Outsourcing, Supply Chain Management and Cutting Operating Costs

Thankfully, nothing had changed for Dan, and once on the sidewalk he continued with an even voice level, “On the subject of moving I/T outside, have you also heard examples of spectacular consequences from taking the wrong direction when it came to outsourcing?”

“Not really, I guess. What are you getting at?” I was puzzled by the question.

“Well, you’re familiar with the resounding success of Zelinski’s Full Line Discount Stores in recent years, while their major competitors have been suffering in most markets around the country?” he asked. Everybody knew the extraordinary success Abe Zelinski had enjoyed as he had built the largest national chain of retail stores in the country. They had locations in just about every urban community of any size, coast to coast, and were rapidly entering markets throughout Europe as well.

“Of course,” I said. “A great deal has been written in the Wall Street Journal, Business Week and other publications. My executive MBA classes used Zelinski’s as an example of a firm whose success was largely possible through innovative uses of computer and communications technologies. They constantly monitor sales activities throughout their network of stores from cash registers back to their warehouses, using up to the minute information to drive purchasing and distribution. I’m not sure how others you mentioned operate, except to say they all strive to offer the widest selection of goods at the lowest possible prices.”

Thankfully, nothing had changed for Dan, and once on the sidewalk he continued with an even voice level, “On the subject of moving I/T outside, have you also heard examples of spectacular consequences from taking the wrong direction when it came to outsourcing?”

“Not really, I guess. What are you getting at?” I was puzzled by the question.

“Well, you’re familiar with the resounding success of Zelinski’s Full Line Discount Stores in recent years, while their major competitors have been suffering in most markets around the country?” he asked. Everybody knew the extraordinary success Abe Zelinski had enjoyed as he had built the largest national chain of retail stores in the country. They had locations in just about every urban community of any size, coast to coast, and were rapidly entering markets throughout Europe as well.

“Of course,” I said. “A great deal has been written in the Wall Street Journal, Business Week and other publications. My executive MBA classes used Zelinski’s as an example of a firm whose success was largely possible through innovative uses of computer and communications technologies. They constantly monitor sales activities throughout their network of stores from cash registers back to their warehouses, using up to the minute information to drive purchasing and distribution. I’m not sure how others you mentioned operate, except to say they all strive to offer the widest selection of goods at the lowest possible prices.”

“Well, you’re right as far as you went. An important point about the Zelinski’s example that is relevant to you today was this: Zelinski’s understood they were in the business of selling commodities that could be bought at a wide variety of other stores, including grocery stores, drug stores, and a host of other competing outlets… ‘course, that was long before the explosion of retail connections made possible by the Internet! To differentiate themselves, they determined they needed to be recognized by the buying public as a source for the widest product assortments at low prices, as many hours per day as each market area justified. However, their competitors could also make about the same claims. Right?”

I nodded and he went on, “So, Zelinski’s decided they could best differentiate themselves by developing and continuously improving their overall distribution system. In addition to their total reliance on a very broad array of computer technologies and the advanced techniques employed in their warehousing facilities, what do you think is the critical part of a widespread system that would have to function as nearly perfectly as possible?”

Thinking through what had to be involved, I offered, “Well, since you’ve named the computer and the physical warehousing components, I guess you must be talking about how the merchandise actually gets to the stores.”

“Exactly! You are paying attention, John! And do you know what happened…what Paul Harvey would call the rest of the story?”

“Sorry to disappoint you, Dan, but that’s about all I know on that. Please go on.”

“Well, the Zelinksi example is probably the best model for what we call Supply Chain Management in today’s terminologies. It begins with tight controls over inventories throughout the pipeline of goods from purchasing through distribution centers and into the stores. Inherent in their processes is the never-ending emphasis on cutting costs at every step in the chain. And, it’s all what we call demand-driven by the real-time tracking of sales from the registers in every store. I heard one speaker characterize the Zelinksi chain as being so effective that when a consumer purchases a roll of toilet tissue from one of their stores, a signal goes out and someone cuts down a tree from a paper producer’s forest! ‘Course, that’s a strong exaggeration, but it makes the point quite well, don’t you think?”

