fact,“Outstanding Day’s Receivables” can often be the differ-entiating factor of a company being fiscally viable or not.Ouremployees cannot pay their mortgages with receivables from

our customers! This is so important, that I believe allsales people should in fact be responsible for col-lections as well selling product.To be sure,the orderis not complete until we have received our cash.

It is no wonder the Dell Computers model is soenviable. They receive payment for goods before evenordering raw materials to build the product!

Unfortunately though, most of us in the traditional worldmust face the reality of receivables.The ultimate goal is to

receive payment as quickly as possible after we make a sale.This means we need to focus on the perfect order. In orderwords,we need to ensure we provide our customers with the

right product, at the right place, in theright quantity and right quality.

Mastering Cash Flow:

The Need for CFOs to Focus on Logistics

Many of the costs associated with doing business remain hidden from CEOs and senior management.

Here’s how to root them out, and find value through a disciplined look at logistics

and supply chain management practices.

By Robert Martichenko


Note to CFO regarding Accounts Receivable1. Deliver the perfect order every time.2. Reduce order to delivery lead times in order that pay-

ment is received as quickly as possible.

Revenue Growth and CashMany management gurus have argued that the only pur-

pose of any business is to develop a customer. The logic isthat without a customer there is no business model.However, we know that there are good customers and not-so-good customers. Therefore, it is important to understandthat cash is generated from our good customers.A good cus-tomer can be defined as a customer who has a genuineneed for our service, will be reasonably easy to do businesswith and will allow us to generate a competitive rate ofreturn on our investment.

Increased revenue from good customers will result inincreased cash flow. So how do we secure additional cus-tomers? The most effective way is to retain current customersand to be cost and quality leaders for new prospects. Thesegoals will only be accomplished with a strategic focus onlogistics and supply chain issues.

Note to CFO Regarding Revenue Growth1. Retain current customers and develop new, profitable

customers to generate increased cash flow.

2. Reduce inventories to become more cost competitiveand increase visibility on product and process quality.

Gross Margin and Cash FlowGross Margin is generally defined as “Net Revenues less

Cost of Goods Sold”.Gross Margin is the first line of profit con-tribution that the firm will see from operations. It plays a sig-nificant role in cash flow. Logically, the larger the gross mar-gin, the more gross income we will have to contribute to cor-porate overhead burdens and net profit. This results in cashgeneration (after dealing with receivable issues describedearlier).To increase gross margins,we need to ensure that ourcost curves do not grow linearly with our revenue curves.Thatis,we need to be able to generate increased revenues withouta proportional increase in the cost of goods sold.This is thequintessential example of doing more with less. To reach thisgoal,we need to focus on Cost of Goods Sold activity drivers.And talented CFO’s know that many of these drivers are logis-tics related.

Note to CFO regarding Gross Margin1. Manage inbound logistics and reduce overall work-in-

process supply chain and manufacturing lead times.2. Reduce work-in-process and raw material inventories in

order to reduce inventory carrying costs and thereforereduce overall cost of goods sold.

Cash Drivers and Cash Flow Implication Logistics and Supply Chain ValueAccounts Payable

1. Payables = Cash Out 1. Increase working capital2. Timing between receipt, payment, and use of goods 2. Reduce order to build lead time3. Timing between receipt, payment, and use of services 3. Reduce service to build lead time4. Reduce time of payment to suppliers and revenue from customers 4. Reduce cash-to-cash cycle timeAccounts Receivable

1. Receivables = Cash In (waiting for cash) 1. Increase working capital2. Timing between customer receipt and payment 2. Reduce order-to-delivery to invoice lead time3. Accuracy of order and invoice 3. Increase perfect-order rate and invoice accuracyCapital Expenditure

1. Capital Expenditure = Cash Out 1. Conserve cash2. Must relate CAPEX with strategy 2. Focus attention on core competencies3. Strategic use of outsourcing 3. Invest cash on core competenciesRevenue Growth

1. Increased Revenue = Cash In 1. Increase sales2. New markets determine growth 2. Create supply chain competitiveness for new markets3. Current customer satisfaction drives growth 3. Meet critical quality measuresGross Margin

1. Sales-COGS=Gross Margin=Cash In 1. Increase bottom line impact2. Reduce COGS = Cash In 2. Reduce operating expenses3. Focus on reduced COGS 3. Develop optimized logistics infrastructureSales-General+Administrative

1. SGA = Cash Out 1. Increase bottom line impact2. SGA must be value added 2. Reduce operating expenses3. Need to focus on waste reduction 3. Develop optimized logistics infrastructureInventory

1. Opportunity cost of holding inventories = Cash Out 1. Increase working capital2. Services Costs = Space, Insurance, Taxes, Transportation - Cash Out 2. Reduce inventory service costs3. Risk Costs = Obsolescence, Shrinkage, Pilferage = Cash Out 3. Reduce inventory risk costs4. Overproduction = Cash Out 4. Reduce overproduction


SG&A and Cash FlowAlthough not all companies call it the same thing, SG&A,

or Sales - General and Administrative is the most commonterm used for corporate overheads. Reducing the corporateoverhead burden will result in increased cash to the bottomline. Many companies have outbound logistics rolled up intoSG&A, and a few of these companies believe that outboundlogistics is simply an evil but necessary cost of doing busi-ness. It may come as a surprise to some C – Level officers thatlogistics costs may exceed 12 percent of revenue. In today’sbusiness climate, where 1 percent of sales can mean the dif-ference between viability and bankruptcy, you would thinkthat logistics would be an area of concentration? Not to men-tion that logistics functions can, in fact, become a strategicarea for product differentiation. There are opportunities forcost reduction with respect to logistics; however, there arealso incredible opportunities to create a strategic advantageover the competition. Doing so will result in increased cashflow.

Note to CFO Regarding SG&A1. Improve internal processes and reduce SG&A costs to

ultimately increase cash flow to the bottom line.2. Reduce customer order to delivery lead time and

reduce finished goods inventory while increasing your com-petitive advantage.

Capital Expenditure and Cash Flow Capital Expenditures (Capex) are the best example of how

cash flow and accounting income diverge.For example,if youpurchase a building for $1 million, you may decide to outlay$1 million in cash to close the purchase. However, the cost ofthe building will show up on the income statement as depre-ciation expense over the useful life of the building.The resultin the first month may be $5,000 is deprecation expense, yeta full $1 million disappeared from the cash drawer. CapitalExpenditures are an immense drain on cash,and possibly anarea where ineffective decisions are being made. If so, theseineffective decisions may be due to ill conceived logisticsstrategies.

Private fleets,warehouses and advanced supply chain soft-ware are three examples of capital expenditures that requiresignificant amounts of cash to finance the transaction.Yet,dowe always know we are making the right decision? Whywould we invest in a private fleet when our for-hire truckingcompanies have all the latest technology and years of experi-ence in the trucking industry? Why do we continue to buildwarehouses when we should be focusing on eliminating theinventories that we believe we need to store in the new ware-house? When will we learn that there is no magic softwarepill to fix our supply chain challenges at the press of a button?Capital expenditures drain our companies of cash that canbe better used in revenue generating activities.Therefore, weneed to focus attention on logistics strategies that take advan-tage of existing infrastructure and we need to focus on effec-tive supply chain and people processes.

Note to CFO Regarding Capital Expenditures1. Reduce reliance on fixed assets and allow cash to be

used on revenue generating activities.2. Focus on reducing inventories as opposed to building

more warehouses for inventory you don’t need.

Inventory and Cash FlowInventory is the most elusive of all the cash bandits. The

main reason is because everything about inventory is count-er intuitive. For example, consider that inventory sits on thebalance sheet as a current asset.Yet as inventory sits in ourwarehouses, it consumes cash and it is not easily liquidatedinto cash (a pre-requisite to being a current asset). A casecan be made that inventory is, in fact, a liability.

The second counter intuitive aspect of inventory is the self-evident law that the more inventory you have, the less likelyyou will have what you need when you need it. In otherwords, too much inventory means we are surrounded byinventory that is not needed and in fact may never be need-ed.To store and move this inventory is a drain of cash on ourorganizations.

The third, and arguably most significant counter intuitive,point about inventory is that inventory is very visible.Yet itscosts and cash impact are not. Although we can walk thefloors of our facilities to see inventory first hand, we cannotreadily go to our financial statements and determine howmuch cash is being consumed by the inventory. Risk costssuch as obsolescence and shrinkage drain cash. Servicecosts such as taxes,material handling and interest drain cash.Not to mention the implicit costs such as the opportunitycosts of money tied up in inventory and the value of spacebeing used to store the same inventory.

Note to CFO Regarding Inventory1. Eliminate inventories and conserve cash.2. Have the courage to gather the data required to calcu-

late and articulate the cost of carrying inventories inside yourorganization.

Cash and the CFO – The Big PictureTo be competitive these days,we need to manage cash as if

the life of the organization depends upon it.Logistics and sup-ply chain activities affect the seven key cash drivers within acompany. Accounts payable, accounts receivable, revenuegrowth, gross margin, SG&A, and capital expenditures can allbe more effectively managed by focusing strategically on logis-tics issues.The reduction of the seventh cash flow driver,inven-tory,needs to become the relentless pursuit of all CFOs.

Alone, each of these seven cash drivers acts independent-ly. Together, they form an organization’s cash-to-cash cycle.This cycle must be understood, measured and managed inorder for an organization to reach its potential.

In summary, it’s important that all CFOs become involvedwith the logistics function and ensure that a skilled logisti-cian holds a C-Level position within your firm and board-room discussions.


IN A RECENT RESEARCH STUDY of manufacturing,whole-sale/distributor and retail members of the WarehousingEducation and Research Council (WERC), the product

returns processes of warehouses and distribution centers(DC) were examined. Interviews, combined with ware-house/DC site visits, were conducted with 20+ companies.Based on information gathered from the site visits,a mail sur-vey was sent to 1,095 WERC members. Total response ratewas 242 (22.1 percent).

Based on the information obtained, the product returnsprocess was identified as consisting of five phases: (1)receipt; (2) sort & stage; (3) processing; (4) analyze return;and (5) support operations (i.e., disposition). Some of thesephases may be combined if product return volumes are smallor if the majority of returns can be placed directly back intoinventory because they are ready for sale. Exhibit 1 identifiesthe five phases of the warehouse/DC product returns process.

The Product Returns ProcessA key question by firms is whether customers will be

required or encouraged to utilize a return authorization (RA)when sending back an item for credit. Companies prefer touse RA’s because they facilitate the returns processing activi-ty. Customers often don’t like them because they add extrawork for them.

