(This is part two of a three-part series. Read parts one and three.)
Editor's note: By all rights, Limited Brands should have been among the companies hit hardest by last year's port logjam on the West Coast. The company, parent of such brands as Victoria's Secret, Bath & Body Works, Express, Limited Stores and Henri Bendel, imports thousands of containers annually from factories around the world and has traditionally relied heavily on the Southern California ports, bringing 75 percent of its containers through these gateways as recently as the spring of 2004.
But as the containerships began to pile up and other retailers began panicking at the prospect of empty store shelves, Limited Brands sailed through the season relatively unscathed. Instead of waiting weeks or months for its merchandise, the company experienced delays of only two days on average from the merchandise's point of origin (typically in Asia) to its seven DCs in Columbus, Ohio.
At the same time, the company—or to be precise, its logistics group, Limited Brands Logistics Services—was doing the seemingly impossible on another front. In the midst of the worst trucking environment in decades, it not only managed to find trucks to move its goods, but it did so while maintaining service levels. In fact, the company, which moves approximately 40,000 domestic truckloads each year, actually recorded improvements in inbound performance (though outbound service suffered slightly).
The question that immediately comes to mind is how did they do that? To find out, we turned to Paul Marshall, director of inbound logistics for Limited Brands Logistics Services. What follows is his first-hand account of how Limited Brands reacted to the developing crisis and some of the key lessons learned.
IN THE SPRING OF 2004, WE BEGAN TO SEE DETERIORATION IN THE LEVEL OF SERVICE ON the U.S. West Coast that worsened throughout the year. That was something we couldn't ignore: At the time, we were shipping approximately 75 percent of our containers through ports in the Pacific Southwest, which, with the exception of the contract dispute with the International Longshore and Warehouse Union in 2002, had always proved reliable.
It quickly became clear to us that unlike the contract dispute, this wouldn't be a temporary setback. To begin with, it wasn't a matter of solving a single problem like a labor disagreement. Instead, a constellation of factors—poor forecasting and labor planning, an unforeseen surge in container volume, labor and equipment issues among the rails and truckers that served the ports, and an imbalance in work flow—were contributing to the lengthy delays.
What was also apparent was that solving a problem of this magnitude would take time. Although the industry is responding with larger vessels, extended hours, more labor and more port and rail equipment, those are stop-gap measures. In the long term, more infrastructure will be needed—particularly rail yards and track— and that will require significant investment and time. And although we were working (and continue to work) with other big importers through industry associations and coalitions to develop long-term solutions to congestion and related challenges, we knew we needed to take action right away. Our team put together a network plan with plenty of contingency options. What follows are some of the key points from that plan:
- Keep everyone informed. There's no substitute for timely communication. At the first sign of trouble, we alerted our customers so they could adjust their performance expectations and plan their inventory appropriately. Then, so we could continue to stay on top of the situation, we began gathering intelligence about our supply chain partners and industry conditions from as many sources as possible, including carriers, railroad and port officials, and other shippers.
- Remain agile. After evaluating this information, we quickly decided to make some adjustments. In March 2004, we were shipping more than 75 percent of our freight to terminals in Los Angeles and Long Beach. By July 2004, we had shifted our flow so that the majority of our freight was moving through Seattle and Tacoma. We wanted to maintain a presence in Southern California, however, so we kept that option open and stressed the need for agility to our carriers. Our carriers responded and did a great job.
- Consolidate where possible. We decided to single source our global consolidation to improve flexibility and communication. This has enabled us to communicate quickly and address potential problems immediately—for example, shifting flows between ports to avoid congestion.
- Keep our options open. Maintaining maximum flexibility is vital in a crisis. We made it a point to work with carriers that not only offer services to a variety of ports but also have strong intermodal relationships. Specifically, we sought out carriers that would be able to change from intermodal to truck options quickly; carriers with strong dray operations; and carriers with the ability to use terminals with on-dock rail options. We were particularly interested in that on-dock rail service option because it gave us flexibility to have the carrier build a train immediately on its dock or dray it to a rail container yard. This flexibility to switch from one to the other proved invaluable when various problems arose with each of these options throughout the year.
- Avoid getting locked into one mode. Though we rely primarily on rail service to the Midwest, we've learned to keep the trucking option open in case of rail or other delays. During the past year, we've found ourselves forced to switch to trucks at times, either because of a time crunch or to avoid congestion delays. In some cases, we trucked the containers to their destination; in others, we cross-docked containers and shipments into over-the-road trailers for better utilization.
- Communicate with carriers weekly. We found it invaluable to establish weekly conference calls with our carriers to prioritize incoming shipments, hash out issues and create action plans for improvement or network adjustments. Measuring each segment of the service helps you drill down to specific issues and actions.
So what lies ahead? Though it appears that West Coast ports have largely reverted to their previous service levels, we anticipate similar challenges this year as peak season approaches. Our response will be very much the same. In the end, we believe that giving ourselves as many options as possible, gathering up-to-date information on congestion hotspots and being agile will enable us to succeed.
