A Boatload of Kitties

When there are glitches in the logistics pipeline, sometimes it's good to have an outsourced provider on your side.

When there are glitches in the logistics pipeline, sometimes it's good to have an outsourced provider on your side.

[From iSource Business, February/March 2003] We all remember well the massive lockout a few months ago involving the 29 ports operated by the Pacific Maritime Association along the West Coast of the United States. The lockout came after the International Longshore and Warehouse Union, which controls all work on the West Coast docks, engaged in several months of slowdowns to make known their disagreement with the Pacific Maritime Association over the organization's desire to use new technologies such as cargo scanners to speed cargo handling.

It couldn't have come at a worse time.

The ports operated by the Pacific Maritime Association handle at least $300 billion in cargo a year. Many of the ports are designed to accommodate massive container ships from Asia that are too large to be diverted through the Panama Canal. Because the holiday retail season was fast approaching, many in the manufacturing, retailing and agriculture industries had already been preparing for the increased demand. And don't forget those just-in-time facilities that rely on the latest shipments to keep pace with their lean inventory. In a study commissioned by the maritime association, the dollar impact of the strike was estimated at $934 million a day, however that figure was expected to rise the longer the strike lasted.

As stated earlier, it couldn't have come at a worse time, especially for a boatload of little kitties. In one of those cargo ships, floating maddeningly close to the West Coast but with nowhere to unload its hold, was a shipment of Nakajima USA's Hello Kitty plush toys bound for U.S.-based-Toys "R" Us stores. The longer the strike lasted, the later and more costly their arrival would be.

First, Let's Begin at the Beginning

A little over two years ago Nakajima, a Japanese manufacturer that has owned the license to create trademarked Hello Kitty toys and PVC figurines in Japan and Korea for over 25 years, decided to expand its operations.

Now, in case you don't have a little daughter, granddaughter or niece that owns one, Hello Kitty is a soft, tiny cat doll, sporting any number of poses and pastel outfits. Nakajima also manufactures all the paraphernalia that are made especially for the kids  or kids-at-heart  that collect Hello Kitty, like backpacks, lunch boxes, key chains and jewelry.

Nakajima therefore acquired the license to market the Hello Kitty products in the United States, Canada and Mexico, and it set up a Los Angeles-based headquarters for its U.S. operations, which is run by president and chief operating officer Eric Weber. According to Weber the nine-employee company is set to bring in roughly three times more than last year's $1.7 million in revenues. It sells to both national, mass accounts, like Target and Toys "R" Us, and smaller "mom-and-pop" stores, like Neil's Toys.

When it first started its operations, Weber said Nakajima USA used a distributor and its sub-distributors to fill the incoming orders from small- and national-account customers. Unfortunately, Weber and his team found that the distributor was not as financially sound as it had lead Nakajima USA to believe, and it had not done a very good job of developing its sales representative force across the United States.

With orders increasing daily and the pressure to keep on top of the company's distribution deadlines mounting, Weber said he was faced with two options. First, he could purchase a warehouse or contract with a warehouse to keep the Hello Kitty inventory, hire a warehouse manager, and put together a sales force that would sell directly to the mom-and-pop businesses. This course would require time to set the operations up and train a workforce, and it required a hefty investment for the physical real estate. Weber's second option was to outsource the capabilities.

He explored both options by contacting several warehouse companies and asking for bids on their business, as well as following a colleague's suggestion to get a bid from CaseStack, an almost $10 million business process outsourcing (BPO) company. According to CaseStack President Dan Sanker, the BPO offers services like transportation and warehousing, as well as related software, which is modeled after larger customized supply chain management packages but functions as an application service provider (ASP) with very little customization.

Even though Nakajima's parent company in Japan wanted to give the U.S. operation its own warehouse, Weber explained, "Because of our relatively small size, it did not make sense for us to build our own warehouses and take our logistics operations in house; I told my boss I didn't really want to invest in the infrastructure. Outsourcing logistics became the best choice for our company."

So Nakajima went with CaseStack, particularly because it fit the key parameters Weber and his team had laid out: a low cost for storage and in-and-out charges, as well as good transportation capabilities like truckload, less-than-truckload, parcel, rail, ocean and air. He also pointed out that Nakajima's opportunity for a return on investment with this option is infinite because the company doesn't have any assets tied up in it  no software to buy, no warehouses to manage and no sales force to train and pay.

And Weber said another thing that clinched the deal was the outsourced provider's online inventory tracking feature. "You don't have to call a warehouse, you just go to a Web site and download the information. We have the ability to see where each individual shipment is in real time. We can concentrate our attention elsewhere with our provider managing the complete logistics for our company."

Although Nakajima started bringing the Hello Kitty product in this past March and was ready to start shipping with CaseStack in April, there was still a "learning curve," as the two companies started working together, according to Weber; CaseStack had to study up on Nakajima's particular needs. At first, Weber said the order entry process was not yet efficient because Nakajima had to first plug order information into its accounting software before faxing it to CaseStack, which would then enter the information into its software. Weber said he originally wanted to integrate the provider's software with Nakajima's Peachtree accounting software to circumvent the problem, but later decided it best to just electronically transmit orders, uploading them directly to the provider's order entry software. CaseStack got to work on a translation program, and since May, according to Sanker, data goes from retailers' systems via electronic data interchange (EDI) or XML directly to the BPO's servers. After that, the information is sent to warehouse management systems at the warehouses and transportation management systems at the trucking companies. Sanker said, "Nakajima was an exciting new customer for us  at the time, it was our first foray in the toy industry."

Additionally, Weber said its provider had to put systems in place to juggle servicing Nakajima USA's smaller mom-and-pop businesses and the big mass customers at the same time. The biggest challenge when dealing with the big customers, Weber explained, is making sure the piece count and case count all match up after the orders have been translated into the software. "Life is interesting  we found out an awful lot about how to get a routing to major mass customers," he joked.

Weber added: "I wouldn't say it's been perfect, because logistics never is, especially if you're learning a new category, as CaseStack has been. But they've been very positive and understanding about learning our category, and we took that as a good sign."

The Kitties' Quandry

Now remember that cargo ship we left floating in the northern Pacific at the beginning of this article  the one holding Nakajima USA's big Hello Kitty Toys "R" Us order? That's not something any company wants to have happen when they are under a deadline, and Weber said it just goes to prove the old principle that if anything can go wrong it will go wrong. However, if there's any good to be found in the situation for Nakajima, Weber decided it was the fact that its outsourced provider was on the job for them. "If we'd have run our own warehouse or were running the distribution process ourselves, I don't think we'd have had nearly as good of intelligence, and we would have spent a lot more time looking for it, which we wouldn't have had the resources to do" he stated. "Our provider was good about telling us what was going on and keeping us informed. As they got information from the docks they passed it along to us."

Even better, despite the dock worker strike and some distribution delays for Nakajima, with an outsourced solution in place it shipped almost the same amount of product in the first half of 2002 than it did in all of 2001. "We can get things out relatively quickly," Weber said. "We haven't had to tie up a lot of resources or manpower in running a third-party warehouse."

Whether it's a boatload of plush kitties or a retailer's Christmas inventory, perhaps that freedom to focus on more critical business issues is the biggest need facing international customers, as well as what top-of-the-line outsourced logistics providers must start offering, especially when the forecast calls for glitches in the pipeline.