SPECIAL REPORT: Eaton leverages lead logistics providers across business units

Fluid power, electrical, truck and automotive logistics get a central organization.

By Dave Hannon -- Purchasing, 9/10/2007 9:24:00 AM

When Eaton CEO Sandy Cutler made the decision three years ago that the company would move from a holding company to an integrated organization, Mario Hegewald knew he had some work ahead of him. As director of global logistics at Eaton Corp., Hegewald would be the point man on the effort to centralize the company’s logistics processes where it made sense, while meeting all of the diverse logistics needs of its individual (and global) business units: Fluid Power, Electrical, Truck and Automotive. Eaton makes, sells and ships everything from circuit breakers to golf club grips.

“The logistics needs and supply chain models of those four businesses are unique,” Hegewald says. “But we felt it was important to develop a logistics strategy that could be embraced by all of the businesses but would address their individual supply chain model.”

Hegewald’s first move was the convene Eaton’s Logistics Leadership Team, which includes representatives from each of Eaton’s businesses. Together, they voiced logistics priorities for their business units and matched them to the company’s overall logistics and supply chain goals and capabilities. The overall logistics strategy that came out of that meeting is centered around three main goals across the business units: 

• Leveraging activities or relationships across business units for cost savings or performance improvements
• Develop consistent logistics processes across the business units
• Emphasize trade compliance for all of the company’s logistics operations

One of the issues that became clear in reviewing the logistics operations of the individual businesses was there were many logistics providers being used—more than Eaton could manage effectively from a centralized organization. The Logistics Leadership Team decided that Eaton would implement a Lead Logistics Provider model and outsource high-level responsibility to fewer, but larger logistics providers. But selecting which providers to work with and how to divide up the responsibilities was something of a quandary. It could be done by geography or mode, or some mix of both.

Hegewald eventually decided to put out RFQs for LLPs covering three main areas:

• Intercontinental shipments (those that cross from one continent to another regardless of mode). This contract was split between Expeditors International and UPS.
• Intracontinental shipments (those that remain within one continent regardless of mode). This contract was split between Penske in the U.S. and Europe and CEVA Logistics for Asian shipments.
• Small parcel (regardless of geography). FedEx won this business worldwide.

“The key to this strategy was the robustness of the RFQ process,” says Hegewald. “We needed to make sure these providers could meet all the needs of the individual business units.” For example, the inbound logistics network for Eaton’s automotive business is very well established—carriers know what they will pick up and when. Conversely, on the outbound logistics network for many of Eaton’s products, there is a more consumer oriented distribution model, which requires much more flexibility from carriers.

The LLP model is currently in place in North America and close to complete in Europe, Hegewald says. Asia and South America are in the early stages of migrating to the LLP model. Getting business-level logistics users to migrate to the core LLPs is a challenge, however, that requires internal education.

“Logistics users at the business units] have a legitimate interest in controlling their own fates with their previously trusted carriers,” Hegewald says. But the early results from the education process are encouraging. For example, the North American business units have more than 90% compliance to the small parcel contract so far. “And we continue to see more opportunities for synergy between business units and supply chains,” he says.

The move to LLPs has given Eaton’s internal logistics organization more time to focus on other key strategies, notably trade compliance. As Eaton’s procurement organization sources more material from international markets, trade compliance issues are a higher priority for the logistics organization. “Through this LLP model we have been able to re-focus people in areas of trade compliance without adding headcount,” Hegewald points out.

Another area where the LLP model has helped produced synergy is in Eaton’s global vendor managed inventory (VMI) program. Like many global companies, Eaton was pursuing two goals that often contradict each other: increase sourcing from low-cost countries and reduce the cost of inventory. Typically, global sourcing means longer leadtimes and bigger safety stocks at local plants. But through a very advanced VMI program introduced by LLP UPS, Eaton is now practicing VMI with suppliers in India and China.

UPS set up a system including very high-end software that tracks current inventory, reorder points, and even inventory that is on ships and sends signals automatically to suppliers in India and China alerting them when they need to put more product on the water. UPS even sent staff to train suppliers’ personnel in India and China on the VMI system.

“Ocean transit from India or China is 30 days and the product is in our warehouses for another 60 days,” says Hegewald. “Now all of that is on our suppliers’ dime.”

In the move to an LLP model, Eaton had to change the metrics it used to track its logistics providers. Tracking performance of a regional niche trucking firm is certainly different than tracking the performance of a major multi-national LLP. With that in mind, Hegewald says there are four main metrics LLPs are measured on—two are quantitative and two qualitative:

• Productivity (quantitative)
• Innovation (qualitative)
• Service level (quantitative)
• Program management (qualitative)

Hegewald points out that adding qualitative metrics to the scorecard truly changes the dynamics of a relationship. For qualitative or subjective metrics, the corporate function and each business unit has a single vote that will contribute toward the final score.

“Most logistics providers are comfortable with quantitative metrics, but when you give them a grade for their ideas, they suddenly take notice. So we’ve seen a significant improvement in their ideas as we started measuring this.”

For more information:

Click here to review a PowerPoint presentation on Eaton Corp.’s logistics supplier scorecard strategy, including examples of the company’s logistics supplier scorecards.