Tbm opex review march2014

OpEx

A TBM Consulting Group Publication

Review

March 2014 | Issue 1

You Need Your Customers More Than Bring It On: They Need You

Winning Strategies for 2014

By David Drickhamer

Kevin Peters, CEO of FleetPride, talks about how customer focus and Operational Excellence are helping the heavy-duty truck parts distributor gain market share and drive growth.

Although FleetPride—at about $1 billion in annual revenues—is roughly four times larger than its next largest competitor, its market share is still in the single digits. That means, according to CEO Kevin Peters, that there’s a huge opportunity to grow the company. “We want to grow our business.

We want to grow it fast.

And we think continuous

process improvement will help us do that,” he says. “We can’t grow the business by simply doing the same things we’ve always done. We need to be much more effective and efficient.”

FleetPride was established in 1999 and grew steadily over the next decade through a series of acquisitions. Private investment firm TPG Capital

purchased the company in 2012. Today, FleetPride has over 250 branches and five distribution centers serving all major U.S. metropolitan markets. They collectively stock over 250,000 heavyduty truck and trailer parts for brake, drive train, engine, hydraulic, suspension and electrical applications. (continued on page 3)

Also in this issue 2 | Customer Touch Points 6 | Consumer Trends/Operational Implications Consulting Group

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8 | Six Sigma Tames Big Data 10 | Boost Warehouse Productivity

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Leading Thoughts

A Business Journal for Leaders Who Embrace Operational Excellence March 2014 | Issue 1

Publisher Angela Scenna: ascenna@tbmcg.com Executive Editor David Drickhamer Contributors Andy Andrews Doug Bonner Jonathan Chong Jeff Leake John Lewis Beth Morrison Ken Koenemann Art Direction and Design Crossbow Group crossbowgroup.com Printing Carter Printing & Graphics, Inc. carterprintingnc.com

Customer Focus: Touch and Go In our conversation with Kevin Peters, the CEO of FleetPride, he talks about customer “touch points.” He’s referring to every interaction—every phone call, every retail transaction, every email quote—that his company has with its customers. Clusters of customer touch points, and the lifecycle of touch points, positive and negative, are what create a customer experience.

Supply chain and order fulfillment conversations tend to focus less on these customer touch points and more on costs. That’s one reason why the work handled by third party logistic providers continues to expand as more manufacturers and retailers outsource “non-core” activities to these efficiency experts. One risk that’s not always taken into consideration with these arrangements is that they tend to be fairly uniform within industry segments. When service levels are the same, market differentiation is diminished, which makes it easier for customers to defect to a competitor.

Maintaining control of customer touch points offers two other key benefits: 1) The opportunity to not only meet but exceed customer expectations, which drives repeat and referral business, and 2) The ability to capture and use the intelligence arising from customer interactions to jump on emerging opportunities or respond quickly to any issues when they arise.

For a truck parts distributor like FleetPride, which owns both the customer relationship and the order fulfillment stream, controlling and innovating around customer touch points—in addition to improving their cost structure—is how they are winning new customers and growing their business. That’s why, for CEO Kevin Peters and similarly minded business leaders, performance metrics like 99.9 percent product availability and order accuracy aren’t good enough. That’s only the starting point.

Ken Koenemann Vice President TBM Consulting Group, Inc. kkoenemann@tbmcg.com

2 | OpEx Review | March 2014 | www.tbmcg.com

(continued from page 1)

“For every million

Before coming on board transactions, there are a in January of 2013, Peters thousand defects. If you served in senior leadership truly believe that customers positions at Office Depot, have choices, every W.W. Grainger and Home day you’re giving those Depot. As he recalls, when he first reviewed FleetPride’s customers a reason to go someplace else.” operations, he saw a clear opportunity for it to be — Kevin Peters, CEO FleetPride run more as a single entity than as an aggregation of small businesses, as it had been operating. While efficiency has certainly been a key goal of the company’s subsequent improvement efforts, Peters says that serving each customer better and building clear points of competitive differentiation are equal priorities.