If customers are not required to use RA’s and can returnitems at any time, sellers will not know when or how manyitems to expect at their returns processing facility. This makesforecasting difficult and can lead to inefficient utilization oflabor and equipment. If RA’s are required, the seller can plan

their returns processing activities accordingly and usuallyoperate more effectively and efficiently. In the companies sur-veyed, 83 percent use some type of RA and about 70 percentrequire pre-approval of RA’s prior to accepting productreturns. Interestingly, less than one-half of RA’s are computer-ized, that is,available from the Internet or in some other elec-tronic format. That means that a majority of RA’s are still gen-erated and processed manually.

The more and better information provided by the cus-tomer to the seller,the more efficiently the product return canbe processed. Returns will be processed more quickly andcheaply, resulting in higher levels of customer service andlower costs. Leading edge firms are more likely to use RA’sand know more precisely when, and how many, returns willbe received at their warehouse/DC processing facility.

Although individual firms handle product returns in manydifferent ways, most follow a five-step process. Exhibit 1 liststhe stages as receipt, sort & stage,processing,analyze return,and support operations.

Stage 1, or RECEIPT, entails receiving the product returnsfrom various delivery carriers at dedicated or combinationreceiving doors in the warehouse/DC. During Stage 2, SORT& STAGE, items are sorted and positioned for initial returnsprocessing. This stage allows for the fastest processing ofreturned items that can be placed directly back into invento-ry or require little or no processing activities. Stage 3, PRO-CESSING, involves several activities, most notably the initialinformation input into the firm’s data system and the determi-nation of the initial disposition strategy. Customer credits aresometimes made at this stage,especially if the items returned

Processing Product Returns in Your Warehouse/DC

After languishing for years as a back room activity in many companies, reverse logistics hasbecome an opportunity to improve customer service levels, reduce costs, and, in a fewinstances, a source of competitive advantage. However, in some firms, product returns/reverselogistics is still just a hassle and something that is a necessary evil of doing business.

James R. Stock, Ph.D.


can be returned to stock or otherwiseprocessed quickly. In Stage 4, ANALYSIS OFTHE RETURN, more detailed information isentered into the information system, the opti-mal disposition strategy is determined foreach returned item, and in most instances,customers are credited for their returns.Stage 5,SUPPORT OPERATIONS,includes sev-eral activities associated with the dispositionof returned items: return-to-stock, return tovendor, repair/refurbish/remanufacture, sendto stores, donation/charity, salvage/scrap,destroy/landfill, or return to customer.

In the discussion that follows, some of thekey elements of each stage of the process arepresented.

Stage 1—ReceiptAs product returns come back to the

warehouse/DC, they are received and enterthe first stage of the process. When productreturns arrive at a facility, they are usuallystaged prior to further processing. Often,there are receiving standards regardinghow long the return can wait before being processed.Typically that time horizon is 48 hours or less, except dur-ing periods of unusually high volumes. Firms must be ableto identify when returns are received so that employeescan determine how long they have been in the facilityprior to initial processing. A “first-in, first-out” (FIFO) pro-cessing scheme is the most often utilized procedure. Oneof the best,and in some ways easiest,ways of keeping trackof the time items have been at the facility since receipt isby using a manual system for recording arrival time.

Utilizing standard 8-1/2” X 11” paper that can be preprint-ed or handwritten, the date/time of receipt is recorded. Thatprovides warehouse employees with a quick and easy wayof identifying which returns have been in the facility thelongest and thus,which ones should be handled first. Whencolored sheets are used to represent a different day of thework week, such recognition is relatively easy and mostlyerror free.

Stage 2—Sort & StageOnce returns have been received, they are typically sort-

ed. This sort is usually based on whether the returns are fullpallets, cartons, or individual packets. It may be based onthe type of return, size and/or number of the items beingreturned, or a method that would allow balancing employ-ee workload for those involved in the initial processingactivity that occurs in Stage 3. Firms in the electronics,com-puter and retail sectors often have such sorting proceduresin place.

If a warehouse/DC receives returns that include smallpackages, cartons and full pallets, employees sometimesplace the packages into totes and put them on a conveyorfor delivery to an initial processing station where they are

opened and basic information obtained (usually usingsome type of bar-code scanning technology). Alternatively,they might place them into Gaylord’s for movement to initialprocessing stations or move the pallets to a staging areanear the stations. There, employees would perform initialprocessing activities.

Stage 3—ProcessingProcessing the return occurs at the next stage of the

process, typically at an initial processing station. Returns aresub-sorted into groups based on their SKU number so thatthey can ultimately be returned to inventory if they are insaleable condition, while vendor returns are sorted accord-ing to the vendor name. Customer credits can be given at thisstage of the process because the warehouse/DC is enteringproduct and customer information into the firm’s database.

When returns reach the processing station(s), employeestypically process items in one of several ways: (1) order oftheir receipt (FIFO); (2) according to the type of product; (3)by customer type or location; (4) according to the physicalsize of the items; or (5) some combination of these or otherfactors. When one electronics company receives returnsfrom stores on pallets, they stage them in areas adjacent tothe processing stations. Employees take items from variouspallets or from the same pallet so long as they are not the eas-iest items to process. This eliminates the selection of the eas-iest and/or quickest items to process while leaving more dif-ficult and/or slower items for later. Handling a mixture ofitems evens out the workflow and makes it easier to developpiece handling metrics and standards for each employee,function and/or warehouse/DC location.

A consumer goods company places returns on a belt con-veyor after receipt. Items move to processing stations where

EXHIBIT 1STAGES IN THE PRODUCT RETURNS PROCESS

Receipt

Sort & Stage

Processing

Analyze Return

Support Operations


diverters direct them to a station so that each processing linehas an equal number of return items in their queue. Havingthe appropriate information (i.e., customer ID and returnauthorization numbers) on the return product label allowsfor items from the same customer to be diverted to the sameconveyor line for processing at the same time. Efficiencyand effectiveness are tied to having the right information onthe items that are going to be processed. Having a returnauthorization attached to the item with a bar-code or 2-Dlabel that can be scanned electronically enhances the suc-cess of this process.

Most of the necessary information about the returneditem should be captured during this initial processing activ-ity. Also, at this stage, the paperwork that accompanied thereturn is separated from the item and sent to the administra-tive area for comparison with the electronic records if dis-crepancies should occur. If there are none, these docu-ments are kept on file or destroyed.

Most firms will have an extremely detailed listing of rea-son codes for returns. An electronics company had morethan 100 reason codes, but typically, there are usuallybetween 20-40 return reason codes that are used to indicatewhy items have been returned. Some firms perform auditsof those return codes and try to determine if anything couldbe done to reduce their number.

Stage 4—Analyze ReturnPotentially, a large number of products will already have

been processed by this stage of the returns process. Thereturns remaining in the system at this stage will be thosethat will consume the greatest amount of resources (time,personnel, cost) to process. Employees must be the mosthighly trained since it is here that the most important dispo-sition decisions are made.

Since the value of returns varies depending on the prod-uct disposition strategy employed, employees involved inthis stage must be very knowledgeable about product repairor refurbishing opportunities, allowable versus non-allow-able returns,and the financial benefits associated with eachdisposition option. Items that can be repackaged for resaleresult in more revenues than items that must be refurbished,repaired or remanufactured prior to re-sale. Repackaged orrefurbished items always result in higher revenues thanitems being sold as scrap or salvage.

At the completion of this stage, the firm should haveentered almost all of the information about the returneditems with the exception of data that could not be record-ed until after disposition of the product. In addition to theprocessing of the return, various data related to processingefficiency and effectiveness should have been collected.

Once the returns have been analyzed at the processingstations, they are now ready for disposition. One consumergoods company utilizes three colors of totes to indicate thedisposition strategy for their returns. For items that do not fitinto totes, carts are used, and for returned items that will besent directly back to vendors, the shipping boxes in whichthey were returned are often used.

Stage 5—Support OperationsThe most common disposition options occurring at the

warehouse/DC are return-to-stock, return-to-vendor, repair/refurbish/remanufacture, send-to-stores, donation/charity, sal-vage/scrap, destroy/landfill, and return to customer. The dis-position of each returned item has been determined at theprocessing stations, so at this stage of the process, items aredistributed to where they should go. If returns can go back-to-stock or back-to-stores, they are moved into the activeinventory, or to a special area of the warehouse/DC thatstocks returns that are ready for resale.

If repair/refurbishment/remanufacturing and/or repack-aging are required, appropriate diagnostics, repairs andassembly/disassembly operations are performed in order toget the items in a saleable condition. Relative to costs, thedegree of repair or refurbishing that occurs should be cor-related with the potential value of the product once it hasbeen improved. Because recovery rates for these productsare high, performing repair/refurbishment/remanufactureefficiently, at low cost, is important to a firm’s return oninvestment (ROI). From a service perspective, these returnsare made ready for resale to customers sooner, thus improv-ing service levels.

Whether performed on-site or off-site,firms that do productrefurbishing often reap significant benefits. Recovery rates(as a percent of the dollar value of the product) for refur-bished or remanufactured items can be quite high comparedto products resold as is, sold for scrap or salvage, or donat-ed. In several of the companies visited in this research study,the recovery rate was as high as 85-90 percent.

For items being returned to vendors,employees determinethe appropriate quantities and time windows acceptable tovendors and ship items back accordingly. When vendorreturn windows are small, it is important to process thesereturns quickly. It is not unheard of that a vendor will notifyits customers that returns of a certain item will not be accept-ed after a specific time period and the amount of time it takesthe firm to recover these items from their stores or other facil-ities exceeds the allowable time window established by thevendor or supplier.

If the firm utilizes outlet stores, saleable returns can beresold through them. Saleable returns can also serve asreplacements to be used in warranty repairs or sold to whole-salers,off-price retailers or offshore buyers. Returned items canalso be donated to charities or relief organizations, althoughthis option occurs less than five percent of the time. Returnscan be sold as salvage or scrap (this occurs about 20 percentof the time). The last option, and least favorable from an ROIperspective, is to destroy items or place them into a landfill.

In a very few instances (only about two percent of thetime), when items are identified as not being returnable(non-allowable) to the firm, they are sent back to the cus-tomer or store with a note indicating why the items werebeing returned and credit not provided. Often, if an item isnon-returnable, the firm will ask the customer how they wantthe product disposed of (which could include destruction,donation, or return), even though no credit is given.


