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Questions for LQ’s Executive Interview Series have been prepared by members of LQ’s Board: Graham Allen, Program Manager of BPS, Supply Chain Secretariant, Ontario Ministry of Finance; David Closs, PhD., Michigan State, LQ Executive Editor; Bruce Danielson, Executive Communications Manager, UPS; David Faoro, Director, Supply Chain, The International Group; Cliff Lynch, Executive Vice President, CTSI

Shippers Warehouse Co., Inc. is a Texas-based provider of third-party logistics services, custom packaging, and supply chain management. From its corporate headquarters in Dallas, Texas, Shippers Warehouse manages a network comprised of 10 facilities and exceeding 5,000,000 square ft., with operations in the Dallas/Ft. Worth metropolitan area and Atlanta, Georgia.  Established in 1901, the company is privately owned and operated.  Customers include consumer-packaged grocery, confectionary, automotive, health and personal care, consumer electronics, major appliance, gaming, cosmetic, veterinary, building supplies, physical fitness, chemical, furniture, and industrial concerns.  Shippers Warehouse manages the largest-volume LTL grocery consolidation program in the southwestern United States, and provides its customers the very latest capabilities in EDI transmission, RFID labeling, Web-based visibility, RF-enabled warehouses, serialized inventory control, and automated small shipment fulfillment services.

LQ: What are some of the initiatives you are taking to be more environmentally friendly? (Graham Allen)

Ken Johnson: At Shippers Warehouse, we have gone out of our way to contribute in every way we can to an improved environment and a greener planet for our children and our grandchildren.  Energy-saving initiatives such as the use of reflective roofing material, the capture and collection of rainwater runoff for landscape irrigation, energy-saving lighting, and the use of energy-saving construction materials are employed in all new facilities.  Older buildings have been retrofitted with energy-saving lighting, and we use only biodegradable scrubber detergents in our cleaning equipment.  Aluminum, paper, and corrugate are recycled, and we strive in our supplies procurement process to purchase as many goods made of recycled material as possible. The interesting thing about “going green” is that it is a sound business decision.  Shippers Warehouse has realized significant reductions in the cost of energy, landscape irrigation, supplies, etc., and the dollars we receive for bundling and selling our corrugate often pay our monthly expense for trash removal. It is an absolute “win/win” situation.
LQ: How will warehousing continue to deliver value given the drive by companies to increase supply chain velocity and to reduce operating capital? (Graham Allen)

Ken Johnson: We continue to deliver value by being innovative in our efforts to provide our customer base with an array of services that they can purchase on a variable basis as needed, freeing up capital that was previously required to support these initiatives.  As goods flow through the supply chain, they often require some sort of modification prior to arriving at their final destination.  Special packaging, labeling, display construction, quality auditing, etc., are some examples of changes to finished goods that have historically been handled by departments within the customer’s organization. By providing these services to our customers on a variable (per unit) basis, we allow them to remove the expense for those departments from their cost structure. In other instances, we are able to free up capital for our clients by taking over supply chain management functions such as transportation management, call center administration, reverse logistics planning, etc.  We strive to put our customers in a position where they only need to invest their effort and capital in producing/importing/purchasing their goods; we can handle the total supply chain effort from that point forward.

LQ: How do you effectively communicate with customers given the range of IT systems and the difficulty they have communicating with each other? (Graham Allen)

Ken Johnson: With the incredibly diverse customer base that we have, Shippers Warehouse has invested a tremendous amount of time and money addressing this issue.  Our clients communicate with us via EDI transaction sets, the exchange of flat files, custom interfaces, and a number of less sophisticated methods.  Custom programming of some sort has become a given with the startup of any new client relationship.  The IT environment adjusts and upgrades continually, and will require investment and innovative answers to new questions from now on. 

LQ: How will the current economic environment impact the 3PL industry?  Would you expect to see further consolidation or will everyone just ‘hunker down’ and try to make it through? (David Closs, PhD, Michigan State, LQ Executive Editor)

Ken Johnson: I believe that the current economic environment will not affect all 3PLs in the same manner.  The customer base, markets that a 3PL operates in, real estate obligations, asset vs. non-asset, legislation, and the relevant labor environment are all factors that will impact each 3PL entity in a manner consistent with each individual firm’s circumstances relevant to those issues.  Companies whose customer base is dominated by consumer electronics, apparel, luggage, decorative items, or other such non-essential consumer goods are going to be more severely distressed than those dealing with customers whose goods are more essential.  Firms with large building lease obligations that were put in place to service customers in these markets could be severely at risk.  Non-asset based 3PL providers could be in a less perilous position, but could also be severely compromised by the failures of their customers’ businesses if a large percentage of their clientele deals in the sale of these non-essential goods.

