February 8, 2010
thought leaders | The DC Velocity Q & A

For competitive edge, try "flipping" your thinking

Forget the tried and true, says Peter Sheahan. Sometimes, success lies in turning everything you know about business on its head.

By Mitch Mac Donald

If you want your questions answered, you call in a consultant. But who do you call if you want your answers questioned? For some of the world's biggest companies, the answer is Peter Sheahan.

Sheahan, who will speak at the Warehousing Education and Research Council's (WERC) Annual Conference in May, has built a career out of challenging business leaders to rethink their assumptions and find innovative ways of doing business. He currently heads up his own international consulting practice, where he helps clients like Google, Hilton Hotels, and Harley Davidson learn how to "flip" their thinking and find opportunity where others cannot.

Sheahan is also active on the lecture circuit, having delivered more than 2,000 presentations to over 300,000 people in 15 different countries to date. In 2006, his peers voted him Australia's National Speakers Association Keynote Speaker of the Year.

In addition, he has written six books, including the best-sellers Fl!p: How to Turn Everything You Know on its Head—and Succeed Beyond Your Wildest Imaginings and Generation Y: Thriving (and Surviving) With Generation Y at Work. Sheahan spoke recently with DC Velocity Group Editorial Director Mitch Mac Donald about what businesses can learn from Wal-Mart, Zara, and (yes, we're serious) Tiger Woods.

Peter Sheahan Q: In your best-seller Flip, you argue that business today requires new perspectives. Could you talk a little about how logistics and supply chain management fits into that?
A: I think in the past—in the boom times of the mid 2000s and then leading into, say, early 2008—a lot of change initiatives were built around cultural transformation, which I am a really big fan of, by the way. But I think you're going to find in the next 25 years, the focus will be on how to extract more value out of existing business models and at the same time, extract or find new value from alternative business models. Both of those questions will lead back to supply chain, distribution, and logistics. So I think that is the first thing for a logistics executive to understand—that you will be at the center of competitive advantage moving forward.

The second thing to understand is how important it is to approach these problems with fresh eyes and not let your current business model blind you to other possibilities. Because of the enormous amount of capital tied up in distribution centers and distribution/transportation networks, we tend to assume that our distribution infrastructure is too big to tamper with. But that kind of thinking too often leads to a band-aid approach.

I think it is really important for people to ask themselves, if I were starting from scratch now—no legacy IT systems, no legacy capital investment—how would I design this? I would start there and move my way into what is appropriate, what is cost prohibitive, what is not—basically stepping back and saying, "Wait a second, how else could we do this? Is there another way?"

Let's use Wal-Mart as an example. Wal-Mart built its entire competitive advantage on being the lowest-price competitor. So in recent years, they've started taking over distribution for their suppliers simply because they have such a powerful supply chain. They know they can do it even cheaper than the supplier can. So they basically tell their vendors, "Here are the box dimensions; here are the specs. Don't put anything on a truck. We're going to come to you." I mean, that is completely flipping, to use my language, the general understanding of how the whole supplier-retailer relationship works. But someone at Wal-Mart obviously said, "Hang on a second. It is actually going to be cheaper for me to pay my own transportation given the size of the Wal-Mart supply chain."

Q: Absolutely.
A: It is a brilliant question to ask: How else could we do this?

Take another example from Wal-Mart. We are now having a crack at the coming supply chain for medical and health supplies in North America. They know they do this better than anybody else. So to go back to my question of how to extract value and how to find new value right now, for Wal-Mart the answer is obvious. They know their supply chain is so good they can find new value in whole new sectors because of the power of this part of their business.

Q: What are the biggest challenges logistics professionals face when they try to drive organizational change?
A: One is siloed thinking. If you were to name a part of business that touches every other part of the business, you'd have IT and you'd have distribution—supply chain, logistics, and warehousing, right? Unfortunately, distribution is too often treated as a silo. But if your marketing people go out and make a promise about, say, speed and the warehouse doesn't deliver, you have killed that promise.

Q: Any others?
A: Another challenge will be keeping up with changing expectations. Once upon a time in business, it was good enough to be really, really fast or really, really good or really, really well priced. But as the marketplace evolved, that all changed. All of a sudden, being just one of those things wasn't enough—you had to be two of the three. For instance, if you weren't cheap, you at least had to be both fast and good.

But now, businesses are finding that in order to stay in the game, they need to be all three: fast, good, and cheap. And even that's not enough to give them a competitive advantage. What is giving businesses a competitive advantage is what I call the fourth dimension. It is things like how easy you are to deal with.

