The logistic challenge
Elsevier Food International Vol.9, Number 1, February 2006 Len Lewis
Logistics and supply chain management have become essential sciences in the food industry’s race to cut operating costs, increase assortment and reduce out-of-stocks. The issue is whether enough has been done to maximise supply chain efficiency and alleviate further cost pressures.
For more than a decade the retail industry’s attention has been focused on such initiatives as ECR and CPFR (collaborative planning, forecasting and replenishment). More recently the impact of B2B trading exchanges, retail ready packaging and the potential of RFID technology has been heavily scrutinised.
Meanwhile, a number of trends are affecting the logistics strategies in the retail industry. These include an increase of 4.7 per cent in average distribution costs as a percentage of sales, a drop in average stock levels to 11.1 days and less frequent deliveries, according to a new report, Retail Logistics 2006, published by IGD, a London-based international research firm.
Process failure is a key component of shrinkage
Streamlining the supply chain and driving further inefficiencies from the system have become more urgent over the past year as oil and gas prices skyrocketed and transportation costs went through the roof.
“There are a number of key logistical challenges in the industry. But from a macro view the main thing is the increase in oil prices and the impact on fuel costs,” said Tarun Patel, programme manager for IGD. The food industry is the largest user of road transportation and IGD estimates that transport accounts for over 37 per cent of retail distribution costs.
However, Patel and others agree that rising fuel costs cannot be blamed for the many process failures within the supply chain that lead to lost stock or out-of-stocks.
“I’ve done a lot of work with ECR Europe and process failure is a key component of shrinkage,” noted Adrian Beck, a reader in criminology at the University of Leicester in the UK. “There’s a real sense in the industry that we’ve overplayed the importance of internal and external theft and forgot about getting the processes right. There is a growing awareness that shrink severely impacts the bottom line. If you can reduce it to zero you can grow profits by 60 per cent,” he said, pointing to a survey on shrinkage for ECR Europe, which found that shrink in the supply chain costs the industry €24.17 billion annually, or €465 million per week.
Long list of failures
The list of process failures in the supply chain is a long one and the consequences are costly, according to Paul Chapman, an associate of Beck and professor at Cranfield University in the UK. These include:
• Excess ordering leading to out-of-date products.
• Price reductions on excess inventory.
• Goods damaged in transit, including temperature sensitive products.
• Delivery errors, including failure to record products transferred between stores.
• Inaccurate inventory checks in the warehouse.
• Products inadvertently sold at promotional prices.
• Incorrect entry of product type on the master files.
• Products being misplaced as they move between stores and warehouses.
“We see these failures time and again,” said Chapman. “Anyone visiting or working in the back of a store is faced by a mass of product that simply should not be there and all too often this descends into chaos. The consequence is that goods can become unsaleable.”
Too many companies are doing nothing about these problems, according to Chapman. “Attention is focused on capturing or defending market share. However, it’s too easy to miss the impact that shrinkage has on these objectives, he said.”
However, the impact of oil price increases is forcing companies to look at supply chain practices – beginning at the loading dock. “All organisations now recognise they can work their vehicles a bit harder,” said IGD’s Patel. “There are a percentage of vehicles that are not going out as full as they could be and others that are sitting around idle for a good portion of the day.“
One solution has been for retailers to use their own vehicles to collect products from suppliers. “Factory gate pricing has become more widespread over the past three years. Not only do retailers find that it cuts costs, but actually improves service levels to the store and increases flexibility of deliveries,” he said.
“A company like Tesco can integrate its own transportation quickly. Instead of three suppliers making a delivery, you’ve got a single vehicle to unload when it gets to a store or distribution centre. This is the Holy Grail in logistics – joining up the supply chain so when a customer picks a product off the shelf, [replacement] items are getting into the store more quickly,” he said.
This is one reason that some companies have been able to keep supply chain costs stable, said Patel. “Costs would be a lot higher if initiatives like this hadn’t been put in place.”
RFID
Other efficiencies centre on access to information. This enables suppliers to respond better on product replenishment. Toward this end, ECR and CPFR have become increasingly important. Patel: “We’ve had ECR in the UK for over ten years. It’s gained a lot of traction and we’ve seen a considerable growth in these partnerships. Some companies recognise that they are getting to the stage where they are as efficient as they can be and remaining inefficiencies are due to the way they trade with each other.”
Whether B2B trading exchanges have had a significant impact on logistics remains to be seen. “The jury’s still out. They started out four years ago with grandiose plans. But many of them have reduced what they do. They were originally driven by auctions and there was some benefit to that. But the more strategic projects such as ‘track and trace’ of products failed to materialise”, Patel said.
