Among off-road motorcycle racers, the name KTM is synonymous with high-end dirt bikes that consistently finish at the top of some of the world's toughest races. The company is also known for the tiny motorcycles that engage even young children in racing. Though the Austrian company has a small presence in the United States compared to the overall motorcycle market—less than 2 percent of the market for its 2002-2003 fiscal year—sales of its products, which range from minicycles to off-road bikes to its relatively new on-road motorcycles, have shot up during the last several years. Unit sales this year should exceed 20,000, compared to 13,744 for the 2000-2001 fiscal year, and around 1,600 at the time of a company restructuring in 1992.
Moving those 20,000 bikes out to 400-plus U.S. dealers is the responsibility of the company's U.S. division, KTM North America. And for KTM executives John Zolikoff, who is the division's director of new business development, and Lee Hammond, the division's logistics manager, the challenge is getting all of those highly specialized bikes to the right place. KTM's core products are the lightweight racing and off-road bikes, bracketed by the 50cc minibikes and the large 950cc Adventure. But its four classes of motorcycles include 30 different models designed for different terrains. "For the woods and rocky terrain of the East and for the sand in the South or the desert out West, we tend to be [highly] specialized in our product offering. That's been the secret to our success," Zolikoff says. "Distribution must be fine-tuned around getting the right bikes to the right markets when people are ready to buy." And because the company markets its bikes as "race ready," the bikes must be ready to go straight from the crate to the starting line.
For years, the division operated its own distribution centers, one in Amherst, Ohio—where its U.S. headquarters are located—and a second in El Cajon, Calif. "We owned the warehouse in Amherst and we leased warehouse and office space in California," Zolikoff says. Products were allocated to the two locations based on annual sales projections. The manufacturing plant back in Austria shipped the products through the Port of Long Beach for distribution in the West and through Montreal for the 65 percent of products bound for markets in the East. The company used (and continues to use) Kuehne + Nagel to manage import and customs activities, and it hired several truckers out of each DC location for final deliveries.
Growing pains
But growth creates its challenges, particularly for a supply chain that extends 6,000 miles from the KTM Sportmotorcycle AG factory in Mattighofen, Austria, to the desert, mountain, and forest racetracks (to say nothing of the highways) of North America. Two years ago, KTM North America decided to look into outsourcing its logistics operations. "A big part of the decision to outsource was that we got to the point where we had two warehouse facilities and with our growth, we were at the limit of what we could handle without additional offsite storage or capital investment," says Zolikoff.
That decision also made sense given the company's increasing emphasis on selling "street bikes," or motorcycles designed for the road. KTM plans to add to the number of street bikes it sells over the next two years, which means it will be using a separate dealer network and accommodating a different demand pattern, Zolikoff says. "Given that we'll be facing seasonal demand," he adds, "there was a competitive opportunity in being flexible and able to react.What it really boiled down to is that we needed space, and the solution focused on our corporate philosophy to stay as flexible as possible."
Zolikoff and KTM considered four different candidates during their search for a third-party logistics (3PL) provider. (Hammond had not yet joined the company.) "The key criteria had to do with breadth of service," Zolikoff notes, but that breadth of service couldn't come at the expense of central control. "We came across some candidates that had multiple locations," he recalls, "but [we had to reject them because they] didn't have a common system."
He also came across one candidate capable of managing a five or six-warehouse distribution network using a single computer system. And in the end, that candidate, Con-Way Logistics, got the nod. Zolikoff says he hasn't looked back. "Two or three times now, we've made major inventory shifts and there have been no systemic issues. That was a huge consideration. We were able to realize cost savings, and it allowed us to focus on our core competencies by finding experts whose whole business is moving products and information."
Hammond adds that he's particularly impressed with the detailed reporting that Con-Way provides, a task that would otherwise require him to hire a full time person. "I get a consolidated report every 30 days," he says. "I'm able to monitor costs as we go along."
Model solution
Con-Way has done more than help KTM monitor costs, however. It's also helped cut them. From the outset, Con-Way saw a way to save money, says Michael Bare, vice president and general manager of Con-Way Logistics."Based on the early results, we saw we had an opportunity, depending on volume, to take out 24 percent of the transportation cost without doing it on the backs of the carriers," he recalls. The key would be moving out of the two existing DCs and into a single facility run by Con-Way in the Dallas area.
