20. Interview with Mr. Brent Beabout of Office Depot
Introduction
This chapter consists of a series of questions and answers from an interview with a leading supply chain executive. The objective of this chapter is to provide a practitioner’s perspective on the subject of life cycle issues in supply chain management. Other related subjects are also discussed in the interview.
About the Interviewee
Mr. Brent Beabout is currently serving as the Senior Vice President, Supply Chain at Office Depot, leading all facets of the supply chain for the $11.5 billion, multichannel global retailer. Prior to joining Office Depot, he served as Vice President of Engineering at DHL Express and Director, Operations Engineering at Amazon.com. He holds degrees from the Pennsylvania State University and MIT, including an MBA from the Sloan School of Management. He is a member of IIE, INFORMS, and CSCMP, and has been a frequent lecturer and collaborator at numerous academic forums on the intersection of supply chain and technology in today’s globalized economy. He began his professional career as a naval officer while serving over a decade on nuclear-powered submarines.
“Nature favors the nimble. Get excited by change... it’s coming one way or another.”
—Brent Beabout, 2012
About Office Depot
Office Depot was founded in 1986 with its first store in Fort Lauderdale, Florida. Today, Office Depot provides office supplies and services through 1,677 worldwide retail stores, e-commerce sites, and a dedicated sales force. Office Depot has annual sales of approximately $11.5 billion, and employs about 39,000 associates in 60 countries around the world.
Interview Questions and Answers
How would you characterize your organization’s supply chain?
Our supply chain is rapidly evolving. During our short history, we’ve evolved from a wholesale-type of operation where we placed product on pallets and watched it fly out the door to a more specialized retail operation. We’re also continuing to evolve from the traditional retail model to that of a more consumer-driven, customized operation... more like an e-commerce type of supply chain. So what you’re seeing is a much different type of supply chain than what we were even a few years ago.
How would you characterize you role in your supply chain?
I am currently responsible for all aspects of the supply chain at the enterprise level. In my previous role at Office Depot, I had three main areas of responsibility: global transportation, global network design strategies (building locations, sizes, and so on), and engineering (inside building design).
How do you manage your supply chain for products that are in the Introduction Stage of their product life cycle?
Any new product in our assortment is assumed to have an inaccurate demand forecast until a sales “run rate” can be firmly established. We try our best to forecast with similar existing SKUs, but those tend to be hit or miss at best. So, we like to do a couple of things with new products. We tend to source them domestically rather than from overseas. There are usually some cost disadvantages to this approach (that is, given cheaper labor overseas), but it minimizes the amount of working capital investment in these new products that might not take off with the customers and that might therefore become quickly obsolete. Additionally, domestically supplied products have a much shorter lead time and can be quickly switched off in the case of an inaccurate demand forecast.
A second thing we often do with Introductory Stage products is to move them to an “eaches pick” type of fulfillment strategy (that is, a selective distribution) instead of immediately dispersing them to over 1,100 retail stores. That being said, we make exceptions for the few “blockbuster” SKUs that we know will be big sellers, and we immediately ship these products to our retail stores. We also store the majority of stock in our distribution centers (DCs) and employ a “pull” strategy for supplying demand to the retail stores in a just-in-time (JIT) fashion. This strategy minimizes the inventory carried in the retail stores and places the remaining inventory where it’s needed. So if a store in Texas can’t sell the new product but a store in Florida can, we can quickly divert the product to serve the customer demand in Florida.
We can also regularly reevaluate the SKU based on sales velocity. We then convert that SKU into a flow product (based on a real-time store allocation model) where we will send it directly to the retail stores; otherwise, we store it at the DC level and allocate as we need it later down the road.
Do you ship directly from the manufacturer to your retail stores, bypassing the DCs?
We are no longer a pallet type of operation where we just drop off a large amount of inventory at one time. Instead, we use an intelligent “cross-dock” approach at our supply chain facilities. For items that are designated as “flow,” we receive them from the manufacturer and allocate them to each retail store according to a JIT allocation model based on near-term customer demand and forecasts. These products flow out the same day they are received so that they can be delivered to the retail stores the next day. For slow-moving (low-velocity) products or new SKUs, we retain those units in the DC section of the buildings, as I mentioned earlier. These items get picked in a normal warehousing setting and are eventually merged with the flow type of traffic outbound. We review inventory frequently and SKUs regularly get reclassified as flow or pull depending on their current attributes and forecast accuracy.
How do you manage your supply chain for products that are in the Growth Stage of their product life cycle?
We have a number of explosive growth SKUs, and in those cases sourcing becomes the major focus. There are two parts to this strategy depending on the manufacturer. First we want to get a volume-based price break to increase the gross margin because we’re selling a significant amount of the item. More important, we want to confirm that we can continue to receive the fast-moving product in a timely fashion. We measure the timeliness and accuracy of the vendor inbound deliveries using specific metrics, and we watch it very closely so that we don’t stock out of fast-moving items. Additionally, we’re now moving toward a much tighter vendor collaboration model with our manufacturers using cloud-based tools to ensure they have the visibility and capabilities to satisfy our future customer demand. Finally, since we’re talking about fast-moving SKUs, we expect to use our cross-dock flow approach to move them quickly along in our supply chain and out to the retail stores as rapidly as possible.
How do you manage your supply chain for products that are in the Maturity Stage of their product life cycle?
For this subset of items, these items are typically steady sellers but not rapidly growing. This dynamic moves the sourcing discussion further upstream, most likely overseas to be manufactured under our own brands. SKUs in this category generally become a gross margin play, and since we have good forecasting data, we feel comfortable sitting on the extra lead time coming across the ocean and making the additional investment in inventory (that is, longer lead time requires a larger inventory purchase), knowing we will be able to sell it.
