"Looking Left, Looking Right": The Critical Role of Supply Chain in Supporting Business Transformation

Ensuring alignment between supply chain strategy and broader business objectives is an increasingly critical success factor in any competitive market, particularly as companies evolve to meet new challenges and conditions. Three examples from the office products sector show how the supply chain function can be an integral player in supporting overall business goals.

[From Supply & Demand Chain Executive, October/November 2004] Mark Yoshimura is the first to admit that differentiation can be a tough nut to crack in the office products business. The director of supply chain vendor integration with Delray Beach, Fla.-based Office Depot, Yoshimura points out that many of his company's competitors are able to purchase goods at about the same price, in many cases their stores look very similar and even their advertising can appear indistinguishable at times. In fact, Office Depot's own market research has shown that about 50 percent of customers buying office supplies couldn't say for certain at which of the major players they had shopped for the purchase.

So when Office Depot rolled out its Millennium2, or M2, concept this past June, it's not surprising that this initiative featured as a core component redesigned "super stores" intended, in part, to distinguish the company from its rivals in the office supplies market. But what might be surprising is the extent to which the company's supply chain function was a key behind-the-scenes player in supporting this initiative. "One point of differentiation is who can get the product to the right place at the right time, with the highest service and the lowest cost," Yoshimura says. "From that perspective, supply chain can be and should be a potential competitive advantage for us."

Aligning supply chain strategy with broader business objectives is becoming more and more critical for companies across a variety of industries in the face of growing global competition and shrinking margins. Where once supply chain was an afterthought, brought in after engineering and marketing had their say, now the supply chain function is increasingly being included early on in the design and planning of major corporate initiatives, particularly when an enterprise's competitive edge is on the line. This article will look at how three players in the rough-and-tumble office products market Office Depot, Corporate Express and Staples have relied on their supply chain functions to support changes in their overall business models. In each case, the supply chain has played a vital role in ensuring the success of new and ongoing initiatives at these companies.

Building a Better Mousetrap at Office Depot

Office Depot, which operates 1,105 stores in 14 countries and had 2003 sales of $12.4 billion, began working on its M2 concept in November 2003 when its top leadership tapped Rick Lepley, then president of Office Depot Japan, to work on a clandestine project to reinvent the company's core retail operations. Goals set for the project were ambitious: creating an Office Depot store that was less expensive to open, more efficient to operate and easier to shop. Lepley gathered a small team to work on the initiative "undercover" to ensure confidentiality and a fresh approach, going so far as to establish, separate from the company's main test facility, a prototype laboratory in an old furniture building scheduled for demolition.

Lepley's team visited Office Depot stores as well as competitors' outlets, delved into extensive research on customer preferences and shopping habits, and quickly assembled a wish list of elements that would go into building a more customer-friendly and employee-efficient store. Through the research, for example, the team came to understand both the perception of value and the efficiencies created by using pallets of merchandise, the advantages of effectively utilizing "display-ready" packaging, and the benefits of highlighting key product categories such as paper, ink and writing instruments in "mini-worlds" or "pods" within the store. With its vision for the new Office Depot taking shape, Lepley's team began working with an outside design agency, Miller Zell, to transform its learnings into a next-generation store layout, and they also began to involve other functions within the company, including the supply chain organization.

The supply chain function at Office Depot had several concrete assignments, as well as one overarching objective, in supporting M2. As an example of the former, Yoshimura points to supply chain's work on holding capacity on the store floors and the company's collaboration with its suppliers on display-ready packaging. The work on holding capacity stemmed from learnings from Office Depot's earlier store design initiative, Millennium 1 (M1). "We wanted to build a better mousetrap with M2," Yoshimura says, "and one of the key learnings from Millennium 1 centered on holding capacity and the implications on distribution expense and our just-in-time cross-docking model." The company primarily distributes to its stores through its cross-docks, working on a once-a-week replenishment cycle, with product held on top of those towering, warehouse-like shelves on the store floor. The trouble with top stocks, of course, is that the store employees must spend considerable time and effort recovering open position on the selling shelf by bringing down top-stocked product.

