At a time when businesses across the world are facing tough economic times, retailers have the option to take stock and review their strategies and identify the appropriate back office improvements to deliver an agile and flexible supply chain without high-cost infrastructure changes. For most retailers, weathering the current storms involves three key strategies: enhancing the customer experience to maintain market share; ensuring that they deliver the right products to meet consumer demand; and – of course – trimming whatever costs from the back office that they can.
While cutting costs has been a retail priority for years current circumstances provide even more reason for making this activity a priority. And, of course, those costs are very different from the last time we had a serious downturn. In the past decade retailers have become multi-channel, they have embraced global sourcing, many have expanded overseas, and the product assortment has dramatically expanded, for example, as leading food retailers have grown their non-food sales.
The result has been increasingly complex supply chains, both to operate and to manage, and getting the goods to the shelf to meet burgeoning consumer demand has more often been the priority. Supply chain change is perceived as an expensive activity and if retailers were unwilling to undertake such initiatives during the boom times, then they are certainly not going to contemplate such capital expenditure during a downturn.
This perception, however, is not necessarily correct. Developing a flexible supply chain need not always be a matter of capital investment. Quick wins can be achieved by identifying improvements in efficiency that can often involve purely operational change rather than any alteration to infrastructure. As always, a major problem for many is in understanding precisely where costs occur in the supply chain. It’s an area where DHL’s adoption of the “DMAIC” approach to process improvement – standing for define, measure, analyse, improve and control – really can be profitably applied. As they say, “you can’t control what you cannot measure” and by focusing on each supply chain activity and understanding its role and what it costs, many small changes can be made that collectively add up to significant savings.
Such a process can often put the focus upon many of retailing’s “sacred cows”: do you really need multiple daily drops to stores? Do you need different delivery cycles for general merchandise and food? Do you even need to deliver big ticket items to a store rather than managing fulfilment from the RDC?
Many of these practices can continue almost as a habit without anyone actually sitting down and thrashing out the rationale for each process or operation. DHL understands that its success and that of its clients are intrinsically linked to efficiency and effectiveness of operational processes. Sharing the value delivered through these improvements between the partners is a key enabler in driving out cost. “Within the retail and consumer group at DHL Exel Supply Chain, we’ve already held almost 100 Process Improvement / DMAIC workshops this year, which have contributed to continuous improvements and identified effectiveness equating to £4m.”
Another tactic for cutting supply chain costs is to look at the whole value chain – physical flows, information, financial flows, systems, business structure / silos, culture, etc. “We offer our customers these as ‘Value Chain Assessments’ (VCA), where a customer may have a broad question – where is the risk in my supply chain? Where are my major costs and how can I impact them? Answering these questions is often easier said than done as many in-company logistics or supply chain managers lack visibility beyond their own supply chain operations. We can fill in the gaps in the picture – especially with today’s highly complex and extended retail supply chains. With a wide range of clients, 3PLs can provide benchmarking and information on best practice drawn from a range of industries, as well as practical deliverable solutions. Our VCA methodology challenges our customers to embrace change – but it also challenges our own teams to do likewise. Success is not in the delivery of VCA report – it’s in being a catalyst to deliver benefits to our customers.”
Thirdly, there is what is increasingly being called “co-opetition” – a new approach to co-operation that is already delivering real cost savings to many retailers: again it is an area where 3PL expertise can add value. With its cross-section of retail customers, DHL can see where sharing resources can cut costs for everyone involved by sharing transport to reduce dead running and increase capacity utilisation. A number of trials are under development to deliver this agenda. Last year interest in such initiatives was largely being driven by the green agenda, but now cost pressures are accelerating these discussions.
Obviously there are a number of issues that must be resolved before such schemes can get off the ground – the two biggest being delivery priority and vehicle liveries, but making store delivery times / volumes visible to all parties is a key part of the discussions. As for having someone else’s liveried truck delivering to your store while this can still be a difficult concept for some marketeers, it is becoming less so for supply chain operators, and the cost benefits can be exciting. Furthermore, retailers can continue to use their own warehouses and distribution centres and it is only transport capacity which is being shared, but with the current emphasis on cost-savings obviously co-opetition has considerable potential or more collaborative initiatives in future.
Another opportunity for 3PLs to take cost out of supply chains is through the provision of co-packing and co-manufacturing solutions to manufacturers and retailers directly. Co-packing is provided by DHL from many facilities in the UK ranging from promotional to shelf-ready packaging. Frequently these facilities are where the product is already stored obviating the need to incur transport costs and allowing for the stock to remain visible on a company’s systems enhancing availability.
Co-manufacturing services range from handling in-bound raw materials and enhancing their qualities prior to factory working into finished goods through to the packing of tomatoes in the free-trade zone portside in Southampton prior to dispatch directly to retailers’ regional distribution centres.
Most retailers work with a number of 3PLs. This may be partly due to historic reasons reflecting various mergers and acquired divisions retaining a degree of autonomy or it could be more to do with risk reduction and ensuring that capacity is available to meet peak demands. Multiple sourcing brings benefits but it also adds to administrative complexity, additional cost and contractual alignment issues. In the current economic climate it may well be time to look at some of the contractual structures.
This review process can bring forward much broader supply chain cost reduction opportunities through “transformational outsourcing”, through what I term the “three Rs” approach.
First there is “rationalisation”: of supply chain administration developing strategic partnerships with a minimum number of 3PLs and other suppliers and a single logistics team within the business, with both parties having a clear focus and understanding of what success looks like.
Secondly, there is “reprocessing”: this covers many of the areas I have already touched upon – such as process improvement workshops, value chain assessment and co-opetition. However it is principally about re-tooling the supply chain and focusing on operational and organisational efficiency. When business was brisk and booming, few retailers had the time or inclination to undertake detailed analysis of supply chain processes. Now, of course, it is rather different and time spent eliminating redundant operations, minimising product movements or managing peaks and troughs more effectively, really can add to the bottom line.
Finally, this can involve “restructuring” – and this can be the capital intensive part which can distract decision-makers from the day-to-day needs of the business; network design, infrastructure, reorganisation, asset utilisation and redundancy. However, identifying the stresses and strains that a supply chain can absorb within its current infrastructure is key to driving flexibility both today and in the future – especially where many retailers have multiple supply chains that could be combined to reduce costs. Not many retailers will be eager to invest capital in their supply chain in the present climate, but if they do the analysis and planning now they will be ready to reap more cost benefits come the upturn.
Over the past decade retailers have had to cope with major changes in their markets, channels, product assortments and sourcing practices. As a result, supply chains have become more complex and costly. Today’s challenging trading conditions are refocusing attention on cost-cutting opportunities. Some will rise to that challenge and start “thinking the unthinkable” when it comes to long-established processes and practices which may be far from efficient. Others will simply hope to sit tight and weather the storm. I think we all know which ones will be better placed to meet today’s challenges successfully.
Mark Parsons, development director for Retail and Consumer at DHL Exel Supply Chain. Mark has had a varied career across the supply chain, working both in the UK and overseas, covering roles in consulting with Accenture, global procurement with Invensys and change / project management with Electrolux, as well as running the Value Chain Group and operational roles in Freight Forwarding, Warehousing and Transport.