This past fall, Louis Lataif caught the logistics world's attention—and secured the tech sector's eternal gratitude—with his public pronouncements on the long-term value of investing in logistics technology. As he sees it, technological advances have done far more than smooth out bumps in the supply chain. Logistics technology, he argues, kept the meteoric growth of the late '90s from blossoming into an economic hangover of cosmic proportions. Sophisticated demand planning and forecasting technology kept inventory buildups from reaching dangerous levels, which averted a catastrophic backlash when the inevitable recession hit.
Who is this sage and where did he come from? Lataif is currently dean of Boston University's School of Management, one of the nation's most prestigious business schools. But he isn't a career academic. For many years, Lataif headed up European operations at Ford Motor Co., where he worked his way up from a start selling on the showroom floor.
Lataif 's career dates back long before he took that sales job at Ford, however. The son of an immigrant who arrived on American shores at age 16 with an eighth-grade education and an Old World work ethic, Lataif grew up working in the family rug-cleaning business in the former milltown of Fall River, Mass. Upon his graduation from high school in 1957, he enrolled in the School of Management at Boston University. In his senior year, on the dean's advice, he applied for admission to Harvard University's business school, where he earned his MBA. Throughout his ascent to the top of the world business scene, Dr. Louis Lataif hasn't lost sight of the basic values his father instilled in him: hard work, dedication, a passion to be better, and a conviction that "you can be whatever you choose to be."
Lataif spoke recently with DC VELOCITY Editorial Director Mitch Mac Donald about logistics technology and what he sees as the keys to success in today's business world.
Q: As you worked your way through the organization at Ford, how did you get interested in logistics?
A: You can't be in the auto business and not find yourself up to your eyeballs in logistics. So much of the process and so many of the resources—whether time, money or people—are tied up in logistics issues that it's impossible to think about operations independently of logistics. That's true of all business, not just the auto business.
I'm also fascinated by the effects that all the capital spending in the latter part of the '90s had on the industry. Whether they were seeking to head off Y2K problems or reconfiguring their systems to accommodate the newly introduced euro, companies across the country were forced to spend money to update their IT systems. Now it turns out that the investment has produced real operating efficiencies across the board, and in logistics in particular. The information systems that were brought online in the late 1990s are now letting us manage inventories in ways we never could have imagined. It's resulting in a very fundamental change in the way business is done.
Q: How so?
A: Inventories continue to appear on balance sheets as assets, but they're managed like a liability. No company wants to hold even one dollar more of inventory than is necessary to optimize sales. So the Wal-Marts of the world have managed to get their inventories down to near zero, largely by making their suppliers carry the inventories. The automobile business, however, has billions of dollars tied up in inventory. It is a huge capital absorber, since so much working capital is tied up in inventories. You can free up a lot of cash if you can minimize your inventories.You reduce obsolescence and waste and scrap and distressed merchandise and all the things that come with old inventory.
Q: How does that relate to investment in technology in the latter part of the 1990s?
A: Technology now allows us to know exactly where everything is at any given moment, all the way back to the raw materials. That's one of the enormous benefits information technology has brought to business—and one that's not discussed as much as it deserves to be. It's even changing business cycles. In the typical business cycle, the minute consumers start cutting back on spending, manufacturers react by cutting back production in what's called an inventory recession—they stop producing to let the inventories catch up with the demand. That only deepens the recession, creating a second dip, because it puts more people out of work.
We don't see that anymore. In 1998—in the midst of the boom—I wrote an article arguing that the next recession, though inevitable, would likely be shorter and shallower than most because of the way inventories are being managed. Eventually, the slowdown came. And although everybody thought the recession would be very long and very deep, in fact, it officially ran from March to November of 2001—making it the shortest recession on record since the Second World War. The only possible explanation is that there wasn't any inventory to cause the second dip.
Q: So the "soft landing" was essentially an unexpected benefit of tech investments?
A: Exactly. The interesting thing is that we're happy with the efficiency associated with tech spending. But at the same time, we're unhappy that the same technology has displaced as many workers as it has. That's inevitable because cost walks: If it's possible to use technology to reduce costs, you're going to need fewer employees to accomplish the same amount of work. So as shareholders and as consumers, we're happy that companies are becoming more efficient, but as workers we're not.
Q: Ah yes, the notion of the jobless recovery.
Q: How did this relate specifically to the automotive industry you were in? It has to be a lot harder to cut back on inventory in the automotive sector than it would be in, say, apparel. You can manufacture a pair of jeans and get it to a Gap store in 72 hours, but you can't do that with a Ford Mustang.
