CRITICAL FLOW : Managing Inventories, Timely Deliveries Are Key to Keeping Customers, California Markets Satisfied
Melody Salazar thought that the new rug that she ordered on June 2 from the Sears store in Torrance would arrive in plenty of time for her July dinner party.
“I paid $200 and they said it (the rug) would arrive in two to three weeks,” said Salazar, a Manhattan Beach resident who operates her own clothing sales firm. “I had the perfect spot all picked out. But my rug didn’t come until the middle of August. I was very, very angry.”
Anyone who has gone shopping only to find an item out of stock, or who, like Salazar, has waited months for merchandise to be delivered, knows how important adequate product supplies can be in maintaining customer satisfaction.
Once a field that drew little notice, the management of inventory has become a major preoccupation of American business in the wake of the expansion of the global economy and federal deregulation, in 1980, of the U.S. truck and rail freight industries.
The interest in maintaining adequate inventories is particularly keen in California, which is home to the nation’s two largest general merchandise and prescription drug distributors as well as a state that has become an important hub for products arriving from major foreign manufacturing sites such as Mexico, Taiwan, South Korea and Japan.
“Southern California companies are having to compete in the international and national market so they are having to think more about distribution,” said Harold Cypress, a senior consultant with Arthur D. Little in Los Angeles. “One of the true competitive edges in today’s global market is speed of distribution. Quick response has become a prerequisite to being a successful company. It’s an important part of customer satisfaction.”
In this absolutely-positively-have-to-have-it-overnight world, retailers, manufacturers and distributors are dispensing with the old paper-based system of order blanks and shipping receipts and substituting new technologies such as computers and bar code scanners to keep shelves adequately stocked. And with federal deregulation of the trucking and rail industry touching off an explosion of new freight carriers, the industry has become more competitive than ever. Still, as Salazar discovered, mistakes can happen.
“When you are dealing with a decorator rug, we usually just carry a floor sample,” explained Clayton Valstad, regional facilities manager for Sears in Santa Fe Springs. “Our policy is to offer a refund--at any time, for any reason--to an unsatisfied customer. We don’t like to inconvenience the customer.”
Keeping inventory on hand, however, is a complex task that requires planning as well as information on the movement of goods between vehicles, warehouses and stores that can be hundreds of miles apart. Because the federal government no longer regulates the number or prices of truck and rail freight carriers, costs can vary widely, so decisions on shipping products are more crucial today.
“What deregulation has done is dramatically increase the number of economic choices that we as movers of goods have to deal with,” said Robert Wayman, chief financial officer of Hewlett-Packard Co. in Palo Alto. “When transportation prices were regulated, it didn’t make as much difference who you chose.”
Saturn Decision
But today millions of dollars often ride on a manager’s decisions.
The cost of transporting cars from the factory to the marketplace, for instance, was the single biggest factor in General Motors’ decision, in the mid-1980s, to locate its huge Saturn automobile assembly plant in Spring Hill, Tenn., GM officials said. The company noted that the city is within 500 miles of nearly 80% of the U.S. population. Other auto makers--including Nissan, Honda and Toyota--have also built plants in the region because of its central location.
By contrast, Hawthorne-based Mattel Inc. chose to build most of its manufacturing plants in Asia. Labor costs are lower there, company officials say, but distribution is more intricate. Mattel relies on a network of ocean liners, trains and trucks to deliver toys to its two U.S. warehouses in City of Industry and Ft. Worth, Tex.
Mattel’s network was tested earlier this year when student protests in China disrupted the manufacturing of toys at the company’s plant near Canton in southeastern China, said Jeffery Douglas, vice president of logistics for Mattel.
“Transit time from the Orient can take anywhere from 14 to 17 days” by ship, Douglas said. “Toys are time sensitive and if you don’t make a product immediately available on the shelf, parents are going to buy something else.” He said Mattel made “minor adjustments” to its production and delivery schedules from other plants in Asia to make up for the disruption in China.
Rising Expectations
Such planning for distribution efficiency has had a significant effect on moderating price increases and improving corporate profits.
Robert B. Delaney, a consultant at Arthur D. Little Inc. in Cambridge, Mass., estimated that businesses have saved about $60 billion annually in transportation and inventory carrying costs since federal deregulation of the truck and rail industries helped focus more attention on distribution costs.
But while costs have come down, consumers’ expectations have risen.
“We have become used to getting things when we want them,” said Harold Kassarjian, a professor of marketing at UCLA. “With more and more crowding in the cities, life has become more hectic. Consumers are saying, ‘If you don’t have the cereal I want, I’ll go to the store next door.’ ”
The change in attitudes has “caused corporate management to question the traditional ways of meeting customer needs by accumulating stockpiles of inventory in close proximity to customer facilities,” concluded a study on consumer satisfaction conducted last year by Ohio State University’s College of Business.
“We’ve become more sensitive to the consumer,” said Wayman of Hewlett Packard. “By viewing logistics as a vital aspect of customer satisfaction, we’re getting a better appreciation of it. When somebody pays $500,000 for a piece of computer equipment, they are not tolerant of poor delivery. They want it in a timely, complete fashion.”
A major influence on the new ways of managing inventory has been the Japanese who, because of a lack of raw materials and space in their country, perfected the concept of “just-in-time” delivery.
Instead of stockpiling months’ worth of raw materials and finished products, deliveries are timed more closely, reducing carrying costs and storage space for manufacturer and retailer alike.
Likewise, in the United States, goods are often kept in sparsely populated areas rather than stockpiled in costly urban locations. To move products around, retailers rely on frequent deliveries by independent distributors such as Bergen Brunswig Corp. of Orange or McKesson Corp. of San Francisco, the nation’s largest pharmaceutical and general merchandise distributor. McKesson had earnings of $100.6 million on sales of $7 billion in the fiscal year ended March 31.
The two firms distribute more than 100,000 kinds of merchandise. Virtually every item found in the typical drug store, from camera film and toothpaste to prescription drugs and sunglasses, is transported or warehoused by one of these two firms. It is a task that requires military-like coordination.
“You literally have to plan to take in every issue from freeway congestion to when key managers are on vacation,” said Bernard J. Hale, vice president of distribution for Bergen Brunswig, which earned $47.6 million on sales of $3.9 billion for the fiscal year ended in August.
To keep deliveries within 15 minutes of the promised time, Hale relies on a fleet of 500 trucks and 30 distribution centers. He stays in touch by phone with many of his warehouse managers and distributors. But he says his most important tool is the personal computer.
“We always keep in mind that a customer is depending on us to deliver,” Hale said. “When a pharmacist is running low on a life-saving drug, he doesn’t understand when you are two hours late.”
