Surviving the slow recovery

by Array

MM&D MAGAZINE, NOVEMBER/DECEMBER 2010: The recession is dragging on and you need new ideas to ease the crunch. Look no further. Emily Atkins passes along the collective wisdom from our Big Ideas for 2011 roundtable.

When it comes to making it through the tail end of this economic disarray—whether you call it a flat recovery or a double-dip recession—there are plenty of challenges remaining. Fortunately, there are also a few seasoned veterans willing to share their experiences and tips with you.

We gathered a distinguished and generous group early in November for the Big Ideas for 2011 roundtable, sponsored by Trailcon Leasing Inc. At the table were Alan Boughton, Trailcon’s president; Phil King, president of Orlando Corporation; Patrick Cain, president of Hyphen Transportation Management; Keith Lambert, senior vice-president of supply chain and merchandising management for the Forzani Group Inc; and Aaron Lalvani, president of Lalvani Logistics Inc and founder of the Retail Trade Advantage program.

To frame the discussion the group first identified the threats and risks and opportunities facing businesses in the coming year. The list of threats and risks was quite lengthy but there was general consensus around the table that these were indeed the challenges that lie ahead. The group identified bad debt, a looming capacity crunch in both transportation and warehouse space, excess inventory, the fragility of the US recovery, loss of manufacturing capacity, soft consumer confidence and a skills shortage.

On the other side of the ledger, opportunities identified included: consolidation, nearshoring or re-shoring of manufacturing, growth for well-positioned companies, collaboration, redevelopment, redefining processes, and automation.

As could be expected, the conversation was wide-ranging and lively. The following are highlights of the ideas tabled to help your company get through the tail end of the storm.

Start with a strong balance sheet and choose your customers wisely

There was strong agreement among the panelists that having a strong balance sheet is key to survival.  But there are many pressures that militate against this measure of success.

For Alan Boughton, it’s bad debt: “Because the [trucking] industry’s so fragile, if you lose a good customer and you develop some bad debt along the way—this year our bad debt is enormous, it’s over double the worst year we’ve ever had—the stable customer then has to pay the bad debt for the unstable customer because you have to recover that money somehow.”

Phil King agreed, saying, “We only took tenants that had the stronger balance sheets. And if they couldn’t get a mortgage for a building as a company on their own we didn’t want them as a tenant. Because when we go out and finance a building, once we’ve built it that company has to have a balance sheet that the bank will lend to. If they won’t, then we don’t want them as a tenant, because chances are they’re not going to be there at the end of the lease.”

The brutal truth, the panel agreed, is that you cannot afford to do business with weak clients. As Keith Lambert said, “It’s a prime opportunity to feed the pigs, if you will. The people who were in a position with strong balance sheets to acquire other ones are going to do well during the period of uncertainty. And the people who are not are going to fail. That’s been proven time and time again and it’s no different today.”

Pay attention to trends

Being able to scale your supply chain successfully demands a certain amount of foresight.

For Boughton it’s about taking in as much information as possible from diverse sources. “Information is power,” he says. “It’s reading every magazine, reading three newspapers a day, talking to guys who are bringing stuff in and sending stuff out, if you’re dealing in the US. Try to figure out what the trends are and try to be a little bit ahead of the curve.”

Be agile

So how do you stay alive? A key strategy is the scalable supply chain. It’s not simple to achieve, depending on variables such as foresight, your company’s balance sheet, the viability of your customers and your ability to push decisions through your organization.

For Patrick Cain it is the key strategy for dealing with uncertainty. “We need agility in our supply chain network, and whether that’s trailers or whether that’s buildings, they need the ability to flex up and flex down because demand is uncertain. In an ideal world you have a fixed network that delivers against stable demand and you use partners for that unstable demand or the peaks that rise above what you would consider stable demand.

“The problem with that today is nobody is really sure what stable demand is. It was at one level, now it’s at another level. Is it going to come back or not? So it’s this challenge around where do you set your fixed network and then where do you start to work with partners to give you that agility to flex up very quickly, but also bring it back down if the demand isn’t consistent and doesn’t stay there.”

According to Lambert, it’s key to Forzani’s success. “On the supply chain side we’re looking for more scalability than we’ve ever had before. We’re relying more on third-party providers than we’ve ever done before. We recently made a decision to close the warehouse in Calgary in January of 2010 and consolidate all operations into Mississauga. So on the supply chain side, Phil brought up the point earlier that people are looking for shorter-term leases, I think that trend, in my mind, is going to continue.”

For King, accommodating clients’ needs is a necessity. “We’ve got to do everything we can to keep the tenants that we have. So we try to tell them, ‘You stay with us, we’ll help you grow and we’ll help you shrink.’

“Shrinking is more difficult, growing is easy. And so we say, ‘If you sign a 10-year lease with us and three years in, five years in, or seven years in you need more space we’ll tear that lease up and move you. Now we’ll come to agreeable terms and move you. We have the ability to do that.

“Shrinking is difficult, but we do it. They end up paying more per square foot because of the costs that are in there. They may end up having to carry the larger building, but we’ll help them get out of it. We’ll put them into the right size facility.”

Improve your systems and processes

It’s not only about scaling your network. Having the right systems, technology and processes in place will enable your company to take advantage of opportunities as they arise.

“As times get a little tougher you’re looking for every opportunity to get more efficient and improve your business so you become more surgical and take more of an engineered solutions approach to it,” Cain said. “And you’re willing to consider supply chain options or strategies you may not have had the time to consider in good times.”