A Concluding ThoughtMost warehouses/distribution centers

that would be considered leading edge.

would possess many, if not all, of the fol-

lowing characteristics:

Processing of returns is done in two

stages. The first stage is an initial process-

ing that includes the entry of basic data

into the information system and comple-

tion of the most simple and rapid process-

ing tasks (e.g., return-to-stock, re-bagging,

re-boxing, and non-returnables). The sec-

ond stage is a more detailed and/or com-

plex processing of returns that require

repairs, refurbishing, remanufacturing,

return-to-vendor, charity/donations, or

donation.

Detailed product returns process maps

are available that include a narrative of

each sub-process (e.g., receipt, sort and

stage, processing, analyze return, support

operations), as well as an overall product

returns process map.

Higher recovery rates for returned prod-

ucts are achieved. These rates of recovery

(80+ percent) are significantly higher than

for firms that provide only part-time effort

to the management and administration of

product returns (who achieve rates of 60

percent or less). When large dollar

amounts are involved, the higher recovery

rates can mean significant improvements

in a firm’s revenues and profits.

When the warehouse/DC makes a

determination prior to the customer send-

ing back the item as to whether the prod-

uct is worth returning, overall product

return costs are lower. These firms evalu-

ate the value of the item to be returned

given its most likely disposition strategy

and subtract the costs of returns process-

ing (including transportation,labor,materi-

als,and administration) to determine if the

payback is there for returning the item. If

yes, the customer sends the item back

using a return authorization (RA). If no,

then the customer is instructed to disposi-

tion the product at their location.

In sum,there are many opportunities for

cost-and service-level improvements in

product returns handling if the process is

done right.

EXHIBIT 2KEY ELEMENTS OF THE PRODUCT RETURNS PROCESS

RECEIPT

• Use of dedicated receiving doors and/or carrier appointments.

• When possible, conveyors move product returns from receiving to processingstations.

• Full pallets and cartons are handled differently than other returns.

• Pallets, cartons and/or individual items are marked with their date of arrival.

SORT & STAGE

• Staging of items for initial returns processing.

• Return product sort based on one or more of the following factors: how theitems have been returned; type of return; size and/or number of items beingreturned; method that balances employee workload at initial processing stations.

• Sort approach should maximize the efficiency of employees at processing stations and the number of items returned to inventory for resale.

PROCESSING

• Accurate sub-sorts of returns based on a predetermined set of factors (e.g.,SKU or UPC number, vendor name, customer name).

• Some of the basic information entered into the warehouse/DC database duringprocessing includes: company name; ID of employee/associate processingthe return; date and time; SKU number; description of the item; number of items processed (if multiple items in one order); location of item in inventory;package code (if product is available in multiple packages); condition description; reason for the return; and other data that may pertain to theitem’s processing and final disposition.

• Balance the workload at each processing station so that uniform levels of productivity are obtained.

ANALYZE RETURN

• Utilize a two-stage evaluation process: one for easiest processing and one formore difficult processing.

• Employees are the most highly trained and typically the most compensatedgiven the importance of making the correct disposition decisions.

• Credits are issued simultaneously with disposition of the return.

SUPPORT OPERATIONS

• Vendor returns are given high priority to insure that they are sent back within the acceptable time frame.

• When feasible, repair/refurbishing/remanufacture occur on-site.

• Disposition of saleable items occurs quickly to optimize ROI and minimizeinventory carrying costs.

Dr. James R. Stock is Professor of Marketing & Logistics at the University of SouthFlorida,Tampa. The material presented in this paper was based on a research proj-ect conducted at the end of 2003 and funded by the Warehousing Education &Research Council (WERC).


Canadian Logistics Practitioners Type and Level of Formal EducationA recently conducted survey by the Canadian Professional Logistics Institute(CPLI) and Trent Applied Social Research (TASR) survey canvassed a large array ofissues – including education and career linkages. The results have important implications for those considering professional development and education in this field.

IntroductionAlan Saipe (LQ, Volume 10, Issue 1, 2004) recently under-

scored the need for more information about linkages betweeneducation and job and career outcomes for Canadian logisticspractitioners. During 2003 and 2004,The Canadian Profession-al Logistics Institute (CPLI) and Trent Applied Social Research(TASR) conducted an ‘omnibus’ survey canvassing a largearray of issues – including education and career linkages,designed in part to replicate relevant sections of the 1997Logistics Labor Market Information study (Law,1997).This arti-cle shows results of the recent survey with a focus on educa-tion and professional development needs.

Area of EducationFigure one shows area of highest formal education special-

ization for logistics practitioners 1997-2004.As can readily beseen and to be expected, the highest concentration of spe-cialization lies in the business/commerce area followed bylogistics specialty programs. Shifts toward these areasbetween 1997 and 2004 are probably caused by both pushand pull factors. First, we are able to see substantial shifts in‘no’ and other specialization (no specialization most com-monly refers to those without post-secondary qualifications).As logistics becomes an increasingly coherent occupation,

the proportion of practitioners who have drifted into logisticscareers from other areas may be declining.These logisticianstend to be less formally educated.Second,although a formalemployer survey was not conducted as part of the recentstudy, it seems reasonable that we may be witnessing growthin employer preference for more tightly focused and readilyapplicable formal education.

Level of EducationIn 1997, 19.3 percent of middle-level management person-

nel and 25.5 percent of top management personnel did nothave post-secondary educational qualifications.This propor-tion has dropped substantially in the intervening years to 10percent and 6.1 percent respectively. Both push and pull fac-tors are most likely responsible for this finding in a similarfashion to that above.That is, older and less formally educat-ed colleagues have retired and demand for higher level posi-tions are increasing.

Figure 2.0 shows the highest level of education held by joblevel. Similar to the 1997 findings, high proportions of middleand upper management personnel have university degrees.However, college diplomas weigh in heavily at lower levels.Focus group participants pointed to the immediate relevanceand lower cost of college education as probable reasons.The

long-term labor market impact of thisfinding is unclear. While lower levels ofpersonnel are generally better educatedthan they were in 1997 (between 60 and70 percent had post-secondary educationcompared to over 90 percent in 2004),Figure 3 shows that almost all practition-ers,even those at lower levels feel that uni-versity level qualifications are nowrequired for jobs like theirs. Figure 4 illus-trates even more clearly the gap betweeneducation levels of education in handand that felt to be required by employersof such personnel.

While further analysis is required toinvestigate these findings, as shown inFigures 3 and 4, the most immediateimplication is that bridges between col-lege (High school in the United States)

By Alan Law Ph.D.

Fig 1: Area of specialization of highest formal education qualification

•


and university education offerings must be coordinated (ineither direction) to maximize practitioner career outcomes.Itis important to stress that these findings do not imply thatrespondents are under qualified in their positions. Overall,the proportion of post-secondary educated personnel hasincreased since 1997. It is recognized that qualificationsinvolve more than formal education,however, the complexityof jobs and sophistication required of personnel, particularlyat lower levels,indicates the continuing need to build bridgesinto higher education to ensure career success.This point isfurther underscored when we examine pay differentialsbetween university and college educated personnel at eachjob level.

Figure 5 illustrates average salaries for personnel with uni-versity and college level education broken down by job level.University education garners an estimated (CDN) $10,000advantage for middle- and upper-level personnel. The graphindicates the opposite case for lower-level personnel. Whenthese were further analyzed (very small sub-sample), wefound that college educated personnel with relatively highsalaries were primarily much older than their colleagues,indicating that length of experience probably played a role inpushing salaries up. It is not clear that length of experiencewill continue to keep salaries buoyant as younger and morequalified personnel come through.

ConclusionOverall, logistics practitioners are becoming more tightly

focused in their educational backgrounds and, as a group,have become far more highly educated than in 1997.However,the issue of the gap between the highest educationlevels achieved and what employers presently demand istroubling.While college education may be highly regardedfor its lower cost and the extent of job specificity, universitydegrees deliver more exposure to strategic thinking atyounger ages, meaning that careers will probably progressfaster.At this stage, it is not clear that college education rep-resents a career constraint. However, as demand for sophis-tication increases along with the globalization of trade andintensification of technology, it may be prudent to examinethe sorts of concrete bridges that could be built betweenuniversities and colleges to assist Canadian practitionersreach their full potential and provide highest value add toindustry.

References

Law,A. (1997) ‘Logistics Labor Market Information Study’.Canadian Logistics Journal, 4(4): 1-88

Saipe,A. (2004) ‘A Practitioner’s View of Supply ChainExecutive Education. Logistics Quarterly, 10(1): pp

Fig 2: Level of highest formal education specialization for logistics practitioners 2004

Fig 3: University level of education now generally required for my job by job level

Fig 4: Highest education level held vs level now generally (education gap) by job level

Fig 5: Mean salary by highest level of education and job level


Visiting Shanghai

The purpose of our trip was to meet, as representatives of the Logistics Institute from Toronto senior officials of the Shanghai Foreign Service Company (SFSC), an institution specializing in HR services todomestic and foreign businesses,and conduct finalnegotiations for anagreement. Here’s a snapshot of this exciting sojourn and the lessonslearned in the exigencies ofprotocol.

By Victor Deyglio

(LEFT) On Tour. Guides at the Shanghai

Science and Technology Museum answer

questions for Frank Bennett, Chair of The

Logistics Institute’s Board (far left) and

Victor Deyglio, President of The Logistics

Institute (second from right).

(RIGHT) Cultural Curiosity. A group of

students at the museum surround Victor

Deyglio, President of the Logistics Institute.

Rumours were apparently spreading that

someone resembling Father Christmas

was on spring break in Shanghai.


The Trip. Frank Bennett, P.Log., the Institute’s Chairman, and Iboarded a plane for Shanghai at 12 noon Vancouver time onSaturday, Mar. 27. We landed at Pudong International Airportaround 3 p.m. on Sunday, Mar. 28. Entry was relatively easy,until we left the restricted area with our luggage and enteredthe greeting area where we met our hosts and, as friends do,we quickly picked up from our meeting where we hostedthem at Banff,Alberta, in November 2003.THE CITY. We could have been on the outskirts of anyNorth American city, especially one with a cavernous newairport. Ribbons of highway and a 30-plus kilometer drivefrom Pudong to our hotel in the French Concessionimmersed us in the full spectrum of Shanghai. Shanghai’spopulation is 17 million. Yet, like most grand cities, it isbuilt around districts, each with its own charm. TakePudong, for instance (“dong” means “east”; it’s east of the

Huangpu River, which divides Shanghai at its core).At riverside,we have the Pudong New District, the new city

center where everything is glitzy and tall.The Jinmao Tower isan 88-storey architectural masterpiece that has changed theskyline forever.As we travel farther east away from the down-town, we head for the Pudong industrial district. Leavingoffice towers, we enter the world of numbing industrialexpanses – free trade zones, riverside container ports (six intotal), air cargo facilities, warehouses and factories, apart-ment clusters, highway, all afford testimony to vibrant eco-nomic growth as well as great architecture.