“I have never worked for a monopoly or oligopoly, so every business that I’ve been in has had more than its fair share of competitors,” Peters says. “I realized a long time ago that customers, no matter what industry you’re in, have more choices than ever. As a result—unfortunately—we need our customers more than they need us. With every customer interaction, with every customer touch point, it’s important to demonstrate that you understand that relationship.”

Kevin Peters

The company’s improvement efforts, driven by lean and Six Sigma practices, enable FleetPride to demonstrate that customer understanding by continually reducing waste and removing variation from its operations. This requires a laser focus on first-pass yield and defects, according to Peters, which relates directly to the customer experience and the opportunity cost of poor quality.

“FleetPride does millions of transactions every year in our branches and distribution centers,” he explains. “It’s not good enough to be 99.9% accurate and on time. Because that means, for every million transactions, there are a thousand defects. If you truly believe that customers have choices, every day you’re giving those customers a reason to go someplace else.”

OpEx Review | March 2014 | www.tbmcg.com | 3

Customer Focus

(continued from page 3)

As TBM has worked with FleetPride managers and employees to roll out various process improvement initiatives within the company’s branches and distribution centers, Peters has been careful about how he talks about the work. He bristles a bit at the suggestion that any of their efforts so far have been a “proof of concept,” or a “pilot project,” because it implies a beginning and an end.

Sorting Out Distribution Over the past year process standardization, better inventory management and optimizing delivery procedures has been a major focus of the improvement efforts in FleetPride’s distribution centers. Pre-sorting product shipments by storage areas within the branch locations, for example, requires hardly any extra effort in the DCs, but has the potential to save an estimated 129,000 labor hours in put-away time in the branches.

" Lean will be a part of our culture for as long as I’m here.... Some areas will move faster than others. That’s okay. That’s what cultural transformation is about.”

Because it would take too long for a few experts to go location-to-location to help implement such changes, to quickly roll them out across the organization the company’s improvement team created an ever-evolving best practice “playbook.” It identifies opportunities and solutions for site managers in a simple, — Kevin Peters, CEO FleetPride one-page format with before and after photos, implementation costs and estimated benefits.

“The only thing that was a pilot about this work is that we had to start somewhere, and Atlanta was the place that we picked,” he says. “There was never a question in my mind as to whether or not continuous process improvement was going to become a part of our culture…. Lean will be a part of our culture for as long as I’m here. We’ll drive continuous process improvement every day, every week, every quarter, and every year. Some areas will move faster than others. That’s okay.

That’s what cultural transformation is about.”

4 | OpEx Review | March 2014 | www.tbmcg.com

Standardized work practices in a distribution environment has three primary benefits, according to Peters. First, it improves accuracy and first-pass yields, reducing customer defects.

Second, consistent processes enable the company to measure and track performance against clear benchmarks. And third, it makes it easier to rotate people as needed between order picking, packing, shipping and receiving jobs in both the distribution centers and branches.

About FleetPride

One of FleetPride’s 250 nationwide retail branches.

Despite having overwhelmingly manual internal processes, one popular solution for improving operational efficiency that is not a current priority for FleetPride is new information technology. Based on his supply chain management experience, Peters understands the benefits that automation and tracking technologies, from robotic picking equipment to RFID tags, can provide distribution and retail operations. But he also understands the work that must be done before any process is automated.

“I can’t tell you how many companies I’ve seen that have rushed to a technology solution, layered it on top of a broken process, and then scratched their heads not understanding why the benefits they thought they’d get never came to fruition,” he recalls. New technology will someday play an important role in their transformation, he believes, but only after their core processes are operating at a high level.

Next Steps: Extending Lean Practices Companywide When asked about priorities for 2014, Peters says they will continue to identify opportunities to eliminate waste and improve quality in ways that customers will notice. That includes picking accuracy, put-away accuracy, shipping accuracy and delivery accuracy. “So often, people talk about cost takeout. That’s interesting, but what I’m really interested in is identifying processes where we impact quality for our customers,” he adds.

