Posts Tagged ‘Free Trade Zone’

Interview with Surse Pierpoint

Monday, December 30th, 2013

Entrepreneurial Logistics in Panama

k28 thumbSurse Pierpoint is General Manager and shareholder in Colón [Columbus] Import-Export, a firm located in the Panama Canal Free Zone. Colón provides logistics, warehousing, and customized re-labeling services for a variety of international companies, including Procter & Gamble, DHL, Payless Shoes, Novartis, and Eli Lilly. Pierpoint is a third-generation Panamanian who received his undergraduate and graduate education in the United States before returning to Panama to pursue his business career, which now includes being President of the Free Zone Users’ Association and part of a consortium of investors developing a new marina on Panama’s Caribbean coast.

Background and Early Career

Kaizen: Your company is in Panama, which is famous for its canal. What is the significance of the Panama Canal?

Pierpoint: The Canal was an idea going all the way back to the 1500s, from the discovery of the Pacific Ocean. People were already trying to figure out how to connect the two oceans. It was evident to Balboa that there wasn’t that much land separating the two oceans.

Kaizen: About 60 miles?

Pierpoint: Yes, sixty miles from coast to coast. It is the narrowest spot in the Western Hemisphere.

It wasn’t until Ferdinand de Lesseps in the 1800s that people made an effort to build the Panama Canal. De Lesseps started to raise the capital, but malaria caused that effort to collapse.

The American effort didn’t begin until Teddy Roosevelt, who was an accidental president because McKinley was assassinated. Roosevelt became president and, having attended the Naval War College, was heavily influenced by a professor who said that any self-respecting empire needs outposts. Naval power was very important in the projection of that. The Spanish-American War was in 1898, but by the time the Americans’ Pacific Fleet got to Cuba, the war was over. So Roosevelt said, “This can’t be. We must have a quicker way of projecting our naval power.”

Kaizen: So military issues as much as economic drove the idea of cutting the canal?

Pierpoint: Yes. The U.S. needed outposts that projected its power abroad and gave its citizens comfort that their government would stand by them. Coaling stations also mattered, to resupply shipping vessels as they were going around the world. As a result of the Spanish-American War, the Philippines became part of the U.S. protectorate. This was truly a projection across the globe.

Kaizen: Your personal story also starts in Panama.

Pierpoint: I tracked my name, Surse, all the way back to 1833 to a town in Tennessee. Three brothers from there fought in the Civil War on the Confederate side. They wouldn’t swear an oath of allegiance, so they left Tennessee for Texas. From Texas, my great-grandfather decided to go to Panama because the construction was the biggest thing happening.

Kaizen: The canal was being built at this time?

Pierpoint: Yes. He was a doctor specializing in tropical medicine. The public health effort in controlling malaria was the important thing before they actually started building the canal. That’s how we got here.

Kaizen: So you’re third-generation Panamanian?

Pierpoint: Yes.

Kaizen: Where were you born?

Pierpoint: In a hospital in Panama City. I lived about a year in Panama City, and then our family moved to Colón on the Atlantic side.

Kaizen: What was your education like?

Pierpoint: Small-town Americana and very protected. It was great growing up in the Canal Zone — even now on Facebook there are groups of people who are wistful about their time growing up in the Canal Zone, because it was ideal, from our perspective as kids. It’s what I imagine growing up in a small town in the Midwest in the 1950s was like.

I jokingly refer to the Canal Zone as America’s socialist experiment, because they gave you a job, they gave you a home, they gave you entertainment, they provided food and clothing. You also had tropical pay differential, because working as a federal employee in Panama was considered a hardship — even though anybody who lived here said, “This is hardship?” You got fifteen percent on top of your pay grade. So, growing up was wonderful.

Kaizen: Malaria and the other tropical diseases had been contained by that point?

Pierpoint: Yes. Tropical differential should have been eliminated by the forties, but it was a holdover.

Kaizen: You went to college in the USA?

Pierpoint: I went to boarding school and then college in North Carolina. I met my wife there.

Kaizen: Where in North Carolina?

Pierpoint: Greensboro, North Carolina at UNC. I took the easiest path: liberal arts. I got a double major: Spanish and Latin American Studies and Literature. I’ve always been fascinated by magic realism — the literary term that is used for Latin American writers, with Gabriel García Marquez being the best example of that with One Hundred Years of Solitude. Literature was one major — and Spanish as a language. I knew Spanish and I knew a little about Latin America, so it was fairly easy.

Kaizen: At this point, did you have strong ideas about what you wanted to do for a career?

Pierpoint-fishingPierpoint: During my Communist Worker Party days, I had a Cuban professor, and he and I had some very heated arguments about how bad socialism had been. This is around the time of the civil war in Central America—Salvador, the FMLN.

Kaizen: You were arguing the communist position?

Pierpoint: Yes. My professor, Sanchez Boudy, was saying, “You don’t understand what you are saying.” One big satisfaction is that I got to speak to him last year. I said, “Professor, you were absolutely right.” That is one of those things that’s the little pebble in your head, like “If only I could go back to him and say … .” It was very satisfactory for me to do that. He said, “I’m so glad to hear about the work that you are doing.”

The opportunity came about through one of our supporters at Fundación Libertad. I was talking to him about my college experience, and he asked: “What’s the professor’s name?” I told him, and he said, “I have dinner with him once a week in Miami.” He gave me the phone number. So I called him up and apologized.

Kaizen: Nice. So you were a communist in college and taking the path of least resistance in your studies. Were you thinking at all about career possibilities?

Pierpoint: In my senior year, my father said: “There might be an opportunity. I think I can convince the board.” He was looking out for me and saw an opportunity where I could come into the company.

A lot of people confuse the fact that because I’m in the company that it’s our company. We’re shareholders; but we are not by any means majority shareholders. It’s a very close-knit group of families of the original Jewish families that came to Panama from Curaçao. There was emigration out of Spain to Holland to the Caribbean to Panama in the late nineteenth century. That family adopted my father. My father was an only child; he often referred to Clifford Maduro, the gentleman in that middle picture, as his surrogate father.

