CSCMP's Supply Chain Quarterly
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April 20, 2018
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When Coca-Cola Parts and its 3PL couldn't agree on how to define "best-in-class" performance, they turned to a warehouse benchmarking study for guidance. The research helped them set goals that not only led to improvements in warehouse operations but also align with Coca-Cola's corporate strategy.

This article is a follow-up to "Disconnected in the DC," which appeared in the Q4/2015 issue of CSCMP's Supply Chain Quarterly.

What does it take to refresh the world? For the Coca-Cola Company, it requires a supply chain focus that understands and aligns with the company's customer service strategy. When customers are thirsty and want a Coca-Cola product, it is critical that the delivery system for every outlet of Coca-Cola is operating at peak efficiency. This is where Coca-Cola Parts delivers, and as the company itself puts it, enables the mission to refresh the world, inspire moments of optimism and happiness, create value, and make a difference.

Article Figures
[Figure 1] 3PL's service metrics
[Figure 1] 3PL's service metrics Enlarge this image

Coca-Cola Parts (CCP), the master distributor of installation and service parts for Coca-Cola dispensing equipment in North America, exists to support Coca-Cola's commitment to provide "one-stop beverage system support" to its customers. CCP manages the supply chain for over 30,000 vending, cooler, and fountain machine parts that it delivers to the field service providers who install and repair Coca-Cola equipment. It fills just under 900,000 orders annually—about 2.5 million lines, with an average of just under three lines per order—from a central distribution center in Dallas, Texas, that serves the United States and Canada.

For Scott Hardesty, CCP's director, ensuring his organization's alignment with Coca-Cola's corporate focus on customer service is a top priority. Coca-Cola Parts has partnered with a third-party logistics provider (3PL) to fulfill its mission of delivering the right part at the right place at the right time so that Coca-Cola products are always available to its customers. However, creating alignment throughout the supply chain requires supply chain leaders to have the right information to create lasting change that supports the goals of the organization. This became a problem for CCP when it couldn't reach consensus with its 3PL on industry benchmarks and what "best-in-class" performance looked like. As a result, continuous-improvement targets were perceived as arbitrary and subject to debate.

To address this issue, the partners needed a tool to help them align to Coca-Cola's corporate strategy and understand what level of performance they needed to reach together. They wanted to benchmark performance with organizations that shared the same pick profile, size, and customer service orientation. Although many of the benchmarks for customer service were already in place, they did not have benchmarks that fit CCP's broken-case industry profile, and it was difficult to tell whether they were hitting the mark when it came to performance.

While researching possible benchmarks, Hardesty discovered "Disconnected in the DC," an article in CSCMP's Supply Chain Quarterly about the 2015 WERC DC Measures study, a benchmarking study of operational metrics in distribution centers and warehouses. (For more about the study, see the sidebar.) The study results include a detailed breakdown of performance measures by company profile, type of activity, and corporate strategy, among other factors. This allowed CCP to make an "apples-to-apples" comparison with peer companies and helped launch a new performance and metrics conversation with the 3PL.

To help logistics and supply chain organizations ensure that the metrics they are using in their warehouses and DCs are aligned with corporate strategy and are driving the desired results, the study recommends following a five-step "Validating the Value-Add" (VVA) process.1 CCP used this process as it worked with its 3PL to develop new benchmarks and improve performance. What follows are brief summaries of the five recommended steps, along with a look at some of the results CCP and the 3PL achieved by applying them.

Step 1. Clearly articulate the objective(s) to be met.
Before making any changes, companies should first determine their strategy and desired outcomes. Then, those objectives must be clearly articulated and communicated so that the operational levels of the organization can align their actions to the strategy. For example, a firm following a customer service strategy might communicate an objective like "We will achieve a 10 percent improvement in shipping accurate orders in order to maintain our competitive advantage in customer service." The important thing is that the statement clearly links operational and functional tactics back to the overall strategy.

Coca-Cola Parts' customer service strategy is aligned with the company's one-stop beverage solutions support mission. For years Coca-Cola Parts has focused squarely on delivering the right part, at the right place, at the right time to increase dispensing-equipment uptime, and it developed metrics to support the customer service mission. Coca-Cola Parts refreshed its strategy by surveying customers about their expectations in regard to order cycle time and delivery quality.

Customers said that they expected issue-free delivery of stock and drop ground shipments in four days or less, and that "expedite" orders should be shipped the same day for next-day delivery. Based on that customer feedback, Coca-Cola Parts established new on-time delivery expedited shipping goals consistent with these customer expectations. To address increased customer expectations for order accuracy, CCP set a goal of achieving the "best-in-class" benchmark identified by the DC Measures study based on a peer-group comparison among respondents.

