SCM: A foundation for growth

Is supply chain management (SCM) only for big, multinational corporations?

Many people would say yes; they assume that small and medium-sized companies cannot afford to implement such a complex, sophisticated program. But the experience of Kotányi GmbH, where I am supply chain director, shows that such assumptions can be wrong.

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Adopting supply chain management principles allowed Kotányi, a medium-sized spice maker in Austria, to successfully expand into new markets yet still cut logistics costs by 10 percent, reduce inventory levels by 25 percent, and improve market share and customer service. All this was achieved in just three years by an in-house supply chain team without significant external support or investments in additional infrastructure. This article will explain why and how we accomplished so much in such a short time.

Fast growth brings changes
Kotányi is a family-owned company with headquarters in Wolkersdorf, Austria, near Vienna. Founded in 1881 by Janos Kotányi to sell paprika, the business soon grew to include other spices and herbs. With annual revenues of 130 million euros in 2009, 500 employees, and subsidiaries in 20 countries, Kotányi is a medium-sized player in Europe's fast-moving consumer goods sector.

Because Kotányi is positioned as a premium brand in all of its markets, customers expect a wide assortment and product availability at all times. Keeping a certain amount of inventory on hand is a necessity; without such stocks, the company would require up to 80 days to deliver the right product to the right place. The long lead times are partially due to production, which takes 15 to 20 days. But mainly they result from the inbound transit time from some countries (around 40 days when shipping from China, for instance) and outbound customs clearance times (around 15 days in Turkey, for example).

Around 360 different spices and herbs from 50 countries are delivered daily to Kotányi's factory in Wolkersdorf, where they are analyzed, processed, and packaged. The packaged products then move by truck or train to warehouses in the 20 countries where Kotányi does business. (The company has one outsourced facility in each of its markets.) Once an order arrives, the products are picked, packed, and shipped within 48 hours to Kotányi's customers: retailers, the food-service industry, and small, family-owned food shops that are found throughout Europe.

Until 1991, Kotányi's main market was its home base, Austria. In 1992, Kotányi launched an aggressive expansion into Eastern Europe and diversified its product assortment. By the end of 2006, Kotányi had a portfolio of 5,000 stock-keeping units (SKUs) and a presence in 19 countries in Central and Eastern Europe as well as in Russia. (It has since added Turkey.) At that time, the company was annually purchasing around 10,000 tons of raw materials from 100 suppliers and selling 200 million pieces of end product to more than 5,700 customers. Kotányi's distribution network relied on seven third-party logistics service providers, five distributors, and 18 trucking companies.

Kotányi's growth strategy had a positive impact on company revenues. In some cases, however, operational costs grew faster than expected. Meanwhile, inventory started to build up and service levels began to deteriorate. Yet all operational departments (purchasing, quality assurance, production, and logistics) were achieving their individual goals. Corporate management recognized that only a central planning and coordination unit with companywide competencies and goals would be able to improve the overall situation.

Accordingly, at the end of 2006, Kotányi decided to create a supply chain organization, and I was hired to lead this initiative. Previously, I had worked for five years at ITT as a supply chain manager and more than 10 years as a consultant for Accenture, Miebach Logistics, and Deloitte, developing and implementing supply chain strategies for international corporations. At Kotányi I found the ideal place to put into practice all I had learned about supply chain management.

The initial phase
The first step in the creation of the supply chain organization was the execution of a companywide assessment. Over the course of three months, a cross-functional team under my direction analyzed the processes, key performance indicators (KPIs), and costs of every central department and of every subsidiary, identifying areas for improvement and defining corrective actions. These actions were then scheduled according to an ambitious, four-year master plan with clear responsibilities and cost/benefit expectations for the whole company.

The second step was staffing the new supply chain department and defining the competencies that would be needed at the company's headquarters as well as at the subsidiaries. We recruited people with functional skills that the company lacked, such as forecasting and operations research, from several Austrian universities. We were careful to ensure that all supply chain department members, whether recruited internally or externally, had the necessary social and emotional skills to be part of a high-performing team capable of successfully managing a long and difficult change journey. It was decided that the new organization would report directly to the chief executive officer (CEO) and be responsible for supply chain costs and service levels for the entire company (headquarters plus 19 subsidiaries).

The third and last step of this initial phase was the implementation of a balanced scorecard that measures companywide supply chain performance on a monthly basis. Each central department was asked to define key performance indicators and targets for each of the three perspectives measured by the scorecard: financial, customer, and internal process quality. Subsidiaries had to measure the number and frequency of out-of-stocks, service levels, logistics costs, and stock levels. We monitored around 20 KPIs every month using business intelligence techniques to assess the present state of the business and to assist in prescribing a course of action. (For a list of the KPIs, see the sidebar, "Kotányi's key performance indicators.")