So my father said that there might be a job opportunity here, and I didn’t have anything else going on. There’s a saying in Spanish: “It’s better to be the head of a mouse than the tail of a lion.” After living in the United States, coming back to Panama where I had grown up had an allure. My father’s precondition was: “Get an MBA and then come back and you can start working.”

Kaizen: So you went to Thunderbird in Arizona for your MBA.

Pierpoint: American Graduate School of International Management, as it was known then, informally referred to as Thunderbird. Their outlook was that to be a well-rounded, international executive, you had to know not just business but culture and language as well.

Kaizen: Were you excited about the idea of going into business at this point — or was it just the least bad option?

Pierpoint: Yes.

Kaizen: The latter?

Pierpoint: Yes.

Kaizen: How long were you in Arizona?

Pierpoint: That was a one year program. Then I started working at Colón Import-Export on October 1, 1984.

Kaizen: You were about 26 years old?

Pierpoint: Yes.

Kaizen: So what was your first position at Colón Import-Export?

Pierpoint: In the warehouse. Dad said: “You’re not going to be an executive. You’re going to learn the business literally from the bottom-up.”

That was in pre-container days: goods arrived in a vessel, and they were taken off the vessel and loaded onto a truck, and from the truck into the warehouse, where they were unloaded onto a pallet.

Kaizen: All by hand?

Pierpoint: All by hand. I started with loading, unloading, and going to the freight house and receiving the goods that our clients would consign to us for mutual distribution.

Kaizen: What services was Colón providing to its clients?

Pierpoint: “Third-party logistics” is the technical term, which means that clients hire us for our facilities — warehouses and the people — to receive and ship their orders to their clients in the region, which at that time was mostly Panama and Central America.

Kaizen: So manufacturers anywhere in the world who want to sell in Central America will send their stuff to Colón Import-Export, and you will warehouse it and send it on?

Pierpoint: The beauty of it is that, because of the Canal, there were a lot of ships arriving in Panama. On the outbound side, you could also re-export those goods. The complexity of dealing with Latin America meant that it was better to have a regional inventory instead of a country inventory. So Panama was an attractive place to have a regional inventory for servicing all of those countries.

Kaizen: Colón operates in the Colón Free Trade Zone in Panama. How, legally and economically, does the free zone work?

Pierpoint: It’s a big bonded area which, from the Panamanian perspective, means that it’s duty free. As far as Panama is concerned, those goods have not been imported into Panama. They are in transit from where they were manufactured to wherever their final destination is going to be. So it’s a fairly easy place to set up operations, it’s centrally located, and your inventory then is that much closer to the final point of consumption.

The free trade zone was an idea that evolved from the Colón Chamber of Commerce. A director of Colón Import-Export was on that board. He was part of the board that created that idea and convinced the Panamanian president to sign it into law. We were one of the first companies to set up in the free zone.

Kaizen: When was that?

Pierpoint: 1948.

Kaizen: The free zone was established in 1948, but the company was established in 1912, over a century ago now.

Pierpoint: Colón Import-Export today is what I call version 3.0, because we’ve evolved over time. What we are today is a logistics company.

Kaizen: You began in the warehouse off-loading ships and repackaging. How long did you do that?

Pierpoint: Dad figured that after four years I had learned enough. I became general manager in 1989, about two weeks before the invasion. I remember because the board meeting where I was approved as general manager was the same day that General Manuel Noriega declared war on the United States. That’s something that gets seared in your mind.

Kaizen: Obviously, you had to prove yourself before becoming General Manager of a substantial organization. What were the big things that you had to learn or prove yourself on before you got that position?

Pierpoint: Dealing with employees is the biggest challenge that any manager is going to have. Infrastructure — buying forklifts, buying trucks — is easy. Getting people to respond in the manner that you hope they are going to is the biggest challenge — the empathy part of what it is that you want. What it is that I want, and how I can motivate you to do that for the company? Our company has always been known as a very stable place to work, with a great reputation. The average number of years of service is over ten years. We had one gentleman retire with 55 years of service in the company.

Kaizen: How do you do that? Is it a matter of understanding what goals they have personally and meshing those with the company’s goals?

SursePierpoint: One of my favorite sayings now is: “People respond to incentives.” About fifteen years ago we hired a consultant, who is still working with us. I almost consider him as a coach, in the sense that he’s very analytical. He’s an industrial engineer by training.

Kaizen: What’s his name?

Pierpoint: Humberto Linero. Humberto taught me that you can change processes, but you always have to align those processes to make sure that the triangle of incentives — shareholders, clients, employees — always mesh. Anything that is done has to satisfy all three parts or it is not going to work.

Kaizen: It has to be win-win-win.

Pierpoint: Really. Because at the end of the day the employees want to earn more, the shareholders want to earn more, but the clients want to pay less. So the challenge is, “Okay, if the shareholders want more dividends and the employees want more salary, but the clients want to pay less — how can you do that?” That seems like a tough nut to crack.

What Humberto taught me is to align your processes so that people want to chase that carrot. His philosophy is that you want to pay what the market is paying; but the additional “oomph” is going to come from people going the extra mile, because at the end of the day they want to earn a little bit of money.

Our company needs to be able to handle the volumes that the clients throw at us, and it is not an even-flow of orders. That was the challenge that brought Humberto on originally. One of our clients was saying, “We need to lower the order turnaround time. How are you going to do that, Surse?”

Humberto helped us to reorganize the processes from an industrial engineering perspective: What are the steps involved in processing an order? Who is involved? And why are they involved? What can we do to compress the time? Because at the end of the day, all we are selling is the time it takes to process the order. The faster we do it, the more competitive and attractive we will be to our clients.

Kaizen: You joined the company in the 1970s, on the cusp of the personal computing revolution. Computerization went to a whole new level in the 80s and 90s with bar-coding, the Internet, and all of that. How did that impact your business?