The Pudong New District overlooks the Bund on the west-side of the Huangpu (“xi”means “west”,so this is called Puxi).

Here we find “classical Shanghai”and the old city centre (theCustoms House, banks and hotels), mostly built in the 1920s.Shanghai is historically an international city. The FrenchConcession,where we stayed in the Hengshan Hotel, is wherethe French lived until 1940. Elegant urban sensibility standsout in the form of art deco buildings, expansive parks, wideboulevards and tree-lined avenues.

Across the street from our hotel was Xujiahui Park,designed by a Canadian firm on the site of an old vinyl facto-ry. Canadians have left their mark everywhere in Shanghai;the Science and Technology Center was also modeled afterthe Ontario Science Centre in Toronto.

In the park each morning,people did group exercises andtai chi; each evening, they did ballroom dancing (ArthurMurray,1960s vintage);every day,young people played basket-ball (the national passion) on any of the 20 courts. Each

night, the neonlights of the fashion-able Xuhui Districtlit up the sky at theedge of the park,and upscale restau-rants,bars and clubswere everywhere.Our hosts had cho-sen well.HONORED GUESTS.As honored guests,we were treatedalmost like rockstars. Our NorthAmerican sense ofindependence ini-tially made usuncomfortable withthis attention, untilwe realized that todeviate from theprogram would havebeen an insult.

Rock stars havestretch limousinesand chauffeurs; wehad a minivan and a

driver (this is the People’s Republic).Our driver was an excep-tionally skilled navigator of Shanghai traffic,although his driv-ing was consistently a white-knuckle experience.We appreci-ated our driver more than any of the privileges afforded to us.He was our lifeline,and sometimes our lifesaver.He spoke noEnglish,but understood every word we said,which we discov-ered is common in Shanghai.Young people learn English inschool; their parents did not. Our hosts picked us up at thehotel and whisked us from location to location, alwaysaccompanied by guides and translators.

Cars, trucks, buses, motorbikes careen along at greatspeeds on spiral ramps,modern highways,and wide avenues.Personal space, highly valued in Western culture, is practical-


ly non-existent in a land of 1.2 billion people. On all streets,there is also pedal traffic; bicycles and pedestrians and nei-ther had the right of way to motor traffic.

Vehicles are new and well maintained as status symbols;most are European and Japanese, since North American carsare generally too big. Bicycle traffic is controlled in bicyclelanes and forbidden on sidewalks. Should a cyclist encountera motorist, the motorist always wins and sees no need to stopeven if the cyclist is thrown to the ground.

Most Shanghai street names are bilingual (Chinese andEnglish),making it relatively easy to locate yourself once youarrive at a destination. But get-ting there is a nightmare: thecity is a maze of winding thor-oughfares. The Huangpusnakes through the centre;there is no grid pattern. TheEuropean traffic circle isreplaced by intersectionswhere 5,6,or 7 streets meet,allwith two-way traffic.EXIGENCIES OF PROTOCOL.Linked to face are displays ofrespect and politeness. Giftsare essential. (AlthoughShanghai is less formal thanother locales.)

The purpose of our trip wasto meet senior officials of theShanghai Foreign ServiceCompany (SFSC), as well asconduct final negotiations foran agreement.When SFSC del-egates arrived in Toronto inNovember for the first roundof negotiations, we met at theInstitute, then had lunch at theArt Gallery of Ontario. At thattime, gifts accompanied greet-ings.They gave crystal keys tothe City of Shanghai,on whichis mounted an 18-carat goldcity skyline,and officially invit-ed us to visit.We gave fountain pens embossed with designsby Frank Lloyd Wright, and referred to our joint enterprise asbuilding a new future.

Since we had no idea how many people we were meetingin Shanghai, we decided to present an institution-to-institu-tion gift.Our selection criteria were: monumental size, so thatit’s put on public exhibition,uniquely Canadian and one-of-a-kind. We chose an Inuit sculpture of a dancing bear, carvedout of green serpentine rock (Canadian marble). It stands 2.5feet tall, is eight inches at its widest span, and dances on arotating stand so that one can see all sides.

Protocol takes place in special greeting rooms, usually inmid to late afternoons. All offices have protocol rooms,wheresofas and chairs are arranged in an open square configura-

tion. Guests arrive first and the head of the delegation is seat-ed in the appropriate chair at the top of the square. Othermembers sit along the nearest flank. Host representatives siton the opposite flank.

When the senior host arrives, everyone stands. Both seniordelegates are introduced, shake hands (the Chinese don’tbow in greeting like the Japanese), and exchange businesscards with both hands. Other delegates are introduced.Senior representatives sit,everyone else sits,and the dialoguebegins.

This is not a meeting; only senior representatives speak.Ritually, the host greets andthe guest replies.The first dia-logue is a formal welcomeand formal thank you for theinvitation. The second dia-logue is about the vision ofeach organization. The thirddialogue is about workingtogether.All is in “protocol lan-guage”: formal and visionary.

Once the host stands,everyone else stands; gifts areexchanged. If a businessmeeting isn’t set to follow, thehost leaves and the meetingis over. Business is negotiatedin a boardroom, and never atprotocol greetings.

Touring is part of protocol,and if you are unprepared forthis, it can be taxing. TheChinese, and especially thepeople of Shanghai, are veryproud of their history andaccomplishments; they takeextraordinary measures toshare it with you. Parks, muse-ums, temples, industrial cen-ters, redeveloped areas, andmuddy construction sites, areall on the agenda.

Tours are scheduled forany time of the day,even late into the night, rain or shine.Youtravel in a group, accompanied by guides, translators, yourhosts, and even public relations people – this can be a verypublic event.Cameras are ubiquitous: everyone wants to takea photo with you.

If you are curious by nature, you will attract others.Children are always curious, especially if they think you’reFather Christmas on a spring break (i.e., Santa Claus). If yougreet adults in Mandarin (ni hao = hello), they will respond.If you say hello to children, they will practice their English.Smiling bridges gaps.

Formal dinners are also part of protocol. In four dayswe had three formal dinners. The first was hosted bySFSC’s deputy director; the second by senior faculty of

Canada – China Connections. Frank Bennett (second from left),

Victor Deyglio (centre) and Allen Chen, Director of the World

Exposition Training Centre, Shanghai Foreign Service Company

(SFSC) will be working together to meet the goals outlined in a

new agreement between the SFSC and the Logistics Institute.


a university; the final one by SFSC’s director.Chopsticks are not obligatory,but their use is considered a

test of dexterity. If you can pick up a single grain of rice, thenyou are considered less of a foreign barbarian.If you show nodiscomfort selecting food from common dishes, then youunofficially become “part of the gang”.

Taste everything but, if you are even slightly squeamish,never ask what the ingredients are. If you enjoy a particulardish, it will be left exclusively for you.Never eat everything onyour plate; that means you are still hungry and they will ordermore for you. If a special dish is prepared, the senior honoredguest gets the first serving.

Dinner conversation is per-sonal and business is rarelydiscussed. Drinking is not asoutrageous as often reported;an appreciation of Chinesewine is useful (crisp whitesand rich reds). Toasts areexpected, although a simple“gumbei” (bottoms up) is pre-ferred to wordy speeches.

Chinese green tea is stan-dard and learning to use acovered teacup, filled with hotwater and loose leaves, usingonly one hand helps reducethe “foreign barbarian” factor.Pouring for others before refill-ing your cup is a sign ofrespect, although as the hon-ored guest, you are expectedto receive rather than give.

Soup is found at everymeal, but it comes at the endnot the beginning. Dessert isnot standard, but will appearwhen foreigners are present; glutinous rice confections andChinese figs are exceptional. When the plate of fresh fruitarrives, dinner is over.MANAGEMENT DILEMMA. Although an itinerary accompa-nied the briefing binder we received on the first day, wequickly learned that such a detailed plan is really a suggestedguide.At no time was the plan ever changed (that would bea loss of face), but rarely was it adhered to. One bane ofChinese planning is a lack of management skills,as we under-stand them in the West.

Our hosts were all working full days, in addition to hostingus. If a meeting was called by a host’s boss, as happened fre-quently, then that meeting took priority over our schedule. Inits own minor way, this experience demonstrated a micro-cosm of China’s dilemma on the world stage.

There is a strong command structure in Chinese enterprises;decisions are made at the top and filter down through the ranks.In addition,central planning is a key modus operandi.The corecadre sets objectives; the rank and file is responsible for meetingthose objectives by whatever means at their disposal.

Delegated responsibilities and frontline decisions, withaccountabilities, are relatively new capabilities in China.Meeting an objective is more important than managing theprocess. In a land of nearly unlimited resources, especiallyhuman resources, one can successfully do the work to meetthe specific objectives, as the phenomenal growth of China’sannual GDP proves. But can China sustain that success with-out exhausting those resources? As China enters the globalmarket,and positions itself as leader of the world economy,itspeople and enterprises must build the skills needed to man-age growth and sustain success.

The subtle ways in whichthe current situation mani-fests itself are pervasive. Ourhosts were constantly on call;our schedules were always influx.However, there was nevera fluster of spontaneity that inany way indicated new planshad to be made on thespot. Nonetheless, alternativearrangements were alwaysbeing made, no discussionswere held, least of all with us,and no explanations weregiven. Our role, even as hon-ored guests, was to do whatwas expected.

So that we would be prop-erly prepared, each eveningour hosts reminded us of thedress code for the followingday; informal for a day oftours; sports jacket and tie fornegotiating meetings; suits forformal protocol meetings.Patience, sensitivity to the

vicissitudes of change, and a willingness to listen for the sub-tleties of the moment are keys to success.REVOLUTIONARY CHALLENGE. A culture with such an acuteability to develop go around plans will have great difficultyin,and may never be the capable of,developing process man-agement skills.This is a critical challenge in China.

Bringing process management skills to China is core to theagreement signed between the Logistics Institute and theSFSC on April 1.The magnitude of this vision is far-reaching;the opportunities are many and demanding. Moving forwardis tantamount to staging a revolution, but without guns. AsMao said,

In seeking victory, those who direct a war cannot overstep the lim-itations imposed by the objective conditions; within these limitations,however, they can and must play a dynamic role in striving for victo-ry. The stage of action for commanders in a war must be built uponobjective possibilities, but on that stage they can direct the perform-ance of many a drama, full of sound and colour, power and grandeur.

