Logistics Quarterly Magazine - Volume 16, Issue 1, 2010

A Conversation with Allan J.C. Smith, President, BCG Logistics Group

Interviewed by Nicholas Seiersen, Senior Manager, KPMG and LQ Executive Editor

LQ: Thought leaders in performancebased tasks, frequencies and measures sometimes claim a too-tightly written statement of work can leave outsourcing providers responsible for the work without the flexibility. Do you agree?

Allan Smith: I’m finding that innovation is one of the most important things that a 3PL can bring to the table. In the past, in many cases, customers weren’t totally open to innovation. It was predetermined what type of services they wanted to outsource. Then they chose the companies that they felt were capable of providing those services. They were evaluated based on ability and cost.

In today’s economy companies are particularly focused on cost. I think that has allowed forwardthinking 3PLs to take the opportunity to be innovative.

I believe customers should look for process change that should help effect their cost change. That can be simple things like changing origin warehouses; in the Canadian marketplace, instead of having unique Canadian supply chains, having a hybrid supply chain that would be more focused on some unique, centralized warehouse, but some direct distribution out of larger U.S. distribution centers. For some companies, direct shipping out of the U.S. fulfills all of their requirements. You could actually eliminate complete warehousing infrastructure. A lot of that warehousing infrastructure was based on a business model from the sixties and seventies, implemented by U.S. corporations going global - putting a Canadian division in and divisions all over the world. What happens with that, we found, is that it really limits your sales.

We had a large retail account whose Canadian division had a small operating warehouse, about 50,000 square feet, whereas they had two million square feet in the U.S. By eliminating their infrastructure and putting a program together that allowed them to pull directly out of their central supply chain, they actually saw double-digit growth in Canada for five years running. Now the product is all centralized in the U.S. What happens is they actually get to re-order. Now they can pull orders for their big retail clients, do their forward order for spring and fall, which is very normal. In the past, they couldn’t get product because they were seen as a foreign entity to the home base. To order product would take two to three weeks and they’d miss their season.

What happens today is, Canada is a region, like California - it’s just like anywhere else. When they bring their product in, they forward buy their product to their customers. The logistics process and the systems that are used give the Canadian sales and customer service people the window they need to deliver on time to their customer and all the things they need to run the supply chain properly. But they also get reorders in three days and it comes all the way from Los Angeles. It’s all pretty well done regular service over the road with trucks. So basically what’s happening is by being innovative and by doing it differently, the customer is seeing significant growth in sales and reduced cost of supply chain. No warehousing cost - the actual inventory is pushed back in the U.S. and allows the U.S. inventory to turn more times, which is what they’re looking to do. So there’s really no inventory cost as opposed to having that central cost.

We developed a software package to do that because the customers really wanted to be able to have the visibility. The big issue was, given the big box retailers, they want appointments; everything must be on time and scheduled. In Canada, most people ship less than truckload (LTL) and small package, not truckload like they would in the U.S., because of the volume difference in the markets. They needed a tool to be able to see that. As a result, we developed an in-house tool that allowed the customer to upload the detail of the shipments to us real time so we could see that information. Also, their Canadian customer service people could see this information. It was very difficult in their global legacy system to accommodate these kinds of requirements for a regional market like Canada. All of the shipments are bar coded and scanned. When they are cross docked in Canada, either in our Vancouver, B.C. or Mississauga, Ont. operation, and scanned, if there was a credit hold, which can happen a lot in the retail industry, the dock knew right away. The product was put in credit hold or shipped out to the customer.

That’s how we started on our software innovation. We realized that if we could create a better mousetrap for customers, that would be our best competitive edge as a small 3PL trying to grow and compete in a much better known, larger world of global corporations. We also realize that the regional players are still very necessary in the supply chain. We’ve got a lot of big global players that have the big box, big transportation operations. In business, many view Canada in their distribution network as a region. The United States is much different as far as the transportation processes and requirements are concerned.

We also applied this software in the automotive industry. Automotive not only has after-market parts sales, they also have vendor parts. We saw a huge opportunity to eliminate vendors going into product distribution centers (PDCs) before they go to customers and instead apply a vendor-direct distribution-type process in conjunction with the regular stock orders that customers can get on a regular basis. We took that same software initiative and expanded that so that we could now manage vendor parts and direct PDC parts. When we did that we also found we could consolidate all that freight from the vendors and multiple PDCs coming directly in through consolidation hubs using multi-carriers. The result was actually millions of dollars in cost savings with no real reduction in freight cost.