Pierpoint: “Warehouse management systems” didn’t exist as a term. We had to create our own software to be able to do that. I was working already when the fax came along, and I told my dad that we needed to get a fax. He said, “Why do we need a fax?” Because we had dealt with correspondence — orders would come in the mail, and then the telex came along, and then the fax came along. Everything sped up.

Then computers came along. We had a server and terminals connected to that server. Then we went to PCs. Dad bought the first IBM PC in 1984 or 1985. It was a piece of hardware without much software.

My dad had a very clear vision that we needed to be able to provide tracking and other information to our clients. But in the pre-Internet days that meant expensive long-distance phone calls. The Internet meant that we were actually able to fulfill that vision of being able to give our clients visibility online, which was the Holy Grail.

Kaizen: Can you measure the improvements in efficiency that computers have brought to your logistics?

Pierpoint: The revolutionary aspects of computers — that’s another thing that Humberto taught us. If you don’t measure, you don’t have a baseline upon which you have to improve and kaizen is continuous improvement. That’s what it is all about: how can we analyze and improve the process? That’s where I get interested in Deming and Lean Thinking.

In talking to our employees, we try to convey that our vision going forward is that we need to be fewer people with technology that makes us more productive, so that we get paid more. So you, the employee, have to think about how you can be more productive with the technology at hand and identify the inhibitors in the process so that we can take them away; that is my job as management.

Kaizen: You’re encouraging from the bottom-up so to speak.

Pierpoint: Humberto says, “Anybody can be an engineer.” He always emphasizes: “We hire you because it is a very labor-intensive business. We hire you to use your hands, but you don’t leave your brain at home. Analyze that process; look at it; criticize it; challenge the process.” When he came back on board, that’s what I wanted to do. I said, “I want you to develop a process where we can do continuous education.” We get that raw material that has a certain amount of knowledge. Let’s teach them to go to the next level. It’s like the Colón Import-Export University for a model. We want to do that continuous improvement.

Kaizen: How many employees do you have currently?

Pierpoint: We have 500 employees.

Kaizen: When you came on board in the 1970s, approximately how many employees did you have?

Pierpoint: One hundred.

Kaizen: So that is a quintupling. If it’s not confidential, can you say the sales numbers between then and now?

Pierpoint: If we express it as a fraction of sales, our net income is less than one tenth of one percent of sales because of the warehousing component, and we represent about twenty percent of the total Free Zone turnover of $15 billion (USD) in annual sales.

Kaizen: In your role as General Manager, you have people management responsibilities, process management, including all of the technology. Is another part financial, such as raising capital or loans?

Pierpoint: That’s where the board comes in. I’m the warehouse guy, and I will admit my deficiencies on the finance side. Fortunately, the company has always been able to fund itself. And now in Panama the cost of capital is fairly low. So if you have a good trajectory — the banks have always been very open, and we have a good relationship with the local banks to help us grow.

Kaizen: Another job is bringing in clients. Currently you have an impressive roster of clients: Procter & Gamble, Payless Shoes, and the partnership with DHL.

Pierpoint: And Novartis.

Kaizen: Yes. Do clients seek you out or do you seek them out?

Pierpoint: One of the challenges is how to get new clients. My experience is that word-of-mouth is the best way. DHL has certainly opened up a new opportunity, because DHL is the largest warehousing company in the world. Anybody who is looking for DHL to provide services for them in Panama — they will come to us. They’ll say, “Look, this is a client. Let’s see what we can do.”

Kaizen: What’s the nature of your relationship with DHL? They are the largest warehousing company in the world, so what is your value-added?

Pierpoint: They figured that it is easier for them to piggy-back on our established infrastructure rather than trying to replicate that. For them, we’ve done the capital investment in the Free Zone. So their relationship is: “We can plug-in to what you do. So you will be our agent for warehousing and we we’ll take the transport side of it.”

Kaizen: DHL is based in Germany?

Pierpoint: The Deutsch Post — the German post office. DHL was three surfer dudes out of San Francisco who figured out that a good way to get to Hawaii to surf was to take documents for shipping lines that went from San Francisco to Hawaii. DHL is the first letter of the last names of the three guys.

Kaizen: They have since been acquired by …

Pierpoint: The German Post Office, which said that they were going to be the largest courier company, so they bought DHL, the largest warehousing company. They also bought Excel out of the UK. We have a bank in Germany. In Germany, they have a monopoly on the post office, which is where they generated the funds to pursue this global expansion.

SurseKaizen: Two of your major clients are pharmaceuticals, is that correct?

Pierpoint: Yes. Novartis and AstraZeneca are the pharmaceutical clients.

Kaizen: Novartis is out of Switzerland?

Pierpoint: Yes.

Kaizen: What do you do for them?

Pierpoint: Like everybody else, they ship from their factories all over the world to Panama. From there we service their client-orders for the region, which is Central America, the Caribbean, Venezuela, Colombia, and Ecuador.

Kaizen: Sometimes it’s just a matter of re-routing the product?

Pierpoint: Those are in transit. They come in and then they stay for a while in the warehouse and then they are shipped back out.

Kaizen: On the warehouse tour yesterday, Eduardo Lazarus showed me rooms where everything was taken out of boxes and labels were applied. Is that another part of the service that you offer?

Pierpoint: That’s a value-added portion of the service that isn’t just moving the goods but doing something with the goods. The Standard Export Pack means that when the goods arrive to Panama, our clients don’t necessarily know where they are going to go at the moment, so they are holding that inventory.

Kaizen: It could go to Peru; it could go to Guatemala.

Pierpoint: It could go anywhere. That’s the beauty; it takes out the uncertainty of trying to anticipate what each country is trying to buy. But, in general, if you try to project on a regional level, the fact that one country may not meet that budget means that another country might take up that product so you don’t have to worry; it smoothes it out. You can say, “Okay, I expected to sell this much in this country and it didn’t happen, but I have a country over here.” So they just shift that product.