To isolate the key drivers affecting on-time delivery, Coca-Cola Parts implemented diagnostic metrics, such as line-fill rate, warehouse on-time ready to ship, and carrier on-time metrics. CCP referenced line-fill and on-time ready to ship results from the DC Measures study to compare its performance to study respondents that were classified as "advantaged" and "best-in-class" performers.

Step 2. Develop "Validating the Value-Add" statements related to strategic objectives.
VVA statements explain how an employee, area within a warehouse facility (for example, receiving and inspection, pick and pack, or slotting), or department or functional area of a company (logistics, supply chain, marketing and sales, manufacturing, corporate real estate, accounting, or finance) adds value in achieving the related objectives of the strategy. Validating the value that the employee, area within a warehouse facility, or department or functional area adds requires a performance goal to measure performance against.

For example, if the overall strategic objective is "12 percent revenue growth," all employees within the DC should be able to see how they support this objective. Because in some cases serving customers faster than competitors do can grow revenue, the DC could focus on faster response to orders. So instead of turning orders in two days, employees would need to pick, pack, and ship orders much more quickly. In this instance, a value-add statement with a measurable performance goal would be: "We support revenue growth by having 96 percent of our orders picked and shipped within 12 hours." Clearly linking a tactical measure to a broader objective will help employees understand what to focus on in their operational activities.

Coca-Cola Parts developed a value-add statement, using a key component of its on-time delivery (OTD) methodology, to focus the team and ensure consistent performance. For CCP, on-time delivery is basically a "three-legged stool" comprising the percentage of back orders, on-time ship by the 3PL, and carrier performance. CCP used line-fill rate, or the percentage of lines filled compared to the customer's request, to measure back-order performance. Monthly analysis of OTD performance showed that back orders influenced performance the most and therefore merited a closer look. CCP determined the line-fill-rate performance capability required to meet the new OTD goal and created a corresponding value-add statement: "We support our customer's on-time shipment expectation by meeting the DC Measures study's line-fill-rate benchmark for the 'advantaged' level of service." This benchmark category was chosen because it represented the optimal balance of line-fill rate, service, and inventory levels.

At the same time, the 3PL analyzed its processes to deliver the second-most-important driver of on-time shipment performance, warehouse on-time ready to ship (OTRTS). CCP operates out of a single DC in Dallas, Texas, which serves customers in most ZIP codes in the United States. To support the four-day on-time commitment, the 3PL sorted incoming customer purchase orders by number of transit days and created new diagnostic metrics to measure performance. (See Figure 1.) For example, customer orders with greater than three days' transit from the DC needed to be picked and shipped same day. The 3PL created its own value-add statement: "We support four-day on-time delivery by delivering 99.9 percent on-time ready to ship for the corresponding transit day."

Step 3. Measure progress against goals and objectives.
This step is designed to help employees easily understand and track their performance against the benchmark. Once clear expectations have been articulated and the team understands the value the activity it performs brings to the organization, then it is imperative to measure progress against the overall objective in addition to the team's or department's progress against its own goals. It's important, too, to make it easy to see that goals are indeed being met by summarizing data so that the results are obvious, and by including historical data to track trends.

As Coca-Cola's expectations increased, the 3PL responded with a heightened awareness of the performance metrics. Managers articulated the downstream benefit, made sure employees understood the numbers, and intensified their focus on the process needed to deliver them. For example, they increased employees' visibility into the metrics. They also developed review routines, conducted training and counseling, and tied existing incentive programs to the new metrics and goals. For its part, CCP collaborated with the 3PL to calculate prior-year performance using new metric methodologies to enable year-over-year comparisons, and continued to host monthly business reviews to highlight performance against goal.

Step 4. Find the underlying problem.
What if an organization is not meeting its goal? The next step is to determine the reasons for failing to meet the goal. However, the obvious problem usually is not the actual root cause, and the team will have to drill down to find the underlying reasons for the failure. A good technique is to ask "Why?" five times. For example, we've missed our goal for on-time shipments. Why? The orders were late getting to the shipping dock. Why were the orders late to the shipping dock? The product wasn't available to be picked. Why couldn't we pick? Because we didn't have any product in replenishment. Why was there not product in replenishment? Because it was still on the receiving dock. Why was it on the receiving dock? Because the supplier was late shipping their product to us.