“Neat way to put it,” John said. “Makes sense when you lay it out that way.”

Dan picked up the theme again, “Well, under pressure to regain some competitive ground, the management of some of Zelinski’s major competitors took deliberate actions. Looking over their operating statements they discovered very large sums were being spent each year on computers, on warehousing, and on transportation. They didn’t feel comfortable even considering tampering with their I/T infrastructure. Moreover, they had long-term investments in warehousing and stores that didn’t offer much opportunity for savings in the short run.

“That left transportation. Since most merchandise was moved by trucks which they owned or leased, and their commitments were relatively short in duration, that part of their operating budget came under close scrutiny by the bean counters. By the way, it’s critical to this discussion to note that the finance people took the initiative at Corrigan’s and other discount retail companies and drove their decisions, while the Zelinski’s marketing executives drove their strategic decisions. As a result, Corrigan’s, et al, focused on the premise: We’re not in the trucking business, and look how much money we could save by taking a different approach. The finance people convinced upper management to sell off the trucks and to contract their shipments to third party trucking firms. Though that decision probably did look good on paper, those in management didn’t realize they were also giving up control of a critical piece of their competitive strategy to others. Namely, distribution logistics.”

Dan plowed ahead, “Now, as we agreed earlier, the folks at Zelinski’s understood that product selection and availability on their shelves was key to customer satisfaction. It should also go without saying that taking advantage of their tremendous purchasing power with manufacturers to keep per item costs at bare minimums was an obvious cornerstone to their strategies.”

“Yes,” I agreed, without hesitation.

“They were determined to make logistics a cornerstone of their go-to-market plans. That meant they knew they needed to have the tightest possible control over restocking orders and deliveries. That meant they had to continuously monitor sales statistics for each item at each store, and to gear their purchasing accordingly. Finally, it meant Zelinski’s needed to control those most critical parts of their overall business.”

I nodded agreement once again, and Dan continued.

“So Zelinski’s required suppliers to connect their computers directly to the systems at Zelinski’s, enabling purchasing to happen electronically. In this way they could monitor and maintain sufficient inventories and production schedules to ensure rapid deliveries to either distribution centers or directly to the stores. And the point I was getting to is this: while Corrigan’s was handing their trucking over to others, Zelinski’s was strengthening their trucking operations as an integral part of their total strategy. So, while Zelinski’s experienced steadily increasing sales, expanding lines of merchandise and opening of new stores, their competitors suffered declining sales and the closing of large numbers of stores.”

“I hadn’t thought about that . . . and certainly I didn’t know anything about the example you just gave,” I said. “So Zelinski’s looked to their own situation to guide their decisions and didn’t follow the highly touted route of cut-costs-by-any-means-possible we were all reading about in the business journals. But how did they resist that temptation and go their own way?”

“The same way common sense dictates any firm should operate! A strong CEO has the power and the responsibility for setting and maintaining the direction of the company. Abe Zelinski knew that. He made it clear he expected every part of his company to follow the basic philosophies that had taken him from a small operation that no one knew outside his state, to recognition today as the leading discount retailer of general merchandise in the country and the generator of more revenues today than any other retail company in the world!”

“So, I guess that having been inside Weixx-Corp through those early golden years, knowing how we operated then that made us so successful, and comparing it with the company we are today, you can’t be too happy.”

I had hit another nerve, causing Dan to purse his lips, tighten his jaws, and bring tension to his whole body. His face took on an expression of resignation: no, he wasn’t happy, but he had apparently gotten over most of his mad and was now trying to be philosophical about it all.

“Sad and disappointed,” was all he said finally. “But you know… ” he said drawing out kno-o-w for added emphasis, “it doesn’t have to continue to be this way.”



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