CIOs Managing the Supply Chain

Jeff Orton’s 1997 promotion to CIO and vice president of logistics at Wilsons the Leather Experts wasn’t the smooth transition he had hoped for. No one had heard of an IT guy, one without logistics experience no less, running a supply chain organization?particularly for a company as large as the $720 million a year Brooklyn Park, Minn.-based apparel maker. Not surprisingly there was resistance, typified by a lunch meeting with a supply chain management vendor Orton wanted to replace. The vendor listened as Orton described his plan to expand Wilsons’ supply chain system from the point of sale to the manufacturing floor, and his concern that the vendor’s flow of goods software wasn’t robust enough to handle the increased information load. Rather than explain how the software could help, the vendor insisted that the problem was Orton’s logistics ignorance. “It was years ago, and I still get mad thinking about it,” says Orton. “I may not have had logistics experience, but I am a good businessperson.”

The redesigned supply chain has been in place for four years now and has saved Wilsons millions?a far cry from the spectacular failure the vendor predicted. Skeptics may call Orton’s success in wearing both hats a fluke, but the fact that other companies are tapping their CIO to head up the supply chain suggests that the idea has merit. And this faith in the CIO as a business process leader as well as an IT chief is yet another indication of the increasing role that CIOs are playing in central business decisions.

The dual role makes sense because the supply chain is the most technology intensive part of many companies. In the old days, retailers bought something for $20 and sold it for $40?the classic markup. Today many retailers can mark up their goods only a fraction of that. Profits require bulk sales and an efficient supply chain. Good automated systems are the best way to keep track of and manage the entire process, from the ordering of raw materials to manufacturing, shipping and delivery.

In essence, IT has become the driver for those businesses, and the CIO understands IT better than any other top executive. As the role of IT in a company grows, so does the CIO’s strategic importance. The quintessential example is ERP applications, the colossal software packages that provide a common system and data format for every department. An ERP rollout touches every part of a company, often connecting all previously existing systems. The result is that CIOs not only become familiar with how other parts of the company do business, but in most cases they actually redesign the business processes to work with the enterprisewide system.

London School of Business Professor Michael Earl says that CIOs who have overseen ERP projects tend to assume a greater role in their company. “It begins with the realization that all that change is enabled by IT, and that the systems are actually responsible for the processes,” says Earl. “The senior IT executive is actually changing [the way business is done]. They understand processes and projects.”

All the CIOs interviewed for this article either completed an ERP implementation or spent at least a year and a half researching one, and they list that experience as one of the reasons they were given their dual IT and supply chain responsibility. Each insists that combining the role has given him a clear mandate to run the supply chain as efficiently as possible. A few companies are so impressed with the advantages of having the CIO run both organizations that they treat the dual role as a closely guarded competitive secret. The ones who will talk say that having the same head for IT and the supply chain means that the logistics operation receives more technology attention than it would otherwise, and new supply chain technologies are implemented faster. In general, CIOs say, the two departments can be operated more efficiently when the CIO is in charge of both.

“We were able to make IT more business-focused and logistics more IT-dependent,” says Orton. “We have been able to elevate the business impact of systems and logistics so that we are almost as important to the overall profits as the merchandising stores.”

The Coup de Gr‰ce

For the past 60 years or so, com-panies have structured themselves into functional divisions or silos that evolved in part because a large company has too much going on for one person or group to handle. In this traditional organization, IT is a department with a titular head, as are logistics, finance, HR and so on. The model makes sense. It allows workers to become experts in one particular field and provides for a clear career path. In the 1980s and mid-’90s, IT fit nicely into this structure; IT’s job was to implement systems that improved other departments’ efficiency, such as an accounting application for the finance department.

The coup de gr‰ce was ERP, which linked the different departments through a common system. Prior to ERP (or any other enterprise-unifying IT project) there was no easy way to measure the impact of an event across the company, and employees were forced to work in relative isolation, focusing on the more manageable question of how an event impacted their specific area of the company. Now technology can provide a data intensive understanding of how each action affects other areas and the company as a whole.