The master plan
The master plan required Kotányi to adopt a new approach to coordinating all departments at the corporate headquarters. It also required significant changes in the way the company worked with its subsidiaries and key customers as well as the implementation of a new outsourcing and supplier management strategy. Some of the new lines of action we developed included:

• Create a central demand planning unit. Due to Kotányi's long lead times, a "push system" would have to be created to manage demand. Rolling forecasts at the item and customer level would be generated every month for each country. A central demand planning team within the supply chain group would be responsible for the accuracy of the forecast, which is based on mathematical models and qualitative market inputs from the local sales organizations.
• Better control distribution, production, and purchasing outputs by establishing planning parameters. The supply chain group would identify and regularly update key planning parameters (such as economical production and purchasing quantities, lead times, safety-stock levels, customer priorities, out-of-stock cost per item, and so forth) that affect the quantity, time, and quality of outputs.
• Introduce CPFR (collaborative planning, forecasting, and replenishment) techniques. The company would establish new agreements to regulate the periodic exchange of point-of-sale and in-stock data, collaborative forecasting, and stock replenishment with distributors and key customers. These agreements would help to reduce out-of-stocks and optimize stock levels and distribution costs.
• Introduce a strategic sourcing approach for logistics services. To reduce logistics and administrative costs while improving service, the supply chain team would have to establish detailed service specifications for its logistics service providers and implement performance-based compensation models. In addition, it would need to consolidate the logistics service provider and carrier base, moving from country specialists to regional/global providers.
• Optimize product assortment by looking at cost-to-serve. The supply chain team would need to properly allocate all variable costs incurred by a product as it moves through the supply chain, from central purchasing to local distribution. Doing so would enable the team to calculate the product's net margin, a critical factor in the decision to retain or eliminate the product from the company's assortment.
• Optimize internal and external lead times. Standard internal and external lead times would be clearly defined, agreed upon, and regularly monitored. Deviations would have to be analyzed and corrected.

It soon became obvious that it would be difficult to implement so many changes in a traditional organization where people had long years of service and experience. To help employees understand and accept these changes, we developed and implemented a change management plan with a clear vision, leadership, communication, and rewards.

The new supply chain organization was responsible for leading and monitoring the implementation of the master plan. This included coordinating all of the departments and subsidiaries involved and reporting the results achieved to the CEO on a monthly basis. The supply chain group also recommended new lines of action when necessary.

During the first year of implementation, the supply chain team focused on reducing out-of-stocks in each country. Team members spent most of their time in the various markets to gain an understanding of customer requirements, local processes, and demand patterns. Based on this newly acquired knowledge, the central forecasting function was created and was charged with regulating lead times and the levels of safety and operational stock. Overall, out-of-stocks were dramatically reduced, although in a few cases inventory levels increased.

Solving the out-of-stock problem helped to win over the country managers. With their strong support, the supply chain team was able to develop partnerships with key customers, distributors, and logistics service providers in the second year. The result was better data quality and more efficient collaboration based on clear rules about how to plan sales and promotions, order and manage stocks, and respond to exceptional situations (like expedited orders or customs issues). These improvements enabled Kotányi to optimize inventories and distribution costs.

Not until the third year did the supply chain team begin to work on optimizing corporate headquarters' processes. By that time, everyone was aware of the team's successes in the various country markets and recognized the benefits of the new supply chain management system; this softened the expected resistance to change. The team established and monitored central processes (such as sales and operations planning, new product development, and order processing); rules (such as purchasing and production parameters, lead times, and customer priorities); and internal service agreements (for example, between purchasing and production and between production and logistics).

Award-winning results
Now, more than three years later, Kotányi's supply chain department plans and controls all of the company's international operations. The department currently includes 10 people at the headquarters location who work in planning, inventory control, customer service, logistics, purchasing, and information management. In addition, more than 40 employees in 20 countries report on a weekly basis to the supply chain group.

Most of these changes were accomplished with little extra expense beyond hiring people with the needed expertise. For example, since Kotányi had already implemented state-of-the-art enterprise resource planning (ERP) and data warehousing systems prior to 2007, the introduction of supply chain management practices did not require further investments in information technology. Moreover, thanks to the supply chain optimization effort, the size of Kotányi's logistics infrastructure remained stable even though the company achieved additional growth.

In fact, the supply chain organization has saved Kotányi a great deal of money. During the last three years, we have reduced logistics costs by 10 percent, cut stock levels by 25 percent, and reduced customer-issued penalties by 80 percent. Companywide service levels have significantly improved and are currently at 98 percent. This has enabled Kotányi to improve market share and negotiate better terms with existing customers.

The number of logistics service providers has been reduced by more than half, and we now use only four trucking companies. We have also consolidated our outsourcing spend with four global third-party logistics companies, each of which applies standard procedures, interfaces, and performance measurements to Kotányi's logistics requirements in several countries.

Kotányi has continued to expand into new markets—Turkey was added in 2009—and to introduce new products, including around 200 new stock-keeping units (SKUs) that same year. Importantly, the company is now able to take advantage of these new opportunities without undermining profitability and service levels.

Kotányi's supply chain management journey has not been easy. To motivate a traditional and decentralized organization to change the way it had operated for decades has been one of the biggest challenges in my professional life. It required a great deal of convincing and hard work to successfully introduce a central supply chain organization with companywide competencies and responsibilities. One reason was the cultural differences among the country subsidiaries. Additionally, country managers were used to making operational decisions on their own, with little or no influence from company headquarters. At the headquarters itself, people were focused on achieving their departmental goals and were overlooking companywide objectives like reducing out-of-stocks, inventory, and operational costs.

The key factors in our success included a solid, competent team with both functional expertise and emotional strength, the creation and consistent execution of a four-year master plan, the continuous monitoring of key performance indicators, and a sensible change management approach. Our hard work and planning have achieved such notable results that at the beginning of 2010, Kotányi won the Austrian Logistics Award for the most innovative supply chain achievement—an accomplishment we are extremely proud of.