It is reasonable to assume that some consolidation will take place during the dire economic times that are predicted for the very near future.  Smaller firms with strong balance sheets could use this time as an opportunity to increase their market share by purchasing the business of a struggling competitor, or venturing into a geographic market in which they had not previously participated.  Larger firms will most assuredly be presented with opportunities for acquisition, but could be constrained by corporate mandates that force them to pass on such opportunities due to the uncertainties of the economy.  Publicly owned 3PLs can be expected to “hunker down.”

LQ: What role does transportation play in expanding/optimizing your DC network? (Bruce Danielson)
Ken Johnson:Since the transportation dollars spent to get a product to market are typically a multiple of four to six times that of the warehousing dollars spent on that same item, the role of transportation figures into every supply chain decision.  An analysis must be undertaken for our customers that includes the manufacturing source of their goods, discerning what the most timely and cost-effective mode of transportation to get those goods into their DC network is, where their client bases are concentrated, and what is the most efficient way to service that requirement.  Once those determinations are made, we coordinate inbound customer volumes with our LTL consolidation program to maximize transportation opportunities.  This consolidation program is so extensive that many of our customers pay their warehouse bill with the savings they realize from the inclusion of their shipments in it.

It is the transportation component of the overall supply chain strategy that compels us to have a presence in the five primary domestic distribution markets (midwest, northeast, southeast, southwest, west).  Shippers Warehouse currently addresses this need with its own facilities in the southeast and southwest, and with the use of a network consisting of industry partners and “4PL” relationships elsewhere.  This flexibility allows our customers a wide range of options and assures so that virtually any challenge can be successfully overcome.

LQ: How do you balance the needs of serving middle-market customers with those of serving strategic customers? (Bruce Danielson)

Ken Johnson: In our lexicon, every client is a strategic customer.  Our management and supervisory staff are trained to treat every client as though it was the only one we have, and that mindset is passed on from them to the customer service staff, the warehouse associates, the cleaning crew, etc.  This is a legacy ingrained in the organization by Darby Strickland, Chairman Emeritus of Shippers Warehouse.  He led by example, and would treat a phone call from a customer with a few pallets in inventory exactly the same as one from a Fortune 500 customer with 80,000 pallets.  This mindset is beneficial for all customers, regardless of their size and requirements.

LQ: How do you manage for growth and ensure optimal space utilization? (Bruce Danielson)
Ken Johnson: In our industry, the “build it and they will come” approach has a considerable financial risk attached to it. As space represents a huge fixed cost, we learned a long time ago that unneeded space caused by overly enthusiastic sales projections can seriously detract from profitability and drain cash reserves.  Shippers Warehouse has historically kept a real estate portfolio that includes owned property, leased property, short-term leases, long-term leases, temporary leases, large buildings (200,000 square ft. and up), smaller buildings (less than 200,000 square ft.), and various lease termination dates.  This has allowed us the luxury of being able to adjust to changing business conditions.  We have always made certain that any vacant space in the system could be consolidated into one facility within a geographic region, and fit our primary market niche (food grade, high ceilings, etc.).  Addressing this particular issue this way has resulted in steady, constant growth fueled by dependable profitability. 

LQ: Do you feel there has been too much emphasis of late on the adoption of new technology and systems compared to a focus on the fundamentals of warehousing and distribution? (David Faoro)
Ken Johnson: Certainly, new technology has greatly enhanced all of the parts of the supply chain process.  When I started in this business, inventory was kept on a manual “cardex” system.  We’ve come a long way since that time.

The danger that I see regarding this question is the “technology for the sake of technology” issue.  A pick to light warehouse provides a highly productive environment with tremendous inventory accuracy, but does its capital investment allow the 3PL provider to be price-competitive?  The answer to this question would depend upon the gross sales dollars, margins and activity associated with the commodity to be stored/distributed. This is a question that must always be asked when making an assessment regarding the purchase and implementation of new technology.

LQ: What steps have you taken to reduce your warehousing costs? (Cliff Lynch)
Ken Johnson: While the current state of the economy presents substantial challenges, it also offers tremendous opportunity.  Because of the downturn in the commercial/industrial real estate market, we have been able to renegotiate existing lease obligations to obtain substantially reduced building costs.  Other vendors (propane, temporary labor, supplies) have also offered reduced pricing in return for extended terms.

On the labor side, we constantly measure productivity and margins with a series of metrics designed to maximize the return on our labor dollar expense.  These metrics are shared with everyone within the organization, and our workforce is financially incented to keep these ratios within a pre-determined target range—but never at the cost of service.