Consider Owens Corning. A mid-’90s SAP implementation at the construction materials manufacturer boosted the credibility of its CIO, David Johns, throughout the company. But it took an extreme circumstance to vault Johns into the dual role of CIO and chief supply chain officer. In October 2000, the Toledo, Ohio-based company filed for Chapter 11 to protect itself from court judgments in excess of $5 billion stemming from earlier sales of insulation that contained asbestos.

After emerging from bankruptcy, Owens Corning began a companywide restructuring in April 2001 aimed at increasing efficiency across the company. Johns’s new position is a direct result of that. Before the April reorganization, Owens Corning had separate heads for IT, supply chain and customer service. The three departments tried to work closely together, says Johns, but the structure “didn’t work as efficiently as it could.”

The separate departments within Owens Corning were often victimized by conflicting goals. For example, the transportation group, whose expenses consumed 60 percent of the company’s $600 million supply chain budget, tried to cut transportation costs. The transportation manager believed that the cheaper the carrier, the better he was doing his job. But the lowest-cost carrier was dirt cheap for a reason: It didn’t pick up or deliver the order on time. Similarly, the inventory group’s goals conflicted with customer service’s goals. The warehouse manager wanted to drive inventory down to zero, but when the warehouse ran out of an item, it extended the time to ship and again resulted in dissatisfied customers. Each group did its job?and did it well?but the lack of alignment among the organizations ended up increasing the overall cost.

Johns compares what happened to a stool, which is useless unless all three legs are the same length. “Having two legs going for lowest cost doesn’t sit with the third leg that is working for customer service,” he says. “By bringing those three organizations together, we have a better idea of how inventory, transportation cost, technology and customer service all fit together.”

The restructured organization now has one head, Johns, who oversees customer service, logistics and IT, and has a deputy for each. With that structure in place, Johns is able to make decisions with the whole company in mind. For example, he used some of the tools in the SAP package to find the best shipping routes?considering on-time arriv-als, cost and other factors?and rerouted as much traffic as possible along them. In total, Owens Corning sliced $32 million out of the supply chain budget in the eight months after the reorganization, and Johns expects to save an additional $60 million this year.

Johns insists that separate organizations, no matter how close together they work, could not attain the same savings. In order to coordinate the employees who execute the day-to-day decisions, the organizations needed to be combined. For instance, the transportation manager who decides which shipper handles which route now works in the same group with the person who handles service for the customer. And both use the same system to do their job. “We learned [from installing] our SAP system that you can’t fix a problem by just throwing a system in there,” says Johns. “One could say that there is more of a technology focus in supply chain, but that is not the fundamental reason that we combined them. We understand that it is not just technology but the relationship between the people, process and technology.”

The people, process, technology mantra is repeated almost verbatim by Orton. Like Owens Corning, the IT department at Wilsons gained broader credibility after implementing a companywide software package. Although Wilsons considered ERP, it ultimately decided to link several different best-of-breed solutions and Lawson’s financial and human resources packages. In the process, the IT department learned how each functional area’s systems affected one another?and how they could best work across the company to improve the supply chain. The packaging of wallets?Wilsons’ best-selling product?is a good example. Data from the stores showed that it would be most efficient to replenish wallets in batches as opposed to individually, the practice at the time. They were bought by retail stores in batches, so why not manufacture and ship them that way? Armed with that information, Orton insisted that Wilsons change the way the factories packaged the wallets and the way the distribution centers processed them. The shift incurred a major financial charge in two functional areas, but it improved efficiency across the supply chain. “The point is you have to see across departments and understand more than your own process,” says Orton. “There is no way you can look at one part of the supply chain and say, ’I am done.’ You have to look at the whole.”

Combining IT and logistics also ensures timely execution. “Logistics may have a number-one priority of implementing an advanced ship notice system,” says Orton. “For [IT], this priority could be down the list. Managing both departments helps us get to a better alignment faster.”