Headquartered in Irving, Texas, FleetPride is the largest independent distributor of heavy-duty truck and trailer replacement parts in the United States with over 250 branches and 3,100 employees. It supplies a full spectrum of heavy-duty truck and trailer parts for brake and wheel ends, drive trains, engine components, hydraulics, suspensions and electrical applications. Customers include truck fleet operators in freight, shipping, agricultural, food and beverage, construction, and waste management businesses as well as municipalities. It also sponsors a nationwide network of over 200 repair and maintenance facilities known as FleetCare Truck Service Centers.

Looking beyond manufacturing and distribution, FleetPride will be extending the application of lean practices, like 5S, into the branch outlets. They will also be working in their accounts payable and accounts receivable departments, and on how they add new products and part numbers into their IT systems. Shorter and more consistent cycle times for adding new SKUs, Peters says, will allow them to offer new products sooner, and thereby capture some first-mover market advantage.

Longer term, he wants the organization to be as effective at applying lean practices to businesses that it acquires as it has already become at many of the technical details, like the transfer of customer information, point of sale transactions and costing systems. “By adopting a continuous process improvement methodology as part of our acquisition integration, with lean as being the principle tool for that, it will accelerate synergy realization, which will allow us to do more acquisitions faster in the future.” 

OpEx Review | March 2014 | www.tbmcg.com | 5

CONSUMER TRENDS

Getting Inside the Mind of Today,s

Fickle Consumer

The key takeaways from an operational standpoint, in response to commodity price volatility, market fragmentation, and business growth initiatives, were that enhanced flexibility and annual cost reductions of three percent or more are essential. “A three percent annual target is realistic. It’s perhaps even conservative for an organization driven by both product innovation and process innovation,” says TBM’s Keith Yeater, Vice President, Food & Beverage and Consumer Products.

“Industry executives are very focused on product innovation, but ongoing investments in process innovation and new technology also need to be a top priority.”

Emerging market trends and the operational implications were spotlighted at a recent TBM executive briefing.

TBM recently co-hosted an executive briefing in Chicago on the economic outlook for the food and beverage industry.

Food&Bev TrendView attendees included senior executives from leading U.S. food industry companies, including ConAgra, Quaker Foods, Pepsico, Hillshire Brands, U.S. Foods, Johnsonville, and Jim Beam Brands. The keynote speaker was renowned sell-side equity research analyst, Alexia Howard, from Sanford C. Bernstein & Co.

Freshness Has Become Very Important to Consumers = Attributes: Bubble size indicates reported importance to respondents; larger size implies higher importance UNMET

How well are needs met in your supermarket?

2.1

From Where My Family is From

1.9

Locally Sourced

1.7

Gourmet

1.5 1.3 1.1

Restaurant Branded

Ethnic Flavor

Helps Me to Learn to Cook

Environmentally Friendly Inexpensive Organic

Non-Perishable

0.9 0.7 WELL MET

Simple Ingredients

Convenient Fresh

0.8

0.9

1.0

1.1

LESS IMPORTANT

1.2

1.3

1.4

1.5

MORE IMPORTANT

How have your priorities changed from five years ago?

Source: Bernstein U.S. Food Survey (2010). Note that this analysis is based on a scale where the maximum score if everyone rated the criteria as being more important would be ’2’ and the minimum would be zero.

6 | OpEx Review | March 2014 | www.tbmcg.com

While Howard focused on the economic and growth implications for packaged food companies, her presentation included a number of observations that are relevant to a wide range of industry sectors.

Trust in Social Media as a Source of Reliable Information Is Increasing Social media is changing brand awareness and increasing fragmentation in many markets.

As Howard noted, women

Both social media and mass media—via television shows like those on The Food Network—are creating consumer demand for naturally healthy and organic ingredients, as well as antibiotic-free and hormone-free products.

Such preferences are increasing for all household income levels, not just the upper and middle levels, Howard reported.

10 9 8 7

%

E-commerce

ealth mer H

Consu

U.S. E-commerce Sales as a % of Category Sales

Care Beauty & Personal are Pet C

6 5 4 3 2 1

Tissue & Hygiene Home Care

0

Packaged Food 2008

2009

2010

2011

Source: Euromonitor and Bernstein analysis.

with kids under the age of seven—who are much more active online than the average U.S. consumer—are increasingly using social media to get product information and post their opinions.