Q: Could you expand on that?
A: The thing most people are suffering from today that you didn't see seven or eight years ago is a kind of cognitive overload. Everyone today is under so much pressure that they're unwilling to take on even one more thing. So it's no surprise that they're choosing suppliers on the basis of how easy things are, how easy they are to deal with, how easy it is to get their order delivered.

Take these five-hour time windows for deliveries of mattresses, for example. I'm like, five hours! Are you kidding me? Those guys are getting 12 bucks an hour and I have to wait around five hours for you? I will pay you five times as much if you get it to me at the time I want it delivered. I just can't handle having that stuff hanging up in the air because it adds to my cognitive load.

Q: How about the future? What will be the key competitive differentiator a few years from now?
A: I think in three to four years, we'll be having a discussion about the fifth dimension, which will be design and green and carbon footprints and all that brand and social identity stuff.

Q: Could you talk a little about some businesses you've seen that have completely transformed themselves on the back of warehousing and logistics innovation?
A: One would be Samsung, which has completely overtaken Sony in the consumer electronic space. Although Samsung officials have publicly credited the chief design officer for the company's recent success, that's nonsense. The reason they're outselling Sony three to one isn't just that someone designed a cute TV. The other part of the story is that someone worked out how to package it and get it there without driving the price up.

Another example is Zara, the fashion retailer owned by the Spanish company Inditex. If there is an industry that got walloped by the economic downturn, it is fashion retail, right? Yet the Inditex share price doubled, or almost doubled, during the recession. And store sales are up in Spain, which was one of the hardest hit markets.

To understand how they did that, you have to know a little bit about Zara's business model. Essentially, Zara offers you couture design with a second-rate fabric for not half the price, but one-tenth the price you'd pay for a high-end brand.

And they're not just cheap; they're also fast. They can go from design to distribution in 15 days. Fifteen days. I mean, just imagine that. What they do is they go to the Prada couture show in Paris or Milan, see a design they like, and two weeks later, they have it in the store—beating Prada to the market even though they've been working on it for two years. This is not a small operation. They have 300,000 SKUs. It is just mind blowing.

They call it fast fashion. In my opinion, it is the most efficient retail supply chain around. Think about it: Where does a fashion company lose money? What kills their margin? Oversupply of the wrong stock.

Q: Oh, absolutely, because if it is fashion, it's worthless if it isn't current.
A: So you end up discounting 30, 40, 50, even 60 percent in a market like this. But these guys don't have that problem with overstocking. They never have more than two items of any size, shape, or anything else in the store because they know that whenever they sell something, it will be replaced within 24 hours. They just don't have long stock-out times.

Q: Where does this go next?
A: If some of your clients are pretty advanced with that stuff, you look at how you do that with less human capital input. For example, you might look at RFID technologies and their potential to slash data capture costs.

Where else might it go? Well, we are starting to see algorithms and rules being built into databases that actually make better decisions than humans can make. In other words, the information gets intelligent. We're seeing a phenomenal move from information gathering to knowledge capture to intelligent systems.

That's why you want to be starting fresh today with the technology available to you now. If you've got a legacy CRM or inventory system that is 15 years old but still works, you're probably tempted to stick with it. But it's important to ask yourself: how else could I do this?

Tiger Woods is a case in point. His personal problems aside, Woods is widely considered the number one golfer in the world. Yet at the peak of his powers—after winning every major there was—Woods basically went and completely deconstructed his game to rebuild his swing from the ground up. When asked why he did that when he was already the best, he answered 'Because I want to stay the best.'

Woods' rebuilding his swing was like an organization's rebuilding its supply chain and warehousing and distribution network. Yes, it hurts for 18 months, but, wow, the impact it has 36, 48, 64 months down the road. Add that to the kind of market we're in now, where you can acquire capital equipment for 30 percent less than you could at the market peak of 2007. Right now, you could rebuild and reinvent all this stuff for a lot less money than you'll be able to in two years' time because everyone is bleeding out there. They've got this capacity that is unfilled. It is actually a good time to seize some of those opportunities.

About the Author

Mitch Mac Donald
Group Editorial Director
Mitch Mac Donald has more than 30 years of experience in both the newspaper and magazine businesses. He has covered the logistics and supply chain fields since 1988. Twice named one of the Top 10 Business Journalists in the U.S., he has served in a multitude of editorial and publishing roles. The leading force behind the launch of Supply Chain Management Review, he was that brand's founding publisher and editorial director from 1997 to 2000. Additionally, he has served as news editor, chief editor, publisher and editorial director of Logistics Management, as well as publisher of Modern Materials Handling. Mitch is also the president and CEO of Agile Business Media, LLC, the parent company of DC VELOCITY and CSCMP's Supply Chain Quarterly.

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