Culture Clash

Orton says the CEO put him in charge of logistics because the company understood IT’s potential to help the supply chain. However, even the CEO’s endorsement didn’t ensure a peaceful transition. Vendors weren’t the only ones that tried to take advantage of his inexperience. Veteran Wilsons employees were slow to accept his leadership. “I hate saying this, but people did try to take advantage,” he says. “They had an expertise, but they wouldn’t volunteer answers. If I didn’t ask the right questions, I wouldn’t get to where I needed to go.” To help win their loyalty, Orton wrote personalized Christmas cards to all his employees, specifically mentioning how each was helping the business.

Other CIOs have had to overcome a similar culture clash. When Johns took over as chief supply chain officer at Owens Corning, he says, supply chain employees initially thought, Jeez, we will be turned into tech-weenies. But he worked hard to convince them that they weren’t just working for IT but a new umbrella organization, and employees eventually realized the benefits of realignment.

There are other caveats to such a dual role. Michael Earl, for instance, wonders if it isn’t more than one man can handle. “The CIO has become such a big job,” he says. “You work with these people all the time, but to take on other areas of responsibility is too much.” (For more on this, read “IT Takes Two” at www.cio.com/printlinks.) It has proved to be so in one case: Thomas Conarty, who was in charge of both IT and logistics at Bethlehem Steel, was forced into retirement in December 2001 as part of the company’s Chapter 11 restructuring. His position has since been split. Other CIOs say that their dual role works only because they themselves have had extensive experience working in other parts of the company. Richard Mazzoni, former vice president of IS and logistics at Levitz Furniture, started there in the 1970s and worked all across the company?including showrooms?before becoming vice president of IS in 1985. He began a major ERP implementation in 1995 and took over the logistics operation in late 1996. The ERP project only enhanced Mazzoni’s companywide view. “The entire process gives you a complete and thorough understanding of the entire enterprise,” he says.

One thing he learned was that the logistics operation was in shambles. Every year Levitz spent $450 million on goods but spread it out to more than 200 suppliers. As a result, the furniture company was not able to gain any economies of scale. Furthermore, the logistics managers were still using spreadsheets to coordinate the transportation of goods from the suppliers to the approximately 150 stores. In some cases, Levitz would have to pay for an entire truck to transport only one or two couches. Mazzoni put two of his top business analysts in charge of redesigning the logistics processes. Between 1997 and 1999, Levitz opened two central distribution hubs in California and North Carolina and required suppliers to ship all finished goods to those hubs. From that point on, Levitz was able to ship full truckloads of goods to their retail stores.

Mazzoni’s efforts, however, were too little and too late. In 1997, the Boca Raton, Fla.-based furniture giant declared bankruptcy. The ERP project was killed in 1999, even though it was 70 percent complete. And Mazzoni himself left the company in June 2001 after it was sold to the Levitz Home Furnishing Holding Corp.

But without his seniority and experience in other parts of the business, he says, he wouldn’t have had the credibility necessary to even attempt the job. “Taking over logistics was a natural step,” says Mazzoni, “but it wouldn’t have been natural without me.”

Wilsons’ Orton, who has a strictly IT background, is uncomfortable with the notion that giving the CIO command of the supply chain should come down to the strengths of any one individual. “The deal is that [the company] recognized the business issues,” he says. “It is very much a collective effort.”

In fact, Earl says company executives often use the dual role to promote the CIO into a greater leadership role in their company. As IT and business processes become more and more interwoven, he says, top executives recognize that the CIO should be contributing more to business strategy.

The bottom line? Combining the two positions is unorthodox and risky, but companies that have taken that step consider it a risk worth taking.

“Our job, to be successful, requires us to look across and at the bigger scope,” says Orton. “I think there are certain departments?logistics and systems being one of them?where you actually get a better result if you can see across them.”