C-commerce gets cruise line's supply chain in ship-shape

With a growing fleet and an expanding customer base, Royal Caribbean needed to overhaul its supply chain. The answer? A collaborative commerce effort that will cut inventory and save millions.

Five short years ago, Royal Caribbean Cruises Ltd. had five ships, and its smaller customer base allowed for inefficient processes, such as manually administered supply chains.

Today, however, with 22 ships and counting, the company has come to the harsh realization that its manual processes aren't working. The Miami-based company began seeking a more efficient and cost-effective approach to supply chain management (SCM), and so began its foray into collaborative commerce.

Complex supply chains, unique challenges
Royal Caribbean has two distinct supply chains, each managed by a Provision Master. The first supply chain encompasses all food, beverage, and lodging inventories.

When the list of materials needed for the next cruise (and sometimes for a few upcoming cruises) is finalized, it is transmitted to Royal Caribbean's procurement department, which then does an extract in the system and sends purchase requisitions to vendors via electronic data interchange (EDI), fax, or e-mail.

The second supply chain is managed by a separate Provision Master, who is responsible for procurement of "corporate spend" materials, such as office supplies, printed materials, printing services, computer supplies, hardware, and software; and marine consumables, such as spare parts, fuel, and lubricants--any and all services associated with ship maintenance.

Each vessel must receive all materials needed for a seven-day trip within an eight-hour window prior to departure.

When the company was smaller, with smaller ships and less diverse itineraries, it could manage supply chains on a much more manual basis. At that time, the company dealt with fewer vendors and suppliers, so managing those relationships was simpler. But as the number of vendors involved has increased, and as the cruise industry has become more competitive, efficient processes have become critical to the company's financial success.

According to Michael Allsup, Royal Caribbean's VP of supply chain management, the goal of the company's SCM efforts "was to be able to supply the ships, on time, with the right quality and quantity of materials, goods, and services to meet the demands of the cruise."

The big hurdle for Royal Caribbean was that its supply chains had holes--there were some purchasing activities that were undefined and unknown. Both chains needed to collaborate more closely with vendors in terms of demand signals and supply needs.

"We ended up doing things that were extraordinary to meet certain demands, where we were probably adding more cost not only to ourselves but to our vendors as well," explained Allsup. For example, Royal Caribbean got into the bad habit of airfreighting materials--such as chocolates--when an inventory was understocked or improperly planned. In this scenario, Royal Caribbean ended up paying more for the airfreight charges than it did for the materials themselves. This was also occurring with materials purchased via Royal Caribbean's other supply chain (office supplies and materials and marine consumables).

How c-commerce became the focus
To improve processes within its two supply chains, Royal Caribbean decided to institute a c-commerce approach.

"We want to work very closely with our suppliers so that we can effectively plan for the deliveries of truckload quantities of materials to key strategic locations. In this way, we can fulfill requirements to the fleet as needed," explained Allsup.

To do this, Royal Caribbean also needed to have a clear view of the ships' consumption patterns and to be able to share that information with vendors.

Royal Caribbean's vendors currently manage much of the uncertainty when it comes to the amount of supplies needed. "The closer we get to managing that and collaborating with them, the better we can do in terms of reducing our overall cost in the supply chain," said Allsup. "Additionally, we want to increase the velocity in which the supply chain can react, and simultaneously operate with lower inventories."

The company saw that it needed to provide much more guidance and much more timely information about inventory positions, itinerary changes, or even menu changes that could drive or change consumption patterns. Royal Caribbean then needed to translate the needs of these operations programs into purchasing and supply chain requirements. Royal Caribbean's procurement and logistics processes together spend in excess of $600 million of the company's $2.9 billion in total revenue.

"For this reason," said Allsup, "it was important for us to look at where and how we were spending that money." It became evident there were many opportunities for improvement in inventory management and procurement. For example, the company's warehouse applications were poorly integrated and the EDI infrastructure was insufficient for the company's needs, so concentrating on getting those two areas up to speed would mean cost savings for Royal Caribbean.

"Collaborative commerce was a natural move for us," said Allsup.

Before any enterprise considers a foray into collaborative commerce, it must evaluate the business approaches, business systems, and the supply chains used to procure products and services. It then needs to identify the key drivers within the supply chains, and target areas of improvement in efficiencies, effectiveness, and cost reductions.

At Royal Caribbean, this up-front work fell to Allsup. While it can be an exhaustive effort, as Allsup relates, the payoff can be huge: Royal Caribbean expects to cut inventory excess by half and save at least $5 million once its c-commerce effort is complete.

Allsup began by evaluating Royal Caribbean's procurement and logistics processes. Because these processes used a combination of homegrown software and package solutions, Allsup decided that a major overhaul was necessary. He also realized that a collaborative, Web-based supply chain management system could streamline the entire process.