They’re relying less on more centralized sources of information, such as pediatricians, news media and advertising.

2012

“I have a pretty firm belief that the reason health and wellness trends have come to the forefront,” she said, “is that we’ve seen a big change in how people get information.”

situation,” said Howard. “It’s definitely where a lot of the big brands, the Western brands in certain categories, are doing incredibly well.”

E-commerce Creates Openings for Niche Brands

Shifting Fuel Sources Drive Price Volatility

E-commerce, while it still only accounts for a fraction of sales in some categories, is creating some new opportunities. “People are actively seeking out brands that are more niche and finding different ways of sourcing products that they want, often at a premium price,” Howard said. As an example, she cited Bob’s Red Mill Gluten-Free Whole Grain Rolled Oats, the top cereal on Amazon, compared to General Mills’ Honey Nut Cheerios, which is the top seller in stores.

The diversion of corn to fuel applications over the past decade or so has increased global demand and price volatility.

Rising demand has increased acreage under cultivation in countries like Brazil and the Ukraine, where marginal costs of production and distribution are higher in comparison to other regions.

Such opportunities to reach a broad consumer base weren’t available to niche brands only a few years ago. Major retailers would only stock the number one and number two brands, and pretty much exclude everything else. “I’ve seen it in a lot of different categories, particularly in snacks,” said Howard.

“We’re seeing these small premium brands really start to take off and gain share. That would have been very unusual five or ten years ago.”

“Made in U.S.A.” Has Global Quality Cachet As much as some business leaders may gripe about the added costs of operating in a regulated environment like the United States, it does have some market benefits. In countries where regulations are not enforced, weak or non-existent, experience with tighter regulations implies higher quality and consumer safety.

“China is definitely the place to go at the moment, although it’s a bit of a mine field, as we’ve seen with the baby formula

“Every time we have a shock, a weather-related shock to the system when inventories get tight,” Howard observed, “that immediately sends us up these very sharp marginal cost curves and leads to the kind of commodity-cost volatility that we’ve been seeing since 2007.” Infrastructure investments are needed to bring marginal costs down in these new growing areas and reduce volatility, she added, but that’s unlikely to happen anytime soon. 

Download TrendView Proceedings

TBM Consulting Group and Avondale Strategic Partners hosted Food&Bev TrendView in January 2014. Visit www.tbmcg.com Resource Center to learn more about the market insights that Alexia Howard presented at the event, download her presentation and the proceedings, or check out the video at www.tbmcg.com/F&B.

OpEx Review | March 2014 | www.tbmcg.com | 7

ACTIONABLE DATA

Eating the

Elephant Six Sigma Skills Key to Turning Big Data into Actionable Insights.

New information technology is making it possible for companies to capture, store and analyze reams of data to extract valuable market and customer knowledge. When it comes to problem solving and process optimization, Six Sigma tools could be the key to turning “big data” into actionable insights.

Several elements of the “big data” revolution have already reached the “peak of inflated expectations.”

Cloud computing and fast in-memory data analysis are currently sliding down the “trough of disillusionment,” according to Gartner’s Hype Cycle for Big Data.

The tech research firm regularly plots the hyperbole vs. real-world productivity benefits of emerging technology. Technology innovations that prove their effectiveness gradually rise out of the trough and climb the “slope of enlightenment” until they level out on the “plateau of productivity.” For big data to make that second climb, the terabytes and petabytes being recorded and collected will need to be turned into more actionable insights.

For some executives, Six Sigma—the step-by-step, statisticsoriented methodology for reducing process variation first popularized in the early to mid-1990s by Motorola, Allied Signal and GE—slipped into the trough of disillusionment years ago. Since then, it has never emerged and is only spoken of in derisive tones. But like other management fads loaded with high expectations, the root causes of failure and

8 | OpEx Review | March 2014 | www.tbmcg.com

disillusionment aren’t necessarily the methodology or tools, but their application.