What that means is that that product can then be customized. In pharmaceuticals, the number one client in Latin America is the government. So government tenders tend to have specific requirements that require you to identify that the product is property of, say, the Honduran Social Security. So you have to do ink-jetting and labeling and that kind of stuff. That is what we do in that value-add portion that you saw.

Kaizen: Customizing it for each country’s specifications.

Pierpoint: At the moment of sale, which is a huge advantage. From a factory in Switzerland, you can’t anticipate that; and they aren’t going to deal with the nuisances of a small run, at least from their perspective. We can do that for them here.

Kaizen: Procter & Gamble makes personal care products, and they are based in the United States; but they send product to you in Panama, and you re-route it to all of the particular countries in Latin and Central America.

Pierpoint: Yes. It’s the same model, just a different commodity.

Kaizen: And Payless Shoes. Did that client also come through DHL?

Pierpoint: Yes. At first we thought: shoes? Traditionally we had been a pharmaceuticals company. Shoes were different. But that relationship has been tremendous. We’ve really developed systems, as you saw: everything gets scanned in and out.

Kaizen: Payless is an American company?

Pierpoint: Based in Topeka, Kansas.

Kaizen: Though the shoes are manufactured in China and then they come to Panama?

Pierpoint: The model before us was China to Long Beach, Long Beach to Topeka, Topeka to Miami, and Miami to the stores.

Kaizen: A lot of transfers.

Pierpoint: That was a very cumbersome supply chain. They saw Panama as an opportunity where it would be China to Panama and Panama to the stores. They took out that component of having to bring the shoes to the United States and re-exporting them out to Latin America.

Kaizen: If you bring your product into Long Beach and you want to get it to Topeka, would it be on trucks or trains?

Pierpoint: Trucks, typically.

Kaizen: Then all the way to Miami and back onto ships.

Pierpoint: They cut out that whole component and lowered their supply chain costs.

Kaizen: Right. Then it’s only on ships from China to Panama. Then?

Pierpoint: It ships from Panama to the country. As a mode of transportation, ocean is cheapest. So that lowered their cost. And as the name “Payless” implies, they don’t want to pay any more than they have to. They want to be able to sell a cheap shoe to their Latin American customer base.

Kaizen: Take a standard work week for you as a general manager. How do you typically spend your time? How much cultivating clients, dealing with existing clients, meeting with your board, on the floor?

Pierpoint: Dad taught me that the best kind of management is management by walking around and visiting clients. One of his favorite things to do was to go see an operation, like Novartis’s in Europe. And he would always pick up something from walking around and just looking. To be aware of what’s happening and then looking at it from the perspective of “What are you doing that I can copy and use in Panama?”

Once a month I have a board meeting. I will be in the office looking at results; meeting with the managers who handle the different operations. I have five executives under me and each one is in charge of a different area: finance, quality, operations, technology, and human resources. We’ll review what is happening with the clients. What are the issues?

There’s always a problem. We’ve got the push at the end of the month when we need to be able to ship everything out before the last day of the month in order to book sales. The last week is when the pressure is compressed.

Kaizen: Management by walking around means visiting clients …

Pierpoint: Or being in the warehouse, going to the different operations and talking to the managers. What is it that makes their job difficult and what can I do to resolve them?

Kaizen: How much travel is involved? Payless is in the United States, as is Procter & Gamble. Novartis is in Switzerland.

Pierpoint: In my dad’s days it was a trip to Switzerland to meet with Novartis. What the modern corporate world has tried to push that down to a regional level. So it is no longer going to Basel, Switzerland; it’s meeting in Guatemala or Costa Rica or Bogota with the regional managers.

Kaizen: So the travel is not as intensive and overwhelming.

Pierpoint: The travel now is more related to working as the President of the User’s Free Zone Association or going to the Mont Pelerin Society Meeting in Prague. Of course with Skype, email, and phone, there is not so much visiting. Maybe that is an area where I need to improve. There is still a huge value in face time and building relationships.

Panama Canal History

Kaizen: You talked earlier about the free zone and the history of the Panama Canal. There was a failed effort to build it in the 1880s or 1890s.

Pierpoint: 1880 to 1888 was the French effort.

Kaizen: Why did it not work?

Pierpoint: Malaria and yellow fever. De Lesseps was the king of the world because he had done the Suez Canal. He figured, “Heck, I did it in Suez. Panama is the next narrow spot in the world where a canal is needed, and I know how to do canals. So let’s go to Panama and do it.”

Kaizen: But he under-estimated malaria and yellow fever.

Pierpoint: Malaria, from the French mal air. People figured that it was the bad air from the swamp that caused yellow fever. Paradoxically, that was part of the lore from my great-grandfather. In the hospitals in Colón it was very typical to have little trays of water on the foot of each hospital bed because you didn’t want the ants to get into the bed. That little pool of water became a place where mosquitoes could breed. But they didn’t know any better. They say that the hospital is the worst place to get better.

Kaizen: The canal was built successfully and opened in 1914?

Pierpoint: Yes.

Kaizen: When did the American effort to build the canal begin?

Pierpoint: 1905.

Kaizen: So it was a nine year process from conception to completion. By then malaria and yellow fever had been figured out?

Pierpoint: Yes, during the Spanish-American War in Cuba—by Dr. Walter Reed, who has that army hospital in D.C. named after him. He, along with some Cuban doctors, figured out that the vector was the mosquito. That’s what was transmitting the malaria and yellow fever. That’s where my great-grandfather got involved, in the public health effort in trying to control the situation so that at least the challenge wasn’t going to be that workers were dying off. Incidences of death by malaria dropped precipitously as that public health effort took hold.

Kaizen: Wonderful. There were other engineering challenges. The Atlantic and the Pacific aren’t at the same sea level, and the interior waterways are also at different levels. So they built locks on the Pacific side and on the Atlantic side, and flooded the middle to make a giant lake.

Pierpoint: The original design was to copy the French effort to make it sea level. One engineer started the effort, but it was a mess. There wasn’t much digging going on and, of course, the tropical environment made it difficult.