"When we talk about supply chain management, it's really about using demand planning, collaborative commerce, and becoming more advanced in terms of the way you're managing every aspect of the business," says Allsup.

Since Royal Caribbean ship galleys produce such large quantities of food and beverages (approximately 10,000 meals per day, per ship), they are very similar to factories, but with a gourmet twist.

"You're making 50-gallon batches of soup, and this requires a lot of manufacturing-type activities," says Allsup.

For this reason, Royal Caribbean looked to implement supply chain management and shop-floor execution and control practices (such as production schedules and bills of material). But first it needed to adapt these practices to the cruise industry in a somewhat hybrid approach.

That's the primary reason Royal Caribbean stayed with its longtime ERP partner, J.D. Edwards, to facilitate the new approach. Royal Caribbean has used J.D. Edwards' WorldSoftware for nearly a decade for financial management, procurement, and some very limited inventory activities. In 2000, the company expanded to a full range of J.D. Edwards solutions, including advanced planning and collaborative commerce.

The first phase of the Web-based c-commerce effort, which Royal Caribbean hopes to complete by the third quarter of this year, began in 2001 when Royal Caribbean began using J.D. Edwards' OneWorld Xe ERP suite. The product's interoperability technology allowed Royal Caribbean's disparate technologies to work together.

"Before we could fully leverage J.D. Edwards, however, we had to do some things internally," Allsup explains. "We had to really establish new business processes associated with inventory management and demand planning. We had to integrate our disparate procurement systems and collapse them into a single, robust platform."

Allsup also had to implement a new warehouse management system to integrate the complex logistics environment managed on a daily basis. Royal Caribbean is using its DS I, a DC Link handheld product, for its warehouse management system and is excited about using the warehouse capabilities via OneWorld Xe in concert with that.

"As a critical prerequisite to supply chain improvements, we also had to concentrate heavily on data cleansing, warehousing, and intelligence," says Allsup. To facilitate this, Royal Caribbean partnered with SoftFace, a provider with expertise in data categorization.

As the final component to phase one, Royal Caribbean will use J.D. Edwards' solutions to ramp up its EDI architecture. The company currently uses Peregrine Systems for EDI and is considering the B2B component from Peregrine's Extricity. With the J.D. Edwards' solution in place, Royal Caribbean will be able to deliver more finely tuned planning mechanisms that can drive the collaborative process.

During the second phase, Royal Caribbean plans to integrate J.D. Edwards' solutions on its vessels with the phase one components used in land-based operations.

"Then, we want to expand the use of the manufacturing modules to the galley operations and investigate integration of the InfoGenesis POS (point of sale) systems on the vessels," explains Allsup.

As part of phase two, Royal Caribbean plans to expand the use of c-commerce with its vendors, incorporating self-service and vendor portals. At that point, Royal Caribbean plans to consider using J.D. Edwards' Advanced Planning module to boost causal-based forecasting as Royal Caribbean gets a better handle on how to manage the business using traditional forecasting methods.

Allsup is interested in how the advanced planning software can help Royal Caribbean predict inventory needs, especially in light of new feature capabilities.

"How much beef we're going to consume on Mondays, with the mix of steak, chicken, and fish for the entire cruise, is important for upstream planning and replenishment cycles. The attractive part of a J.D. Edwards application is that it has a lot of deep integration points with the foundation systems," he says.

In early December, J.D. Edwards released an upgrade of its Advanced Planning product with new features designed to support collaborative forecasting with input from various stakeholders. The upgrade also includes support for real-time guarantees of order delivery and scenario management features designed to set up business scenarios to compare potential impacts across the extended supply chain.

While Royal Caribbean hasn't yet purchased a CRM application, Allsup indicates that the company is interested in J.D. Edwards' product potential in this space as well. Although Allsup has no direct need for CRM apps, other business units in Royal Caribbean are actively considering potential use.

J.D. Edwards has adopted a unique approach to customer software development: Start with the customer's business processes, choose appropriate modules from its 110 components, customize them to clients' needs, create new components if necessary, and weave all the pieces together. This approach could prove beneficial to Royal Caribbean as the company tries to adapt c-commerce to the cruise industry.

The much-anticipated ROI
Even if Royal Caribbean chooses to stop its efforts short of any CRM implementation, and puts purchasing and logistics efficiencies aside, the Web-based c-commerce solution Royal Caribbean is putting in place will have a million-dollar impact on the company's bottom line.

"One estimate is that we could reduce our excess inventory by as much as half. Even as a one-time reduction, that's a substantial value, but the potential recurring cash savings would also be significant," Allsup says. "Overall, we estimate about $5-6 million in one-time and recurring savings enterprisewide for the total supply chain upgrade."

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By Franky McCoy
First published by TechRepublic on April 10 and April 12, 2002