In this article we share our observations about the evolution of Six Sigma* and its potential for analyzing the massive amounts of data being collected under the heading of big data, and launching a new era of statistically-driven problem solving and process optimization.

By Doug Bonner, Jonathan Chong and Beth Morrison

From Defect Reduction to Process Optimization Bluntly stated, the need for Six Sigma and the related statistical tools will never go away. For complex problems, there is no better or more widely-known approach than the DMAIC process, which thousands of people in practically every industry can rattle off as Define, Measure, Analyze, Improve and Control.

For operations leaders who understand the perennial value of such a problem-solving approach, the application of Six Sigma tools has moved away from an exclusive focus on defect reduction, and into process optimization. Rather than finding something ‘wrong’ and fixing it, companies are finding something that’s ‘just okay’ and improving it. It’s a natural evolution. Once you have your processes under control, the next logical step is optimization.

Over the years, Six Sigma developed a reputation for being resource-intensive and time consuming. Projects took six months to a year or more to complete, and they required a unique leader to get everyone who touched the process targeted for improvement on board. In the end the results were often difficult to maintain, and the financial benefits weren’t as clear as upper managers were led to believe. Most business improvement leaders and black belts now recognize that always using the complete Six Sigma DMAIC model can be overkill.

We frequently use the discrete tools without doing a whole Six Sigma project. As an example, without developing a Z level and defining a defect, a client might know that one of his processes is performing poorly and want to improve performance. Since his team already has a lot of process knowledge, we’ll help them perform a DOE—Design of Experiments, a multi-variant testing methodology—to determine the optimum process settings.

When addressing more complex issues, TBM’s SigmaKaizen™ process pulls together a team of people to accelerate project execution. During the first week, the team works together to understand and define the problem, set up measurement systems and create a data collection plan. One to two months later, after the data has been collected, the team meets again to analyze the information, create an action plan, and begin to implement the plan. * In this article we use Six Sigma to describe the formal DMAIC methodology and related statistical tools which have historically been used to reduce process variation.

More than a decade ago, to reflect our multi-pronged approach to helping our clients solve specific problems and transform their organizations, TBM formally combined lean manufacturing and Six Sigma practices as LeanSigma®.

The approach overcomes many of the shortcomings of traditional Six Sigma projects, tightening the cycle from problem identification to data collection to corrective actions.

The wider availability of more machine and process data will only make the problem-solving cycle even faster.

From Data Rich/Information Poor to Actionable Insights DNA variants, video streaming logs, and social media posts, are early examples of the raw data being mined today for research purposes and market insights. Machine sensors have the potential to collect useful data on an even larger scale. For example, according to Boeing a jet engine creates 20 terabytes of operational information for every hour of run time. A single transatlantic flight for a four-engine jumbo jet would therefore generate 640 terabytes of data.

The ability to access and analyze such a massive flow of data in real time could transform maintenance practices, which consume a huge amount of operational resources.

GE estimates that it requires 300 million man hours, or $20 billion per year, to service the world’s steam and gas turbines, aircraft engines, and diesel-electric locomotives. On the topics of machine sensors, networked machines and data analytics, Jeffery Immelt, GE’s CEO, has been talking recently about the opportunity to completely eliminate unplanned downtime.

To achieve such a vision, the challenge goes beyond gathering and storing huge amounts of data. Plenty of potentially useful data was recorded and stored on a smaller scale long before the rise of big data. In many cases it was so labor intensive to pull together into a useable format for Six Sigma analysis that it was never done. We’ve seen manufacturing data systems, for example, where you could learn absolutely everything you want to know about a single product, but could only extract the data one record at a time. Similar failures must be avoided if the promise of big data to transform maintenance, process optimization and other operational practices is going to be realized.

As some organizations discovered, one of the secrets to efficiently and successfully using Six Sigma’s statistical tools to address persistent problems was that it required highly skilled and dedicated people. People who had worked on hundreds of projects, not just one or two as part of a company-wide indoctrination program. There’s no doubt that moving from even larger pools of data to insight, and from knowledge to actions and results, will require similarly experienced and skilled people, whether they operate under the Six Sigma banner or not. 