John Frank Stevens, the second engineer, came along. He was involved in building railroads in the American West. I think he worked on the effort to put a railroad through the Rockies, so he was a brilliant engineer. He came through and figured out: “Okay. What we need to do is to get the dirt out of here as quickly as possible.” He came up with some very innovative ideas. The story is a PBS documentary that’s available online. It’s a fascinating story of how he came up with steam shovels and trains to move the dirt in a very efficient manner.

But his design was: “We aren’t going to do sea level. Let’s do locks.” The design is that 60% or 70% of the canal is the flooding of a river valley to create Gatun Lake. Then the portion of digging through the Continental Divide and out to the Pacific was the digging challenge. Parallel to the digging was the creation of the locks and the flooding. That was the inaugural moment — the blowing up of the dyke in Gamboa where the Chagres River met the dyke. Once the digging portion was completed, water flooded in. That was in 1914.

Kaizen: Awesome. What was the nature of the business arrangement between the United States and Panama? Revenues? Control of the canal? How did that work out?

Pierpoint: A friend of mine wrote a book called, How Wall Street Created a Nation. And that is an interesting story about the “black” legend of how Panama was created. Was it truly a bunch of Panamanian patriots who wanted to be free from Colombia? Or was it New York money that convinced and funded the revolution, and the United States backed them after Colombia said to the United States: “No. We don’t want to give you an option to build a canal.” The United States then chose the path of least resistance: “Well, if we can’t convince Colombia, let’s let Panama become independent and then we can negotiate with Panama and not with Colombia.”

Practically, one of the first acts of the Panamanian government was to sign a treaty with the United States to grant them, in perpetuity, a 50-mile wide by 50-mile long sector of the middle of the country to operate as they saw fit. So it was a piece of the United States in the middle of the Republic of Panama.

Kaizen: And that revolutionized world transportation. Shipping is suddenly coming through there instead of having to come all the way around South America. What is the average savings? Let’s say that you are sending something from China to the eastern part of the United States. Before the Canal, you can send everything to Seattle or to California and truck it across by land, or you can send it around South America.

Pierpoint: Or through the Suez.

Kaizen: Yes. Is there some average dollar number savings one is likely to get by going through Panama?

Pierpoint: It’s all about days of travel, so going through Panama certainly eliminated having to go around South America. But getting from Asia to Latin America you either go around through the Indian Ocean, the Suez, the Mediterranean, and the Atlantic — or you come across the Pacific to Panama, through the canal to the east coast. It’s faster through Panama. How many days, I’m not sure.

Kaizen: It’s a significant enough savings that there has been huge traffic through the Panama Canal over the last century.

Pierpoint: Well, the original lock design — the Army Corps of Engineers said, “If this is going to last a hundred years, how big can boats get into the future?” That’s what is really amazing, the foresight of these guys to say, “Let’s make it really big. There is nothing on the drawing boards for that size, but we have to think long term.” So that is what we saw with the expansion: 1,000 feet long by 100 feet wide. People were like, “You’re nuts! That’s crazy! That’s way too big” “Maybe it is now,” they replied, “but we don’t know what the future is going to be like.” That created what is known as the Panamax type of a vessel with the maximum weight and width that can fit through the locks.

Kaizen: How long does it typically take, to go from one end of the canal to the other end?

Pierpoint: The transit on average is ten hours.

Kaizen: How much does it cost to send a ship through? I know it depends on the size of the ship.

Pierpoint: It can be all the way up to $350,000 or $400,000 for transit. The off-set of that is that, though that sounds like a lot of money, if I had to go another way, those days of operation from the vessel makes the amount worthwhile.

Kaizen: $350,000 would be for the largest of the large? Cruise ships and so forth?

Pierpoint: Yes. You’ve got the bulk carriers, container ships, cruise ships, and car carriers. The Canal measures that. The biggest category is container vessels.

Kaizen: From the early twentieth century to Noriega, let’s say. What was Panama’s political history? Was it stable?

Pierpoint: Alternating governments in power — some populism, strongmen, and elections. 1964 was a watershed year because many Panamanians resented the fact that the United States controlled a portion of the country into perpetuity. Of course it depends on your world-view, but the nationalists and certainly the anti-imperialists saw the United States as an evil empire — amongst the student population especially. On January 9, 1964, some Panamanian students said, “We are going to Balboa High School to raise the Panama flag.” There’s Cristobal High School, where I went to school on the Pacific side, and there’s Balboa High School. The firebrands marched on the campus of the Balboa High School to raise the Panamanian flag because only the American flag was waving before then. That set off about a week’s worth of riots, and some of these students were killed.

Kaizen: Here in Panama City?

Pierpoint: Yes. But it spilled over to Colón as well. The president broke off relations with the United States. He said, “You guys have killed some of my students, and we have to talk about this issue because perpetuity isn’t going to work.” The president was tapping into nationalism from a political perspective, obviously. He was popular because he was backing our students, but it must have been a difficult situation. That began a process: in 1968 there was a military coup and the leader of that coup’s claim to fame is that he said, “One day I’m going to walk in the canal zone because it is going to be a part of Panama.”

Kaizen: What was his name?

Pierpoint: Omar Torrijos. He was politically very shrewd because he realized that that gave him legitimacy with the populace; that was his reason for living: “I’m going to push the fact that I’m going to sign the treaty where we will abrogate the existing treaty and renegotiate it in our favor.”

Kaizen: He was in power for how long?

Pierpoint: About 15 years. Jimmy Carter and Omar Torrijos sat down in the Organization of American States in Washington, D.C. and signed the treaty in 1977. That treaty established that by December 31, 1999 everything would be given back to Panama.

Kaizen: But then Torrijos died in a plane crash, and his second-in-command, Manuel Noriega, became the new military dictator. What was Noriega’s regime like?