On Protracted War (May 1938), Selected Works, Vol. II

Objectives and Goals of the agreement (April 1, 2004) between.

SFSC and the Logistics Institute:

• Short-term goals of training nearly 300,000

workers, from front line to senior management, in

logistics and event management skills, to support

the World Exposition hosted by Shanghai in 2010;

• Mid-term goals of certifying the competence of

the Shanghai logistics labor market as P.Log.

professionals, modeled on Canadian workforce

development standards established by the

Logistics Institute;

• Long-term goals of establishing a China-wide and,

subsequently, a world-wide logistics professional

community, based on P.Log. certification.


IT’S OFTEN a difficult taskfor supply chain profes-sionals to explain the con-

cept of supply chain manage-ment (SCM) to colleagues orsenior executives in a contextunderstood by general man-agers. The logistics industry,like most vertical disciplines,operates with its ownassumptions and vocabulary.This makes it difficult for peo-ple outside the field to fullyunderstand the generalities,let alone the complexities.The following presents sup-ply chain management in thebusiness context withoutbogging down in SCM jargon: supply chain management fornon-SCM CEO’s.

Many firms continue to dismiss both the importance andthe impact of supply chain management and erroneouslycharacterize this practice as a staff activity usually buriedsomewhere in the administrative process.More often than notit is oversimplified as a cost by the financial department, abottleneck by operations and an impediment to customerservice by sales; in other words a department-by-departmentissue. However, increased awareness regarding the impor-tance of supply chain management at the executive level canoffer significant competitive advantages.

First it’s essential to broaden and embrace the full defini-tion of the term. The conventional phrase “transportation,warehousing and distribution” still tends to dominate themindset of many executives and is used somewhat inter-changeably, albeit incorrectly with supply chain manage-ment. Nothing could be further from the truth. Let’s see if wecan strip out the textbook explanation and look for theuncomplicated overview of supply chain.

Once a product passes the planning and prototype stage andhits the production cycle the supply chain begins.Components

and raw materials are sourcedand pulled to the manufacturingfacilities where they can beprocessed into finished goods.During that time some unfin-ished goods may be stored orsub-assemblies could be movedoff-line and inventoried untilfinal production is completed.Goods could then be ware-housed and/or shipped to mar-ket and transportation expensesare incurred while reaching des-tination. Conventional theoryfocuses on negotiating the low-est cost providers of storagespace and transportation rates.However, it overlooks the real

opportunity,which is to optimize the investment of the time andmoney required over the entire duration of the process.

Just as the modern day automobile manufacturers havegotten their designers and engineers talking and workingjointly to produce the most efficient and highest quality auto-mobiles, so too should supply chain be a consideration longbefore a product is manufactured. The largest and often dou-ble-digit cost savings are generally the result of having theability to design an optimal supply chain that includes highdiscipline and integrity. This optimization is limited to thoseopportunities that include processes that are often well out-side the typical supply chain thinking. Efficiency is the directresult of avoiding the compartmentalization of logistics tothat of an afterthought to manufacturing or a pre-determineddistribution channel.

At day-to-day ground level,logistics solutions don’t need tobe profound; they simply need to be practical.“We need partsnow – get them here by airfreight.”“Customer needs product– send them by courier.” Instant solutions also add instantcost. It may relieve short-term pressure but kills profit. Andevery department has a different ground level demand.Whatworks for the sales manager may drive the plant manager

SUPPLY CHAIN: A CEO’s Competitive Advantage

Too often executives and managers outside the disciplines of logisticsand supply chain management have a narrow and uninformed view

of what these practices encompass. Sometimes this can be disastrous. In most cases, a broadened understanding of supply

chain management can make their companies a lot more competitive.

By Jim Davidson


crazy,and visa versa.Supply chain management demands anexecutive perspective.The theory is simple; shorten the timeand reduce the cost to deliver product to market and theresults fall straight to the bottom line. However, managing ismeasuring - so where do we start? There’s only one way andthat begins with mining available data to understand wherethe opportunities are.

It should be pretty easy to get at costs and timelines in thepurchasing and manufacturing phase.Costs for input of goodsand services like raw materials, freight, maintenance, andequipment are usually pretty exposed to scrutiny.However,notall costs are so obvious.For example,if unexpected sales activ-ity on an item forces a shift of manufacturing resources or aproduction line from one product to another do you know thereal impact? Do you know the cost of moving unfinishedinventory to storage,the cost of damage or spoilage during thedown time, the cost of space and the cost of the money that istied up in the shift to non-productivity? Do you even know howto get at those costs (because the time and dollars are real)?They may be tough to dig out, but are they real? Every pennyyou find and save adds to the margin.

Often the terms logistics and supply chain are oversimpli-fied by non-SCM general managers who often narrowly focuson negotiating freight rates. In reality, few manufacturers gainany advantage over their competitors by beating up truckingcompanies for cheaper rates.If your company’s business strat-egy is clear, the real value is in negotiating service levelslinked to rates.Working with transportation providers to lever-age delivery cycles or to adjust load volumes and even sched-uling load pick-ups or deliveries to dovetail with their drivershours-of-service requirements mandated under new legisla-tion can pay bigger dividends than simply pounding away ondiscounts.Raising the dialog above cheaper rates to focus onimproving the time and cost to get market is where supplychain management can generate measurable gains.

Most companies generally assign decision-making to man-agers of departments who in turn develop their own strategies:purchasing strategies, manufacturing strategies, sales and mar-keting strategies, distribution strategies and so on. Each ofthese are critical links in the supply chain. And therein liesthe opportunity as well as the threat.Some of the strategies areactive at the same time. Some are coordinated and some areindependent.But if there is no executive driven overall supplychain strategy by which the company is managed,then there isa missed opportunity overall to shorten the time and reducethe cost to deliver product to market. And that minimizes theprospect for added margin and profit. So what’s the solutionfor a company executive to deliver supply chain success?

The cornerstone of supply chain management is informa-tion–knowing where to find it,knowing how to retrieve it andknowing what to do with it. Some of it as we discussedshould be pretty easy to get at. The rest will take some dig-ging. Each department more than likely has some data thatneeds to be put in the kettle.

The next step is to analyze the data and understand thecurrent supply chain processes.Ask tough questions.Are theprocesses driven by our company’s overall business plan orare they focused on departmental objectives? Do theyaddress all of the relative costs and issues for both our com-

pany and our customers? Do they promote a healthy corpo-ration or are they short term bandaids? Can we identifyopportunities for both short and long term improvements?And most importantly, can we pull them together in a corpo-rate strategy that serves everyone in the supply chain fromsuppliers, through our own plant to our customers?

The strategy can be a fundamental platform for a company’ssuccess, but it needs to be measured and that means settingbenchmarks. If you can’t measure it, you can’t manage it.Executive ownership of supply chain management doesn’tmean day-to-day micro-managing the process. Set the direc-tion, lay out the benchmarks and assign the responsibility. Itmay be a project manager or even a management committee,as long as the supply chain strategy itself is the touchstone forall departmental sub-strategies or initiatives. After all, this isabout your entire company’s ability to cut the time and cost tomove product to market. The strategy should focus on compa-ny wide efforts. If it is to be initiated through a launch projectthen the design, the goals, the process and the benchmarksneed to be defined,understood and communicated.

Progress Not Perfection. Reports need to communicate progress against bench-

marks to ensure success throughout the organization. Supplychain strategies need to evaluate and constantly address thedynamics of a changing business climate. And to keep theconcept relevant, build in the mechanisms for continuousimprovement.

To summarize,supply chain management is the continuousthread, the common denominator throughout any organiza-tion that earns its living by delivering a product to market.SCMcan only succeed if it is owned and managed at the most sen-ior level of the company. Supply chain management shortensthe time and reduces the cost to deliver product to market.Thisnot only contributes to a healthy bottom line,by any definition,it clearly gives a company a competitive advantage.

SUPPLY CHAIN MANAGEMENT encompasses the planning and management activities involved in sourcing and procurement, conversion, and all Logistics Management activities.Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party serviceproviders, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.

LOGISTICS MANAGEMENT is that part ofSupply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer requirements.

The Council of Logistics Management (CLM)

For more information visit: http://www.clm1.org

One America, One Vision Changing conditions in the marketplace require anew vision. The right vision for your supply chain isone that decreases inventory costs, expenses and capital expenditures while increasing customersatisfaction. This is the vision of BCG Logisticsand our One America solution.

One America is an innovative approach that alignsmanufacturers, third party logistics suppliers andsoftware companies to offer a strategic and innovative solution to streamline the delivery ofgoods across the border, resulting in increasedservice levels and profit margin.

BCG Logistics will work with you to review the system-wide management of your company’s integrated supply chain, both regionally and internationally, and develop and execute a customized One America solution that is both flexibleand adaptable to changes within your industry.

BCG Logistics. The right supply chain solutionfor your business.

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WITH CONTINUED growth in interna-tional trade and cross-border movementscoupled with an unprecedented marketof tight North American freight capacity,both shippers and carriers are chal-lenged to find solutions that will efficient-ly and securely transport goods. Perhapsone of the biggest challenges carriersface is the shrinking pool of drivers, put-ting a significant strain on their ability toprovide reliable capacity. The fact is,carriers are experiencing the largest driv-er shortage the industry has seen in overa decade, and as the economy steadilyimproves,available capacity will actuallybecome significantly tighter.

Drivers Defecting to Construction Jobs

While demand is rapidly rising forfreight services, more drivers are choos-ing alternative employment that pays aswell or better – and in some cases,

offers a more appealing lifestyle.Therefore, carriers are competing for ashrinking pool of increasingly competi-tive labor.

In particular, trucking is competingin a shrinking labor pool as many driv-ers turn to the construction trade.Construction employment compensa-tion has outperformed truck driver payfor the past decade. Due to the ongo-ing, masterful intervention of AlanGreenspan and his U.S. Federal Reserve

Policy, interest rates havebeen kept low and new hous-

ing starts have remained high inspite of the economic slowdown. Asrecently as this past April, an additional18,000 construction jobs were created,and in the past 14 months,constructionemployment grew by some 218,000 jobs-- the most since 1999. According to astudy by Professors Hokey Min andThomas Lambert of the University ofLouisville-Shelby UPS Center forWorldwide Supply Chain Management,“trucking employment is highly corre-lated to construction employment.”With the number of building, road andinfrastructure projects planned or inprocess, it is unlikely that constructionworkers will be looking for a job intrucking any time soon.