OpEx Review | March 2014 | www.tbmcg.com | 9

WAREHOUSE PRODUCTIVITY

Warehouse

Get Your

in Order

Warehouses and distribution centers. Stuff goes in.

Stuff goes out. What exactly happens inside is a mystery to many executives. It’s worth taking a closer look.

By Jeff Leake and Andy Andrews

There are two main reasons why your company’s warehouses and distribution centers are worth your attention. First, having escaped the scrutiny applied to other operational areas, these facilities offer significant untapped opportunities for efficiency and productivity improvements. And second, as the final internal touch point before customers receive your products, it’s an area where quality and performance have an outsized influence on customer satisfaction and future business.

From a sales and marketing perspective, warehouses are places to store anything and everything customers might need until they need it. The overriding objective is to avoid any stockouts and lost sales. While such inventory is tallied as an asset by accounting, it’s really a cost in terms of space utilization and reduced flexibility. The demand for product availability must be balanced with an ongoing drive to optimize cubic warehouse space and get the best return on the investment.

10 | OpEx Review | March 2014 | www.tbmcg.com

Seeing the Opportunities Business executives and lean proponents alike frequently talk about warehousing and distribution operations as a necessary evil, or as an uncontrollable cost of doing business. Such narrow views can overlook the opportunities to optimize the type of inventory, the quantity of inventory, how it’s stored and handled, and how it flows. All of these factors and more contribute to exactly how high those costs of doing business will be.

Over time, even the best storage configurations will become less efficient if not refreshed. Some of the factors that reduce efficiency include new product introductions, changes in customer demand patterns, and acquisitions. The hottest products in your DC today may be among your slowest moving items or even be obsolete 12 months from now.

TOP 5 Productivity Issues in Most DCs

2.

4.

Associate travel time

1.

Slotting

Put-away efficiency and flow

3.

5.

Picking, packing and shipping efficiency and flow

This is why warehouse optimization efforts almost always start with slotting. A typical warehouse worker spends up to 60 percent of his or her time traveling between storage locations.

Storing products according to sales volume and velocity can reduce travel distances and time, cutting labor costs significantly. Of course, those variables are in constant flux.

Re-slotting products based on current demand patterns should be done at least once a year, or more often if there are major changes in your product mix or sales volumes. The benefits include: • Increased picking labor efficiency • Increased picking accuracy • Reduced replenishment labor costs • I ncreased speed and flow of goods through the distribution channel • Safety and ergonomics (by storing high-volume and heavy products in the best ergonomic positions) • Reduced damage and shrinkage As mentioned in the story about FleetPride in this issue of OpEx, “You Need Your Customers More Than They Need You,” reducing labor requirements by reducing travel times can be achieved in other ways as well, especially when you take your customers’ processes into consideration.

FleetPride is now shipping products from its distribution centers to its retail branches according to targeted storage zones at the branch locations. The change of approach only takes a few extra minutes on the shipping side, but it saves a tremendous amount of put-away time and labor on the

Logistics management (carrier selection, routing, product marking, etc.)

receiving end, which has freed up employees to spend more time with customers.

This initiative, like the typical re-slotting project, did not require significant investments in new equipment or information technology to realize the benefits. That’s not to say that IT solutions and automation don’t have their place. Even in long established facilities, pick and pack, voice picking, pick-to-light, and automated material handling equipment can offer dramatic productivity and accuracy gains that easily justify the sometimes substantial investments.

Regardless, as with any mature process or operation, improvement starts with someone who asks why things are being done a certain way. Operations executives need to look at how their distribution and warehousing operations are currently being run, and keep encouraging site managers to consider and test alternatives.  About the Authors

Jeff Leake is Managing Director of TBM’s Global Supply Chain Practice. His areas of expertise include planning and scheduling, logistics, inventory management, demand planning, materials management, warehousing, distribution and sourcing.

Andy Andrews is a Senior Management Consultant and supply chain expert who helps TBM clients use lean approaches to transform their supply chains, logistics, transportation, distribution and warehousing operations.

OpEx Review | March 2014 | www.tbmcg.com | 11

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