BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- SPECIAL REPORT

Logistics Gets a Little Respect
Delivering the goods on time is suddenly a sexy business

Pity the poor logistics manager. No one really cares how a can of peas gets from Buffalo, N.Y., to Austin, Tex. Or what it takes to get that bright red sweater to your doorstep. As long as the grocery shelves are stocked and the clothes from the mail-order catalog arrive a few days later, we never give a second thought to how the goods are delivered.

Until now. Buying online has spoiled customers. Go to a Web site, click on that book or CD, and two days later the doorbell rings. There's no room for delays or misplaced orders. Just ask Toys 'R' Us ( TOY). The Federal Trade Commission fined it $350,000 last holiday season because of a breakdown in its order and delivery systems. The Web site mistakenly informed customers that things were on the way when they were really out of stock. Now, the company is counting on Amazon.com Inc. ( AMZN) to handle its fulfillment tasks.

Toys 'R' Us is not alone. The ghost of Christmas past is haunting a lot of dot-com companies. Last year's delivery disasters have persuaded plenty of e-tailers to turn to outside experts to help deliver products to front porches--or to beef up their own logistics capabilities. They now know that what happens after a customer pushes the ''buy'' button is just as critical as a user-friendly Web site. ''The whole industry recognizes that to be successful, delivering the product on time and accurately is absolutely essential,'' says Jonathan Morris, executive vice-president of online outlet store Bluefly Inc. ( BFLY) ''If it's not right the first time, the customer doesn't come back.''

Suddenly, logistics is sexy. Online companies that used to focus on creating a slick Web site and spent tens of millions on advertising to try to build a brand are now turning their attention and dollars to the more mundane business of delivering the goods--from knowing what's in stock to how fast it can get out the door (page EB124). ''We've learned that we need to spend more time on the back-end systems than the front,'' says Connie Fuhrman, a senior vice-president of BestBuy.com ( BBY), the online arm of the electronics retailer.

Like the dot-coms, Old Economy companies are paying more attention to making the trucks run on time, too. Many of them have well-established warehousing and shipping systems in place, but now, thanks to the Web, they're coming up with ways to get things delivered to customers faster and cheaper. The newest thing: collaborative logistics. Using the Web to hook up manufacturers, retailers, and truckers, companies can easily pass along the information they need to share trucks and warehouse space with others. ''Executives have begun to understand there is a great deal of value in moving things around and storing them, not just making great products,'' says Gene Tyndall, executive vice-president for e-commerce at Ryder System Inc. ( R)

Logistics is no easy chore. It involves more intertwined pieces than a Rubic's cube. A single global shipment of toys, for example, requires an average of 27 parties to complete, according to Forrester Research Inc. Along that path, anything can happen. Maybe a customs broker fails to submit the right papers or a truck gets a flat tire on the way to pick up cargo. The customer doesn't know why the delivery is late, and often, neither does the company that made the sale. A recent Forrester survey showed that 76% of logistics managers at major companies couldn't trace the products en route or get updates. That data gap can delay deliveries and potentially cost retailers and manufacturers millions of dollars in lost sales or wasted resources.

The Web opens up new channels of communication so companies can anticipate problems or shortages and respond quickly. This holiday season, the smart dot-coms will be using sophisticated software to link their Web sites with warehouses. EToys ( ETYS), for one, has spent $43 million to set up its own distribution network. After a customer clicks the buy button, the order reaches an eToys warehouse within two hours. Those couple of hours allow for a fraud check and for a customer to cancel the order. What a change from last year, when it took 24 hours for an eToys order to get to the warehouse floor where a worker would pick and pack a toy. EToys had hired Fingerhut Business Services to handle its deliveries, and that added a step to the process: The order would go to eToys and then have to be placed in Fingerhut's processing system, along with orders from other clients. Because of that setup, eToys struggled to meet the holiday surge in volume. And that's why it took the whole process in-house this year.

Other dot-coms hope they've done enough trouble-shooting to avoid those mishaps. Kmart Corp.'s BlueLight.com ( KM) is tackling its first season online with SubmitOrder.com Inc., a new fulfillment company in Dublin, Ohio. When a customer clicks on the site to order a Razor scooter, that order goes immediately to SubmitOrder. Within an hour, the order moves to a picker to pull the scooter off a shelf and send it on its way to a UPS truck. Also every hour, SubmitOrder's computers send an update to BlueLight so it knows what's in the warehouse and can either replenish an item or yank it off the Web site if it runs out.