A: You're right in a sense, but keep in mind that the lead time from the moment a vehicle is ordered to the time it's delivered to the dealership has already been cut in half. What used to take seven or eight weeks now takes three to four. Many manufacturers, such as Toyota, have been quite public about their efforts to get their system down to 10 days. When it was at two months, 10 days seemed like a joke, but in fact, they're approaching that. All of the manufacturers, both domestic and foreign, are working on cutting their lead times. Toyota, for example, is building a state-of-the-art truck plant in San Antonio, Texas, in a push to eliminate overseas shipping and come up with ways to respond to demand quickly. It will rely on logistics to make that happen.
Right now, it only takes about 18 hours to build a vehicle from start to finish. The question is how many more days or weeks you need on top of that to get the vehicle to the customer. The answer lies in how well you can manage the information that supports the process—how good your systems are for notifying the sheet metal supplier that we need "X" and the tire supplier that we need "Y" and so forth. If we can make all that happen in real time and if we can persuade suppliers to locate near the assembly plants, which is what the Japanese have done for two decades, we can cut the time significantly and save billions of dollars. Then, if we bring in more perfect, real-time information on what's selling—so you know the red cars with air conditioning are selling faster than the green ones without—you can adjust your production. You build what people want, which raises the likelihood that what's on the dealer's lot will be sold quickly because it's desirable. You have that kind of real-time information about what people are buying.
Q: By extension, you lower your risk of getting stuck with a lot full of obsolete models at the end of the year and being forced to mark them down.
A: A deeply discounted markdown. Sure, exactly.
Q: I guess it's important to point out, too, that within the automotive sector, we're not just talking about the inventory of finished products on the lot.We are also talking about all the preceding inventories, all the raw materials, component parts, and so on.
A: Sure, and the same information systems can be used to manage the parts inventory. This includes the parts for the after market, the repair parts, and so forth. Dealerships have fewer obsolete parts because they, too, have better information about the turn. The manufacturers know down to the part number what's being sold out of a dealership's parts department, so their warehouses have a better idea of what they should be stocking and storing. This kind of real time information is enormously helpful in serving customers better. We talk about it in terms of reducing costs and freeing up working capital, but the end game is that customers find more of what they want when they want it, whether it's a transmission component or the whole vehicle.
Q: How much farther can this go? Are we approaching the point where we have squeezed as much inventory out of a system as possible, or is there still plenty of room for improvement?
A: I think there is still enormous room for improvement. In a perfect world there would be no inventory. A customer would decide to buy something, he or she would order it, and it would appear within a matter of hours.
Q: That would move us to the realm of the "Transporter Room" on the Starship Enterprise.
A: Almost, yes. There could be virtual inventory. You could go online and call up a three-dimensional view of whatever you wanted. That's certainly coming in the years ahead. Say you decide to order a lawnmower. You figure out what you want in a lawnmower and spec it out. Then you sit back while it's built in a day or so and delivered to you.
The younger generation,my children and their children, find it very easy to shop online. Some of us old guys are still a little bit awkward about that, but my 40-year-old son, who's a physician and doesn't have time to shop in stores, simply goes online, does some comparison shopping, orders what he wants, and it gets delivered to the house.
I've been telling my students and faculty colleagues here how the next generation can't imagine life without computers in the same way that you and I can't imagine life without telephones. One of my grandchildren, a two-yearold who's just learning to talk, was looking over my shoulder the other day when I was on his mother's computer trying to get my e-mail. He kept trying to tell me something and I was having trouble understanding what he was saying. I finally figured out that he was telling me to go to playschool.com. Apparently, his sisters boot that up for him and he jumps up on the chair and he plays these games. He can hardly speak English, but he's playing with a computer! How is his shopping pattern as a young adult going to be different from ours? He'll consider some of the things we're now doing to be Neanderthal.
Q: What's next?
A: I think there's much more that can be done. Nano-technology is the next thing on the horizon. I just read recently that with nano-technology, we'll be able to put the entire contents of the Encyclopedia Britannica onto a device no bigger than the head of a pin. I think in the years ahead we'll look back on all the whiz-bang stuff we have now and think it was pretty primitive. I also think there's more to be done in cutting costs and becoming more efficient.
One of the questions that's raised all the time is the impact of globalization on America. If the Chinese, the Indians and the Indonesians can produce things for a fraction of our labor costs, what hope is there for us? But it seems to me, although I don't have any concrete data on this, that it won't be long before we're using machines to produce machines and we won't have to worry about labor costs. If we do get to the point where we have a computer building a computer, we could find ourselves fully competitive again because we could manufacture any product—whether it's an automobile or a computer—in the United States as cheaply as they can do it in China.
I think the proportion of service jobs will increase, certainly, as we get older, and there will be a lot of very high-tech jobs, which means we'll have to concentrate on math and science education in this country if we want to be fully competitive. I don't think there's going to be that much manufacturing employment in the world.
Q: So, even as American workers raise the alarm about the migration of jobs to South or Central America, it's increasingly likely that those jobs will be taken over by machines?
A: Correct. It takes fewer people to build a car in China today than it did five years ago. They are doing the same things everybody else is doing.