Seeking a profit island in the warehouse
Wednesday, August 03, 2016
This article was inspired by "Islands of Profit in a Sea of Red Ink," a book by Jonathan L. S. Byrnes. For those who want a deeper discussion of this topic, I highly recommend the book.
Many buyers of logistics services regard their vendors as purveyors of commodities. While providers tend to fret about this, remember the fact that this attitude has been prevalent for decades, long before deregulation and the rise of physical distribution and supply chain management.
In the days of freight regulation, the commodity buyer sought to negotiate lower fees by changing the language of the printed tariffs that were an essential part of government supervision of transportation prices.
There was the legendary traffic manager named Murphy, who achieved immortality by establishing the fact that the compressed gases his company distributed were chemically similar to equine excrement and therefore should be governed by the same freight rate that was used for that commodity. This creative executive is enshrined as the inventor of "Murphy's H---- S--- rates."
Your ability to maintain profits starts with positioning your product or service as a unique value, not merely a commodity. Three principles should be considered in your company's quest to live on a profit island:
- Your ability to provide customer value
- You have to be the best at something — a special magic your competitors cannot provide
- Your innovation
Isolating the red ink
As Byrnes points out, nearly every company could be more profitable by any measure. At the same time, 20 to 30 percent of the business is highly profitable, and this revenue subsidizes the unprofitable part of the business. The rest of the company is marginal.
Most control systems fail to identify this. Because the buyers of logistics services continue to see your service as a commodity, they will seldom fail to apply Murphy's Law, if you let them.
There are six things you and your team can and should do to be certain you are providing continuing value to your clients:
- Stay close to the customers
- Continually develop related services
- Demonstrate your dependability
- Be a change agent
- Maintain an organization based upon teaching and learning
- Maintain a teamwork culture
Staying close to the customers
The business of customer service has undergone dramatic change. On-time deliveries are assumed, and near-perfect accuracy is expected.
In today's environment, the best way to win client loyalty is to demonstrate your ability to increase your customer's profitability. It is not easy to measure your success in doing this, but this at least should be your goal.
What changes in your operation will enhance the relationship between your client and the ultimate customer? What steps can you take to learn how to better serve the consignees, the firms that you ship to, in effect the customer's customer?
Some logistics service providers (LSPs) pay special attention to their top 25 clients, scheduling frequent visits with those major customers who typically represent at least 80 percent of total revenue. Byrnes observes that many buyers are reducing their supplier base by 40 to 60 percent. Those suppliers who are retained will be those who have created the closest relationship with the buyer.
A frequent error in client relations is the creation of a "bowtie" relationship. A close relationship exists between two people, a sales executive from the vendor and a purchasing manager from the buying organization. If anything upsets the rapport between those two individuals, the entire relationship may be damaged.
On the other hand, when contacts exist between CEOs, operating officers, information technology managers, transportation professionals and other executives, the bond between seller and buyer is stronger.
Finally, it is essential to constantly test the strength of the relationship.
The term "accessorial services" became a distasteful process, an effort to "nickel and dime" the customer. Later terminology referred to "value-added services" with little attempt to describe the value that is actually added. There is a similar reaction today to the airlines' extra fees.
If you are the vendor, consider related services as providing extra value that your competitors lack the ability to provide. Provision of related services is one of the best ways to differentiate your company from the commodity vendors. Your ability to demonstrate that your company is truly different can be the heart of your marketing strategy.
If you learn your client is purchasing packaging services from another vendor, why not add packaging capability within your warehouse to eliminate the waste of transporting product to a packaging center?
Warehousing and delivery have always had a "ham and eggs" relationship. If you discovered a major client has experienced some frustrating delivery failures, why not take over the job by demonstrating your ability to perform better than the current transportation supplier?
A few logistics service providers have entered the staffing service business, recognizing their ability to recruit and train warehouse workers is substantially better than most of their customers. Others have entered the business of leasing materials handling equipment, recognizing their superior skill in purchasing and maintaining lift trucks.
Demonstrate your dependability
Most buyers place a higher value on dependability than speed. This involves the process of recording and reporting all the things you did right, the promises, the record of accurate and on-time delivery, and all the little things that separate great companies from good ones.
Emeritus professor Bud LaLonde stated it this way: "If you don't tell your customers about the things you did right, you will be constantly defending the few things that went wrong."
Nearly every customer will strongly prefer predictable flawless service to a competitor who makes promises that frequently are broken. Be sure to place emphasis on those dependability steps that enhance the profitability of your customer.
Be a change agent
There is a difference between logistics and supply chain management. Cost control is a hallmark of logistics management, but supply-chain management may encompass the productivity of many assets in the corporate chain. You have the ability to substantially improve asset productivity, perhaps by entering the leasing business or by demonstrating your ability to utilize assets better than your customer does.
Information technology is one way to position your company as a change agent. Byrnes observes that the chief information officer has evolved from chief technologist to change warrior. Development of cloud-based software is a way for your company to demonstrate skills in stimulating and managing productive change.
Materials handling in the warehouse is on the edge of radical change with the introduction of robotics, and the cost and risk of robotics solutions continues to shrink.
Maintain a culture of teaching and learning
Many of the world's best companies have recognized their ability to create and maintain a culture of teaching and learning. McDonald's established a "hamburger university" in suburban Chicago to develop skills among its franchisees. IBM, from its earliest days, established the culture of the learning organization.
Warehousing is a simple business, and a well motivated person should be able to acquire the skills that can be provided by a good teacher using an effective training program. Instead of looking for a lift truck operator, the best operators will teach these skills while hiring well motivated people who have never seen a lift truck before.
Build and maintain an effective team
The most successful industry leaders are those who not only create new ideas and initiatives, but also develop their direct reports into successful managers who can grow to replace the current leaders as they move up.
Management development involves succession planning, but it also requires implementation of effective teamwork. In my early days in warehousing, we observed a breakdown of teamwork between office staff and warehouse workers. The customer service representative in a second-floor office would respond to a client inquiry by saying "we sent that order downstairs" without realizing the caller had no interest in upstairs versus downstairs, but only needed to know when the customer would receive the merchandise.
In the best warehouses, everybody is on the same team, and the entire staff works together with no distinction between departments. Sales and operations must be a well integrated partnership. The sales and marketing people should be constantly searching for better ways to serve the client. At the same time, the operations people should be looking at operational changes that would add value as well as reducing costs.
Once again, it's about adding value
Added value is the foundation of the profit island that is the title and theme of this message. There will always be ample competition in the logistics service industries, as well as buyers who view the transactions as commodity purchases.
If you want to be a commodity vendor, then the best strategy is to offer a low price and accept a thin margin. On the other hand, if your goal is to develop the island of profit in a sea of red ink, then all of your efforts should be focused on the ways you can creatively add value for your clients. Finally, report your progress to the client.
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