[asset_ref id=”246″]The world is shrinking, competition is becoming keener and consumers ever more demanding. As a result of these increasingly pan European issues, companies are facing the potential of shrinking profit margins, erosion of markets and increasing costs in getting their goods to market. Against this background, the successful management of supply chains has come to be seen as one of the most decisive factors in determining profitable survival. Companies have sought to unlock this potential through increased integration of supply chains, use of more advanced technologies and greater outsourcing to third party providers so that, on the one hand, they are released to focus on their core competencies and, on the other, they can shed the high fixed costs of logistics operations.
Declining costs of logistics
Generally speaking, within the UK, companies have responded well to the new trading scenarios: currently, Britain boasts the lowest cost per tonne of movement in the world and this is still declining. The Retail Logistics Survey 2003 has found that the average cost of distribution fell again last year to represent just 3.44 per cent of sales over 3.86 per cent in 2001 while stock levels in slow moving goods, non-foods and beers, wines and spirits have also seen a significant drop. Such good news reflects increasing collaboration between retailers, their suppliers and the supply chain management companies that serve them; it also reflects the impact of new technologies and a more sophisticated approach to distribution networks and transport infrastructures.
However, it remains true to say that there is still much more benefit to be extracted from logistics, especially where the supply chain is opening up to take control further upstream and to take advantage of alternative sources of supply, for example, in central and Eastern Europe. Furthermore, as margins have become tighter, the removal of even a small percentage of logistics operating costs now represents a significant impact on the overall profitability of a company. Clearly, the opportunity for companies today is to grasp the step changes recently made possible in logistics processes.
So what might a new model for best practice contain? The retail supply chain today may be described as comprising three areas of opportunity: Inbound supply chain – new approaches to the management of the upstream end of the business, nationally and internationally, including the multiples’ recent factory gate pricing (FGP) initiatives; Warehousing and Distribution – the re-design of facilities and networks to improve productivity; and In-store logistics – focusing on key areas of productivity and replenishment operations relating to improving on-shelf availability.
There has been a good deal of furore about FGP, not least and quite understandably, because manufacturers are concerned that it will leave them to manage the ‘tail end’ of the supply chain which will be even more expensive to maintain once multiples have taken over the volume movements. Nevertheless, the fact is that FGP is already with us and some manufacturers, in recognising this, are taking the opportunity to re-appraise their existing practices and costs and revise their supply chain strategies. Some are seeking more collaborative solutions, such as those provided by the leading 3PLs. These offer sophisticated shared-user operations supported by advanced IT systems that deliver management control and supply chain visibility and enable the fast tracking of consolidated orders to retailers. The total scale of the operation means that investment can be justified by the logistics company in special storage environments, integrated transport networks, staff training and value added services, all with the focus of meeting the multiples’ latest requirements as cost-effectively as possible for their suppliers.
A critical point of control
As competition increases, control of inbound supply chains will become more critical. Increasingly, companies are motivated to reduce costs by sourcing goods and/or moving production to low wage countries but the perception has been that this will inevitably increase distribution costs and reduce service to the customer. The problem for retailers has been rooted in their sourcing practices. Traditionally, they have charged suppliers with delivering products to a distribution centre in the country of final purchase – the process of Delivered Duty Paid (DDP). For retailers sourcing in the Far and Middle East and Eastern Europe, the concept of supplier consolidation at source offers opportunities to reduce costs in total supply chain transactions, both by changing purchasing practices, as well as by carrying out many value-added activities, in low wage, at source countries, rather than high wage destination countries. Source country consolidation, as carried out by Exel for retail customers brings many benefits, not least lower costs – through the management of inventory at an early stage and reduced warehousing and transportation costs – but also greater control, visibility and availability. By carrying out value-added activities, such as labelling, tagging and ratio packing in lower wage countries, quality control processes can be implemented at source, thus removing waste, reducing delays and improving customer service. It is estimated that there is the potential to reduce design to delivery cycle times of clothing, for example, by 30 – 60 per cent. Furthermore, by consolidating goods prior to import, far higher fill rates can be achieved, reducing domestic and international movement costs, while demurrage charges and environmental tariffs will also be reduced and more effective customs procedures can be secured.
Costs down, visibility up
As mergers and acquisitions continue nationally and internationally, companies are increasingly having to evaluate their existing logistics networks and they are find-ing that not only can overall costs be reduced substantially, but that the visibility of their supply chains can be dramatically increased. Often the total number of a company’s warehouses can be reduced and the size, purpose and location of those that remain re-defined. Apart from the obvious savings in overheads and staffing, the result is that more volume can be handled through fewer facilities bringing with it associated benefits in terms of throughput efficiencies, economies of scale and labour flexibility. In the case of high value goods where traditionally – say – individual warehouses served each different European country, now one warehouse can serve a region or even the whole of Europe thereby reducing transportation costs significantly. In the case of lower value, more bulky products, network re-structuring will typically reduce the number of warehouses serving each customer, or will position warehouses more appropriately to meet increasing demands for customer service.
The pro-active warehouse
There is often much that can be done in terms of re-designing the layout of warehouses, enhancing use of resources and expanding deployment of IT systems such as voice picking. Far from being viewed as anachronistic in this time of reduced stock holdings, the potential of warehouses in the future to become a pro-active part of the supply chain solution is becoming more widely appreciated today. Warehouses will increasingly become key to delivering optimum logistics operations because they will be, in effect, an extension of the production process. By encompassing co-packing activities including such elements as last minute assembly and shelf ready packaging, warehouses will be key in achieving postponement whereby both retailers and manufacturers can leave the decision about customising or promoting products to the last minute. Consequently, they will reduce dependency on somewhat unreliable pre-sales forecasts and avoid the risk of excess customised product, which then has to be restored to its original form, freeing up their stock to fulfil other orders.
The final area of best practice potential concentrates on in-store activities, the ‘last fifty metres of the supply chain’ which not only accounts for as much cost as warehousing and distribution activities, but also results in average, out-of-stock levels of around eight per cent. This is a complex issue and there are a number of stages within the supply chain where better management and processes could help improve on-shelf availability and reduce costs. In terms of availability, 70 per cent of products not available are either in the store back-of-house or were not ordered due to inadequate inventory and ordering processes in-store. In terms of cost, significant scope exists for more ‘store friendly’ delivery services and for improving back-of-store warehouse processes and management. Within the retail operation, clearly there is a need to re-evaluate ordering processes as there is to improve physical shelf replenishment processes, particularly for key lines and promotions.
The seeds have been sown for rapid development in logistics over the next 10 years. Fuelled by enlargement of the EU, as well as new Asian markets such as China, and made necessary by corporate consolidation, supply chain management will increasingly be used at a strategic, as well as an operational, level. Fortunately,logistics managers can leverage the elements now available to them to drive time and costs out of the process and to sustain the flexibility necessary to manage all the variables and new developments that characterise logistics today.
Mike Samuels is Vice President Development Retail and Consumer at Exel.
• For retailers sourcing in the Far and Middle East and Eastern Europe, the concept of supplier consolidation at source offers opportunities to reduce costs.
• It is estimated that there is the potential to reduce design to delivery cycle times of clothing, for example, by 30 – 60 per cent.
• Warehouses will increasingly become key to delivering optimum logistics operations because they will be, in effect, an extension of the production process.
• In terms of cost, significant scope exists for more ‘store friendly’ delivery services and for improving back-of-store warehouse processes and management.