Pierpoint: Noriega wasn’t as charismatic as Omar Torrijos. And if you remember the 80s, with massive amounts of cocaine moving north from Colombia — we are a natural transit point. It was rumored that Noriega was friendly with all parties: drug traffickers, the CIA — anybody he could make a buck from, he was willing to sit down and make a deal.

His regime coincides with a political spring where parties begin to come back into play. One was a gentleman who had been deposed in 1968 and went in exile, Arnulfo Arias. He came back, and elections were held in 1985, I believe.

Many felt that the election was stolen; the official candidate won by a narrow margin. But it created the effervescence where the losing side began a resistance effort to challenge the result and started lobbying the United States to do something about it: “You guys have been here so long; you’ve created this problem; now you have to help us get rid of Noriega.” That culminated in the invasion on December 20, 1989.

Kaizen: In what way was the U.S. seen as having contributed to the Noriega problem? Was there explicit support for him?

Pierpoint: There was an entendre because the U.S. thought, “Don’t rock the boat.” But then Noriega started getting out of hand. The Panamanians were very successful at linking him with drug trafficking and money laundering. So Noriega started clamping down. “The Crisis,” as it is referred to here, from 1987 through 1989, is when things got tougher and tougher, and the United States started applying measures. It was a downward spiral where people were resisting and Noriega was resisting going out.

Within the military, there was a failed coup attempt to take Noriega out. The plotters were captured and executed. That is the really dark portion. The trigger for the U.S. invasion was the arrest and manhandling of a U.S. military officer who supposedly ran through a police road-block. The car was fired upon and that US officer was killed.

Kaizen: So at that point the United States invaded and removed Noriega.

Pierpoint: And they installed the loser from the 1985 elections.

Kaizen: The 1985 elections that were thought to be rigged.

Pierpoint: Yes. After the invasion, Guillermo Endara was put into power, and elections, were held in 1989.

Kaizen: So democracy returned to Panama through the 1990s, and in 1999 the U.S. formally transferred ownership of the Canal Zone to Panama.

The decision to expand the canal — the engineers back in the 20th century had good foresight, but nonetheless technology has advanced far and there are a significant number of super ships that can’t get through the current canal. When was the decision for the expansion project made?

Pierpoint: A few years ago. There was a national referendum. You know the movie Cars?

Kaizen: Yes.

Pierpoint: The rise of the interstate highway system in the United States meant that Route 66 was no longer the main road. I use that example to highlight the fact that the carriers, especially the container carriers, are looking to lower the cost per container of moving a boat around the world. So from the year 2000, Panama took over the Canal, they started to think: We are coming up on 100 years, and we need to widen the canal because we are seeing the trends in the industry. If we don’t widen it, we’re going to be Route 66 instead of Interstate 40. A national referendum was approved overwhelmingly by over 70 percent of the population.

Kaizen: That was what year?

Pierpoint: October 22, 2006.

Kaizen: This is a multi-billion dollar project.

Pierpoint: About $5.5 billion.

Kaizen: Involving new locks at both ends.

Pierpoint: Two new locks and raising the level of the lake to have more water, deepening the draft for the bigger vessels—not just in the lakes, but in the approaches on both the Atlantic and Pacific sides coming into the new chambers.

Kaizen: Currently, how many ships can be in the system at a given time?

Pierpoint: Between 35 and 40 per day.

Kaizen: When the new locks open in 2014 or 2015, the current locks will still be in operation. What’s the anticipated number of ships that will be able to go through?

Pierpoint: By the time they’ve ironed out all of the kinks, they expect to be able to double the capacity.

Kaizen: 70 to 80 ships per day.

Pierpoint: Yes. And some of them will be much larger, and they are going to pay more money, so it is a huge economic benefit for the country as well.

Kaizen: Currently how much revenue does the canal generate in transit fees?

Pierpoint: It shifted over the years. The Americans always ran the canal on a cost-basis: “We are going to charge whatever it costs.” The Panamanian administration adopted a much more business-like attitude: “Let’s charge what the market will bear.”

One of the proud facts of the Panamanian administration of the canal is that what we’ve gotten from 2000 to 2011 far surpassed what we got from the United States as a stipend for running the canal from 1914 to 2000. We are talking about over a billion dollars last year that the canal gave to the national treasury. It is expected that when we double the capacity, it’s going to be more than two billion. Again, it’s a question of what the market can bear. So the tolls have been rising.

Kaizen: Most of that money gets invested in infrastructure?

Pierpoint: It goes into the kitty to deal with infrastructure: security, health, and education.

Kaizen: The Panamanian skyline is extraordinarily impressive, and most of the buildings look new. Is that Canal money or Free Zone money? A combination of the two?

Panama-skylinePierpoint: In the last five or six years, since 2007 or 2008, it made a lot of sense for Panamanians to reinvest in Panama. A lot of the banks in Panama — their capital base comes from Free Zone money. A lot of the skyline is due to the Free Zone. The profits generated are reinvested in the country.

Kaizen: I’ve never seen so many construction projects in one place.

Pierpoint: With this administration, it’s not just buildings, but also roads, overpasses, highways, and new airports. A lot of money is being reinvested in infrastructure.

Kaizen: How is the rest of the world reacting to the Canal expansion? For example, it affects the ports on the west coast of the United States. The super-ships that can’t go through the Canal currently might off-load in California and truck across the United States. But with the expanded Canal, lot of that traffic will start to come through Panama.

Pierpoint: There is a website called, which is an effort by a group of Californians worried about what the Canal is going to mean for Los Angeles-Long Beach traffic. It might mean up to 20 percent less movement through L.A.-Long Beach, which is the largest port in the United States. So they are very concerned about what is called the all-water route: Asia, through the canal, to the east coast of the United States. Demographically, most of the U.S. population lives east of the Mississippi. China is the United States’ factory. All of those goods have to get to the east coast and right now, L.A.-Long Beach is the preferred destination.

