Outsourcing Logistics: Donaldson's Canadian Logistics Arm
Senior economists have predicted the diminishment of distance in the global village is likely to be the single greatest economic factor to shape our society in the next fifty years. However, as John Nolan, director of Global Logistics of Minneapolis-based Donaldson Company Inc., readies himself to speak to Toronto conference delegates about insights predicated on what he demurely calls traditional business practices, he is aware that not all of the Canadian delegates will concur with his international orientation.
With more than $381 billion in bilateral trade between the United States and Canada, and up to 82 percent of Canada’s exports destined for U.S. markets, Canadian companies are focused on international logistics. But Nolan is addressing an approach derived from a cohesive rethinking of the way logistics is practised by U.S. firms interested in seamless access to Canada and its markets.
It specifically signals the way a handful of companies are dismantling their traditional corporate structure in logistics, particularly in Canada, and turning to third party logistics providers instead of maintaining their own corporate logistics operations. Even if some industry pundits do not agree with this approach, in the context of the North American Free Trade Act, deregulation in the Canadian industry since 1989, and above all, the growing need to mirror customers’ demands with excellent service, Nolan’s corporate strategy has proven itself by bolstering international growth and improved profit margins.
Donaldson Company, founded in 1915, provides its customers with innovative filtration solutions in a wide array of products and operation environments, from agricultural to construction, mining and automotive markets. The company’s air and liquid filters and exhaust and emission control products are also used for everything from mobile equipment to industrial air cleaning systems. Although this eighty-year-old company’s logistics outlook seems precursory, tracing its strategic steps shows how its straightforward strategy has enabled it and others to compete with Canadians in their own backyard, without investing in a lot of infrastructure and large overhead costs.
In the beginning, Donaldson’s clients and their requirements helped prompt and guide the company’s far-reaching transformation in logistics, Nolan explains. “We recognized that we needed to be able to deliver to approximately 80 percent of our customer locations with two-to-three day delivery times,” he says. As a result, small LTL shipments are now cross docked and delivered to all of Canada’s major centres, comprising more than 60 percent of Donaldson’s market, with next-day deliveries.
As a manufacturer of filtration and exhaust products, Donaldson delivers its products to OEMs, dealers and distributors in the heavy duty diesel engine markets, which include companies such as UAP, Freightliner, Volvo, Navistar, Mack Trucks, to name only a few, as well as to companies in the “off highway” sector, such as those in the agricultural market, namely, Caterpillar, John Deere, J.I. Case.
Even though these clients are located across Canada’s expansive regions, from the maritimes to the western provinces, fulfilling an order is now performed seamlessly through Donaldson’s multiple channels of distribution and its strategically established warehouse distributors and dealers to provide timely service to the replacement market. “In every case it is imperative that we have the product available when the customer wants it,” Nolan states, unequivocally. In fact, the process is so transparent that it could be likened to making an international phone call that goes through many networks, systems and junctures, none of which are known to the customer.
Providing these customers with access to Donaldson’s complete line of products with high fill rates, while always being mindful of dependability, to nearly anywhere in North America has worked with aplomb. “Our experience has been that by leading the way with service, sales follow,” Nolan explains. Donaldson’s success is also evidenced by its growing volumes of transborder trade. “We have gone from less than one truckload per week to eight to Canada, and our sales have tripled in Canada,” he states.
Before changing its Canadian logistics strategy and choosing its current Canadian third party logistics provider, Mississauga, Ontario-based Unicity Integrated Logistics Inc., Donaldson priced its products only in U.S. dollars. In addition, Canadian customers paid a brokerage fee and had to place significant minimum order sizes to receive prepaid freight. “This discouraged small orders and in many cases the brokerage fee was equal to, on a small shipment, the cost of the product,” admits Nolan. “We changed the way our products are priced. Today they are in Canadian dollars - and they are delivered, door-to-door, without a premium price.”
The bundled price of the product, including delivery, brokerage fees as well as duties to present one comprehensive price for Canadian customers, includes a service that is faster than air delivery in some cases.
He points out that clients have always been at the core of the company’s logistics strategy and during the past five years, armed with its new vision, logistics operations have been simplified with the growing complexity of its customers’ requirements. Turning this equation, in effect, on its head has enabled the company to maximize service and limit investment costs typically required to achieve such corporate objectives. The comprehensiveness of Nolan’s strategy belies the complexities called for in its logistics operations. But, he singles out the premise for going forward as an openess to use a global perspective, a willingness to accept new ideas and, perhaps more daunting, putting some of the old practices aside.
“We looked at the North American region as a whole and felt this would give us a competitive advantage if we said there were no sacred cows, and anything involved in the logistics process could be re-engineered to make this happen,” recalls Nolan. This openmindedness meant transcending borders and mapping the continent in terms of regions open for business.