Conducting a root-cause analysis, whether using the technique outlined above or any other, requires having relevant data. CCP used Failure Mode Effects Analysis (FMEA) to identify root causes and isolate gaps in line-fill-rate performance. The quality-assurance organization ASQ defines FMEA as a step-by-step approach for identifying all possible failures in a design, a manufacturing or assembly process, or a product or service. Failures are prioritized according to how serious their consequences are, how frequently they occur, and how easily they can be detected. The purpose of the FMEA is to take actions to eliminate or reduce failures, starting with the highest-priority ones.2 The FMEA results led to the creation of a formal sales and operations planning (S&OP) process, implementation of mean absolute percentage error (MAPE) and bias (tendency to over-forecast or under-forecast) to measure forecast accuracy, and new business routines to address weekly top 20 back orders. All of this allows CCP to determine the impact on line-fill percentage and determine where to apply countermeasures.

Meanwhile, the 3PL performed root-cause analysis to uncover process gaps that were preventing consistent order-accuracy performance. Managers analyzed 12 months of order-accuracy defects to identify correlations to part numbers, part characteristics, order quantities, units of measure, picking zones, supplier inbound accuracy, and pick/pack associate performance.

Step 5. Take action to fix the problem.
Once the true source of the problem or the barrier to meeting the objective has been identified, it's necessary to craft action plans to fix it. Identifying a problem doesn't mean it will go away; you've only highlighted a need for change. It's important to communicate that need, and how those changes align to the corporate strategy. Stress that the process needs to be changed, not necessarily people. Keep the goal in mind, and communicate your progress toward that goal. One way to do this is by keeping progress charts or reports visible in the workplace. Finally, and importantly, praise people's progress when action leads to the needed change.

CCP implemented a cross-functional approach to improve line-fill rates and warehouse on-time ready to ship performance. CCP considered the line-fill rate to be a key service indicator for the Coca-Cola network, yet an incremental line-fill improvement (in terms of percentage) from month to month, or year-over-year, was often viewed as just that—a number without any context in relation to customer impact. To make the benefits of improvements more concrete, CCP translated line-fill gains to the number of back orders avoided and shared that information with customers and senior management. For example, the 1.5 percent reduction in line-fill rate percentage represented over 9,500 back orders avoided year-over-year.

At the same time, the 3PL took several actions to improve its performance. As a result of the analysis described above, it changed its pick/pack performance-measurement methods to highlight and address associates' performance gaps before they impact order accuracy. The company also collaborated with CCP to improve the audit process for supplier inbound accuracy and the scoring model to heighten supplier awareness and focus efforts on lesser-performing suppliers. Additionally, the 3PL established standard order multiples and inter-packs for selected parts that aligned to customers' ordering patterns, thereby reducing the risk of picking errors.

Recognizing the need to change its OTRTS methodology to meet Coca-Cola's four-day on-time delivery goal, the 3PL communicated the need for change to its frontline staff and implemented a tiered approach to OTRTS measurement. This new measurement added visibility to the transit days, simplifying the planning process and providing a guide for prioritizing and planning shipment volume. It also created scheduling consistency for the workforce.

A road map for the future
For Hardesty and his team, the "Disconnected in the DC" article validated that aligning with corporate strategy was the right way to go. They also understood that the DC Measures study was not a "silver bullet" that would fix all problems or address all of their issues. Instead, the study served as a data source and informational tool for gaining insight into the organization's performance and how it was doing in comparison to similar broken-case-pick operations. Additionally, CCP did not use all of the study's metrics, only the ones that were relevant to aligning with its customer service strategy.

Aligning metrics acted as a sort of "kickstart" that opened up other areas for improvement. As CCP started to introduce the best-in-class metrics into performance reviews, managers challenged the performance status quo and uncovered opportunities to strengthen forecasting, S&OP processes, and supplier performance management routines. Among the most important results of this process was that it helped CCP establish aspirational goals that align with corporate strategy and are relevant to CCP's business and operational model. As a result, it now has a road map for driving continuous improvement throughout the organization and its supply chain.

The improvement journey facilitated by the DC Measures study also allowed Hardesty and his team to initiate conversations among CCP's leadership team, senior management, and suppliers that provided clarity and identified opportunities for improvement. One other benefit of the DC Measures study was also identified. If, for some reason, its parent company's corporate strategy were to shift in another direction, CCP would have access to other metrics it could use to ensure it remains aligned with whatever that strategy might be.

Notes:
1. "Validating the Value-Add" is trademarked by TSquared Logistics.
2. American Society for Quality, asq.org/learn-about-quality/process-analysis-tools/overview/fmea.html

Scott Hardesty is Director, Coca-Cola Parts. Donnie F. Williams Jr., Ph.D., is Assistant Professor of Logistics/Supply Chain Management at Georgia College & State University. Joseph Tillman is principal of TSquared Logistics. Tina Ceaser is Account Director at DXP Enterprises Inc.

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