The longshoreman strike was a wake-up call for a lot of retailers. Because of today’s just-in-time supply chain, that type of interruption creates havoc. So people were looking at alternatives. What that means is if you can get to Savannah, Georgia, by boat, then that is going to be a cheaper landed-cost than off-loading it in L.A. and moving it by road or rail to the big box stores on the east coast that the Walmarts, Targets, and Home Depots have.

Kaizen: Is the east coast of the United States prepared for more traffic and larger ships?

Pierpoint: The Washington Post had an article recently that is a good summary of the different ports. A lot of federal money is being spent in getting prepared for the impact of an expanded canal. The Savannah River has to be dredged for the Port of Savannah; the Bayonne Bridge in New Jersey has to be raised because these larger vessels can’t currently come under the bridge. That article mentioned something like $6 billion in different projects along these major ports, which are all vying to be the destination for these carriers. Miami is investing money; Savannah is investing money; Charleston is investing money; the Port of New York-New Jersey is investing money. They all want to be the place where those big ships will stop and off-load their containers. So they are competing for the L.A.-Long Beach market as well.

Kaizen: Traffic going from Europe to the west coast of the United States: will the Canal make any difference in that?

Pierpoint: The main trade-flow is Asia to the east coast of the United States. There is a lot of stuff going that way, but not much going the other way. Grapes from Chile going to Europe — the boat comes back relatively empty. Banana ships going from Ecuador to Europe mostly come back empty.

But there is talk that now maybe because of these fracking fields on the east coast of the United States, the LPG tankers could go from the east coast, through the canal, to Japan. Japan has a huge demand and they pay a premium for LPG. So you have a lower cost. Put it on a boat and now you don’t have to go the long way around to get to Japan; you can go through the Canal and get to Japan much more quickly than it would be crossing the Atlantic. It just doesn’t happen right now. So there is a lot of speculation right now about what the new trade flows will be.

Kaizen: Fascinating. To come back to you personally: you have been GM at Colón Import-Export for 23 years. What will you be doing over the next four or five years?

Pierpoint: One of the challenges is to do the same thing my dad did. I came aboard right around the time he was looking to transition. So who’s going to replace me? That’s what worries me now.

Kaizen: You are in your mid-fifties now.

Pierpoint: Fifty-four.

Kaizen: What will the transition involve?

Pierpoint: To bring somebody on board who will have five or six good years of training so that he will be in a position to take over.

Kaizen: Are you planning to grow the business in any new directions? I saw the huge warehouse you just built. Do you plan to bring in more customers to grow the company?

Pierpoint: We’ve had a bit of organic growth. Procter & Gamble has been a tremendous client. They just came on board three years ago, and they are doing what Novartis did from 1960s. So I see a lot of opportunity.

Part of what we hear from our conversations with consultants is that Panama and the Free Zone can start looking northwards to the United States. We just signed a free-trade agreement with the United States. So there are opportunities there. The United States is kind of undiscovered territory, and the fact that Procter & Gamble has validated the model means that other people will also be interested in looking at Panama as an option for a redistribution point—not necessarily for this region, but for other areas.

Kaizen: Technologically, these are revolutionary times. A significant amount of what is done in your warehouses now is by hand. Do you see improvements in technology on your horizon?

Pierpoint: Kiva Systems was bought by Amazon. With Kiva, instead of a picker going to the product, the product is brought to the packer. Part of what I do as well is keep abreast of what is happening in the industry. It’s still the cost of the robot versus the cost of labor, and it’s still heavily in favor of the cost of labor.

But part of the challenge is that we need to have smarter laborers; a high school degree isn’t enough anymore. They need to have a university degree so that they are conversant with a PC, able to use Excel, able to use the scanners, and that kind of stuff. A big challenge is the very bad education system that we have; it means that we have to create our own education system so that we can bring our people up to speed.

Kaizen: The University of Colón Import-Export.

Pierpoint: Yes.

Kaizen: You have interests outside of work, including your busy family, and you are on the Free Zone Users’ Association Board (FZUA).

Pierpoint: I got on the board in 1988, and I was very honored. But my father said, “You are a fool.” The problem was that 1988 was one year before the invasion; it was terrible. There weren’t many executives who wanted to be on the Free Zone Users’ Association Board. My father thought it would make me lose focus on managing the business.

Kaizen: What is the FZUA’s function?

Pierpoint: It was created in 1980 as a place where all of the users could get together and have a channel to talk to the government. Every five years a new administration comes in, and that new administration, unfortunately, doesn’t know much about the free zone. The perception of the free zone is that we all have gold bricks in the warehouse and the streets are paved with gold — that there is a whole lot of money and it is the natural place to come get money. What we say is that the FZUA is like the firehouse: When the bells go off, we are the guys who jump in the truck and try to put out the fire — in this case, the government trying to hit us up for funds.

Kaizen: Is educating each new administration straightforward? They can see the economic impact?

Pierpoint: We need to educate them because, while it is true that we’re part of the country, we’re not immune from losing competitiveness as more fees are tacked on. It makes us uncompetitive because it’s a huge drag. Then people start saying, “Well, why are we shipping to Panama? Why not just let it go through?” And you can do that today — China direct to Venezuela — without having to unload the container. And if that happens, you are talking about 30,000 people working in the Free Zone. The Canal’s labor force is around 11,000 people. So we are three times the size of the Canal. A lot of people know the Canal, but we are a significantly more sizable employer, especially in an economically-depressed zone like Colón.

Kaizen: So you make the economic case, and typically administrations understand, but it has to be redone on a regular basis.

Pierpoint: Exactly. Every five years.

Business Success and Rest of Life

Kaizen: What have you enjoyed the most about being GM at Colón Import-Export?

Pierpoint: One of the things that frustrates my wife — she runs a furniture store — she says, “Oh, you’ve got people for that.” Because she’s the chief cook and bottle washer in her operation. I accidentally got into logistics; but what is interesting to me is the international nature of the business, and how what you read in the newspapers impacts what we do. It really is a globalized world, and I’m a fan of current events.

Kaizen: Is there one area in your job as GM that you’ve consistently struggled with or found challenging? Or you wish that you didn’t have to do it?

