Driven by thinning margins and dramatically shorter order lead-times for its high-end data storage systems and servers , Hitachi Data Systems (HDS) decided to abandon its bi-coastal warehouse strategy in favor of a move to the heartland. From its new 450,000-square-foot distribution center on the outskirts of Indianapolis, the company is able to provide faster customer service at a lower cost.

Speed is crucial because HDS puts serious money behind its product guarantees. Its storage systems and servers come with a 100 percent availability guarantee, backed by a $1m penalty. The company, owned by Hitachi Ltd. of Japan, also markets its new systems by promising shipment within five days of order entry. Together, these market postures place enormous pressure on the logistics end of the business.

For more than 20 years the global logistics operations based in the U.S. largely were handled through a two-warehouse arrangement: a primary distribution center in San Jose, Calif., and a smaller facility in the Maryland-Virginia area, most recently in Laurel, Md. These facilities were responsible for assembling and shipping new equipment to customers in the Americas, Australia, New Zealand and parts of Asia; replenishing a global network of parts supply depots; receiving returned merchandise from customer locations; and performing a pick-and-pack shipping operation for less critical orders. The company maintains a distribution center in Waardenburg, Holland, about 60 miles south of Amsterdam, to service customers in Europe, Africa and the Middle East. Markets in Japan are serviced by the parent company, while Korea, the Philippines, Malaysia and Indonesia come under HDS's purview.

"We are a global company, which is a little unique within the world of Hitachi," explains Dave Roberson, chief operating officer for HDS. "Most of their other subsidiaries are regional, product-line based, where we are a global distribution and sales arm." HDS does not manufacture products; the company buys essentially finished goods, does some final assembly, packages the equipment and delivers it to the customer. Most of the inbound products and components come from Japan, while some parts and components are manufactured at a Hitachi facility in Norman, Okla.

The two-warehouse set-up in the U.S. at times generated a bit of quiet grumbling but never really received much scrutiny, says Roberson. "Even though the question was asked many times why we needed two warehouses, the answer was always 'because.' That may sound peculiar, but it was more an emotional reason than anything else, and we could never get the folks that were involved in running those operations to step back and see what really made sense here."

But changes under way in the marketplace and within HDS itself forced the issue. About two years ago, the company named Frans van Rijn as vice president of global logistics. "That was the first time we had someone focused exclusively on that set of activities, and after raising the issue, Frans agreed to investigate and see what really made sense for the company," says Roberson.

"This project started with the recognition that the marketplace we are in is changing very rapidly in two ways," explains van Rijn. "First, the margins are coming down, particularly compared to 20 years ago, so the amount of money we can afford to spend on logistics and the supply chain continues to go down. And second, companies used to plan data center moves and data center upgrades six and seven weeks ahead of time, so from a logistics point of view, you had a lot of time to plan deliveries.

"But nowadays, in this internet environment, customers cannot predict workload any more and have to react very quickly. Sometimes it comes down to a matter of days, and that means that in order to react in a timely manner, you either have to be pretty close to your customer base or else spend money to compensate for the distance." When van Rijn and his associates recognized these changing conditions, they seriously began looking at what they could do to improve service levels and reduce costs.

Roberson says no consultants were involved. "We did it ourselves," acknowledged van Rijn. "We are supposed to be logistics experts, so if we can't do it ourselves, why did they hire us?" HDS did work with various vendors, including North American Van Lines, Federal Express, BAX Global and Sonic Air, to tap their expertise. It didn't take long to figure out that being in two places was not the best solution, and that a single location in the Midwest would be closer to the customer base and much less expensive than the two-DC arrangement.

Having decided to change DC strategies, HDS used CB Richard Ellis to help identify about 10 sites for consideration, says Ron Parham, director of global transportation for HDS. After reviewing the collected data, examining the various infrastructures and interviewing the principals at each prospective site, the decision narrowed to Memphis and Indianapolis. A detailed analysis of these two sites as well as the company locations in Norman and San Jose followed.

"Transportation routing was probably the deciding factor," says Parham. "Memphis is really kind of off the beaten path when it comes to trucking infrastructure, so the trucks would have to be re-routed from most of the consolidation points in the U.S. to get to Memphis to pick up our equipment. Our transportation costs would have been higher and our efficiency would not have been so good.

"But here in Indianapolis, we really are at the crossroads of America. Most major trucking lines have consolidation centers within a couple of hours of Indianapolis, and interstate highways crisscross right through the city here. FedEx has a national hub here, and Chicago gives us a major gateway for international air freight only a couple of hours away." Having some air lift capability with connections to Europe was an advantage, although the HDS team really focused on how it could improve service levels mainly within the domestic U.S. market, because it is the single biggest market it serves. And with BAX Global having a hub in Toledo and UPS located in Louisville, the domestic airfreight and small package services were attractive.