He cited the example of a client that historically resisted intermodal transport options. “There was only one transit day difference between over-the-road and for the inter-modal option,” he said. “And we were able to convince them to re-look at it. And we’ve been able to—for this company alone—take over a thousand loads a year off the road and put it onto the rail.”

Aaron Lalvani looked at the technology side, saying, “We’ve talked about technology as the opportunity, as an enabler. Companies are starting to dig into understanding their cost structures and their processes a little bit better. And the only way that they can actually gain the efficiencies is to enable them with an ERP and MRP upgrade. And it’s amazing how many major organizations have not upgraded their systems in five or seven years.”

Lambert pointed to Forzani’s experience. The company committed to an enterprise software upgrade before the recession. “We’re currently in the largest—from a technology standpoint—supply chain initiative the company’s ever undertaken,” he said. “And we’re in the midst of an economic recession. We made the decision before 2008 that we were doing a systems upgrade, but at the end of the day, we haven’t let the recession affect that decision to proceed with it. So we have the largest supply chain upgrade that the company has ever seen underway this year and next year—again, on the premise that we’re counting for that returning consumer confidence in our systems.”

Work with your partners

As a baseline, said Lalvani, supply chain partners “need to be talking the same language.” He pointed out that often his clients and their customers measure performance KPIs using different definitions. “I think in order for this collaboration initiative to happen, the partners need to be on the same level. They need to know if I’m talking [about] fill rate percentage, it needs to be clearly defined what that fill rate is based on. And I think that will at least start the ball going in the right direction in terms of understanding each other and measuring correctly.”

For Boughton, the key is commitment. He cited the example of a large retailer wanting a major commitment of infrastructure, staffing and equipment from their 3PL and other suppliers, but they wanted a 30-day walk-away clause in their contract. “Not making the commitment causes problems for everybody up and down the line,” he said.

“What we are doing is trying to shorten the list. We’ve signed a deal with Michelin to do all our tires from Michelin. Not because we got a lower price, but we felt that our service level and the longevity of the product was going to be greater.

“We’re driving our suppliers hard on the price, but increasing the quantity, in order for them to have a better feeling about what they’re doing. So instead of buying a thousand of these a year, we’re going to buy 3,000 of whatever this part is.

“I think that all the people involved have to have enough respect going both ways to recognize that we’re all doing a lot more with less for lower margins, and that we can’t be put in a position where you could put us out of business or put us in harm’s way.”

Patrick Cain pointed out, “most large organizations that I’ve worked with, and whether that’s General Motors or Nortel Networks in their heyday, or Sobeys, they recognize that it’s a win-win situation. They’re bringing you on as a partner in their business. And they recognize that if you fail, they fail.

“It starts with the premise that in the supply chain—retailer, manufacturer, distributor—they’re all partners in trying to get the product to the consumer in the most effective and efficient way,” he added. “And so, if you start with that mindset, you’re willing to share information and discuss cost-benefit trade-offs. You’re approaching it in the sense of, ‘OK, ultimately we need to work together to make this work for the consumer. How can we do that in the most effective and efficient way?’”

Lambert pointed out, “As a smaller player, and especially in a downturn, you need, more than ever, to enter into strategic relationships with the people you’re doing business with. And maybe even with competitors—to get into a situation where you’re sharing space in a distribution centre, using combined volume to turn it into critical mass where you can all benefit. I think it’s key for the smaller players, that they look towards those types of things to get back on a level playing field with the larger players.”

Be green if it pays

The panel agreed that cutting carbon is a great objective, but they also agreed that most companies are not making carbon reduction a key pursuit.

From Cain’s perspective, “The economic impact and environmental impact will go hand-in-hand. So if you can engineer your logistics network in the appropriate way to reduce cost, in most cases you’re also having a favourable impact on the environment—because, again, it’s about getting leaner, about a smaller footprint, about choosing the right mode of transportation.

“I do think that the larger organizations that have made corporate responsibility commitments are looking to their supply chain groups to say, ‘How are you going to contribute to this overall objective?’ And it’s not everybody, but it’s certainly the leading companies are doing that.”

Aaron Lalvani pointed out that “A traditional buyer of transportation is not coming to us and saying, ‘Part and parcel of what we want to see here is a reduction in rate, but I want all these other value-added features.’ They’re not saying that.

“And in tenders that are going out more and more these days, they are making note that, ‘We want to know what your initiatives are, but put 10 percent more on there.’ I think that’s where the push-back comes.”

Likewise, Boughton says that prospective buyers are not asking about the environmental benefits of his services. “Because the first question is the only question, ‘How much?’ That’s what’s driving it.”

For King, it’s definitely a pragmatic decision, “They’re doing it when there’s a cost benefit. The biggest thing that we’ve done over the last year and a half—and it’s because of  government programs—is changing lights in buildings.” He pointed out that the ROI payback period for changing light fixtures in warehouses is about two years.

Lambert concurs: “I don’t think the trend has shifted enough yet towards where this has become a defining moment or issue…The mindset just hasn’t shifted to that point yet. I think it will; it’s just a matter of when there’s enough public pressure. When there’s enough government pressure, then I think that needle is going to move father over and then you will see that shift to where it just becomes a norm or common practice for [green] to be a part of any solution that people are looking for.”

Photography by Roger Yip