Easing the truck capacity crunch
As so often happens, while we were dealing with crises in our global supply chain, we were experiencing trouble on the home front too. As the port and intermodal congestion escalated, Limited Brands, like retailers everywhere, found itself dealing with a shortage of truck capacity as well. At first glance, that might appear to be less troubling to a company known for its heavy import volumes, but that's not the case at all. Reliable trucking service is crucial to keeping our store shelves (and garment racks) stocked. We move about 40,000 truckloads per year of both materials sourced domestically moving to DCs and shipments moving from our DCs to stores. We deliver to 60 percent of our store base in one day and to all stores within three days, which means even a few days' delay could be disastrous.
We first began to see deterioration in truckload services in late 2003 as factors like a shortage of drivers, skyrocketing fuel and insurance costs, rail capacity conconstraints, and government regulations began to take their toll on trucking operations. It quickly became clear to us that this was more than a simple transportation problem; if we wanted to assure ourselves of truck capacity when we needed it—and at a reasonable cost—we would need to examine the process from end to end.
Our team looked at operations at our own DCs, at our suppliers' loading docks and at the carriers themselves to come up with a multifaceted trucking plan. What follows are some of the key objectives from that plan:
- Work out the bugs in our forecasting (and planning). Like many shippers, we were not good at forecasting our business, which hampered our ability to react quickly to unforeseen spikes in demand. To fix that problem, we began working with our key domestic suppliers to create specific operating plans and improve forecasting. We found that our suppliers could help us predict spikes and pre-plan for high volume.
- Make our business more attractive to carriers. Again like many shippers, we found there were many things we could do to help make carriers' operations more efficient, and thus make our business more attractive to them. To that end, we created drop-and-hook operations, urged suppliers to extend their hours of operation, and requested feedback on how we could improve our operating procedures.
- Make sure trucking capacity is fully utilized. Together with our suppliers, we launched a truckload cube utilization plan to increase the weight per truck and reduce the number of trucks required. Through that simple action, we reduced total landed costs from specific suppliers even though truckload rates were rising.
- Crack down on non-performing carriers. If you're paying premium prices, you should get premium service. But you can't just assume you're getting top-quality service. In tracking our carriers' performance, we discovered that for various reasons—weather, hours-of-service regulations, overbooking, driver or dispatch errors—our carriers were failing to pick up approximately 1 to 2 percent of the time during the busy season. Though 2 percent may not sound like a lot, this failure rate is unacceptable to a customer with time-sensitive shipments. We aggressively moved business from under-performing carriers to those that could get the job done. Adding carriers gave us greater capacity and improved our performance, but it also had a downside: we found we needed more internal resources to manage them. We ended up adding a second-shift associate to monitor loads en route throughout the evening.
- Use creativity to find backhauls. We have a small dedicated fleet that moves merchandise to and from our Columbus, Ohio, DCs. Though service is excellent with this operation, we have an imbalance of inbound and outbound freight in Columbus, making expansion impractical. We do, however, have regional volume: components and raw materials that have to be moved from factory to factory or finished goods into regional cross-dock operations. We decided it would be worth our while to expand our contracted dedicated operation into these areas of high volume. Our assumption proved correct. Not only did costs decrease, but performance improved because the drivers found themselves going to the same suppliers daily.
- Put contingency plans in place. Admittedly, it's extra work, but we found that the time we devoted to drawing up contingency plans was time well spent. As it turned out, there were several occasions throughout the year when our carriers notified us that they would likely miss a scheduled pickup or fail to deliver a shipment as promised. In many cases, we were able to recover the loads by resorting to fallback plans we had created in each of our three key regions in the United States.
- Team up with a partner in another industry. Many industries experience seasonal swings in demand, but their peak periods don't necessarily coincide. One company's peak shipping season may be someone else's doldrums. We decided to see if we could partner with a shipper with a different peak season to determine if we could use its excess capacity when its volume was low and ours was peaking. We found another shipper, a large manufacturer in an entirely different industry, that used the same dedicated contract service company we did. We approached its logistics people and worked out a successful collaborative relationship. As a result, the other shipper was able to keep its drivers busy during its slow seasons and cover fixed expenses. We, in turn, were able to take advantage of additional capacity and obtained access to a pool of drivers that outperformed our common carriers (the service proved to be 5 percent better than common carriage).
As hard as we've worked to remediate the trucking problems, we still have a ways to go. To date, our efforts have met with mixed results. We actually improved on our inbound trucking performance thanks to our contingency planning and our commitment to monitoring loads on a daily basis. Unfortunately, however, our outbound performance deteriorated slightly from the prior year.
Because we expect the same challenges this fall, we're now tweaking our plans for the outbound operation. Among the options we're weighing are adding capacity in the form of more carriers and creating contingency plans for the outbound operation. There are no guarantees, of course, but we hope that these refinements will allow us to post positive results once again.