The rationale for simplifying the company’s distribution process across North America was not only due to its customers calling for high fill rates within a few days, as well as competitively priced product without premiums for expedited delivery. Donaldson opted to limit the number of distribution centres and, in effect, simplify its operations, partly to avoid the high cost of investment required for additional regional distribution centres. But it also reduced the handling of product and enhanced the integrity of shipments by limiting the number of break-bulk locations.
Today, Donaldson has a distribution centre located in the northwest area of the United States, namely in Indiana, which provides service to customers in Canada and the United States east of the Rockies, as well as a centre in Ontario, California. When the company began working with Unicity, all of its Canadian shipments went to Toronto, which served as a hub for distributing to the rest of Canada. But now, with sufficient marketshare acquired, Donaldson has the volumes needed to split its deliveries into the eastern and western regions of Canada, with five weekly truckloads to Toronto and three to Winnipeg on a schedule, with set cut times and its distribution centre working on a three-shift basis.
This enables customers to order throughout the day, and with more than 95 percent of Donaldson’s shipments shipped the same night as order placement, trucks are dispatched each hour from nine to midnight, and then until 2 a.m. in the morning, with trucks destined to cover the greatest distance dispatched to their destination first.
Unicity Integrated Logistics Vice President Allan Smith characterizes a typical Canadian order to highlight the value his firm affords Donaldson as an extension of that company. When a Kingston, Ontario-based dealer needs a product, they check their inventory, which is Donaldson’s. The customer knows that if they place the order on Monday, it will arrive on Wednesday morning. This means the dealer can schedule work for their client or set appointments. “In the past that dealer would have paid a premium, as well as for customs clearance on international freight,” Smith notes. “Today shipments are cleared through a consolidation process and come into the distribution centre at approximately 4 p.m., where they’re cross docked and forwarded, either as a small package courier delivery or an LTL (Less Than Truckload) shipment. This means it is at the customer’s door at 9 a.m. the next morning.” The benefits show on the customer’s bottom line. It eliminates of the cost of keeping high inventory levels and reduces logistics costs, resulting in higher profit margins on some products. Unicity, which has specialized in providing systems and strategies to enable international clients access to Canada since 1972, also consolidates returns and ships them back to Donaldson’s U.S. offices via truckload.
Donaldson’s regional partners in Canada and the United States were selected on the basis of a specific set of criteria that has evolved with its strategic vision. Each partner must specialize in a region and be, in practice and approach, an extension of Donaldson in all of its business practices and representations to Donaldson customers. “We feel responsible for our product from the time we manufacture it to the time it is used by our customer. We don’t think our responsibility stops at our shipping dock when a carrier picks up the freight,” Nolan says, referring to Unicity Integrated Logistics Inc.
He adds: “If we have a problem or a complaint from one of our customers, we expect our partner to solve it and often a member of our partner’s senior management will meet with our customer face-to-face and apologize for there having been a problem, and set out a plan of corrective action as well as followup with that customer to ensure they are satisfied. I insist on it.”
Donaldson’s distribution centre strategy, its inventory management, customer service and transportation strategies were integrated ultimately to tighten the firm’s relationship with its customers. Nolan describes the selection of Unicity as a thir d party logistics company in Canada as a tactical step. “We wanted partners whose primary objective was to service their customers and to understand what they had to do well in order to achieve their customers’ objectives,” Nolan says. “And if there was ever to be an error, it would be an error that favored service and not on the side of minimizing costs.”
Prior to associating with Unicity, Donaldson had experiences where its third party providers “...cubed-out their trucks at the expense of service. This resulted in split shipments, pallets that had been unitized and stretch-wrapped were broken by the carrier and, as a result, shipments lost their integrity.”
Donaldson measures its success in Canada partly by its partner’s performance as an extension of the company. “You have to be very good to be selected,” Nolan says of his third party providers, continuing, “and good to stay on. It can be a good long-term relationship for both of us as we help to grow each other’s business.” Today, performance is measured by several criteria; in particular, Nolan refers to the company’s fill rates, its distribution costs as a percentage of sales costs, total order cycle times and inventory turns, the company’s growth in markets and ultimately “we listen to our customers in terms of their levels of satisfaction.”
As a company that began to implement its new logistics strategy with a philosophical precept that meant putting its Canadian customers first by dealing directly with the principals of a Canadian logistics provider, Nolan acknowledges that Donaldson has already achieved many of its marketing goals and fulfilled its basic objectives in Canada. “When we set out we set a goal that we would move 80 percent of our freight via low-cost truckload on a consistent scheduled basis and we would do this fast enough so as to avoid the cost of premium transportation. And we have done it.” Nolan acknowledges this, but then he adds, with deference, that competitors and others are working hard to catch up. Donaldson, however, is already working on the next act with its partners.