This season, many e-tailers have picked the logistics help they expect will be able to respond in a flash to spikes in demand. This year, Bluefly, for example, switched to National Catalog Corp. in Virginia because it agreed to do whatever is necessary to ship orders in one day. National Catalog added a second shift of workers and allowed Bluefly to place employees at its warehouse to monitor and help manage the process. ''It's very important for us in an age when everything is expected to happen instantaneously to be able to transmit that order, have a pick-ticket printed, have a worker go find it, and ship it out the same day,'' says Morris. Of the 133,582 orders shipped in the second quarter, 90% went out the same day, he says.

The logistics problems are just as complex for old-line companies--and the potential rewards for harnessing the Web are just as alluring. For them, logistics is no longer simply a matter of getting from Point A to Point B. It's now about wiring every point in the supply chain--the sales office, manufacturing plant, warehouse, and the truckers. The Web allows everyone in the chain to share information and coordinate their movements simultaneously, making quick adjustments possible without a snafu (page EB120).

Photo by Michael J. Abramson
CNH's Logan aims to work with competitors
Better collaboration. For Ace Hardware in Oak Brook, Ill., the savings are pouring in. The company persuaded its retailers and suppliers to feed forecasts and orders into an online system. With everyone hooked to the Net, suppliers might respond to an order by sending an e-mail suggesting that Ace order 210 cases of wrenches rather than 200 because the larger amount means a full pallet and a lower price. That saves time at the warehouse because the supplier doesn't have to break up a pallet, pull out 10 cases, then shrink-wrap the short pallet again for storage. At the delivery site, there's less chance for loose cases to be lost. That saves Ace the trouble of redoing the paperwork so it's not charged for the lost or misplaced items. The result of all this: Ace's transportation costs are down 18%, and warehouse costs have been slashed 28%.

Better collaboration means customers can get what they want when they want it. Subaru of America used to supply cars to dealerships based on past sales. But that tactic didn't take into account that a dealer may have sold a lot of black cars because that's all the dealer had to offer to begin with. By letting the dealers key in their preferences in models, colors, and even accessories, Subaru can deliver more of what customers want. Dealers in Colorado don't end up in the dead of winter with a lot of white cars they can't sell. ''It's difficult to measure the bottom-line impact,'' says Steve Morel, Subaru of America's director of logistics. ''But when we are in the field and talking to dealers, they all say their model mix is much better than it was before.''

In the latest advance in logistics, some companies are sharing transportation information and resources with other, unrelated companies. Companies share trucks, in some cases, with others shipping goods in the same direction, or use somebody else's truck on a return trip. Why share? For many manufacturers, transportation costs run up to 6% of revenue on average and make up the largest chunk of logistics expenses. So there are lots of potential savings. General Mills Inc. ( GIS), for instance, has been testing an online transportation exchange since July and expects to save $800,000 in its first year by sharing a truck route with Fort James Corp. ( FJ), which makes paper towels and Dixie cups.

The next logical step is teaming up with competitors. Take the auto business. Once a car is unloaded from a train, it can sit for days waiting for more cars to fill a truck. Subaru's Morel says the company is talking to another carmaker that imports vehicles about sharing rail and truck space and getting cars to dealers more quickly. Sorel says he could save up to two weeks on deliveries.

This collaboration won't be easy, though. Companies may not be able to overcome incompatibilities in their computer systems and production schedules. A bigger hurdle: Competitors may not want to play along. That's the dilemma for CNH Global ( CNH), a maker of farm and construction equipment based in Racine, Wis. It asked several companies in the Midwest--Deere ( DE), Caterpillar ( CAT), and Komatsu ( KMTUY)--to combine equipment bound for overseas on a nonstop train from Chicago to Baltimore. The potential savings: up to 8 days of travel time. But Deere is holding back. It thinks it can achieve savings by handling logistics on its own. ''I don't want to tip my hand to my competitors if I can be there faster, smarter, and with better quality,'' says Jay Fortenberry, director of worldwide logistics.

Sooner or later, though, as more companies learn to share via the Net, the competitive advantage may shift to team players. And loners could end up being derailed.

By FAITH KEENAN

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EBIZ Contents for issue dated Nov. 20, 2000


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