Moving to the redesigned M2 store model, Office Depot wanted to ensure sufficient holding capacity on the store floor but minimize top stocks, while also maintaining the company's existing cross-dock distribution network. To accomplish these goals, the M2 design team envisioned switching to low steel shelving, adding selling-shelf capacity and holding more inventory on the store fixtures and bringing more product into the stores in display-ready packaging. "If we could have a packaging concept that allowed us, much like the wholesale clubs, to receive at our store dock door, take the product straight onto the shelf and, in a simplistic world, tear the top off and it's ready to go, we felt that we could reduce store labor via those mediums," explains Yoshimura. Some of the Office Depot's suppliers already provided display-ready "trays" of products, but the current store fixtures did not allow the company to take full advantage of the efficiencies afforded by this packaging, prompting changes in the types of fixtures included in the M2 format. In addition, the company called on its top dozen suppliers and involved them in the process of rethinking their own packaging approaches to assist Office Depot in simplifying its processes and reducing its costs. According to Yoshimura, this collaboration has not resulted in a blanket mandate to change packaging but has helped Office Depot, and the suppliers, understand where changes are appropriate. "In working with our supply base, we really are attacking it category by category and figuring out where it makes the most sense for us to do this, and then individually working with vendors in those categories to make the necessary changes," Yoshimura says.

Adding Flexibility Without Adding Costs

Elsewhere, Office Depot's supply chain function took aim at the broader objective of supporting the M2 initiative by looking at ways to add flexibility to the company's supply chain without adding cost. In particular, the supply chain needed to be able to support the company's planned expansion with new stores (including M2-type stores set up in 50 to 60 converted Kids "R" Us sites acquired from Toys "R" Us), as well as redesigns of existing stores, all the while ensuring high service levels and holding the line on costs. Of course, supply chain flexibility has been an ongoing goal of the supply chain organization at Office Depot, but with regard to M2, the company's supply chain function began focusing on ways to make its inventory ordering and allocation decisions based more on a total supply chain cost model. "In the past we've looked at inventory ordering and allocation based on maximizing inventory turnover," Yoshimura explains. "Now we're building a model that looks at total cost, taking into account not only inventory carrying costs and turnover, but also handling costs within our distribution network and labor costs within our stores."

The company supported the drive to greater supply chain flexibility with a series of organizational changes over the past year. In the past, the supply chain function was fragmented organizationally, with replenishment reporting to merchandizing, fulfillment centers reporting to the sales organization with the company's Business Services Division (BSD, which serves the needs of midsize and large corporate or institutional accounts on a national or global basis), and the cross-dock distribution network reporting to the store sales organization. But in September 2003 Office Depot named Mark Holifield as executive vice president of supply chain, giving him responsibility for all warehouse, cross-dock and replenishment activities in North America. "By bringing it all together, we're able to focus on the total cost instead of just maximizing opportunities within the individual silos, and that really gives us the capability to leverage our total supply chain infrastructure across the business," Yoshimura says.

Moving forward, Yoshimura says that Office Depot's supply chain function will continue to focus on inventory management. "We're spending quite a bit of time re-looking at how we order things, our safety stock levels, our replenishment algorithms, our service levels," he says, "looking for opportunities to reduce stock-outs and improve fill rates while reducing inventory." The company also is implementing a merchandizing and planning system from Retek. The emphasis here, too, is on deploying processes and systems that contribute to supply chain flexibility, so that as M2 continues to roll out and as new corporate initiatives arise, the supply chain function will be able to support those efforts.

Looking back at the M2 rollout, Yoshimura points to one important lesson: By continuously working to improve the company's supply chain processes, his organization positioned itself to take on the tasks necessary to support the M2 project. "There haven't been that many challenges from a supply chain perspective because we were already working on things, such as the flexibility, that have allowed us to adapt to these new concepts without a lot of pain."

Adding Private Labels and Addressing Complexity at Corporate Express

At Corporate Express, the supply chain function has been working to support the company's move toward a greater emphasis on private-label brands by creating a revised logistics network called "mixing centers/private-label warehouses," according to Tim Beauchamp, senior vice president of distribution operations at the company.