Owner-Operators AlsoDisappearing

Another phenomenon affecting thedriver shortage is the diminishingowner-operator population throughoutNorth America. Not only is the pool ofowner-operators aging, but the totalpopulation is in decline because busi-ness costs – most prominently fuel,insurance and equipment — are out-stripping revenues, making it increas-ingly difficult for owner-operators tostay in business. Many carriers rely onowner-operators for a significant por-tion of their capacity, so this trend isalso squeezing capacity to the limit.

Even increasing driver pay is not alle-viating the problem. According toGordon Klemp of the National

By Tom Nightingale

What Cross-Border Shippers Need to Know About Driver ShortagesThe largest driver shortage in history and healthy economic growth have created an unprecedented problem that is no longer solely the responsibility of carriers to solve. What lies ahead and how can shippers help to mitigate the problems converging on this sector?


Transportation Institute,“since Q4 2003,48 percent of the carriers in our data-base (over 400 carriers) increased theirowner-operator pay package and 29percent of carriers increased their com-pany driver pay package.Of the carrierswho have not yet adjusted their paypackage, 86 percent are currentlyreviewing them in light of a very diffi-cult market in which to hire drivers. Ofthe carriers who have already recentlyadjusted their pay package, 29 percentreport that they are currently consider-ing an additional adjustment later thisyear if the driver hiring situation doesnot improve.”

Expediting Cross-BorderOperations

In this difficult environment, whatcan cross-border shippers and carriersdo to help the situation? To begin with,they must embrace the “alphabetsoup” of ongoing initiatives to helpexpedite the flow of goods across theU.S./Canadian border: C-TPAT, FAST,CSI, NCAP, CSA and PIP have all beencreated to help expedite processing,speed security clearances and movequickly through customs. This allowsdrivers to get more miles in a shorterperiod. Carriers who have not provid-ed their drivers with the air-cover toexpedite the shippers’ freight andimprove the driver’s earnings aredoing a disservice to both; shipperswho are not providing proper alertsand simplifying paperwork are work-ing against the quality of life for thedrivers, therefore driving up industry

freight rates by constraining capacity.Today, because of such high demand

for capacity, carriers can be selectiveabout where they do business.The 2004hours-of-service changes have created anarrower window of productivity fordrivers, so any delays at the border oron the loading docks will encouragecarriers to send their drivers wherethere is more productive work. In otherwords, shippers who habitually holddrivers at the docks or require non-driv-ing related work (i.e. hand loads/unloads, product counts, multiple stop-offs, etc.) will find it increasingly diffi-cult to cost-effectively attain therequired capacity needed to movegoods across the border.

High Costs of SecurityInternational shipping is changing

in other ways as well. Security initia-tives implemented since 9/11 are esti-mated to have added over $75 billionto the cost of trade since 9/11. Forexample, an industry-wide increase ofone hour in clearance at the U.S.-Canada border costs the truckloadindustry $(U.S.) 500 million. In addi-tion, the industry is currently bearingthe brunt of increasing costs for fuel,equipment and insurance. And as car-riers face the most acute driver short-age of the last decade, costs areexpected to increase even further.

For years, shippers have beenfocused on just-in-time shipments andinventory reduction. Therefore, theclearing and security of cargo is criticalto avoid delays that would negatively

impact supply chain efficiency.Financially stable carriers have theresources to comply with today’s securi-ty initiatives, and are thus better able toprovide reliable, quality capacity andservice options to shippers at equitablerates. Shippers need seamless process-ing at border crossings to ensure expe-dited movement of goods to their cus-tomers. In responding to these needs,carriers must strive to maintain low-cost, efficient operations and achievecompliance with minimal impact toshippers.

Not all drivers are compensated bytheir employers for their increased waittimes at the border. Certainly, relativelyfew carriers have the financialresources to attain the certificationsthat are so critical to keep the driversmoving and earning the pay. In eithercase, drivers can and often feel theeffect on their earnings.

What Does it Mean to a TrafficProfessional?

Traffic professionals today are forcedto expand the number of carriers theyuse to cover their loads and pay pricepremiums for consistent movement offreight due to lack of carrier capacity.Both these situations bring unique chal-lenges for traffic managers.

First,carrier proliferation brings a seaof administrative,tracking and qualifica-tion headaches. A recent report pub-lished by 3PL consultant Cliff Lynch,notes, that “Most sophisticated logisticsmanagers, particularly when they moveto a new company, look to carrier con-solidation as one of the first ways toreduce costs and improve service. Insome cases, the number of carriers ismanageable; but in others, it can benecessary to eliminate literally hun-dreds of motor carriers over a period oftime.” Furthermore, he adds,“the logis-tics manager wants to develop a core ofreliable carriers that can be dependedon to provide excellent service at a rea-sonable cost.” As capacity becomestighter, it grows increasingly difficult fortraffic professionals to follow this bestpractice.

Secondly, increased costs bringdecreases in competitive market posi-tioning vis-à-vis competitors. In the

Driver Wage-Related Trends


hyper-competitive marketplace oftoday’s rebounding economy,speed andcost are critical elements to ensuringcompanies remain competitive. Fewtraffic professionals are in a position todictate the markets in which the compa-ny can compete; yet the decisions theymake are large economic drivers of thatoutcome.

How Can Traffic ProfessionalsHelp Solve The Problem?

It is no longer solely the responsibili-ty of carriers to solve the capacity prob-lem. The industry is now realizing thatthere are inextricable links betweentheir actions and the quality and avail-ability of drivers.These links include:• The quality of freight – The quality ofthe driver’s work is a function of the typeof freight tendered and the amount ofmanual labor he or she has to performto haul the freight.• The professional handling and treat-ment of drivers – In an increasinglyhigh-stress world, treating drivers withprofessionalism will help attract driv-ers to this industry and help to retainthem longer. By creating driverlounges, break areas, preparing paper-work ahead of time, and treating driv-ers as an extension of their business,companies can contribute to the long-term health of the profession.• Driver pay and freight rates – Thelargest single cost component in thetruckload industry is labor. As driverwages are raised to a competitive level,the industry and lifestyle will becomemore attractive to professional driverswho will stay in the business longer. Inthe end, that will translate to higher lev-els of safety and more consistent timein transit.

Traffic professionals need to under-stand how these factors are affectingcross-border shipping costs, carrier per-formance and increasing capacityshortages. The current climate in trans-portation and logistics requires bothshippers and carriers to focus on bestpractices that build upon current initia-tives to minimize costs and delays, pro-vide greater incentives to motivate andretain drivers,and develop win-win rela-tionships that drive wasted time andresources out of the process.

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Coming in the Fall Edition

NEW FRONTIERS IN TECHNOLOGYLogistics professionals have become managers of

information as they oversee sophisticated suppy chains on a global scale. This issue focuses on the information

technology that enables logistics executives as well as those in other disciplines to drive leadership and excellence in

their practices. Here is an informative and provocative look through the eyes of some of the world's leading academics

and leaders who are developing systems that will transform businesses.

Invest in your company’s and your own future


FAIREWARE, a software company, isstruggling to be number two in aduopolistic software market.FaireWare has excellent products.But it often fails to get the rightproducts to the right location at theright price, on time. Here’s a look atan aggressive strategy to recast thecompany’s entire operation.

With its haphazard delivery of out-standing products to its customers,FaireWare’s market share has beeneroded. Its new CEO, Steve, has beencharged with finding a solution and hehas hired an internal project managerto review the business practices of theentire organization.

In addition to his concern about theerosion of the company’s marketshare,he is also mindful of the fact that whenthis company has announced supplychain improvements in a previousprospectus, its stock price increased.

An overview by Harry,FaireWare’s new project manager:

Steve is convinced that FaireWare’sprimary strength is in product develop-ment. After all, FaireWare’s ingeniousprogrammers have an excellent reputa-tion for building brilliant tools for busi-ness. In fact, end-users have remainedenthusiastic about this company’s prod-ucts despite its ongoing failure to deliv-er them in a timely manner.

In reviewing this strength, Steveobserved that in a product’s develop-ment cycle,a new team of programmerswas struck to be dedicated to the devel-opment of each new version of soft-

ware. Traditionally, after each productlaunch this team was disbanded.

Programmers typically communicat-ed with the Marketing and LicensingDepartment on an as-needed basis andrarely worked with Operations.

With regard to marketing, FaireWareaimed to please all of its customers, byfocusing on high caliber products andresisting sun-setting older and cheaperproducts. In addition, FaireWare offeredits customers some 3,000 products, dis-played in the company’s regularlymailed catalogs. These catalogs wereessential to provide assistance for chan-nel partners and distributors.

The programmers have been consid-ered an elite group within FaireWare by

senior management. They are dedicat-ed to creativity but not to a specificprocess. Consequently, the new CEOdiscouraged Harry from conductingstudies about this Development/Programming Department.

The operations manager, Murphy,indicated he had everything under con-trol. He expressed doubt that the proj-ect manager could find any significantimprovements. Murphy had a magnifi-cent monthly report that was com-prised of some 25 pages of charts andgraphs to document the performanceof the Operations Department. Some ofthis performance report also providedinformation about the Sales andDistribution Departments.

INSIDE TRACK

By Rebecca Jasper

A Case Study:A fictional account of the travails of software manufacturer, FaireWare, which has excellent products,

but is failing in the marketplace because of its logistics and supply chain practices. LQ's panel reviews

this case study, and offers solutions and direction for the company's new CEO.


Murphy’s order-entry peo-ple were very proactive; theyeven had hired some newtroubleshooters who werededicated exclusively toexpediting orders. Murphy’sdepartment was primarilyresponsible for order entry.Also noteworthy is the factthat representatives in Cus-tomer Service, who enteredthe orders, were not allowedto speak to customers.However, they often brokethis rule.

Dave, the sales manager,also thought he had every-thing under control. Hissales people met their quar-terly quotas and he ensuredthat all the order informationwas sent to the OperationsDepartment. They main-tained fairly good relation-ships with their channel part-ners and often were alloweda last look to price morecompetitively. He knew thatthey were supposed to beselling solutions to the cus-tomer. But they weren’t coor-dinated with the consultingarm of the company, andDave was convinced thatmissing the timely delivery oftheir newest product wastheir primary barrier to a sat-isfied customer. As distribu-tion and product develop-ment were not within hisdomain of responsibility hefelt powerless to mitigate thishurdle to improved sales.

In summary, the new proj-ect manager documentedthat he was impressed withthis company’s people, theirprofessionalism, work ethicand dedication. At the endof every quarter, for example,the operations people stayedat work until midnight toensure that all orders wereprocessed in time for salesdeadlines.