What about SKUs that require you to use their brand name products rather than produce under your brand names?
For nationally branded name products that our customers expect us to carry, we purchase them from domestic sources, but there are also many SKUs where you try to source overseas. We also try to grow our own brand portfolio to offer products that our customers want and expect. While some of these products are not the Office Depot brand name, they provide our customers with a choice and attractive price points. Some of these provide us with the opportunity to utilize our overseas margin enhancing strategy, while still carrying other domestically manufactured products for our customers.
How do you manage your supply chain for products that are in the Decline Stage of their product life cycle?
Dealing with end-of-life products which will eventually become discontinued is always a constant struggle since these could end up as an unwanted write-off if not properly managed. To manage these properly, we try to gracefully remove the remaining inventory in our system by either moving the remaining inventory upstream to the pull DC environment or use store-to-store transfers to put these older SKUs in high-traffic stores. If well executed, we will sell the remaining inventory before customer demand drops to zero.
How do you deal with a product that is a part of a plan-a-gram (that is, a display of multiple products, usually from a single manufacturer and often offered as a full line of products)?
Almost everything we sell in the retail channel is part of a larger plan-a-gram. Some of these displays are made up of SKUs from a single manufacturer, whereas others are based on SKU type or classification. There is a carefully choreographed plan to constantly replace old or slower selling SKUs in each plan-a-gram with newer ones to ensure the best customer presentation and sales rates.
Do you use sales per square foot as criteria for measuring sales performance of products?
Yes, sales per square foot is one of the many criteria we use to evaluate product sales.
How does this type of measurement impact core suppliers and their plan-a-grams? Is there a threshold on this metric that might be used to determine which manufacturers you continue to allow display space in your stores?
Yes, there are sales expectations for our suppliers that must be met or they risk our stores offering their competitors’ products.
When a product is in decline, do you have any difficulties in bringing a product to an end with your suppliers when you decide to discontinue a product?
In any merchandising environment, you want to work with your vendors to be able to make the right decision regarding when and how to discontinue a product or a particular SKU. Sometimes it’s hard for both parties to discontinue a product that used to be a hot seller but no longer is. Part of the issue is finding a replacement SKU, and sometimes it is hard to find a good replacement. Also, if you still have a lot of inventory in that particular SKU, you have to be aware of the possibility of writing off a lot of the inventory (liquidation) for a discontinued product.
Are there any additional points you might like to add about supply chain management?
One key point concerns the future, and I mentioned the desire to increase the gross margins on our products. I believe that fuel costs are going to continue to increase in the long term, and this may change the current vendor dynamic with Asia-based suppliers, particularly China. As Chinese labor and fuel costs continue to climb, this will likely change the cost/benefit advantage China currently enjoys and increasingly will place greater pressure on retailers to nearshore. Consequently, sourcing will become even more global, and continents such as Africa and South America are likely to see an uptick in sourcing into the United States. Additionally, as countries like China become more affluent, there will be a greater need to export goods into China to meet their domestic demands, so their production efforts will be diverted over time from export-focused to domestic consumption.
How does your firm deal with reverse logistics (that is, reversing the flow from the consumer back to the manufacturer) in any phase of their product life cycle?
We have a complete reverse logistics network using facilities in the United States that are designed to handle reverse logistics from all of our retail stores. Some of our products are recycled, some are sold for liquidation, and some items get returned back to our shelves for resale.
Do you use a “milk run” between the stores to pick up the items for reverse logistics or how do you handle this part of your supply chain activities?
No, we use a different approach. For our retail operations, we service over 1,100 stores in the United States using a five-days-per-week delivery schedule. We do this to take full advantage of our DC’s eaches pick operations for the slow-moving SKUs, keeping store (SKU) outages and overall inventory levels to an absolute minimum. This delivery frequency allows us to conveniently backhaul the reverse logistics items (including recycling waste) to the cross-docks on a regular schedule, and eventually these items make their way to one of our three reverse logistics consolidation centers or recycling vendors (as appropriate).
Do you use your own trucks or common carriers for the logistics?
We are completely asset free from a transportation perspective. We have an extensive network of third-party carriers that provides the assets and drivers to deliver to over 1,100 retail stores daily and well over 1 million packages a week to our “last mile” customers. In many markets, the retail and direct delivery assets are dual-utilized each day to ensure maximum efficiency.
Do you run your containers through the flow centers?
We are currently in the middle of optimizing our global inbound operations. We utilize a number of inbound (container) deconsolidation centers in the United States operated by third-party providers (third-party logistics [3PLs]) to optimize transportation costs. Most of our large cube items (for example, furniture) run through these facilities, while the remainder typically gets shipped directly from overseas to one of our regional DCs. For containers that contain a heavy mix of product destined for many regions of the country, these containers get deconsolidated, and the import product is commingled with domestic shipments to give full truckload quantities to our destination DCs. To enable this process, we use sophisticated decision support tools to ensure lowest total landed cost.
You mentioned the reverse logistics program. Do you have a sustainable program that is related?
Yes, we have and continue to expand our sustainability programs. We currently recycle most waste streams from our retail stores using the same reverse logistics network I described earlier. Office Depot has been recently recognized as the “greenest” retailer in the United States in an annual assessment by Newsweek magazine.
Do you practice any lean principles in the supply chain?
Yes! We are in the beginning stages of a multiyear “lean journey” with a focus on elevating all of our operations to a world-class level. We’re currently building a team of experts both from the corporate level and in the field to ensure we shift our culture toward a lean way of thinking. I firmly believe lean is the path toward operational excellence in any endeavor.