Retailers are making some of these investments on their own, including the use of RFID technology to track products through the system. “Things are getting better but it still needs to be proven and cost is still a stumbling block,” he said, noting that the cost per tag is still hovering around five cents.
Nonetheless, some retailers are deeply involved, Patel said, pointing to Tesco, Ahold, Metro and Marks & Spencer. “Marks & Spencer has tagged all its plastic crates containing chilled foods. This represents 70 per cent of their business and the perishability of chilled products requires logistics that are significantly different than those for products that have significantly longer shelf lives.”
By far, the most advanced proponent of RFID technology is Wal-Mart. RFID tags reduced out of stocks by 16 per cent over the past 12 months, according to Linda Dillman, chief information officer. And, the chain has been able to restock RFID-tagged items three times faster than non-tagged ones. At the end of October, it was estimated that 500 Wal-Mart stores were using these tags. “We expect more suppliers to tag more items as tag prices fall,” Dillman told a recent meeting of financial analysts.
By January, some 300 vendors were expected to put RFID tags on products shipped to the chain’s distribution centres. Moreover, the chain will also be increasing RFID systems for its Sam’s Club warehouse stores, an initiative that will involve another 300 suppliers.
RFID needs to be 99.9 per cent accurate
While industry observers feel that Wal-Mart’s reported improvements are impressive, real efficiency and profitability may be more elusive. “Out-of-stock improvements are not necessarily equal to a positive return on investment, Scott Langdoc, vice president of AMR Research in Boston, Mass., noted in a recent interview with Forbes magazine on Wal-Mart’s initiatives. “A number of factors will determine whether Wal-Mart will receive a financial return on the money they’ve spent on RFID. Are they seeing sales improvements? Is there an increase in the ordering efficiency?” he asked.
An AMR study has concluded that only 48 per cent of stock availability improvements will translate into a sale, said Langdoc. RFID will play an important role in the evolution of supply chain technology. But RFID is just not the panacea of supply chain improvements,” he said. In fact, pallet and case tagging will not generate enough additional revenue to have a real impact on a retailer’s bottom line.
The University of Leicester’s Beck agreed. “Wal-Mart has made a big impact in getting suppliers to tag cases and pallets and the technology is getting more reliable. But it needs to be 99.9 per cent accurate – otherwise you’re building in error and losing money.”
Despite these technology and logistical initiatives, the question is whether retailers at large understand the importance of logistical processes to their own operations. “The common view at one time is that they did not, said Patel. “Forty years ago, suppliers were the experts because they were the main distributors of products. But as retailers went to centralised distribution, they started benchmarking themselves against each other and other logistics companies. They learned a lot very quickly and a number of them are extremely good at managing logistics.”
Third-party logistics companies
To Patel and others, Tesco stands out as a model for best practices. “They have demonstrated their ability to take control of their business on every front. They view the supply chain as a competitive advantage,” he said.
At Tesco, improvement in logistics led to Retail Ready Packaging (RRP), which has been recognised as a more efficient way of getting products into warehouses and stores. “In the past you had cases of products delivered in a cage to the back of the store. It might have been filled with 50 items all in brown boxes. The amount of time needed to identify all these products is immense. Also there are more foreign-born workers in the stores who don’t read or write English. This is a way to recognise products quickly and efficiently,” he said.
“One of our biggest concerns is the reduction in the amount of checking and counting of stock as it moves through the supply chain,” Beck noted. “There’s a tendency on the part of some retailers not to count the stock at the back door. There’s a major potential for error.”
Unfortunately, retailers see it as cost efficiency – a way to save money on shipments. “We think it’s a false economy. We’re working with companies who now realise that if you don’t check product (as it moves through the supply chain) you are simply creating other problems,” he said. “There’s a need to create accountability and transparency within the supply chain.”
A better way to save money on the supply chain is to use third-party logistics companies – a trend which is likely to continue as the retail food industry consolidates and goes global. This will stretch the supply chain network even further.
According to IGD’s logistics report, the rationale for using a third-party provider for warehousing and distribution is to allow retailers to focus on their core competencies. However, this strategy also enables retailers to reduce capital expenditures, thereby improving the balance sheet and to lower overhead and administrative costs.
On the other hand, the disadvantage to outsourcing is the loss of control and in-house knowledge of specialists. But as IGD’s Patel noted: “Globalisation is straining the entire network. If you’re looking to expand in a new country it’s not viable for a company to have its own fleet until there’s a certain amount of scale. Unless there’s a reason not to, everyone’s looking at outsourcing.”
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