Broomfield, Colo.-based Corporate Express, which had 2003 sales of about $4.4 billion in North America, is a wholly owned subsidiary of Holland's Buhrmann. Traditionally, private-label product has made up about 10 percent of the company's business in the United States, versus about 40 percent in some other regions, such as Europe. However, Beauchamp says that over the past few years of difficult economic times, as the company has been carrying on conversations with its customers to learn how Corporate Express could bring more value to the table, the idea of introducing a wider variety of private labels grew increasingly attractive. So much so that this year the company has been rolling out four differentiated private-label brands, including the top-of-the-line CEG, or Signature products; the CEB line, intended to be equivalent to similar branded products; a "price fighter" line known as EXP; and DPS, or Diversity Product Solutions, a line of products sourced from diversity suppliers.

Corporate Express has been sourcing its private-label products both domestically and internationally, either on its own or through third parties. The company has been using a trading partner called Atico International, for example, for most of the goods sourced abroad, primarily because Atico has established foreign offices and "feet on the street" in a dozen countries. But Corporate Express also has its own dedicated sourcing staff working on the private-label products (in fact, the company has added some staff to manage the increased international sourcing it is undertaking), and its personnel has been involved in developing standards for the products and ensuring that the necessary testing is in place.

On the distribution side of the business, the company's supply chain organization has set up and staffed a new network of five mixing centers, or private-label warehouses with one each on the West and East coasts, as well as Dallas, Atlanta and Chicago to support the new lines. The private-label products will come into the mixing centers in containers and go into inventory. Then, as branded products come into the mixing centers and get cross-docked, the private-label goods will be married up with branded goods for transfer out to the company's more than two dozen distribution centers (DCs) for eventual delivery to customers. (Interestingly, on the branded side, Corporate Express has worked with many of the suppliers to decouple the freight costs from the branded products, with Corporate Express taking control of the product at the suppliers' factories, eliminating the need to send the products through the suppliers' own DCs and reducing cost and complexity.)

Beauchamp says that the move to increased use of private-label products, with the greater use of international sourcing and the introduction of the mixing centers, has added a new level of complexity to Corporate Express' supply chain. Beyond the obvious issues of having to operate on a 24/7 basis, sitting on conference calls late in the evening in the United States when it is morning in a supplier's home country, or dealing with language issues when working with offshore suppliers, Beauchamp finds himself these days managing increasingly intricate international supply chains for individual products. "You have to work through the timeline to source the product from multiple places," he says. "Some components come from one part of the world. They're brought to another part of the world. They go through assembly. Then you have to look through forecasted demands and conversion factors from branded stock-keeping units (SKUs). It's getting to be a pretty challenging process."

Looking Left, Looking Right at Staples

For Paul Gaffney, executive vice president of supply chain at Staples, the hallmark of his company's business strategy over the past few years has been about learning how to deliver high returns to shareholders while also growing the business. "It's about balancing profitability with growth," he says, "and supply chain plays a big role in that, because those two economic imperatives are sometimes at odds with one another. It's often more profitable to deliver lower service, and, vice versa, it's easier to think about delivering higher service with more expense. What we've become quite good at is figuring out how to deliver higher service with lower investments in inventory and lower expense."

Staples, based in Framingham, Mass., operates 1,400 retail stores throughout the United States and Canada, as well as 265 stores in Europe, and the company had 2003 sales of $13 billion. Like other companies in this market segment, Staples has been in a growth mode in recent years, both in its brick-and-mortar presence and online, particularly with its B2B Staples Contract division. But the company has also been focusing on improving its supply chain performance. In fact, one of the company's five corporate-wide objectives for 2004 has been to "drive supply chain performance by improving merchandising, distribution and fulfillment center management."

As the supply chain organization within the company works to support Staples growth on the one hand, and at the same time to drive new efficiencies on the other, a key focus within the organization has been on, as Gaffney puts it, "getting people to understand how their role fits into accomplishing the end goal and to recognize that just optimizing their part of the supply chain doesn't necessarily lead to the best results." Gaffney says that he emphasizes what he calls a culture of "looking left and looking right," that is, cultivating an environment in which actors in the supply chain seek to understand how their actions affect other players upstream and downstream in the supply chain. Part of the trick to building this type of culture, he says, involves continuously communicating and reinforcing the company's priorities as a mechanism for ensuring that employees see and understand their role in the bigger picture. Another component is aligning compensation plans to ensure that everyone is focused on the same economic and customer-service levers.