There are 5 or more hand-offs per order

Average sales orders entered per day


This research also clearly evidenceda strong commitment to FaireWareamongst its employees. But this team ofprofessionals often failed to deliver theright product to the customer on time,according to the company’s channelpartners. They were frustrated with dif-ficulties involved in placing an order;there were so many SKUs, “…and thesales people don’t even understand theproducts,” distributors stated. Evenordering free upgrades could be com-plicated, requiring many conversationswith internal sales representatives, cus-tomer services representatives and,occasionally, the Credit Department.

When Harry mapped the organiza-tion as one process, he learned thateach department functioned well as aunit. But when processes that engageddepartments to function together wereconsidered, he observed several prob-lems that often resulted in the failure todeliver the right products to the cus-tomer in a timely manner.

This was illustrated by the fact thatmany of the orders were rejected withinthe Operations Department due to inac-curate order entries and cancellations.

Harry also noted that the customersales representatives, charged withentering orders, processed most of thecompany’s orders at the end of eachquarter.

The daily activity of customer servicerepresentatives had up to 42 percent of“available time” at the beginning of thequarter under review.

In addition, Harry was surprised tofind 14 different customer databasesbeing used to capture data about the

same customers. Each department haddeveloped their own IT database tofocus on the customer. Each depart-ment mentioned the same rationale forthis practice: they wanted to be cus-tomer-centric.

After carefully reviewing these cir-cumstances, Harry had a lot of ideas,but he didn’t know where to start. So heasked several consultants to providehim with their recommendations. Hereare their recommendations.

Comments from Rebecca S. JasperThis behavior change must be driven

from the top driver, namely, Steve. Hemust measure the right activities toensure that the company as a whole ful-fills orders properly. Simultaneously,Steve must attenuate the budgets,department-focused metrics, and oldjob descriptions to realign the depart-ments to act as one team to better servethe customer.

Murphy and Dave are performingand meeting existing expectationsgiven their current rolesand responsibilities.Clearly, booking ordersat whatever price to fillquotas is the name ofthe game and the SalesDepartment is playing itwell. However, the Oper-ations Department is suf-fering. Forcing ordersthrough the system atthe end of the quartercauses errors in orderprocessing as well asfatigue and burnout

among customer service representa-tives. Murphy and Dave must work as ateam, not as separate departments.

This company needs a makeover.Call it process re-engineering, leanmanufacturing (of a back office), TotalQuality Management (TQM), or Six-Sigma. Any of these tools uses a cross-functional team of energized peoplethat could be applied to strengthenFaireWare's order-to-cash process. Six-s igma’s def ine -measure -ana lyze -improve-control (DMAIC) project man-agement technique works well. Makingeach department responsible forthrough-put and service levels will getdepartments to coordinate their effortsto ascertain and remedy the root causeof order rejections and failures.

The perception of the Product-Development as a sacred cow must bediscontinued. Even 3M, famous for itsingenious product development andlaissez-faire management, hasembraced Six-Sigma to review andimprove their product developmentprocess. Also, the lack of coordinationand communications between Salesand Distribution Departments is killingthis company’s service levels.

Harry should recommend that theproduct-development team discontin-ue the practice of disbanding after aproduct is launched. After it is disband-ed this leaves all the necessaryupgrades to a new team who must re-learn the product. A cross-functionalteam, including some customer servicerepresentatives to aid delivery of freeupgrades where FaireWare is having


problems, would improve customerservice. There is also a need for theproduct development team to continuetweaking and doing ‘kaizen events’(continuous improvements) on theproduct as well as supervising the sun-set of their product to avoid the confu-sion that customers experience whenordering products from a product list ofsome 3,000 SKUs.

The Sales Department is meeting theexpectations that have been in place.However,without an immediate changein sales incentives, FaireWare will con-tinue to lose market-share.

Dave has explained that they have apricing strategy, but competing on priceis almost always a losing sales strategy.Furthermore,making quota seems to bethe primary sales incentive indicated bythe large number of orders at the end ofeach quarter. Monthly or even weeklysales quotas, which count only whenthe order is properly executed, will getthe sales train on the right track. Bonussales points for selling consulting serv-ices may also be an idea that the cross-functional team should consider.

Comments from ChristianWeidner, BS, ME Senior Manager,Business Operations Group,Genesis 10 Consulting

A quick Pareto Analysis of the areasof opportunity shows that the majorityof issues with the process revolvearound poor interaction between thecustomer and FaireWare. Sixty-eightpercent of orders are either rejected orcanceled within the first operationalstep. In addition, 38 percent of ordersundergo credit reviews but only 5 per-cent end up having credit issues.

If 68 percent of orders are rejected orcanceled within the first operationalstep, this would indicate that the cus-tomer is having difficulty in tellingFaireWare exactly what it wants. Thiswould be the first area to address. Anumber of possible avenues exist forthis. With a product list of 3,000 items, itshould be possible to form productfamilies (i.e.,group/categorize productsin a meaningful way) to assist both thecustomer and FaireWare. The main fac-

tors in determining product familieswill most likely revolve around the cus-tomer type and the expertise requiredto understand the product. Customerservice representatives could then beorganized in teams to support the prod-uct families. More contact between thecustomer and the product family teamsshould be encouraged to help the cus-tomer understand what products theyrequire and how to communicate thisto FaireWare. The 42 percent of avail-able time for customer service repre-sentatives should allow for this. In addi-tion,the use of weekly or biweekly salestargets with end-of-the-year goals mayhelp to smooth out the flow of orders.

FaireWare can address credit issuesby developing better guidelines forwhen to do a credit review. Creatingpreferred customers and setting criteria(i.e., flags) for credit checks shouldlargely eliminate this delay.

With these improvements, Harry willhave proved his credibility and willhave the opportunity to address morefundamental issues within FaireWare.The most glaring of these,deals with theprocess for researching, developing,marketing, and obsolescing product.

Comments from Richard J. Sherman, PresidentGold & Domas Research, a visioneering company

Steve observed that announcingsupply chain improvements couldhave a significant impact on a compa-ny’s stock price. According to bench-marking research, top quartile supplychain performing companies enjoy a50 percent cost advantage over theirmedian competitors, and far above thelaggards.

This is a product-dominated compa-ny without market vision and cross-functional integration. Without an inte-grated,balanced vision to achieve oper-ating best practices, the company willcontinue to lose market share and valu-ation.Unless cross functional manageri-al objectives are set to achieve the mar-ket vision, attempts to implementimprovement programs will meet withstiff resistance.

The vision must be created at the top.Steve, as the new CEO, has the capabili-ty and charge to set the market leader-ship vision for the company to drivenew operating objectives,plans,and sys-tems. The operating units can use theseto engineer process improvements andimplement new systems to create a newdestiny and result for the company inthe future.

There are 4Ps in traditional market-ing strategy–product, promotion, place,and price. The company’s success andfailure has resulted from an unbal-anced focus on its principal strength,product,at the expense of performancein the other three areas. By creating abalanced vision to achieve market lead-ership across all four strategic areas,metrics and operating processes can bealigned to move product efficientlythrough the supply network (Place)which will drive cost efficiencies(Price) and improve customer satisfac-tion (Promotion).

By implementing systems to supportoperational capability to achieve thevision, FaireWare can take advantage ofnew “business process-based” enter-prise software that is emerging in themarket. These new systems transcendtraditional functional systems (ordermanagement, warehouse management,manufacturing management, etc.) byenabling business analysts to map sys-tem-supported activities to businessprocesses creating workflows unique tothe operation’s requirements. Becausethe software is process based,by designit integrates cross-functional activities,smoothes the transition from functionto function, automates data collectionand reporting, and updates existing sys-tems.

As FaireWare strategically redesignsits processes based on vision driven pri-orities and returns, its business processimprovements, system investments, andoperating performance will evolve andcreate the competitive advantagerequired to achieve market leadership.Announcing the vision and plan toachieve supply network improvementand best practices may produce thestock price improvement to fund Phase


THIS CASE STUDY focuses on integrat-ing distribution logistics and web tech-nology via a Sample PromotionGateway (SPG) to build customer rela-tionship management programs (CRM)for Health Care Marketers.

Customer relationship managementis about understanding customerneeds and leveraging this knowledgeto drive and maintain market share.Here is a look at how a SamplePromotion Gateway with a centralizeddistribution system for samples andpromotional material provides anessential CRM building block for cap-turing information across all promo-tional channels.

The foundation of any CRM initiativeis the acquisition of customer informa-tion, its accessibility, sharing and analy-sis.This requires that customer informa-tion be consolidated in one databaseand that business processes are cus-tomer centered.Competitive healthcaremarkets require that marketers:

Innovative solutions• Develop innovative solutions toachieve adequate reach and frequen-cy against their target audience.

Competition for physicians’ time isintense. Super Reps by Dr. Lou Sawayareported that in 2002 the number ofcompany-affiliated and contract phar-maceutical representatives in theUnited States and Canada surpassed

100,000 – a threefold increase since1993. This is roughly the equivalent ofone representative per every eightphysicians, or one rep for every fivephysicians if non-clinicians and non-prescribers were excluded. HealthStrategies Group reported that 43 per-cent of sales visits to doctors end at thereceptionist desk, and that 87 percentof sales calls to high volume pre-scribers last two minutes on average.

Improve executional excellenceMany good strategies are compro-

mised by poor execution.Managing sam-ples and promotional materials is a hori-zontal process involving numerous inter-nal departments and external suppliers.Each hand-off point is a potential oppor-tunity for compromising execution.While sales force detailing still consti-

tutes over 50 percent of promotionalbudgets,a significant portion of the pro-motional budget is allocated to othermarketing programs such as continuingmedical educational programs, sam-pling, patient education,direct mail,etc.Capturing information and centralizingthe distribution of all materials acrossall promotional channels provides mar-keters with a powerful CRM database.Integrating all non-sales force promo-tions with sales force activity provides atotal promotional picture against theirtarget audience.

Integrating marketing information

from these different promotional chan-nels to measure the total promotionalimpact against a target audience hasbeen a challenge for health care mar-keters. The SPG through its centralizedordering and distribution system cap-tures the transactions from these alter-nate promotional channels and allowsthe information to be shared with exist-ing Enterprise Resource PlanningSystems (ERPS).

As senior health care executives, weexperienced the following:• Inadequate tools existed for develop-ing innovative direct-response market-ing programs.• Information wasn’t available to meas-ure and analyze total promotionalactivity.• Implementation timelines were toolong.• Too many good strategies were under-delivered because of poor execution.• Analyzing why promotions failed wasdifficult because of the lack of tools forcapturing and integrating information.• Inventory management tools wereinadequate.