"From a trucking standpoint it was an ideal location," says John Peterson, director of U.S. logistics for HDS. "We also found that we could deliver to 75 percent of our customers within 24 hours from this facility, and no other city could give us that."

Six months after van Rijn launched his evaluation effort, the HDS executive committee agreed to close the existing facilities and relocate all the activities to Indianapolis, says Roberson. "When that decision was made, the site we selected was a vacant lot," he adds. "Ten months later, on April 1, we opened Indianapolis as an operating distribution center."

Part of the move to Indianapolis depended on a substantial intensification of HDS's relationship with North American Van Lines, Peterson says. "We have been using NAVL as our domestic trucking partner for 15 years, first together with Allied Van Lines, then migrating exclusively to NAVL in 1993. Our relationship was been very strong on the transport side, and since they also have a logistics division, we began talking with them as well as other 3PLs when we started this project."

Essentially HDS agreed to outsource its logistics activities to NAVL's North American Logistics unit, he says. "They actually are the lessee of the building, not us, and most of the employees here are their employees." HDS maintains leadership positions at the facility and provides the technically skilled people needed in the DC.

HDS planned for the new facility to be available April 1. It closed the Laurel facility on March 31, and NAVL spent two weeks hauling all equipment and inventory to Indianapolis. Starting in late March, HDS had been receiving equipment shipments at Indianapolis from the factories in Norman and Japan. During this part of the move, it served customers exclusively through the San Jose facility. Production began from Indianapolis on the third Monday in April, at which time NAVL began moving all the material and equipment from the San Jose facility to the new DC.

"More than 100 truckloads of equipment came in here over a very short period of time, so the third week in April was a little rough," recalls Peterson. "We had a lot of new people and were still putting material away."

Complicating matters, albeit in a good way, HDS experienced a big pop in sales at the same time as the move. The HDS data-storage hardware "has always been the best," says van Rijn, "but the software functionality in some areas was lagging behind. When we added some key functionality to our software, our product instantly became more competitive in the open systems world and allowed us to better compete with EMC."

The HDS customer base includes more than 2,000 companies around the world - mostly larger companies that tend to have substantial data processing requirements, such as telecom giants AT&T, MCI Worldcom, Sprint and Deutsche Telecom DT. "These companies have large databases and do large transaction volumes on those databases, and that's where our equipment is particularly effective," says Roberson.

Also feeding the surging demand are new customers - many of them internet-based companies that didn't exist three years ago, such as internet infrastructure company StorageWay.

Fast Turns
HDS advertises a maximum five-day turn from receipt of orders at the DC to shipment and routinely had been turning orders in two days prior to the move. That turn time ballooned to four or five days during the changeover, but dropped back down to two to three days in June and July.

HDS uses approximately 350,000 square feet of the existing space in the new facility. That includes 10,000 square feet for administrative offices for HDS and the NAVL operation. Five acres on the lot can provide an additional 160,000 square feet.

There are two primary concerns in the DC: the new products business, and the spare parts business. With new products, various types of equipment come into the DC by their respective channels. Servers are manufactured at a factory in the Tokyo suburb of Kanagawa. The main plant for storage products is in Odawara, Japan, 10 minutes from the server factory. A sister company, Hitachi Transport Systems, manages inbound delivery from the factories in Japan to Indianapolis, with products moving by ocean and airfreight. Due to supply and demand issues, 80 percent to 90 percent of equipment inbound to Indianapolis currently moves by air. Additional components for the storage devices are built in Norman.

HDS relies on its Oracle system to manage the flow of supply-chain information. The software is based in Sacramento.

Indianapolis receives advance notification of inbound truck shipments, which arrive at the DC after being pre-assigned to dock locations. Airfreight arrives at O'Hare International Airport, and the pallets are trucked to Indianapolis. Incoming equipment is unloaded and positioned in a staging area. Workers scan the items with Intermec scanners and affix any necessary barcodes. The DC's RF system feeds the data into the Oracle system, matching inbound shipments with purchase orders and updating inventory records. Some equipment is put away in storage locations, while other units are staged near the receiving area for assembly.

Orders from customers, OEMs and the HDS sales force arrive electronically via the company's extranet or through the HDS call center in San Diego. The center uses Clarify software, which communicates with the Oracle system in Sacramento. As Oracle receives orders, it examines available inventory at the DC and downloads only those orders that can be filled by existing inventory; no partial fills are allowed.

The downloaded orders arrive in real time at the DC, and the Oracle system generates a pick list with the order, order number, and the specific components required to assemble the finished piece. Each order goes into a blue folder, and supervisors distribute the folders to employees. The folder follows the order through the warehouse, as materials are picked and delivered to a configuration lab. There, the material again is scanned to track its location in the DC. Assemblers take the materials into the lab, where teams consisting of two assemblers and one technician put the respective systems together in accordance with customer specifications.