In addition, Gaffney points to the need to spend institutional energy building teamwork for example, by making sure that the right meetings are happening and that the wrong meetings get canceled. "The wrong meetings would be those that continue to allow people to silo-focus, and the right meetings are those that have a number of participants who span several different links in the supply chain and that are run and driven in a way that force people to work together, versus blaming each other for things that have gone wrong," Gaffney says.

Staples has taken this "look left/look right" philosophy one step further by working with both customers and suppliers to drive down costs for all concerned. For instance, the company has invested in technology that allows Staples to provide its own customers with visibility into how their order patterns affect costs for the supply chain as a whole and how changes in those patterns can produce shared benefits. "In many cases, they had no visibility into their pattern of ordering and certainly couldn't connect that to a driver of our costs," Gaffney explains. "We've been able to collaborate with them to essentially allow them to 'look left' and understand how changes in their behavior can positively impact the whole economic value chain." On the supply side of the equation, Staples has worked with its supply base to effectively replace safety with synchronization, that is, to put in place the processes and systems necessary to give Staples confidence that its suppliers will be able to deliver reliably, allowing Staples to hold less safety stock. "Taking away a lot of that safety is what allows the economic efficiency to be harvested," Gaffney says.

Part of the challenge in building this type of collaboration with the company's customers and its supply base has been changing the traditional buyer-vendor relationship. "The typical supply chain culture and I think the typical customer-supplier culture, too is very transaction-oriented," Gaffney explains. "It's not very goal-oriented. The challenge is to educate people and to inspire them to recognize the larger context and to act consistent with the larger goals, even though it might look like they're giving something up in their set of transactions. We have to change the dialog from 'What price are you going to charge me for that product?' to 'What are the total economics of the relationship?'"

"Bullet Points" for Success

The technical backbone that backs up the supply chain's efforts at Staples to look left and right, and achieve synchronization with its partners, includes three buckets: analytics, transactions and collaboration. The first bucket comprises a full-strength data analytics solution from Brio (acquired by Hyperion last year) that Staples has been using for about five years, according to Gaffney. This tool provides the information that the company uses as the basis for discussions with customers and supply chain partners about the patterns of their relationships and about potential changes that could benefit all involved parties.

The transaction systems in use at the company are one area where Gaffney sees opportunities for new efficiencies. Like many enterprises, Staples has been using a number of packaged and home-grown transactional solutions, but the company has been on a two- to three-year mission to integrate those systems to a greater extent.

For example, a couple years ago the company used one system for replenishing its retail stores and an entirely separate system for replenishing its warehouses. Combining those two systems to operate off a shared view of demand was an important improvement in Staples' execution environment, according to Gaffney.

Finally, with regard to collaboration tools, Staples has invested in tools on the customer side, for example, in its B2B commerce framework. But the company has also made a number of investments in functionality to allow it to do better planning and forecasting with its upstream partners. "That functionality really having a planning and forecasting discipline supported by robust, easy-to-use, best-response tools has been an important element of our transformation," Gaffney says.

Asked about the success factors for ensuring that transformation within the supply chain supports broader business transformation within an enterprise, Gaffney offers two "bullet points." The first, he says, is ensuring that the supply chain's fundamental economic objectives equal the company's overall fundamental economic objectives. At Staples, that has meant keeping the supply chain focused on the primary goals of customer satisfaction and return on net assets, both of which are directly linked to supply chain decision-making. And "bullet point" number two, Gaffney says, is to maintain a focus on the end customer. "Somebody once said that one of the more sobering realities of thinking about supply chain is that, at the end of the day, the only source of money is the paying customer. And so all participants in the supply chain are essentially shuffling around the customer's money. Oftentimes just returning people to that simple reality helps them understand the need for greater efficiency and collaboration."

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