One of the things that we find quite often is that you can reduce your freight not by bidding it out, but by changing the process. By looking at how the freight moves and what PDCs are presently being used by customers, you can say, “You know, we can build a better mousetrap.” We had a customer that we were bidding on that had actually already eliminated their infrastructure in Canada for the most part. They moved their product up into Winnipeg, Man., and into Toronto, out of distribution centers (DCs) in the midU.S. The problem was that because they didn’t have enough volume at certain times of the year, and their product was going to the west, it was very expensive out of Pennsylvania and those types of areas. And, they were only sending a truck once or twice a week, instead of every day, which meant poor service to the customer. We proved that we could bring in everything from Mississauga, Ont., bringing multiple trucks out of facilities every day, and with our expedited service there was no service degradation and, in some cases, it was a lot better. We saw a significant double-digit savings in costs. We really didn’t go in with the least expensive rates. Instead it was a different process to get the job done that resulted in savings and improved service. The tools we developed helped us to develop the visibility to manage this business and help customers to plan their business moving forward. LQ: When your firm looks at developing innovative and sustainable supply chain practices does it look at innovation in its alignment with partners?

Allan Smith: On the software end, we came to the part of developing our own systems largely out of the call from customers to create innovative alignments. Before I started BCG Logistics, I spent seven years doing warehouse automation for the big grocery retailers. We did a lot of interesting things, like the first radio frequency units on forklifts in warehouses. Using smaller companies to develop that software worked well. Whereas the larger companies in those days were skeptical about niche players. They were very set in their business model. We accomplished this IT development successfully with a very big payback. I realized there was an opportunity to look beyond the standard operating systems that large 3PLs use. We took the opportunity to develop software that we needed for our customers that would interface with multiple customers.

Many customers were on legacy systems. The new systems being developed today didn’t integrate very well with legacy systems and the programming time and cost for them to integrate with us was very expensive compared to our nimble system. We had to be very flexible. We had to take information and files any way we could get them from the customer so that we would all be successful. Otherwise, it could harm the project and it wouldn’t likely happen. We started off doing it out of necessity, to give them the visibility and that’s how we began the process of development.

LQ: How important is the investment in technology to continuously improving the business relationship between logisticians and their outsourcing partners in terms of mitigating risk and growing the business?

Allan Smith: It’s interesting as I think the large organizations are very much focused on dealing with the large software companies because they may feel their customers will have a better comfort level with these large firms and brands. However, when it comes to innovation, I think that’s where there’s the opportunity for the smaller companies now. I’m finding in the last three years our accounts are bigger than they used to be, simply because the bigger companies are also more open to innovation. I always like to say that generally customers are innovative and understand their market. That’s not always true. The reality is that many customers are desperate to save money and are willing to take a risk.

You’ll get people coming to you saying, “I’ve got to save money. I’ll look at whatever there is to look at. It’s pretty clear that if I don’t save money, my boss has told me he’ll find somebody that will.” For logistics companies this should be really exciting because whether you’re big or small, it’s an opportunity to take your abilities and knowledge and say, “What if we did this?” and to actually model it and play with it. Today it doesn’t take a month and a half to model somebody’s supply chain and take a look at what’s going on and do some quick calculations to see if you’re going in a direction that makes sense.

The other interesting thing that we’re now seeing is that corporations are starting to look at sister companies and modeling supply chain over other supply chains to see if there are opportunities. They’re bringing us in as part of their team. Recently we had an experience like this with a customer who met with us and said: “Here’s the data. Let’s mirror what we’re doing here. Let’s see if we can’t build a better supply chain for both companies and let’s do it in three months.” This would never have happened five years ago. Today the opportunities for innovation, if you’ve got software and flexible systems, are really quite amazing. I think that’s going to make companies a lot stronger and innovative for the long term over the next couple of years when things really turn around.

(This interview is an abridged and edited edition of LQ’s Executive Insight Interview Series, held December 2, 2009.)