Pierpoint: The most important part is dealing with people, and that is the challenge: dealing effectively with people. You have to be careful about everything that you say because it can be misinterpreted.

One of the benefits of being on the Free Zone Users’ Association Board is dealing a lot with politicians. You realize how they are very good about going on and on about nothing. That’s not necessarily what I do, but you begin to realize the nuances of what you say. That’s opened up not just sticking to the inside of the job. That was one thing my dad did; he didn’t like extraneous issues. But I think that is part of the marketing: get out there, get known, and you’ll be the go-to guy when an opportunity pops up.

Kaizen: The skills and character that people need to be successful in business: people skills, clear communication, aligning incentives. Also being able to deal with frustrations, make gutsy decisions, admit mistakes, and so on. Which traits, in your experience, stand out?

Pierpoint: One thing that I’ve learned is that if you’ve made a mistake and it’s going to be really expensive, you still have to say, “I screwed up.” That’s a hard decision. It’s in line with business ethics: at the end of the day, you have to be as good as your word.

One thing that makes me look at the ceiling at three a.m.: we have very expensive products being handled by people who don’t make as much as that product is worth, and a screw up can be a huge cost. So making sure that everybody is motivated to do their best is a challenge.

And the skill-set, I think, is just to be a guy who is very transparent and doesn’t have a hidden agenda and is sincere. So one of the things I’ve tried to develop is empathy and try making the other guy understand what my situation is and to try establishing a relationship. That has been one of the teachings of the free market is the free exchange between two parties where we both benefit. And that is a challenge, certainly, with this environment with big corporations that are always trying to squeeze, squeeze, squeeze — is to convince the other side: “Let’s not compromise quality for cost.” It’s a challenge.

I think as you get older, you get tired. There is this natural cycle, and I’m an anachronism in the sense that I’ve been at the same job all of my life. What you need to do is be energized, and that is where innovation comes in. That’s another thing my coach Humberto — I refer to him as a coach more than as a consultant — has been helpful with. I’ll look to see what the latest and greatest and currently topical book is, and I’ll buy that book and he’ll read it and we’ll discuss it. What’s the applicability of that idea in the company?

Kaizen: Keeping yourself young through innovation.

The first thing you mentioned was being able to admit when you’ve made a mistake. We all struggle with that; we don’t like to admit that we are wrong. How does one cultivate that in oneself? Is it a courage issue? An honesty issue?

Pierpoint: I think those are the two key words. “Courage” because it is a scary conversation to say “Yes, I screwed up.” But the more you do it, the easier it gets because people generally understand that you are being frank and honest.

Kaizen: You’ve mentioned several people who have been mentors to you in various ways. Is there any one piece of advice or a mentor who stands out in your mind?

Pierpoint: My father, obviously. It was a blessing to be able to work with him. Not everybody has the opportunity to work with their father. Looking at him and his work ethic. Also Humberto, the life coach, and the Board of Directors who have been very supportive. Those constant conversations are especially important, particularly with the Board of Directors because they are such a diverse group; they are always giving insights.

But one thing I learned from my father is: You have to be on time and you have to go the extra mile. Finish the job.

With Humberto, I’ve learned to be more analytical because he’s the engineer. My dad was a history major, so he had no special training for the job that he had. But Umberto as an engineer affected me so much so that my oldest daughter is now an engineer because I thought being analytical was so important. Humberto says, “Remember, what isn’t measured can’t be controlled, and what can’t be controlled can’t very easily be improved.” Those are stand-out points that stick in my mind as far as how I’ve been able to be relatively successful up to now.

Kaizen: What advice would you give to young people about their careers and lives ahead of them?

Pierpoint: One thing I’ve struggled with — and I’ve realized I’m an old-fogey — is the fact that in the résumés you see today, young kids jump around. I have to understand that today that is good because you have to keep your options open.

But there is that saying that to be an expert at anything, you have to have spent 10,000 hours doing it. That’s a long time to become good at something. So you have to pick something that you like — and I’m not saying that I’ve loved being a logistician my whole life — but you learn to like it because you see the challenges and the opportunities to get better at it.

I don’t know if you’ve seen the documentary, Jiro Dreams of Sushi. I highly recommend it. It’s about a Japanese gentleman who owns a sushi shop in a subway station in Tokyo. It has a Michelin three-star rating, I believe. In the Michelin guide, that means it’s worth going to that country to eat at that restaurant. He says, “I’ve been making sushi for 60 years, but I still feel like I’m not as good as I could be at making sushi.”

I still feel like that: I have so much to learn. I have been here for about 30 years, so you would think, “Isn’t that enough time to have learned?” No.

Kaizen: Always striving for excellence; always striving for improvement.

Pierpoint: Yes. Kaizen. [Laughs]

This interview was conducted for Kaizen by Stephen Hicks. For more information about Surse Pierpoint, please visit his company’s website. An abridged version of this interview was published in Kaizen, Issue 28, December 2013.

© 2013 Stephen R. C. Hicks. All rights reserved.

Kaizen 28: Surse Pierpoint, Logistics, and the Panama Canal

Wednesday, December 18th, 2013

k28 thumbThe latest issue of Kaizen [pdf] features our interview with Surse Pierpoint on the theme of Entrepreneurial Logistics in Panama. Stephen Hicks met with Mr. Pierpoint in Panama City to discuss the Free Trade Zone, the Panama Canal’s history and major expansion project, and worldwide trends in transportation and logistics.

Also featured in this issue of Kaizen are guest speaker Professor Nicholas Capaldi, the High School Business Day, and Professor Shawn Klein’s initiatives in Sports Ethics and Sport Studies.

Print copies of Kaizen are in the mail to CEE’s supporters and are available at Rockford University. Our next issue will feature an extended interview with Zol Cendes on the theme of Entrepreneurial Software.

Titanic compared to a contemporary cruise ship, Allure of the Seas:

More Kaizen interviews with leading entrepreneurs are here at our site.