Teams work on several orders simultaneously, assemblers and technician moving between the individual systems as duty calls. As assemblers load disk drives and other components onto a system, the technician moves between machines, formatting the disk drives and loading the systems with HDS's Micro- Code operating system, memory cards, software and other features specified by the customer. Once completed, the machine is powered up, examined and tested, and then moved to a final checkpoint and scanned again to update the material movement. Outbound equipment is palletized, sealed in an airtight plastic bag, and protected by corner pads and a heavy, reusable cardboard wrapping. The NAL team housed in the building arranges the outbound movement with the dedicated NAVL fleet.

Hitachi service technicians perform the installations and de-installations at the customer location. If the purchase order was part of an upgrade, the older equipment is returned to Indianapolis. There, technicians renovate the units with new fans, filters, updated memory cards and the latest version of MicroCode and return them to inventory, where they will be used again.

The DC manages approximately 1,500 SKUs for new products and nearly 12,000 for the spare parts operation. Inventory cycle counts occur daily and run through the entire warehouse every 13 weeks. The company tracks items by serial number, and inventory counts consistently meet the target accuracy of 99.75 percent. Cycle counters scan the assigned bin, then the barcodes on the individual items. "We then run the reports and look at the book count compared to the physical count," says Peterson. Any discrepancies are hunted down for two reasons: The company needs to know if in fact there is a discrepancy or an error in procedure or if certain barcodes are not scanning; and it needs to determine whether preventative action is needed.

According to Peterson, HDS will measure the success of its DC venture by whether it realizes projected cost savings and improves the service level to customers. "So far, so good," he reports. "The interesting thing is that our business has accelerated very rapidly in the past three months, which has taxed the distribution capabilities sooner than we had expected. We did a lot of things at once to reorganize the company, and the success started a little faster perhaps than we might have expected, but happily so."

Outbound volumes have nearly tripled since the rise in sales began early in April, he adds. The DC added a second shift early in August, and now operates from 7 a.m. to 11:30 p.m., with assemblers, technicians and logistics workers arriving at staggered times.

In the near future, HDS intends to bring its IT partner in-house. "We need our IT people here working closely with the people on the floor so that they understand what really is involved in running a distribution center with interactive online real-time systems," says van Rijn. He explains that HDS needs a tighter IT focus than it gets from the remote operation run in Sacramento. "People tend to think you can solve problems in a meeting room, but in logistics, there are very few problems you can solve in a meeting room - you have to be on the floor to make it happen."

It's hard to accurately explain the situation that is created when a truck driver is kept waiting for two hours because the system is too slow, particularly if that driver happens to be moody and grumpy and big, says van Rijn. "We need to be able to resolve the problem a little bit faster than we can from a remote location. Calling a meeting for the next day is not really doing the trick."

People who are used to being in an office environment don't always understand, he adds. "The sense of urgency just isn't there when you are working from a remote location. Here in the distribution center, minutes count. If you have an air freight delivery and you want to use Federal Express, they have cut-off times and they are not going to hold the plane for you."

Added Revenue
HDS also plans to leverage the capabilities of its new DC and create additional revenue streams. The company's business development unit, working with Peterson and van Rijn and others, is talking with a number of companies that see value in collaborating with HDS and using its facility and logistics capabilities.

"We've only been open for a very short time, but already some folks have come to us and said we would like to leverage your capabilities," says Peterson. "One of the reasons we have a larger building than we needed was to be able to partner and engage with other companies to do more than just support our own product lines. We actually want to create value and revenue streams selling the capabilities this building creates for us. We have a global distribution and support capability, and it would cost other companies a lot of money to establish that."

The company reorganized into business units earlier this year and now is better positioned to leverage its logistics strengths, he adds. "We have this tremendous capability for logistics and support of our customers, but it is a value we are not fully realizing as a company because we have limited those services to our end-user customers. We have this excess space, and we are actively looking for some light assembly work and some logistics work for other companies where they can bring in their product and we can do some light configuration, packaging and shipping for them."

The genesis of the reorganization dates back to van Rijn's initial investigation of options. "We considered outsourcing everything we do here, including the technical work, and we looked at many companies that provide that service," he says. "We couldn't find any - not even the ones with great reputations - that could meet all of our standards. At that point it dawned on us that we were providing a service to our company that was pretty unique, as we do logistics work at a manufacturing quality level. So we think we have something we could sell to others who need the same quality level."

He also sees opportunity as a third-party provider of data storage, particularly among dotcom companies. "What you find in the IT industry right now is that all these internet-based companies can't predict the volume of storage that they need. If they come up with a successful application or service or web site, then suddenly they go from no business at all to having a 100,000 hits a day on their site."

Consequently, a new market niche is developing where storage providers essentially build a bank of storage and make it available to these emerging companies as well as to anyone who needs it. "If you are running one of the start-ups and find success, overnight you can shift from having one terabyte of storage to 50 terabytes without making an investment; you pay as you use." It's a service that would be attractive to big customers that want to use the storage for excess capacity as well as incidental customers that find themselves with a problem and need something overnight.