It took a little convincing to get KTM to sign on. "Their gut feeling was [that it would be best] to have the units shipped from California and Ohio, and that's where we started," says Bare. But as KTM gained confidence in Con-Way's abilities, it agreed to consider other possibilities. Con-Way immediately put its network modeling expertise to work. "We looked at a variety of solutions," recalls Randy Mutschler, Con-Way's director of customer solutions, "everything from using five facilities to using one."
From there, events unfolded rapidly. "Because the shipping history was already contained in Con-Way's database, we were able to do the analysis in a matter of weeks rather than the months it would take to commission an independent study,"Zolikoff reports. Once the analysis was complete, KTM and Con-Way decided that it made sense to move to a single facility. Again, they didn't dawdle. Within a few months, KTM had made the switch, just in time for the start of the new model year.
The motorcycle maker immediately began to see results. Shipping all bikes to a single location in Dallas via the Port of Houston made container loading easier and quicker for the manufacturing plant back in Austria. The company was also able to cut inbound costs by negotiating sea freight rates based on 100 percent of the U.S. volume through a single port.
Revving up for racing season
Under the new arrangement, KTM sends Con-Way orders in batches and gives the third party five days to plan and optimize shipments. That allows Con-Way to seek ways to consolidate orders into multi-stop truckload shipments.
That's possible partly because under the KTM business model, 80 percent of its orders are advance orders. "Those orders flow through a standard batch process," Zolikoff says. "We're realizing significant savings in freight costs, which allows us to maintain competitive dealer pricing at a time of rising fuel costs and surcharges."
KTM shares that information with its third party. "They actually give us advance visibility of their orders,"Mutschler reports. "They also provide us with a delivery date for those orders. Based on that, we can optimize and build pool distribution loads and assure that they arrive on or prior to the delivery date."
Con-Way Logistics uses a variety of carriers, including its own sister trucking companies, the regional LTL carriers operated by Con-Way Transportation. Bare says some orders are shipped via multi-stop truckload; others move via pool distribution for the line haul with final delivery by an LTL carrier. Still others are shipped direct to the customer.
But whichever the case, little time is wasted. Zolikoff and Hammond report that the company was able to move thousands of 2005 models through the system in just a few weeks this summer (KTM's peak shipping period comes in late summer). "There were many cases where the inbound container hit the door in Dallas in the morning, and that afternoon the bikes were on the way to the dealers. The flow-through was really tremendous," Hammond says.
Later in the winter, he says, bikes will sit in the warehouse for longer periods. But he notes that because production is largely based on advance orders, the company holds only minimal levels of inventory—"just enough to meet unanticipated demand." Zolikoff says that historically, KTM's U.S. division has expected to do about four inventory turns each year. "With the new system in place, we will certainly do better than that," he says. "Though it's too early to say exactly how much, we hope to get six or so."
Shared rewards
For a company like KTM whose business is highly seasonal, using a third party's DC facility eliminates the need to maintain warehouse space that remains underutilized for much of the year. Con-Way's centers all house goods for multiple clients. "That represents a huge benefit to customers versus owning their own facility and bearing all the cost," Bare asserts.
A challenge for companies like Con-Way is to make the most of its own assets while meeting customer needs. "We do what we can to help drive inventory down and improve throughput," Bare says. "That may seem like we're cutting our own throat, but in this business, we cannot be selfish: We have to help the customers. Our clients are getting more sophisticated every year. They'll figure out quickly if you're not doing for them what you could."
In fact, the contract signed by KTM and Con-Way rewards Con-Way if it is able to improve efficiency. The pricing for the Con-Way services includes not only traditional storage charges, but incentives based on inventory turns and savings realized by optimizing outbound freight.
The reporting provided by Con-Way enables KTM managers to monitor its performance too. "The bottom line is motorcycles arriving on the dealers' floors," Hammond says. He notes that Con-Way rarely misses delivery times or orders. "We shipped 3,000 motorcycles in August, and we had fewer problems than you can count on one hand," he says.
The arrangement continues to evolve. "This is developing into a true partnership," Hammond says. "They are feeding us advice on a daily basis.We went from a case where a shipping manager might have had several balls in the air and was forced to decide which needed attention most urgently.Now Con-Way is doing that. That allows us to concentrate on other things, such as parts shipping."
That's a good thing, Zolikoff adds, because new challenges seem to materialize all the time. "The U.S. dollar's slide against the euro has been a challenge, but it's also been an opportunity. It's not easy becoming 25 percent more efficient while growing the business and holding dealer pricing in a competitive market." For KTM, he adds, business is a big race. "You have to be creative and agile, but it makes the race that much more exciting."