To validate these experiences, wemapped the current processes for themanagement of sample and promotion-al materials for the health care marketand interviewed other senior health-care marketers. The process mappingand interviews confirmed our businessexperiences.

EXECUTIVE’S CORNER

By Wayne Fisher

Building a Bridge Between Logistics andCustomer Relationship ManagementCompanies spend millions of dollars on customer relationship management. Even though the promise ofCRM is outstanding, in practice many times it fails to deliver. But gathering information about customersand building customer loyalty can be successfully developed around a carefully honed customer strategy.Here’s an exemplary illustration of the application of CRM mapped out for the health care market that could be applied in any industry sector with promotional materials to distribute.


Since the sales force representsover 50 percent of the total promo-tional investment, companies havefocused on automating processes thatimprove sales force efficiency. Thisentails developing and implementinga web-ordering tool that facilitateseither the ordering of samples or pro-motional material. Chart 1 illustratesan online ordering system that allowssales representatives to order only their promotional materials.Numerous manual processes remainas illustrated by the remaining com-plex workflow in Chart 1. Automatingonly one process does not address therequirements of all user groups or aneffective CRM program. The SPG’sapproach to process mapping (referto Chart 4) streamlines total sampleand promotional management byencompassing the requirements of allUsers.

Understanding the sample/promotional process

Mapping work processes and mate-rial flow is an effective tool for under-standing the complete horizontalprocess and requirements for the man-agement of sample and promotionalmaterials. The results of a process map-ping exercise depend on the questionposed. If the question is, “how do Istreamline the promotional materialsordering process for sales representa-tives?” the result will be similar to thoseachieved in Chart 1.

Chart 1 describes how a companystreamlined the rep ordering system forpromotional material, but did notachieve the requirements for an effectiveCRM system because:• The complete horizontal processes andrequirements were not mapped.• The distribution of samples and promo-tional materials continue to be managedfrom separate warehouses.• The database for sample and promo-tional materials database were notlinked.• Manual processes remain because thenew system did not include all Users.

However, if the objective were tounderstand the deployment of samplesand promotional material across all pro-motional channels to a target audience

and the utilization of these materials byintermediaries, a broader, customer cen-tric question including all user require-ments would be posed.

Successfulimplementation of a CRM program

Developing an effective CRM programfor sample and promotional materials isdependent on the successful executionof the following requirements:• Re-engineering the current processeswith the customer at the center.• Centralized warehousing and distri-bution of samples and promotionalmaterial.• On-line access for all users.• Sharing information amongst all usersand other sales/marketing systems.• Continuous improvement throughprocess analysis and benchmarking.

One initiative that combines the keyelements of process re-engineering, cen-tralized distribution and web technologyis the Sample Promotion Gateway(SPG).

What is the SPG?The Sample Promotion Gateway

(SPG) is a web-based,supply chain man-agement system that enables differentCommunities of Interest (COI), i.e. salesrepresentatives, health professionals,consumers etc., to order or access ship-ment data for samples and promotionalmaterials from COI specific cataloguesvia an on-line ordering, inventory man-

agement and shipment system.The primary goal of the SPG (Chart

2) is to provide health care marketerswith a CRM tool that builds and main-tains market share and improves effi-ciencies in the management of sampleand promotional materials. To deliveron these goals, the SPG is based on twomajor principles:• Web-enabled tools i.e. a CatalogueEditor, Catalogue Manager, CustomerManager and Campaign Manager thatmanages products, ordering rights andaccess to information for each User andCommunity of Interest.• A centralized distribution center witha Drug Establishment License.

Master catalogueThe Master Catalogue adds, edits or

deletes products and manages inventory.

Catalogue managerThe Catalogue Manager customizes

unique catalogues for each COI – ensur-ing that each COI can order samplesand promotional materials or accessinformation that is relevant only to theirrequirements.

Customer managerThe Customer Manager adds,edits or

deletes Users from the system andassigns Users to a COI.

Campaign managerThe Campaign Manager adds, edits

or deletes direct marketing campaigns.

CHART 1 Pharmaceutical Company Process Map

InformationAccess to information is permissions

based. Users customize reports on-linethrough the Master Report Generator oraccess information through standardon-line reports. Information can beexported to other enterprise systems.

Centralized distribution

Companies have an inconsistentapproach for the distribution of sam-ples and promotional materials. Theymay currently use their existing com-mercial warehouse operations wheresamples and promotional materialsare second priority to shipping com-mercial goods. They may use differentsuppliers for sample distribution ver-sus promotional distribution andother suppliers for direct marketing

campaigns. This fragmented approachcreates a barrier to data capture, com-plicates inventory management andimpedes the ability to implementquickly. Applying proven distributionprinciples for commercial goods tothe management of samples and pro-motional materials simplifies theprocess and provides information onall orders shipped. Centralizing thedistribution of samples and promo-tional material provides shorter imple-mentation timelines, increased speedand flexibility, better inventory controland the ability to track the inventoryand shipment of all drug products inthe event of a product recall.

The benefits of the SPGIntegrating web-enabled tools with

centralized distribution via a SPG

generate the following benefits forhealth care companies:

Increased access The SPG allows COI to order samples

and promotional materials based onpredefined permissions and view orderdata on line. Chart 3 describes some ofthe potential COI’s.

Increased speed and flexibility Marketers can reduce their market

response time. New catalogues orchanges to existing catalogues can beimplemented instantly through theCatalogue Manager.

Innovative marketing applications The SPG provides marketers with an

additional marketing tool. Historicallythey have relied primarily on the‘Promotion” element of the marketingmix. The SPG elevates the importance“Place” or distribution strategies in themix. Integrating proven logistics/distri-bution principles with web technologyallows marketers to create innovativenew marketing, sales and customerservice programs i.e. loyalty programs,increased service levels for high pre-scribing hard to see physicians, etc.

Reporting, increased visibility and measurement

Inventory and shipment data is avail-able on-line. Each COI can access infor-mation as required.

Improved operating efficiencies The management of samples and pro-

motional material crosses many depart-ments within a company and numeroussuppliers. Typically nobody owns thetotal process. The numerous hand-offpoints create a potential for errors.Chart4 illustrates how the SPG streamlinesthese horizontal processes versus theprocesses outlined in Chart 1.

Improved inventory tracking and control

Centralized inventory and orderingprovides online access to inventory andshipments, by product code, DIN, lot #,shipment information, etc. In the eventof a drug recall,shipment and inventoryhistory can be tracked by lot #.


CHART 3 SAMPLE PROMOTION GATEWAY

Order OrderCustomers Created Delivered Shipped To

By By

Sales Rep SPG Sales Representative

Health SPG Health Professionals Professionals

Direct Marketing SPG Healthcare Campaign Professional,

Consumer

Consumer SPG Consumer

Sales Reps order directly to replenish their own inventory.

Health Professional orders directly. High prescribing physicians are provided with a password and registered by company.

Direct Marketing orders from Health Professionals or Consumers.

Consumers order promotional material on their own behalf via an on-line registration process.

CHART 2 SAMPLE PROMOTION GATEWAY

Implementing the SPGThe management of samples and

promotional materials is a horizontalcross-departmental process involvingsales,marketing,distribution and regula-tory affairs as well as numerous outsidesuppliers. Information created by theSPG needs to be uploaded or linked toexisting Enterprise Resource Planningsystems.

The steps to the successful imple-mentation of the SPG are as follows:

STEP 1 - Map the current sample andpromotional process, to understand thecurrent process flow and ownership,costs, departmental requirements, ERPrequirements and the speed and flexi-bility as it exists.

STEP 2 - Set performance bench-marks for the SPG by identifying andprioritizing the key areas for improve-ment from Step 1.

STEP 3 - Assign ownership of the SPGto a Company Administrator. Updatetheir job description outlining theresponsibility, accountability andauthority for managing the SPG. Trainthe individual on their new responsibil-ities.

STEP 4 – Validate distribution part-ners on their ability to unit-pick packand their regulatory approval to distrib-ute drug products.

STEP 5 - Implement the highest priori-ty initiative identified in Step 2.Responsibilities should be clearlydefined and relevant COI trained.

STEP 6 - Roll out the SPG against thepriorities identified in Step 2.Implement performance review meet-ings to manage performance bench-marks.

As more healthcare companiesstrive to build and maintain marketshare by increasing the reach and fre-quency against their target audience,improving their measurement capabili-ty and improving the efficiency of theircurrent sample promotional manage-ment processes, they will begin tofocus on increasing the effectivenessof the promotional efforts. This can beachieved by implementing the build-ing blocks for a CRM program.The SPGintegrates proven distribution princi-ples with web-based technology toprovide the foundation for these CRMinitiatives through the acquisition ofcustomer information, its accessibility,sharing and analysis. While the initialprocess mapping for the SPG focusedon the health care market,our learningfrom this analysis would indicate thatany industry that has samples and pro-motional materials to distribute wouldbenefit from the SPG initiative.


Customer Relationship Management(CRM) is the process used to understandcustomers and to develop strategies tomanage them profitably. Companiesemploy CRM strategies to maintain andbuild market share through customerretention programs, direct response mar-keting, effective customer service pro-grams, etc.

While successful CRM implementa-tion is multifaceted, one of the fundamen-tal challenges to improving CRM successrates is simplifying the data collection andmanagement process and ensuring thatdata collection is based on the principles ofaccessibility and connectivity. The SamplePromotion Gateway (SPG) is an integratedtechnology and distribution platform forthe collection, connectivity and accessibili-ty of data from sample and promotionmarketing programs. The SPG appliesproven distribution principles for commer-cial goods to samples and promotionmaterial and integrates these distributionand customer service principles with aunique web-ordering system based on dis-tinct customer roles or Communities ofInterest.

The SPG provides marketers with aCRM tool that provides them with on-lineaccess to all ordering and shipping infor-mation. Beyond an efficient tool for man-aging the sample and promotion processfor the sales force, it provides them withthe ability to initiate or adjust to marketconditions quickly and assess the successof their sample and promotion programsacross all users and customers.

The SPG integrates proven distribu-tion principles with web-based technologyto provide the foundation for CRM initia-tives through the acquisition of customerinformation, its accessibility, sharing andanalysis. While the initial process mappingand interviews for the SPG focused on thehealth care market, our learning from thisanalysis indicates that any company thatdistributes samples and promotional mate-rials as part of their marketing mix wouldbenefit from the SPG.

CHART 4 RE-ENGINEERED SPG PROCESS

SAMPLE PROMOTION GATEWAY


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